10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2010

OR

¨ 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 001-01011

CVS CAREMARK CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	050494040
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One CVS Drive, Woonsocket, Rhode Island	02895
(Address of principal executive offices)	(Zip Code)

(401) 765-1500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Common Stock, par value $0.01 per share	New York Stock Exchange
Title of each class	Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

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 Act).    Yes  ¨    No  x

The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $39,599,675,690 as of June 30, 2010, based on the closing price of the common stock on the New York Stock Exchange. For purposes of this calculation, only executive officers and directors are deemed to be the affiliates of the registrant.

As of February 11, 2011, the registrant had 1,368,174,000 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Filings made by companies with the Securities and Exchange Commission sometimes “incorporate information by reference.” This means that the company is referring you to information that was previously filed or is to be filed with the SEC, and this information is considered to be part of the filing you are reading. The following materials are incorporated by reference into this Form 10-K:

• Information contained on pages 20 through 80 and page 83 of our Annual Report to Stockholders for the fiscal year ended December 31, 2010 is incorporated by reference in our response to Items 7, 8 and 9 of Part II.

• Information contained in our Proxy Statement for the 2011 Annual Meeting of Stockholders is incorporated by reference in our response to Items 10 through 14 of Part III.

TABLE OF CONTENTS

			Page
Part I
	Item 1:	Business		3
	Item 1A:	Risk Factors		24
	Item 1B:	Unresolved Staff Comments		29
	Item 2:	Properties		29
	Item 3:	Legal Proceedings		32
	Item 4:	Submission of Matters to a Vote of Security Holders		35
	Executive Officers of the Registrant			36
Part II
	Item 5:	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		38
	Item 6:	Selected Financial Data		39
	Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
	Item 7A:	Quantitative and Qualitative Disclosures About Market Risk		40
	Item 8:	Financial Statements and Supplementary Data		40
	Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		40
	Item 9A:	Controls and Procedures		40
	Item 9B:	Other Information		41
Part III
	Item 10:	Directors and Executive Officers of the Registrant		42
	Item 11:	Executive Compensation		42
	Item 12:	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		42
	Item 13:	Certain Relationships and Related Transactions and Director Independence		42
	Item 14:	Principal Accountant Fees and Services		42
Part IV
	Item 15:	Exhibits, Financial Statement Schedules		43
	Signatures			49

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PART I

Item 1. Business

Overview

CVS Caremark Corporation (“CVS Caremark”, the “Company”, “we” or “us”), together with its subsidiaries, is the largest pharmacy health care provider in the United States. As a fully integrated pharmacy services company, we deliver value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our pharmacy benefit management, mail order and specialty pharmacy division, CVS Caremark Pharmacy Services^® (“Caremark”); our approximately 7,200 CVS/pharmacy^® retail stores; our retail-based health clinic subsidiary, MinuteClinic^®; and our online pharmacy, CVS.com^®.

CVS Caremark is uniquely positioned to deliver significant benefits to health plan sponsors through effective cost management solutions and innovative programs that engage plan members and promote healthier and more cost-effective behaviors. Our integrated pharmacy services model enhances our ability to offer plan members and consumers expanded choice, greater access and more personalized services.

We currently have three reportable business segments: Pharmacy Services, Retail Pharmacy and Corporate.

Pharmacy Services Segment

The Pharmacy Services segment provides a full range of pharmacy benefit management (“PBM”) services including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. Our clients are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the United States. In addition, through our SilverScript Insurance Company (“SilverScript”) and Accendo Insurance Company (“Accendo”) subsidiaries, we are a national provider of drug benefits to eligible beneficiaries under the Federal Government’s Medicare Part D program. Currently, the pharmacy services business operates under the CVS Caremark Pharmacy Services^®, Caremark^®, CVS Caremark™, CarePlus CVS/pharmacy™, CarePlus™, RxAmerica^®, Accordant^® and TheraCom^® names. As of December 31, 2010, the Pharmacy Services segment operated 44 retail specialty pharmacy stores, 18 specialty mail order pharmacies and four mail service pharmacies located in 25 states, the District of Columbia and Puerto Rico.

Pharmacy Services Business Strategy - Our business strategy centers on providing innovative pharmaceutical solutions and quality client service in order to enhance clinical outcomes for our clients’ health benefit plan members while assisting our clients and their plan members in better managing overall healthcare costs. We produce superior results for our clients and their plan members by leveraging our expertise in core PBM services, including (as described more fully below): plan design and administration, formulary management, drug purchasing arrangements, mail order services, specialty pharmacy services, retail pharmacy network management services, Medicare Part D services and a broad array of clinical services.

In addition, as a fully integrated pharmacy services company, we are able to offer our clients and their plan members a variety of new programs and plan designs that benefit from our integrated information systems and the ability of our more than 25,000 pharmacists, nurse practitioners and physician assistants to interact personally with the many plan members who shop our stores every day. Through our multiple member touch points (retail stores, mail order and specialty pharmacies, retail clinics, call centers and proprietary websites), we seek to engage plan members in behaviors that lower cost and improve healthcare outcomes. Examples of these programs and services include Maintenance Choice^®, a program where eligible members in plans sponsored by Pharmacy Services clients can elect to fill their maintenance prescriptions at our retail pharmacy stores instead of receiving them through the mail; Pharmacy Advisor^TM, a new program that uses our Consumer Engagement Engine^TM technology to facilitate face-to-face counseling by our pharmacists to plan members of participating

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PBM clients concerning health and safety matters, including adherence issues, gaps in care and management of certain chronic health conditions; new compliance and persistency programs designed to ensure that patients take their medications in the proper manner; enhanced disease management programs that are targeted at managing chronic disease states; and an ExtraCare^® Health Card program (which offers discounts to eligible plan members on certain over-the-counter healthcare products sold in our CVS/pharmacy stores). In addition, we are working with our clients to (i) decrease unnecessary and expensive emergency room visits by encouraging plan members to use MinuteClinic locations for everyday common ailments and (ii) create pilot programs that offer convenient unique services available at MinuteClinic such as injection training for specialty pharmacy services.

While certain of these programs and services have already been adopted by many of our clients, others are in the formative stage and require additional information system enhancements and/or changes in work processes. Accordingly, there can be no assurance as to timing or benefits associated with certain of these programs.

PBM Services - The PBM services we provide for our clients involve the design and administration of programs aimed at reducing the cost and improving the safety, effectiveness and convenience of prescription drug use. These services are described more fully below.

Plan Design and Administration - Our clients sponsor pharmacy benefit plans that facilitate the ability of eligible members in these plans to receive medications prescribed by their physicians. We assist our clients in designing pharmacy benefit plans that minimize the costs to the client while prioritizing the welfare and safety of the clients’ members. We also administer these benefit plans for our clients and assist them in monitoring the effectiveness of these plans through frequent, informal communications as well as through a formal annual client review.

We make recommendations to our clients encouraging them to design benefit plans promoting the use of the lowest cost, most clinically appropriate drug. We believe that we help our clients control costs by recommending plans that encourage the use of generic equivalents of brand name drugs when such equivalents are available. Our clients also have the option, through plan design, to further lower their pharmacy benefit plan costs by setting different member payment levels for different products on their drug lists.

Formulary Management - We utilize an independent panel of doctors, pharmacists and other medical experts, referred to as our Pharmacy and Therapeutics Committee, to select drugs that meet the highest standards of safety and efficacy for inclusion on our drug lists. Our drug lists provide recommended products in numerous drug classes to ensure member access to clinically appropriate alternatives under the client’s pharmacy benefit plan. To improve clinical outcomes for members and clients, we conduct ongoing, independent reviews of all drugs, including, but not limited to, those appearing on the drug lists and generic equivalent products, as well as our clinical programs. Many of our clients choose to adopt our drug lists as part of their plan design.

Discounted Drug Purchase Arrangements - We negotiate with pharmaceutical companies to obtain discounted acquisition costs for many of the products on our drug lists, and these negotiated discounts enable us to offer reduced costs to clients that choose to adopt our drug lists. The discounted drug purchase arrangements we negotiate typically provide for the payment by the pharmaceutical companies of retroactive discounts, or rebates, from established list prices. For certain products that are purchased by our pharmacies, we receive discounts at the time of purchase and/or discounts for prompt payment of invoices. We also receive various purchase discounts under our wholesale contracts, which may include retroactive discounts, or rebates, if we exceed contractually-defined purchase volumes. We record these discounts, regardless of their form, as a reduction of our cost of revenues.

Prescription Management Systems - We dispense prescription drugs both directly, through one of our mail service or specialty pharmacies, or through a network of retail pharmacies. All prescriptions, whether they are filled through one of our mail service pharmacies or through a pharmacy in our retail network, are analyzed,

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processed and documented by our proprietary prescription management systems. These systems assist staff and network pharmacists in processing prescriptions by automating review of various items, including, but not limited to, plan eligibility, early refills, duplicate dispensing, appropriateness of dosage, drug interactions or allergies, over-utilization and potential fraud.

Mail Pharmacy Program - As of December 31, 2010, we operated four large, automated mail service pharmacies in the continental United States. Plan members or their prescribers submit prescriptions or refill requests, primarily for maintenance medications, to these pharmacies via mail, telephone, fax, e-prescribing or the Internet. We also operate a network of smaller mail service specialty pharmacies described below. Our staff pharmacists review mail service prescriptions and refill requests with the assistance of our prescription management systems. This review may involve communications with the prescriber and, with the prescriber’s approval, can result in generic substitution, therapeutic interchange or other actions designed to reduce cost and improve quality of treatment.

Specialty Pharmacy - Our specialty pharmacies support individuals that require complex and expensive drug therapies. As of December 31, 2010, our specialty pharmacies were comprised of 18 specialty mail order pharmacies located throughout the United States and are used for delivery of advanced medications to individuals with chronic or genetic diseases and disorders. Substantially all of these pharmacies have been accredited by the Joint Commission, which is an independent, not-for-profit organization that accredits and certifies more than 18,000 health care organizations and programs in the United States. As of December 31, 2010, the Company operated a network of 44 retail specialty pharmacy stores, which operate under the CarePlus CVS/pharmacy name. These stores average 2,000 square feet in size and sell prescription drugs and a limited assortment of front store items such as alternative medications, homeopathic remedies and vitamins. Through our TheraCom subsidiary, we provide new product launch and other services for manufacturers of specialty drugs.

Onsite Pharmacies - We also operate a limited number of small pharmacies located at client sites under the CarePlus CVS/pharmacy or CVS/pharmacy name, which provide members with a convenient alternative for filling their prescriptions.

Retail Pharmacy Network - We maintain a national network of approximately 65,000 retail pharmacies, including CVS/pharmacy stores. When a customer fills a prescription in a retail pharmacy, the pharmacy sends prescription data electronically to us from the point-of-sale. This data interfaces with our proprietary prescription management systems, which verify relevant plan member data and eligibility, while also performing a drug utilization review to evaluate clinical appropriateness and safety and confirming that the pharmacy will receive payment for the prescription.

Medicare Part D Services - We participate in the administration of the drug benefit added to the Medicare program under Part D of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) (“Medicare Part D”) through the provision of PBM services to our health plan clients and other clients that have qualified as Medicare Part D prescription drug plans (“PDP”). We also participate (i) by offering Medicare Part D pharmacy benefits through our subsidiaries, SilverScript and Accendo, which have

been approved by the Centers for Medicare and Medicaid Services (“CMS”), as PDPs, and (ii) by assisting employer, union and other health plan clients that qualify for the retiree drug subsidy available under Medicare Part D by collecting and submitting eligibility and/or drug cost data to CMS in order for them to obtain the subsidy. In December 2010, the Company announced it had entered into an agreement to acquire the Medicare Part D business of Universal American Corp. (“UAC”) for approximately $1.25 billion. The transaction is subject to customary closing conditions, including necessary regulatory approvals, as well as approval by UAC shareholders. The Company currently expects that the transaction will close by the end of the second quarter of 2011.

Clinical Services - We offer multiple clinical programs and services to help clients manage overall pharmacy and health care costs in a clinically appropriate manner. Our programs are primarily designed to promote safety, and

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to target inappropriate utilization and non-adherence to medication, each of which may result in adverse medical events that negatively impact members’ health and the client’s pharmacy and medical spend. In this regard, we offer various utilization management, medication management, adherence and counseling programs to complement the client’s plan design and clinical strategies.

Disease Management Programs - Our clinical services utilize advanced protocols and offer clients convenience in working with health care providers and other third parties. Our AccordantCare health management programs include integrated rare disease management programs, which cover diseases such as rheumatoid arthritis, Parkinson’s disease, seizure disorders and multiple sclerosis. The majority of these integrated programs are accredited by the National Committee for Quality Assurance (“NCQA”), a private, not-for-profit organization that evaluates, accredits and certifies a wide range of health care organizations. In addition, we have entered into a strategic alliance with Alere, L.L.C. for the management of our common disease management program offerings, which cover such chronic diseases as asthma, diabetes, congestive heart failure and coronary artery disease.

Quality Assurance - We have adopted and implemented clinical quality assurance procedures as well as policies and procedures to help ensure regulatory compliance under our quality assurance programs. Each new mail service prescription undergoes a sequence of safety and accuracy checks and is reviewed and verified by a registered pharmacist before shipment. We also analyze drug-related outcomes to identify opportunities to improve the quality of care.

Pharmacogenomic Services - In the fourth quarter of 2009, we acquired a majority interest in Generation Health, Inc., a genetic benefit management company, that will allow us to expand our offering of pharmacogenomic clinical and testing services to our PBM clients. Pharmacogenomics is the study of how genetic makeup affects an individual’s response to drug therapies. Through genetic testing, doctors are able to evaluate a patient’s genetic makeup to determine the effectiveness of specific drugs, drug dosages and drug combinations. Through this relationship, we expect to use genetic testing to apply greater precision to client prescription management, with the goal of improving individual health outcomes and reducing overall medical costs. We began to offer these services on a limited pilot basis to clients during 2010 and plan to roll out these services to clients on a broader basis during 2011.

Pharmacy Services Information Systems - We currently operate multiple information systems platforms to support our Pharmacy Services segment. These information systems incorporate architecture that centralizes the data generated from filling mail service prescriptions, adjudicating retail pharmacy claims and fulfilling other PBM clients’ service contracts.

Pharmacy Services Clients - - Our clients are primarily sponsors of health benefit plans (employers, unions, government employee groups, insurance companies and managed care organizations) and individuals located throughout the United States. We provide pharmaceuticals to eligible members in benefit plans maintained by our clients and utilize our information systems, among other things, to perform safety checks, drug interaction screening and generic substitution. We generate substantially all of our Pharmacy Services segment net revenue from dispensing prescription drugs to eligible members in benefit plans maintained by our clients. No single PBM client accounted for 10% or more of our consolidated revenues in 2010. Our client agreements are subject to renegotiation of terms. See “Risk Factors – Efforts to reduce reimbursement levels and alter health care financing practices could adversely affect our business” and “- Risks of declining gross margins in the PBM industry.” During the year ended December 31, 2010, our PBM filled or managed approximately 585 million prescriptions.

Seasonality - The majority of our Pharmacy Services segment revenues are not seasonal in nature.

Pharmacy Services Competition - We believe the primary competitive factors in the industry include: (i) the ability to negotiate favorable discounts from drug manufacturers; (ii) the ability to negotiate favorable discounts

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from, and access to, retail pharmacy networks; (iii) responsiveness to clients’ needs; (iv) the ability to identify and apply effective cost management programs utilizing clinical strategies; (v) the ability to develop and utilize preferred drug lists; (vi) the ability to market PBM products and services; (vii) the commitment to provide flexible, clinically-oriented services to clients; and (viii) the quality, scope and costs of products and services offered to clients and their members. The Pharmacy Services segment competes with a number of large, national PBM companies, including Medco Health Solutions, Inc. and Express Scripts, Inc., as well as many smaller local or regional PBMs. We also compete with several large health insurers/managed care plans (e.g., United Healthcare and CIGNA) and retail pharmacies, which have their own PBM capabilities, as well as with several other national and regional companies which provide services similar to ours.

Retail Pharmacy Segment

As of December 31, 2010, the Retail Pharmacy segment included 7,182 retail drugstores, of which 7,123 operated a pharmacy, our online retail website, CVS.com, and our retail health care clinics. The retail drugstores are located in 41 states, Puerto Rico and the District of Columbia operating primarily under the CVS/pharmacy name. We currently operate in 92 of the top 100 U.S. drugstore markets and hold the number one or number two market share in 72 of these markets. CVS/pharmacy stores sell prescription drugs and a wide assortment of general merchandise, which we refer to as “front store” products. Existing retail stores range in size from approximately 8,000 to 25,000 square feet, although most new stores range in size from approximately 10,000 to 13,000 square feet and typically include a drive-thru pharmacy. During 2010, we filled approximately 636 million retail prescriptions, or approximately 18% of the U.S. retail pharmacy market.

As of December 31, 2010, we operated 560 retail health care clinics in 26 states and the District of Columbia under the MinuteClinic name, of which 550 were located within CVS/pharmacy stores. The clinics utilize nationally recognized medical protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations. The clinics are staffed by board-certified nurse practitioners and physician assistants who provide access to affordable care without appointment.

Retail Pharmacy Business Strategy - Our integrated pharmacy services model has enhanced the ability of our retail pharmacy stores to expand customer access to care while helping to lower overall health care costs and improve health outcomes. In that regard, the role of our retail pharmacist is shifting from primarily dispensing prescriptions to also providing services, including flu vaccinations as well as face-to-face patient counseling with respect to adherence to drug therapies, closing gaps in care and more cost effective drug therapies. In addition we seek to be the easiest pharmacy retailer for customers to use. We believe that ease of use means convenience for the time-starved customer. As such, our operating strategy is to provide a broad assortment of quality merchandise at competitive prices using a retail format that emphasizes service, innovation and convenience (easy-to-access, clean, well-lit and well stocked). One of the keys to our strategy is technology, which allows us to focus on constantly improving service and exploring ways to provide more personalized product offerings and services. We believe that continuing to be the first to market with new and unique products and services, using innovative marketing and adjusting our mix of merchandise to match our customers’ needs and preferences is very important to our ability to continue to improve customer satisfaction.

Retail Pharmacy Products and Services - A typical CVS/pharmacy store sells prescription drugs and a wide assortment of high-quality, nationally advertised brand name and private label merchandise. Front store categories include over-the-counter drugs, beauty products and cosmetics, film and photo finishing services, seasonal merchandise, greeting cards and convenience foods. We purchase our merchandise from numerous manufacturers and distributors. We believe that competitive sources are readily available for substantially all of the products we carry and the loss of any one supplier would not have a material effect on the business.

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Consolidated net revenues by major product group are as follows:

	Percentage of Net  Revenues(1)
	2010			2009			2008
Prescription drugs		68	%		68	%		68	%
Over-the-counter and personal care		11			11			13
Beauty/cosmetics		5			5			4
General merchandise and other		16			16			15
		100	%		100	%		100	%

(1) Percentages are estimates based on store point-of-sale data.

Front Store - Front store revenues benefited from our strategy to be the first to market with new and unique products and services, using innovative marketing and adjusting our mix of merchandise to match our customers’ needs and preferences. A key component of our front store strategy is our ExtraCare card program, which is helping us continue to build our loyal customer base. The ExtraCare program is one of the largest and most successful retail loyalty programs in the United States. In addition, the ExtraCare program allows us to balance our marketing efforts so we can reward our best customers by providing them automatic sale prices, customized coupons, ExtraBucks^® rewards and other benefits. Another component of our front store strategy is our unique product offerings, which include a full range of high-quality CVS brand and proprietary brand products that are only available through CVS. We currently carry over 4,400 CVS brand and proprietary brand products, which accounted for approximately 17% of our front store revenues during 2010.

Pharmacy - Pharmacy revenues represented more than two-thirds of Retail Pharmacy revenues in each of 2010, 2009 and 2008. We believe that our pharmacy operations will continue to represent a critical part of our business due to favorable industry trends (e.g., an aging American population consuming a greater number of prescription drugs, pharmaceuticals being used more often as the first line of defense for managing illness, the impact of health care reform), the proliferation of new pharmaceutical products, Medicare Part D and our ongoing program of purchasing customer lists from independent pharmacies. We believe our pharmacy business benefits from our investment in both people and technology. Given the nature of prescriptions, people want their prescriptions filled accurately and ready when promised, by professional pharmacists using the latest tools and technology. Consumers need medication management programs and better information to help them get the most out of their health care dollars. To assist our customers with these needs, we have introduced integrated pharmacy health care services that provide an earlier, easier and more effective approach to engaging them in behaviors that can help lower costs, improve health, and save lives. Examples include: our Patient Care Initiative, an enhanced medication adherence program; our Customer Savings Initiative, which educates customers about cost savings opportunities; Maintenance Choice (a flexible fulfillment option that affords eligible PBM plan members the convenient choice of filling their 90-day supply of maintenance medications at any CVS/pharmacy store or obtaining them through mail order, in either case at the cost of mail, which is typically lower for both the plan member and payor); Pharmacy Advisor, our new program that uses our Consumer Engagement Engine technology to facilitate face-to-face pharmacist counseling to plan members of participating PBM clients concerning health and safety matters, including adherence issues, gaps in care and management of certain chronic health conditions; and the ExtraCare Health Card program. Further evidencing our belief in the importance of pharmacy service is our continuing investment in technology, such as our Drug Utilization Review system that checks for harmful interactions between prescription drugs, over-the-counter products, vitamins and herbal remedies; our new pharmacy fulfillment system, Rx Connect^TM; our touch-tone telephone reorder system, Rapid Refill^TM; and our online business, CVS.com.

MinuteClinic - As of December 31, 2010, we operated 560 MinuteClinics in 26 states and the District of Columbia; 550 of which were located in CVS/pharmacy stores. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health

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conditions, perform health screenings, monitor chronic conditions and deliver vaccinations. Many locations have also begun treating a variety of chronic conditions. Insurers value MinuteClinic because it provides an excellent quality of care at an affordable price, in many cases offering an attractive alternative to the far more expensive emergency room. As a result, visits paid for by employers, health insurers or other third parties accounted for more than 80% of MinuteClinics’ total revenues in 2010. We anticipate opening up 100 new clinics in CVS/pharmacy stores during 2011.

Retail Pharmacy Store Development - The addition of new stores has played, and will continue to play, a major role in our continued growth and success. Our store development program focuses on three areas: entering new markets, adding stores within existing markets and relocating stores to more convenient, freestanding sites. During 2010, we opened 179 new retail pharmacy stores, relocated 106 stores and closed 22 stores. During the last five years, we opened more than 1,400 new and relocated stores, and acquired approximately 1,200 stores. During 2011, we expect to open between 225 and 250 new or relocated stores, and close approximately 15 stores. We believe that continuing to grow our store base and locating stores in desirable geographic markets are essential components to compete effectively in the current managed care environment. As a result, we believe that our store development program is an integral part of our ability to maintain our leadership position in the retail drugstore industry.

Retail Pharmacy Information Systems - We have continued to invest in information systems to enable us to deliver a high level of customer service while lowering costs and increasing operating efficiency. In 2009, we began the rollout of Rx Connect, which reengineered the way our pharmacists communicate and fill prescriptions. The rollout of Rx Connect was completed in September 2010. Our new Consumer Engagement Engine technology enables us to message pharmacists at the point of care which facilitates face-to-face counseling by our pharmacies regarding patient health and safety matters, including adherence issues, gaps in care and management of certain chronic health conditions. We were one of the first in the industry to introduce Drug Utilization Review technology that checks for harmful interactions between prescription drugs, over-the-counter products, vitamins and herbal remedies. We were also one of the first in the industry to install a chain wide automatic prescription refill system, CVS Rapid Refill, which enables customers to order prescription refills 24 hours a day using a touch-tone telephone. We continue to enhance our Visible Improvement in Profits, Execution and Results (“VIPER”) system, a transaction-monitoring application designed to mitigate inventory losses attributable to process deficiencies or fraudulent behavior by providing visibility to transactions processed through our point-of-sale systems. In addition, we operate distribution centers with fully integrated technology solutions for storage, product retrieval and order picking.

Retail Pharmacy Customers - Managed care and other third party plans accounted for 97.4% of our 2010 pharmacy revenues. Since our revenues relate to numerous payors, including employers and managed care organizations, the loss of any one payor should not have a material effect on our business. No single commercial retail payor accounts for 10% or more of our total consolidated revenues. We also fill prescriptions for many government funded programs, including State Medicaid plans and Federal Medicare Part D drug plans. Our contracts with commercial payors and government funded programs are subject to renegotiation of reimbursement rates. See “Government Regulation – Reimbursement” and Item 1A., “Risk Factors – Efforts to reduce reimbursement levels and alter health care financing practices could adversely affect our businesses.”

Retail Pharmacy Seasonality - The majority of our revenues, particularly pharmacy revenues, are generally not seasonal in nature. However, front store revenues tend to be higher during the December holiday season. For additional information, we refer you to the Note “Quarterly Financial Information” on page 80 in our Annual Report to Stockholders for the fiscal year ended December 31, 2010, which section is incorporated by reference herein.

Retail Pharmacy Competition - The retail drugstore business is highly competitive. We believe that we compete principally on the basis of: (i) store location and convenience, (ii) customer service and satisfaction, (iii) product selection and variety and (iv) price. In each of the markets we serve, we compete with independent

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and other retail drugstore chains, supermarkets, convenience stores, pharmacy benefit managers and other mail order prescription providers, discount merchandisers, membership clubs, health clinics and Internet pharmacies.

Corporate Segment

Our Corporate segment provides management and administrative services to support the overall operations of the Company. The Corporate segment consists of certain aspects of our executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments.

Working Capital Practices

We fund the growth of our business through a combination of cash flow from operations, commercial paper, proceeds from sales-lease-back transactions, and long-term borrowings. For additional information on our working capital practices, we refer you to the caption “Liquidity and Capital Resources” on page 33 in our Annual Report to Stockholders for the year ended December 31, 2010, which section is incorporated by reference herein. The majority of our non-pharmacy revenues are paid in cash, or by debit and by credit cards, while managed care and other third party insurance programs, which typically settle in less than 30 days, represented approximately 98.8% of our consolidated pharmacy revenues, including both Retail Pharmacy and Pharmacy Services combined, in 2010. Our customer returns are not significant.

Associate Development

As of December 31, 2010, we employed approximately 201,000 associates, which included more than 25,000 pharmacists, nurse practitioners and physician assistants. In addition, approximately 79,000 associates were part-time employees who work less than 30 hours per week. To deliver the highest levels of service to our customers, we devote considerable time and attention to our people and service standards. We emphasize attracting and training, knowledgeable, friendly and helpful associates to work in our organization.

Intellectual Property

We have registered or applied to register a variety of trademarks, service marks and trade names used in our business. We regard our intellectual property as having significant value in our Pharmacy Services and Retail Pharmacy segments. We are not aware of any facts that could materially impact our continuing use of any of our intellectual property.

Government Regulation

Overview - As a participant in the health care industry, our retail and pharmacy services businesses are subject to federal and state laws and regulations that govern the purchase, sale and distribution of prescription drugs and related services, including administration and management of prescription drug benefits. Many of our PBM clients, including insurers and managed care organizations (“MCOs”), are themselves subject to extensive regulations that affect the design and implementation of prescription drug benefit plans that they sponsor. The application of these complex legal and regulatory requirements to the detailed operation of our business creates areas of uncertainty. There are numerous proposed health care laws and regulations at the federal and state levels, some of which could adversely affect our business if they are enacted. We are unable to predict what federal or state legislation or regulatory initiatives may be enacted in the future relating to our business or the health care industry in general, or what effect any such legislation or regulations might have on our business. Any failure or alleged failure to comply with applicable laws and regulations, or any adverse applications of, or changes in, the laws and regulations affecting our business, could have a material adverse effect on our operating results and financial condition.

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PPACA - Congress passed major health reform legislation in 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, “PPACA”), which were signed into law by the President on March 23, 2010 and March 30, 2010, respectively. This legislation affects the entire health insurance system and virtually every aspect of health care in the country, although many provisions of the PPACA are not effective immediately. Given that many of the regulations implementing PPACA have not yet been issued or finalized and there is ongoing sub-regulatory guidance being issued, there is still considerable uncertainty as to its full impact. Further, aspects of the legislation are being challenged in lawsuits across the country, and some in Congress are seeking to repeal the law or portions of it. There have already been a number of conflicting court rulings calling into question the constitutionality of all or certain portions of PPACA. In addition to establishing the framework for every individual to have health coverage beginning in 2014, PPACA enacted a number of significant health care reforms. While these reforms may not affect our business directly, they affect the coverage and plan designs that are or will be provided by many of our health plan clients. As a result, they could indirectly impact many of our services and business practices.

Among the more significant PPACA provisions is the requirement for health insurers to meet a minimum medical loss ratio (“MLR”) to avoid having to pay rebates to enrollees. The MLR requires insurers to break out clinical, quality improvement and administrative costs. The United States Department of Health and Human Services (“HHS”) issued an interim final regulation on the MLR in December 2010 that includes an example that could be interpreted to suggest that the differential between the drug price charged by PBMs to health plans and the amount reimbursed to retail pharmacies (commonly referred to as “differential” or “spread”) should be excluded from claims costs. Depending on if and how this example is clarified in final regulations, health plan clients that are subject to the MLR requirements may request pricing modifications, include requests to contract using pass-through retail network pricing.

Another PPACA provision requires PBMs that contract with a Medicare Part D plan or a qualified health plan offered through a health insurance exchange to disclose certain information to HHS, the Medicare Part D plan or the health insurance exchange. Among the information that must be disclosed is the generic dispensing rates for different types of pharmacies, the aggregate amount and types of rebates and other discounts negotiated on behalf of, and passed through to, the plan, and the aggregate amount of any differential. It is anticipated that this reporting will be required for Medicare Part D in 2012 and for qualified health plans in 2014 upon the implementation of the health insurance exchanges to be established under PPACA. PPACA also made significant changes to the Medicare and Medicaid programs, fraud and abuse laws and tax provisions. Some of the relevant changes are discussed in other sections below.

In addition to PPACA, among the existing federal and state laws and regulations that affect aspects of our business are the following:

Anti-Remuneration Laws - Federal law prohibits, among other things, an entity from knowingly and willfully offering, paying, soliciting or receiving, subject to certain exceptions and “safe harbors,” any remuneration to induce the referral of individuals or the purchase, lease or order (or the arranging for or recommending of the purchase, lease or order) of items or services for which payment may be made under Medicare, Medicaid or certain other federal health care programs. A number of states have similar laws, some of which are not limited to services paid for with government funds. State laws and exceptions or safe harbors vary and have been infrequently interpreted by courts or regulatory agencies. Sanctions for violating these federal and state anti-remuneration laws may include imprisonment, criminal and civil fines, and exclusion from participation in Medicare, Medicaid and other government-sponsored health care programs. The federal anti-remuneration law has been interpreted broadly by some courts, the Office of Inspector General (the “OIG”) within the HHS and administrative bodies. A broad interpretation of the federal anti-remuneration law is supported by PPACA, which codified a reduced standard of “knowingly and willfully” by stating that this standard does not require that a person have actual knowledge of the federal anti-remuneration law or specific intent to violate this law. Because of the federal statute’s broad scope, HHS established certain safe harbor regulations that specify various practices that are protected from criminal or civil liability. Safe harbors exist for certain discounts offered to purchasers,

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certain personal services arrangements, certain payments made by vendors to group purchasing organizations, in certain cases the provision of electronic prescribing technology to physicians, and certain other transactions and relationships. A practice that does not fall within a safe harbor is not necessarily unlawful but may be subject to challenge by HHS. In addition, as part of PPACA, additional statutory exceptions have been created to permit the provision of certain incentives to federal healthcare program beneficiaries, including retailer coupons, rebates or other rewards and incentives offered to promote access to care.

In April 2003, the OIG issued Compliance Program Guidance for Pharmaceutical Manufacturers (the “OIG Guidance”). In the OIG Guidance, the OIG identifies potential risk areas for pharmaceutical manufacturers and also discusses a number of traditional relationships between pharmaceutical manufacturers and PBMs, such as discount payments, service offerings and data sales, and recommends that such relationships be structured wherever possible to fit within an applicable safe harbor.

Antitrust and Unfair Competition - The Federal Trade Commission (“FTC”) has authority under Section 5 of the Federal Trade Commission Act (“FTCA”) to investigate and prosecute practices that are “unfair trade practices” or “unfair methods of competition.” Relief under the FTCA can encompass equitable relief and consumer redress. In addition, numerous lawsuits have been filed throughout the United States against pharmaceutical manufactures and/or PBMs under various state and federal antitrust and unfair competition laws challenging, among other things: (i) brand drug pricing practices of pharmaceutical manufacturers, (ii) the maintenance of retail pharmacy networks by PBMs, and (iii) various other business practices of PBMs. To the extent that we appear to have actual or potential market power in a relevant market, our business arrangements and practices may be subject to heightened scrutiny from an anti-competitive perspective and possible challenge by state or federal regulators or private parties. See Item 3, “Legal Proceedings” for further information.

Compliance Programs - PPACA requires that providers enrolled in Medicare and Medicaid must establish and maintain compliance programs that satisfy core requirements to be established by the Secretary of HHS in consultation with the OIG. The Secretary of HHS has not yet published information concerning these compliance programs or the timeframe for implementation. In addition, certain state government health care programs have compliance program requirements, and we are subject to various government agreements described under “Government Agreements” below that also contain requirements relating to the maintenance of compliance programs.

Consumer Protection Laws - The Federal Government and most states have consumer protection laws that have been the basis for investigations, lawsuits and multi-state settlements relating to, among other matters, the marketing of loyalty programs and health care services, and financial incentives provided by drug manufacturers to pharmacies in connection with therapeutic interchange programs. In addition, the FTCA bars unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The Federal Postal Service Act generally prohibits the mailing of, and billing for, unordered merchandise. The FTC’s Telemarketing Sales Rule also imposes extensive requirements and restrictions in connection with telemarketing, which applies to plans or programs to induce the purchase of goods or services by consumers. (See the Telemarketing and Other Outbound Calls section below for further disclosures.)

Contract Audits - We are subject to audits of many of our contracts, including our PBM client contracts, our PBM rebate contracts, our pharmacy provider agreements and our contracts relating to Medicare Part D. Audits are typically conducted pursuant to certain provisions in our contracts that grant audit rights and set forth applicable audit procedures. Because some of our contracts are with state or federal governments, audits of these agreements are often regulated by the federal or state agencies responsible for administering federal or state benefits programs, including those which operate PDPs or Medicare Advantage organizations under the MMA. The audits generally focus on, among other things, compliance with the applicable terms of our contracts and applicable legal requirements.

Disease Management Services Regulation - We provide or arrange for PBM plan members to receive clinical services in the form of disease management programs for common and rare medical conditions. Nurses,

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pharmacists and other clinicians, as needed, develop and implement these programs. State laws regulate the practice of medicine, the practice of pharmacy and the practice of nursing, and clinicians engaged in a professional practice must satisfy applicable state licensing requirements.

Electronic Prescribing - The American Recovery and Reinvestment Act of 2009 (“ARRA”), which was signed into law in February 2009, amended the Social Security Act to establish incentive payments to eligible professionals and hospitals participating in the Medicare or Medicaid program that adopt and meaningfully use certified electronic health records (“EHR”) technology beginning in 2011. ARRA also provides for downward payment adjustments beginning in 2015 for providers in the Medicare program that fail to adopt and meaningfully use certified EHR technology. Among the measures of meaningful use is the use of electronic prescribing. A final rule implementing the EHR incentive program was issued in July 2010 which requires that at least 40% of permissible prescriptions be sent electronically in order to qualify for the incentive payments. In March 2010, the U.S. Drug Enforcement Administration (“DEA”) issued an interim final rule allowing electronic prescribing of controlled substances beginning June 1, 2010. These changes, together with the requirement for Medicare Part D plans to support electronic prescribing, should result in a growing number of prescribers adopting electronic prescribing.

Environmental Regulation - Our business is subject to various federal, state and local laws, regulations and other requirements pertaining to protection of the environment and public health, including, for example, regulations governing the management of waste materials and waste waters. Governmental agencies on the federal, state and local levels have, in recent years, increasingly focused on the retail sector’s compliance with such laws and regulations, and have at times pursued enforcement activities. There is also an increased interest by regulators in better managing photo processing as well as pharmaceutical and other wastes. We periodically receive information requests and notices of potential noncompliance with environmental laws and regulations from governmental agencies, which are addressed on a case-by-case basis with the relevant agency.

ERISA Regulation - The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), provides for comprehensive federal regulation of certain employee pension and benefit plans, including private employer and union sponsored health plans and certain other plans that contract with us to provide PBM services. In general, we assist plan sponsors in the administration of the prescription drug portion of their health benefit plans, in accordance with the plan designs adopted by the plan sponsors. We do not believe that the conduct of our business subjects us to the fiduciary obligations of ERISA, except when we have specifically contracted with a plan sponsor to accept limited fiduciary responsibility, such as for the adjudication of initial prescription drug benefit claims and/or the appeals of denied claims under a plan. We and other PBMs have been named in lawsuits alleging that we act as a fiduciary, as such term is defined by ERISA, with respect to health benefit plans and that we have breached certain fiduciary obligations under ERISA.

ERISA fiduciaries may be held personally liable for entering into service contracts or arrangements, like PBM contracts, on behalf of ERISA plans if the terms of the contract are not reasonable or if the service provider receives more than reasonable compensation for the services provided. In such cases, the service provider may also be required to disgorge any unreasonable compensation received and may be subject to civil penalties imposed by the U.S. Department of Labor (“DOL”).

In November 2007, the DOL announced final revisions to Form 5500 and its related schedules effective for plan years beginning on or after January 1, 2009. The revised Form 5500, which most pension and welfare plans subject to ERISA are required to file, includes modifications to Schedule C on which plans are required to report compensation paid to service providers.

In December 2009, the DOL also announced a new project to promulgate regulations under Section 408(b)(2) of ERISA. The regulations, which were previously issued in proposed form, could require service providers, including PBMs, to provide detailed disclosure regarding all direct and indirect compensation to be received in connection with the services to be provided, as well as potential conflicts of interest.

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We cannot be certain the extent to which newly issued disclosure regulations may apply to our business as the DOL has provided very little final guidance regarding what constitutes reportable compensation under a PBM agreement.

State laws discussed in this Government Regulation section that may be applicable to us or to plan sponsors that are our customers may be preempted in whole or in part by ERISA. However, the scope of ERISA preemption is uncertain and is subject to conflicting court rulings.

False Claims and Fraudulent Billing Statutes - A range of federal civil and criminal laws target false claims and fraudulent billing activities. One of the most significant of these laws is the Federal False Claims Act (“FCA”), which prohibits the submission of a false claim or the making of a false record or statement in order to secure reimbursement from, or limit reimbursement to, a government-sponsored program. The Fraud Enforcement and Recovery Act of 2009 (“FERA”) implemented substantial changes to the FCA which expand the scope of FCA liability, provide for new investigative tools and make it easier for qui tam relators (often referred to as “whistleblowers”) to bring and maintain FCA suits on behalf of the government. PPACA further eased the burden for whistleblowers to bring and maintain FCA suits by modifying the “public disclosure” and “original source” provisions of the FCA. Some states have passed substantially similar acts. In recent years, federal and state governments have launched several initiatives aimed at uncovering practices that violate false claims or fraudulent billing laws. FERA also expanded the FCA to cover improperly avoiding an obligation

to pay money to the government, and PPACA clarified that the retention of overpayments beyond the repayment deadline is a violation of the FCA. In addition, PPACA provides that a violation of the federal anti-remuneration law constitutes a false or fraudulent act under the FCA and expands the jurisdiction of the FCA to the health insurance exchanges to be created under PPACA. PPACA also provides for the imposition of civil monetary penalties for knowingly making or causing to be made any false or fraudulent record or statement material to a false or fraudulent claim for payment under a government-sponsored program, for knowingly failing to report and return an overpayment, and for false statements in provider enrollment applications. The Federal Deficit Reduction Act of 2005 (“DRA”), for example, requires certain entities that receive or make annual Medicaid payments over a certain amount to provide their employees and certain contractors and agents with certain information regarding the federal and state false claims acts, whistleblower protections, and the entity’s processes for detecting and preventing fraud, waste and abuse. Claims under these laws may be brought either by the government or by private individuals on behalf of the government through a qui tam or “whistleblower” action, as discussed in more detail elsewhere in this Government Regulation section.

In addition, federal and state governments have commenced numerous investigations of various pharmaceutical manufacturers, PBMs, pharmacies and health care providers in recent years with respect to false claims, fraudulent billing and related matters. The federal government has entered into settlement agreements with several companies in the pharmaceutical services industry following claims by the federal government that such parties violated the FCA by: (i) improperly marketing and pricing drugs; (ii) overstating the average wholesale prices of products; (iii) paying illegal remuneration to induce the purchase of drugs; and/or (iv) failing to accurately report “best price” under the Medicaid program.

FDA Regulation - The United States Food and Drug Administration (“FDA”) generally has authority to regulate drugs, drug classifications and drug promotional information and materials that are disseminated by a drug manufacturer or by other persons on behalf of a drug manufacturer. We previously operated a FDA-regulated repackaging facility where we repackaged certain drugs into the most common prescription quantities dispensed from our mail service pharmacies, but we closed this repackaging facility in April 2010. The FDA also may inspect facilities in connection with procedures implemented to effect recalls of prescription drugs. In addition, the FDA has authority to require the submission and implementation of a risk evaluation and mitigation strategy (“REMS”) if the FDA determines that that a REMS is necessary for the safe and effective marketing of a drug. To the extent we dispense products subject to REMS requirements or provide REMS services to pharmaceutical manufacturers, we are subject to audit by the FDA and the pharmaceutical manufacturer. The FDA also has

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regulatory authority over medical devices such as OTC genetic tests and genetic tests conducted by medical laboratories, and the FDA continues to evaluate the need for further regulation of such tests.

Formulary Regulation - A number of states have begun to regulate the administration of prescription drug benefits. For example, some states have passed laws mandating coverage for off-label uses of drug products where those uses are recognized in peer-reviewed medical journals or reference compendia. Other states have enacted laws that regulate the development and use of formularies by insurers, MCOs and other third party payors. These laws have included requirements on the development, review and update of formularies, the role and composition of pharmacy and therapeutics committees, the disclosure of formulary information to health plan members, and a process for allowing members to obtain non-preferred drugs without additional cost-sharing when they are medically necessary and are determined to be clinically appropriate. Additionally, the NAIC has developed a model law, the “Health Carriers Prescription Drug Benefit Management Model Act,” that addresses formulary regulation issues for risk-bearing entities regulated by state insurance commissioners and could form the basis of state legislation. The MMA also regulates how formularies are developed for and administered to beneficiaries of Medicare Part D. In July 2008, Congress enacted the Medicare Improvements for Patients and Providers Act which requires the Secretary for HHS to identify certain classes and categories of drugs for which, subject to certain exceptions, all the drugs in any such class or category must be included in a Medicare Part D plan’s formulary. The increasing government regulation of formularies could significantly affect our ability to develop and administer formularies on behalf of our insurer, MCO and other clients.

Government Agreements - In September 2005, Caremark’s subsidiary, AdvancePCS (now known as CaremarkPCS, L.L.C.), entered into a settlement agreement with the federal government relating to certain alleged PBM business practices, pursuant to which AdvancePCS agreed, among other things, to adhere to certain business practices pursuant to a consent order and to maintain a compliance program in accordance with a corporate integrity agreement entered into with the OIG for a period of five years. This corporate integrity agreement expired by its terms in September 2010. However, our PBM business remains subject to the terms of a consent order entered into with a number of states in the first quarter of 2008 relating to certain of our PBM business practices.

In March 2008, the Company entered into a settlement agreement with the federal government and a number of states related to the dispensing of the generic drug ranitidine at its retail pharmacies. At the same time, the Company entered into a corporate integrity agreement with the OIG for a period of five years applicable to certain retail and mail service operations of the Company. This 2008 corporate integrity agreement requires, among other things, maintenance of our compliance program, employee training, specific reviews by an independent review organization and various government reporting obligations. Failure to meet our obligations under this corporate integrity agreement could result in stipulated financial penalties, and failure to comply with material terms could lead to exclusion of our applicable business from participation in federal health care programs.

In January 2009, we entered into separate settlement agreements with the FTC and the HHS Office for Civil Rights (“OCR”) resolving a joint investigation prompted by 2006 media reports of disposal of patient information in dumpsters at a limited number of CVS/pharmacy locations. As part of the FTC settlement, we agreed to maintain appropriate enterprise-wide information security policies and procedures during the twenty year term of the agreement. The FTC settlement also provides for periodic compliance monitoring by an external assessor. As part of the OCR settlement, we agreed to maintain appropriate waste disposal policies and procedures, training and employee sanctions at our retail stores. The OCR settlement has a three year term and provides for annual compliance monitoring by an external assessor.

In October 2010, the Company entered into a non-prosecution agreement and civil settlement agreement with the U.S. Department of Justice (“DOJ”) and various United States Attorneys’ Offices relating to the sale and distribution of pseudoephedrine products at certain CVS/pharmacy stores, primarily in California and Nevada.

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The Company also entered into a related memorandum of agreement with the DEA. The non-prosecution agreement and the memorandum of agreement contain certain ongoing compliance requirements for the Company, and failure to comply with the terms of these documents could lead to civil or criminal remedies, financial penalties and/or administrative remedies against the DEA registrations for our retail pharmacies and distribution centers.

In addition to the government agreements described above, the Company and/or its various affiliates are subject to other consent decrees or settlement agreements with various federal, state and local authorities that may contain certain ongoing repotting, monitoring or other compliance requirements for the Company. These agreements relate to such matters as privacy practices, waste disposal practices, selling expired products, environmental and safety matters, tobacco sales, marketing and advertising practices, pharmacy operations and various other business practices.

Managed Care Reform - In addition to health reforms enacted by PPACA, proposed legislation has been considered at the state level, and legislation has been enacted in several states, aimed primarily at providing additional rights and access to drugs to individuals enrolled in managed care plans. This legislation may impact the design and implementation of prescription drug benefit plans sponsored by our PBM health plan clients and/or the services we provide to them. Some of these initiatives would, among other things: (i) require that health plan members have greater access to drugs not included on a plan’s formulary; (ii) give health plan members the right to sue their health plans for malpractice if they have been denied care; and/or (iii) mandate the content of the appeals or grievance process when a health plan member is denied coverage. Both the scope of the managed care reform proposals considered by state legislatures and reforms enacted by states to date vary greatly, and the scope of future legislation that may be enacted is uncertain.

Medicare Part D - The MMA created Medicare Part D, the Medicare drug benefit program, in January 2006. Medicare beneficiaries entitled to Medicare benefits under Part A or enrolled in Medicare Part B are eligible for drug coverage under Medicare Part D. Regulations implementing Medicare Part D included requirements relating to developing and administering formularies, establishing pharmacy networks, marketing of Medicare Part D plans, processing and adjudicating claims at point of sale and compliance with electronic prescribing standards. The Medicare Part D program has undergone significant legislative and regulatory changes since its inception, including changes made by PPACA. Effective for the 2010 plan year, CMS issued a regulation requiring that any “differential” or “spread” be reported as an administrative cost rather than a drug cost of the plan sponsor for purposes of calculating certain government subsidy payments and the drug price to be charged to enrollees. This change resulted in Medicare Part D plan sponsors contracting for pass-through pricing for their retail networks rather than pricing that included the use of retail network “differential” or “spread”. This regulatory change has reduced the profitability of our Medicare Part D business. Other regulatory changes effective for the 2010 plan year include: requiring that any rebates retained by the PBM reduce the Medicare Part D sponsor’s drug costs reported to the government, regardless of the terms of the contract between the PBM and Medicare Part D sponsor; requiring that clean claims from pharmacies be paid within 14 days (for electronic claims) or 30 days (for non-electronic claims); and that substantially all drugs in certain clinical classes be included on formularies.

Regulatory changes effective for the 2011 plan year include giving CMS greater latitude to limit the number of Medicare Part D plans available by allowing it to eliminate plans with persistently low enrollment and plans that it views as poor performers based on certain CMS performance criteria, shortening the period for Medicare Part D sponsors that acquire other Medicare Part D plans to merge the plans or otherwise change them so that their plan offerings remain substantially different, and limiting the period for coordination of benefits to three years for all payers. PPACA changes to the Medicare Part D benefit that are effective for the 2011 plan year include the implementation of the gap discount program under which participating manufacturers fund discounts of 50% on brand drugs obtained during the coverage gap or “donut hole,” starting the phase-out of the coverage gap for generic drugs (to be completed by 2020), allowing Medicare Part D plans that bid a “de minimis” amount above the low-income subsidy (“LIS”) benchmark to absorb the cost of the difference between their bid and the LIS benchmark in order to avoid reassignment of their LIS enrollees, simplification of election periods for Medicare

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Parts C and D, reducing the premium subsidy for higher-income beneficiaries, extending complaint tracking and reporting, and simplifying the appeals process for enrollees. PPACA also requires the Secretary of HHS to develop rules for shorter dispensing periods for enrollees in long-term care (“LTC”) facilities in order to reduce waste beginning in 2012 and new disclosure requirements are expected to be implemented in 2012. HHS issued proposed regulations in November 2010 that would, among other things, require dispensing of brand medications to enrollees in LTC facilities in no greater than 7-day increments at a time and require additional reporting by Medicare Part D plans on dispensing methodologies and unused prescriptions returned to stock by LTC pharmacies. Several of the PPACA changes will require significant adjudication and reporting systems modifications.

Medicare Part D continues to attract a high degree of legislative and regulatory scrutiny, and the applicable government rules and regulations continue to evolve. Accordingly, it is possible that legislative and regulatory developments could materially affect our Medicare Part D business or profitability.

Mental Health Parity Legislation - The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 was signed into law on October 3, 2008, and an interim final rule implementing the law was issued on February 2, 2010. Compliance is required for plan years beginning on or after July 1, 2010. The law requires group health plans that provide both medical/surgical benefits and mental health or substance abuse disorder benefits to ensure that the financial requirements and treatment limitations that apply to the mental health and substance abuse disorder benefits are no more restrictive than those that apply to the medical/surgical benefits. While the regulation contains a special rule allowing for “multi-tiered prescription drug benefits” that meet certain conditions, there is considerable uncertainty regarding the application of the rule. This has caused some group health plans to consider dropping mental health benefits, including drugs that treat these conditions, to avoid being found in violation of the regulation.

Network Access Legislation - A majority of states now have some form of legislation affecting the ability to limit access to a pharmacy provider network or remove network providers. Certain “any willing provider” legislation may require us or our clients to admit a non-participating pharmacy if such pharmacy is willing and able to meet the plan’s price and other applicable terms and conditions for network participation. These laws vary significantly from state to state in regard to scope, requirements and application. ERISA plans and payors have challenged the application of such laws on the basis of ERISA preemption. However, the scope of ERISA preemption is uncertain and is subject to conflicting court rulings. In addition, the MMA contains an “any willing provider” requirement for pharmacy participation in Medicare Part D, and CMS has interpreted this as requiring that a Medicare Part D sponsor, for each type of pharmacy in its network, allow participation by any pharmacy that meets the applicable terms and conditions for participation. To the extent any state or federal any willing provider laws are determined to apply to us or to certain of our clients or to the pharmacy networks we manage for our PBM clients, such laws could negatively impact the services and economic benefits achievable through a limited pharmacy provider network.

Some states also have enacted “due process” legislation that may (i) prohibit the removal of a provider from a pharmacy network and/or (ii) impact how we conduct audits of network pharmacies and recover audit discrepancies, except in compliance with certain procedures. Other state legislation prohibits days’ supply limitations or co-payment differentials between mail service and retail pharmacy providers. In addition, under Medicare Part D, CMS requires that if a Part D sponsor offers a 90-day supply at mail, it must allow retail pharmacies to also offer a 90-day supply on the same terms.

PBM Laws and Regulation - Legislation seeking to regulate PBM activities in a comprehensive manner has been introduced or enacted in a number of states. This legislation varies in scope and often contains provisions that: (i) impose certain fiduciary duties upon PBMs to clients and plan members; (ii) require PBMs to remit to clients or their plan members certain rebates, discounts and other amounts received by PBMs related to the sale of drugs; (iii) regulate product substitution and intervention; (iv) impose broad disclosure obligations upon PBMs to clients and their plan members and/or (v) impose licensing or registration requirements. To the extent states or

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other government entities enact legislation regulating PBMs that survive legal challenges to their enforceability, such legislation could adversely impact our ability to conduct business on commercially reasonable terms in locations where the legislation is in effect.

In addition, certain quasi-regulatory organizations, including the National Association of Boards of Pharmacy and the National Association of Insurance Commissioners (“NAIC”) have issued model regulations or may propose future regulations concerning PBMs and/or PBM activities. Similarly, credentialing organizations such as NCQA and the Utilization Review Accreditation Commission (“URAC”) may establish voluntary standards regarding PBM or specialty pharmacy activities. For example, URAC has issued PBM accreditation standards for PBMs serving the commercially insured market, and Caremark is currently accredited as a PBM by URAC. While the actions of these quasi-regulatory or standard-setting organizations do not have the force of law, they may influence states to adopt their requirements or recommendations and influence client requirements for PBM or specialty pharmacy services. Moreover, any standards established by these organizations could also impact our health plan clients and/or the services we provide to them.

In addition to state statutes and regulations, we are also subject to state common laws to the extent applied to PBMs through judicial interpretation or otherwise. Potential common law claims could involve, for example, breach of fiduciary duty, constructive fraud, fraud or unjust enrichment.

Pharmacy Licensure and Regulation - We are subject to state and federal statutes and regulations governing the operation of retail and mail pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substance and listed chemical products, and medical and controlled substance waste disposal. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. Federal and state controlled substance laws require us to register our pharmacies and distribution centers with the DEA and state controlled substances agencies and to comply with security, recordkeeping, inventory control, personnel and labeling standards in order to possess and dispense controlled substances and listed chemical products.

We also are subject to regulation by the DEA and state pharmacy boards in connection with our online pharmacies because we dispense prescription drugs pursuant to refill orders received through our Internet websites, among other methods. Numerous state laws also exist affecting our receipt and processing of electronic prescription drug orders.

Certain violations of the federal controlled substances laws can subject the Company, its pharmacies and distribution centers, and individual pharmacy personnel to criminal and civil penalties and can also result in administrative action by the DEA, including suspension or revocation of a pharmacy’s or distribution center’s registration to distribute controlled substances and/or listed chemical products. State authorities and state boards of pharmacy similarly have the authority to impose both monetary penalties and disciplinary sanctions, including revocation of a pharmacy’s or individual pharmacist’s license to dispense controlled substances, and these penalties and sanctions are in addition to sanctions imposed under the federal controlled substances laws. Certain violations of these federal and state legal requirements can also trigger other consequences for the Company’s business and could potentially impact our eligibility to participate in federal health care programs. See Item 3, “Legal Proceedings” for further information.

Other statutes and regulations may affect our mail service operations. For example, the FTC requires mail service sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail service orders within thirty days and to provide clients with refunds when appropriate. In addition, the United States Postal Service has statutory authority to restrict the transmission of drugs and medicines through the mail, and state licensing authorities may restrict the types of personnel who may work in mail service operations.

Our pharmacists and technicians are subject to state regulation of the profession of pharmacy, and our employees who are engaged in a professional practice must satisfy applicable state licensing or registration requirements and

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comply with applicable professional standards. Failure to comply with these regulations could subject us and our employees to disciplinary action, including fines, and could cause our licenses and permits and our employees licenses to be suspended or revoked.

Plan Design Legislation - Some states have enacted legislation that prohibits a health plan sponsor from implementing certain restrictive design features, and many states have introduced legislation to regulate various aspects of managed care plans, including provisions relating to pharmacy benefits. For example, some states have adopted “freedom of choice” legislation, which provides that: (i) members of a plan may not be required to use network providers but must instead be provided with benefits even if they choose to use non-network providers or (ii) a plan member may sue his or her health plan if care is denied. Various states have enacted, or have considered enacting, legislation regarding plan design mandates, including legislation that prohibits or restricts therapeutic interchange, requires coverage of all drugs approved by the FDA or prohibits denial of coverage for non-FDA approved uses. Some states mandate coverage of certain benefits or conditions, and PPACA requires the coverage of certain preventive services at no cost sharing. Such legislation does not generally apply to us, but it may apply to certain of our clients (generally, MCOs and health insurers). Other states have enacted legislation purporting to prohibit health plans not covered by ERISA from requiring or offering members financial incentives for use of mail service pharmacies or for use of certain health care providers. Legislation imposing plan design mandates may apply to certain of our clients and could have the effect of limiting the economic benefits achievable through PBM services we provide.

Privacy and Confidentiality Requirements - Many of our activities involve the receipt, use and disclosure by us of personally identifiable information (“PII”) as permitted in accordance with applicable federal and state privacy and data security laws, which require organizations to provide appropriate privacy protections and security safeguards for such information. In addition to PII, we use and disclose de-identified data for analytical and other purposes.

The federal Health Insurance Portability and Accountability Act of 1996 and the regulations issued thereunder (collectively “HIPAA”) impose extensive requirements on the way in which health plans, health care providers, health care clearinghouses (known as “covered entities”) and their business associates use, disclose and safeguard protected health information (“PHI”). HIPAA also gives individuals certain rights with respect to their PHI. For most uses and disclosures of PHI other than for treatment, payment, health care operations or certain public policy purposes, HIPAA generally requires that covered entities obtain the individual’s written authorization, Criminal penalties and civil sanctions may be imposed for failing to comply with HIPAA standards.

In February 2009, Congress enacted the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), as part of ARRA. During 2010, OCR promulgated new and updated non-final regulations in response to the HITECH Act. The HITECH Act contains significant changes to the HIPAA Privacy and Security Rules, which these regulations began to address. These include new restrictions on the use of PHI without an individual’s written authorization, a new requirement to account for routine disclosures of PHI held in an electronic health record, a requirement to notify individuals of breaches to their PHI, new enforcement rights of state attorneys general, extension of the federal privacy and security law provisions and penalties to business associates of covered entities, and increased penalties for violation of the law. While some of the provision of the HITECH Act are already in effect, final regulations regarding the HIPAA privacy, security, enforcement and data breach rules are expected to be issued by OCR early in 2011. Since the rules implementing much of the HITECH Act have not yet been finalized, we cannot at this time determine the extent to which these changes may apply to, or impact, our business.

In addition to HIPAA, most states have enacted health care information confidentiality laws which limit the disclosure of confidential medical information. These state laws supersede HIPAA to the extent they are more protective of individual privacy than is HIPAA. Most states have also enacted legislation and regulations governing the security of PII and specifying notification requirements for any security breaches invoicing PII.

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In addition to HIPAA and HITECH, the Genetic Information Nondiscrimination Act (“GINA”) was signed into law on May 21, 2008, and proposed and interim final regulations were issued under it in 2009 and 2010. GINA prohibits discrimination based on genetic information in health coverage (Title I) and employment (Title II). Under GINA, health plans are not permitted to use or disclose genetic information for underwriting purposes, which includes eligibility determinations. They also may not collect genetic information, such as by requiring genetic testing, except in very limited circumstances.

Reimbursement - A significant portion of our net revenue is derived directly from Medicare, Medicaid and other government-sponsored health care programs, and we are therefore subject to, among other laws and regulations, federal and state reimbursement laws and regulatory requirements, anti-remuneration laws, the Stark Law and/or federal and state false claims laws. Sanctions for violating these federal and/or state laws may include, without limitation, recoupment or reduction of government reimbursement amounts, criminal and civil penalties and exclusion from participation in Medicare, Medicaid and other government health care programs. Also, we provide products and services to managed care entities that provide services to beneficiaries of Medicare, Medicaid and other government-sponsored health care programs, as well as employers and other entities that qualify for the Medicare Part D drug subsidy and/or the early retiree reinsurance program created under PPACA.

The Federal Government and numerous state governments have given increased attention to how pharmaceutical manufacturers develop and report pricing information, which, in turn, is used in setting payments under the Medicare and Medicaid programs. One element common to most payment formulas, Average Wholesale Price (“AWP”), has come under criticism for allegedly inaccurately reflecting prices actually charged and paid at the wholesale level. The calculation and reporting of AWP have been the subject of investigations by federal and state governments and litigation brought against pharmaceutical manufacturers and data services that report AWP. We are not responsible for calculations, reports or payments of AWP; however, such investigations or lawsuits could impact our business because many of our client contracts, pharmaceutical purchase agreements, retail network contracts and other agreements use AWP as a pricing benchmark. In conjunction with a class action settlement implemented in September 2009 involving First DataBank (“FDB”) and Medi-Span, two entities that publish the AWP of pharmaceuticals, the methodology used to calculate AWP was modified in a manner that reduced AWP for many brand drugs and some generic drugs. We have reached understandings with most of our PBM clients and other third party payors to adjust reimbursements to account for this change in methodology, but most state Medicaid programs that utilize AWP as a pricing reference have not taken action to make similar adjustments. As a result, we have experienced reduced Medicaid reimbursement for certain products since the settlement was implemented. In addition, FDB has indicated that it intends to discontinue the publishing of AWP altogether in September 2011. Although Medi-Span has indicated that it intends to continue publishing AWP, we believe the pharmaceutical industry will be evaluating and/or developing an alternative pricing reference to replace AWP. We will continue to work with our PBM clients and other payors to anticipate and mitigate the impact of possible future changes to applicable references for pricing pharmaceuticals. AWP has already been replaced by Average Sales Price as the basis for reimbursing physicians, and sometimes pharmacies, for outpatient prescription drugs under Medicare Part B. The federal Medicaid rebate program requires participating drug manufacturers to provide rebates on all drugs purchased by state Medicaid programs. Investigations have commenced by certain governmental entities that question whether the best price available to essentially any client other than the Medicaid program, or “best price,” was properly calculated, reported and paid by the manufacturers to the Medicaid programs. We are not responsible for calculations, reports or payments of “best price”; however, these investigations could impact our ability to negotiate rebates from drug manufacturers. PPACA increased the amount of rebates required to be paid by manufacturers under the Medicaid program and also imposes certain annual fees on pharmaceutical manufacturers. We do not anticipate the increased Medicaid rebate levels or the annual fees to impact the discounts we obtain from pharmaceutical companies.

PPACA made several other significant changes to the Medicaid rebates and reimbursement. One of these was to revise the definition of AMP and the reimbursement formula for multi-source (i.e., generic) drugs. CMS has not

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yet issued regulations implementing these changes. Therefore, we cannot predict the effect of these changes on Medicaid reimbursement or their impact on the Company. Another significant PPACA change was to require brand and generic manufacturers to pay rebates for product dispensed to beneficiaries enrolled in Medicaid MCOs similar to the way rebates are now required for Medicaid fee-for-service (“FFS”) beneficiaries beginning in 2010. Medicaid MCOs are not prohibited from negotiating with manufacturers for rebates above Medicaid’s statutory rebates. However, the expansion of the federal Medicaid rebate program to Medicaid MCOs has generally resulted in a reduction of the rebates that manufacturers are willing to pay to the Medicaid MCOs and a reduction of the rebates we receive under our rebate agreements on behalf of our Medicaid MCO clients.

Certain state Medicaid programs only allow for reimbursement to pharmacies residing in the state or in a border state. While we believe that we can service our current Medicaid customers through our existing pharmacies, there can be no assurance that additional states will not enact in-state dispensing requirements for their Medicaid programs. Some states have adopted legislation and regulations requiring that a pharmacy participating in the state Medicaid program give the state the “best price” that the pharmacy makes available to any third party payor. These requirements are sometimes referred to as “most favored nation pricing” payment systems. Other states have enacted “unitary pricing” legislation, which mandates that all wholesale purchasers of drugs within the state be given access to the same discounts and incentives. A number of states have also recently introduced legislation seeking to control drug prices through various statutory limits, rebates or discounts extending to one or more categories of the state’s population.

Changes in reporting of AWP, AMP, ASP or other adjustments that may be made regarding the reimbursement of drug payments by Medicaid and Medicare, could impact our pricing to customers and other payors and/or could impact our ability to negotiate discounts or rebates with manufacturers, wholesalers, PBMs or retail pharmacies. In some circumstances, such changes could also impact the reimbursement that we receive from Medicare or Medicaid programs for drugs covered by such programs and from MCOs that contract with government health programs to provide prescription drug benefits.

Reimportation - The MMA amended the Food, Drug and Cosmetic Act by providing that the FDA should promulgate rules that would permit pharmacists and wholesalers to import prescription drugs from Canada into the United States under certain circumstances. However, the promulgation of such rules is subject to a precondition that the FDA certify to Congress that such reimportation would not pose any additional risk to the public’s health and safety and that it would result in a significant cost reduction. To date, the FDA has not provided such a certification. Under certain defined circumstances, the FDA has used its discretion to permit individuals and their physicians to bring into the U.S. small quantities of drugs for treatment of a patient’s serious condition for which effective treatment is not available in the U.S. Congress then expanded this personal use policy in very specific circumstances to allow individuals to personally transport from Canada for their personal use a 90-day supply of any prescription drug, regardless of availability in the U.S. The language does not allow purchases by mail order or via the Internet, and excludes biologics and controlled substances. The FDA continues to strongly oppose efforts to allow the widespread importation of drugs from Canada and elsewhere, citing concerns that such activities undermine the FDA’s ability to oversee the quality and safety of the nation’s drug supply. If the FDA changes its position and permits the broader importation of drugs from Canada in the future, or if new or pending health legislation or regulations permit the importation of drugs from the European Union or other countries in the future, our pharmacy services could be impacted.

Retail Clinics - States also regulate retail clinics operated by nurse practitioners or physician assistants through physician oversight, lab licensing and the prohibition of the corporate practice of medicine. A number of states have implemented or proposed laws that impact certain components of retail clinic operations such as physician oversight, signage, third party contracting requirements, bathroom facilities, and scope of services. These laws and regulations may affect the operation and expansion of our owned and managed retail clinics.

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Retiree Drug Subsidy - The MMA created a drug subsidy program available to certain employer, union and other group plans that provide retiree coverage to Medicare Part D eligible individuals that is at least equivalent to Medicare Part D coverage. The subsidy is equal to 28% of drug costs, and is currently tax-free. However, for plan years beginning in 2013, PPACA eliminates the tax deductibility of the retiree drug subsidy payment received by sponsors of retiree drug plans. This may cause some employers to transition their retirees to employer-sponsored Medicare Part D plans. As part of PPACA, Congress established a new temporary early retiree reinsurance program providing reimbursement to employer and union sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees aged 55 to 64 and their spouses, surviving spouses, and dependents. The program reimburses sponsors for certain claims between $15,000 and $90,000. Congress appropriated funding of $5 billion for this temporary program, which became effective June 1, 2010. The program ends when the funding is exhausted, but no later than January 1, 2014.

Safety Regulation - The Occupational Safety and Health Act of 1970, as amended (“OSHA”), establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated under OSHA, and various record keeping, reporting and procedural requirements. Many of these OSHA standards, as well as various state and local laws and regulations pertaining to employee safety and health, apply to our operations. Any failure to comply with these regulations could result in fines by government authorities.

Self-Referral Laws - The federal law commonly known as the “Stark Law” prohibits a physician from referring Medicare or Medicaid beneficiaries for “designated health services” (which include, among other things, outpatient prescription drugs, home health services and durable medical equipment and supplies) to an entity with which the physician or an immediate family member of the physician has a “financial relationship” and prohibits the entity receiving a prohibited referral from presenting a claim to Medicare or Medicaid for the designated health service furnished under the prohibited referral. Possible penalties for violation of the Stark Law include denial of payment, refund of amounts collected in violation of the statute, civil monetary penalties and Medicare and Medicaid program exclusion. The Stark Law contains certain statutory and regulatory exceptions for physician referrals and physician financial relationships, including certain physician consulting arrangements, fair market value purchases by physicians and the provision of electronic prescribing technology to physicians.

State statutes and regulations also prohibit payments for the referral of individuals by physicians to health care providers with whom the physicians have a financial relationship. Some of these state statutes and regulations apply to services reimbursed by governmental as well as private payors. Violation of these laws may result in prohibition of payment for services rendered, loss of pharmacy or health care provider licenses, fines and criminal penalties. The laws and exceptions or safe harbors may vary from the federal Stark

Law and vary significantly from state to state. The laws are often vague, and, in many cases, have not been interpreted by courts or regulatory agencies.

State Insurance Laws - Fee-for-service prescription drug plans and our PBM service contracts, including those in which we assume certain risk under performance guaranties or similar arrangements, are generally not subject to insurance regulation by the states. However, if a PBM offers to provide prescription drug coverage on a capitated basis or otherwise accepts material financial risk in providing pharmacy benefits, laws and regulations in various states may be applicable. Such laws may require that the party at risk become licensed as an insurer, establish reserves or otherwise demonstrate financial viability. Laws that may apply in such cases include insurance laws and laws governing MCOs and limited prepaid health service plans.

Our SilverScript and Accendo PDPs each must be licensed as a risk-bearing entity under applicable state laws or they must have obtained a waiver of the licensing requirement from CMS. Both SilverScript and Accendo are licensed in all states in which they offer PDPs and do not operate under any Medicare Part D waivers. As licensed insurance companies, SilverScript and Accendo and their agents are subject to various state insurance regulations that generally require, among other things, maintenance of capital and surplus requirements, review of certain material transactions and the filing of various financial, licensing and operational reports. Pursuant to

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the MMA, state insurance licensing, insurance agent/broker licensure and solvency laws and regulations are generally applicable to PDPs, but the application of other state laws to Medicare Part D are generally preempted by Medicare Part D to the extent that Medicare Part D regulates the issue.

Some states have laws that prohibit submitting a false claim or making a false record or statement in order to secure reimbursement from an insurance company. These state laws vary, and violation of them may lead to the imposition of civil or criminal penalties. Additionally, several states have passed legislation governing the prompt payment of claims that requires, among other things, that health plans and payors pay claims within certain prescribed time periods or pay specified interest penalties. These laws vary from state to state in regard to scope, requirements and application, and it is not clear the extent to which they may apply to our clients or to us. Certain health plans and payors may be exempt from such laws on the basis of ERISA preemption, but the scope of ERISA preemption is unclear.

State Prescription Drug Assistance Programs - Many states have established or modified their drug assistance programs for the elderly so that they constitute qualified state pharmacy assistance programs (“SPAPs”) that supplement Medicare Part D. Payments by qualified SPAPs on behalf of a Medicare Part D enrollee are treated under Medicare Part D as if they were made by the enrollees themselves, thereby counting towards the enrollees’ true out-of-pocket costs and helping them qualify for catastrophic coverage sooner. Medicare Part D plans are required to coordinate benefits with SPAPs, including allowing SPAPs to subsidize the Medicare Part D premiums of their members and/or their Medicare Part D cost sharing. Some qualified SPAPs have also received permission from CMS to auto-assign their enrollees that do not choose their own Medicare Part D plans into PDPs.

Telemarketing and Other Outbound Calls - Certain federal and state laws give the FTC, Federal Communications Commission and state attorneys general law enforcement tools to regulate telemarketing practices and certain automated outbound calls. These laws may require disclosures of specific information, prohibit misrepresentations, limit when consumers may be called, require consumer consent prior to being called, require transmission of Caller ID information, prohibit certain abandoned outbound calls, prohibit unauthorized billing, set payment restrictions for the sale of certain goods and services and require the retention of specific business records.

Third Party Administration and Other State Licensure Laws - Many states have licensure or registration laws governing certain types of administrative organizations, such as preferred provider organizations, third party administrators and companies that provide utilization review services. Several states also have licensure or registration laws governing the organizations that provide or administer consumer card programs (also known as cash card or discount card programs). The scope of these laws differs significantly from state to state, and the application of such laws to our activities often is unclear.

Whistleblower Statutes - Certain federal and state laws, including the FCA, contain provisions permitting the filing of qui tam or “whistleblower” lawsuits alleging violations of such laws. Whistleblower provisions allow private individuals to bring lawsuits on behalf of the federal or state government alleging that the defendant has defrauded the government, and there is generally no minimum evidentiary or legal threshold required for bringing such a lawsuit. These lawsuits are typically filed under seal with the applicable federal or state enforcement authority, and such authority is required to review the allegations made and to determine whether it will intervene in the lawsuit and take the lead in the litigation. If the government intervenes in the lawsuit and prevails, the whistleblower plaintiff filing the initial complaint may share in any settlement or judgment. If the government does not intervene in the lawsuit, the whistleblower plaintiff may pursue the action independently. Because a qui tam lawsuit typically is filed under seal pending a government review of the allegations, the defendant generally may not be aware of the lawsuit until the government determines whether or not it will intervene or until the lawsuit is otherwise unsealed, a process which may take years. See Item 3, “Legal Proceedings,” for further information.

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We believe that we are in material compliance with existing laws and regulations applicable to our retail and PBM businesses. We have implemented standard operating procedures, internal controls and a compliance and integrity program designed to help ensure such compliance, and we monitor legislative and judicial developments that could impact our business practices in an effort to ensure future compliance.

We can give no assurance, however, that our business, financial condition and results of operations will not be materially adversely affected, or that we will not be required to materially change our business practices, based on: (i) future enactment of new health care or other laws or regulations; (ii) the interpretation or application of existing laws or regulations, including the laws and regulations described in this Government Regulation section, as they may relate to our business or the pharmacy services or retail industry; (iii) pending or future federal or state governmental investigations of our business or the pharmacy services or retail industry; (iv) institution of government enforcement actions against us; (v) adverse developments in any pending qui tam lawsuit against us, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed against us; or (vi) adverse developments in other pending or future legal proceedings against us or affecting the pharmacy services or retail industry.

Available Information

CVS Caremark Corporation is a Delaware corporation. Our corporate office is located at One CVS Drive, Woonsocket, Rhode Island 02895, telephone (401) 765-1500. Our common stock is listed on the New York Stock Exchange under the trading symbol “CVS.” General information about CVS Caremark is available through the Company’s Web site at http://info.cvscaremark.com. Our financial press releases and filings with the Securities and Exchange Commission are available free of charge within the Investors section of our Web site at http://www.cvscaremark.com/investors. In addition, the SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers, such as the Company, that file electronically with the SEC. The address of that Web site is http://www.sec.gov.

Item 1A. Risk Factors

Our business is subject to various industry, economic, regulatory and other 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.

The health of the economy in general and in the markets we serve could adversely affect our business and our financial results.

Our business is affected by the economy in general, including changes in consumer purchasing power, preferences and/or spending patterns. These changes could affect drug utilization trends as well as the financial health and number of covered lives of our PBM clients, resulting in an adverse effect on our business and financial results.

In that regard, the economic recession resulted in declining drug utilization trends which continued into 2010. Although a recovery might be underway, it is possible that a worsening of the economic environment will cause further decline in drug utilization, and dampen demand for pharmacy benefit management services as well as consumer demand for products sold in our retail stores. If this were to occur, our business and financial results could be adversely affected.

Further, interest rate fluctuations, changes in capital market conditions and regulatory changes may affect our ability to obtain necessary financing on acceptable terms, our ability to secure suitable store locations under acceptable terms and our ability to execute sale-leaseback transactions under acceptable terms.

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Inability to fully realize the benefits of our fully integrated pharmacy services model.

We may not be able to achieve all of the anticipated long-term strategic benefits of the March 2007 Caremark merger. An inability to realize the full extent of, or any of the anticipated benefits could have an adverse effect on our business, financial position and results of operations, which may affect the value of the shares of our common stock.

Risks relating to the pending acquisition of UAC’s Medicare Part D business

In December 2010, the Company announced it had entered into an agreement to acquire the Medicare Part D business of UAC for approximately $1.25 billion. The transaction is subject to customary closing conditions, including necessary regulatory approvals, as well as approval by UAC shareholders. The Company currently expects that the transaction will close by the end of the second quarter of 2011. In the event the closing is delayed or does not occur and/or the regulatory review process materially alters the terms of the acquisition, the Company may not be able to realize the expected benefits of the transaction.

Efforts to reduce reimbursement levels and alter health care financing practices could adversely affect our businesses.

The continued efforts of health maintenance organizations, managed care organizations, PBM companies, government entities, and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates may impact our profitability. In particular, increased utilization of generic pharmaceuticals (which normally yield a higher gross profit rate than equivalent brand named drugs), has resulted in pressure to decrease reimbursement payments to retail and mail order pharmacies for generic drugs, causing a reduction in the generic profit rate. In addition, during the past several years, the U.S. health care industry has been subject to an increase in governmental regulation at both the federal and state levels. Efforts to control health care costs, including prescription drug costs, are underway at the federal and state government levels. Changing political, economic and regulatory influences may affect health care financing and reimbursement practices. If the current health care financing and reimbursement system changes significantly, the Company’s business, financial position and results of operations could be materially adversely affected.

PPACA made several significant changes to Medicaid rebates and reimbursement. One of these changes was to revise the definition of AMP and the reimbursement formula for multi-source drugs. CMS has not yet issued regulations implementing these changes. Therefore, we cannot predict the effect these changes will have on Medicaid reimbursement or their impact on the Company. In addition, PPACA made other changes that affect the coverage and plan designs that are or will be provided by many of our health plan clients, including the requirement for health insurers to meet a minimum MLR to avoid having to pay rebates to enrollees. These PPACA changes may not affect our business directly, but they could indirectly impact our services and/or business practices.

The possibility of PBM client loss and/or the failure to win new PBM business may adversely affect our business, financial position and results of operations.

Our PBM business generates net revenues primarily by contracting with clients to provide prescription drugs and related health care services to plan members. PBM client contracts often have terms of approximately three years in duration, so approximately one third of a PBM’s client base typically is subject to renewal each year. In some cases, however, PBM clients may negotiate a shorter or longer contract term or may require early or periodic renegotiation of pricing prior to expiration of a contract. Therefore, we face challenges in competing for new PBM business and retaining or renewing PBM business. Although none of our PBM clients represented more than 10% of our Company’s consolidated revenues in 2010, our top 10 clients are expected to represent approximately 21% of such revenues in 2011. There can be no assurance that we will be able to win new

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business or secure renewal business on terms as favorable to the Company as the present terms. Our failure to renew or win PBM business could adversely affect our business, financial position and results of operations.

Risks related to the frequency and rate of the introduction of generic drugs and brand name prescription products.

The profitability of retail and mail order pharmacy businesses are dependent upon the utilization of prescription drug products. Utilization trends are affected by, among other factors, the introduction of new and successful prescription pharmaceuticals as well as lower priced generic alternatives to existing brand name products. Accordingly, a slowdown in the introduction of new and successful prescription pharmaceuticals and/or generic alternatives (the sale of which normally yield higher gross profit margins than brand name equivalents) could adversely affect our business, financial position and results of operations.

Risks of declining gross margins in the PBM industry.

The PBM industry has been experiencing margin pressure as a result of competitive pressures and increased client demands for lower prices, enhanced service offerings and/or higher service levels. In that regard, our Company maintains contractual relationships with generic pharmaceutical manufacturers and brand name pharmaceutical manufacturers that provide for purchase discounts and/or rebates on drugs dispensed by pharmacies in our retail network and by our mail order pharmacies (all or a portion of which may be passed on to clients). Manufacturer rebates often depend on a PBM’s ability to meet contractual market share or other requirements, including in some cases the placement of a manufacturer’s products on the PBM’s formularies. Competitive pressures in the PBM industry have caused Caremark and other PBMs to share with clients a larger portion of rebates and/or discounts received from pharmaceutical manufacturers. In addition, market dynamics and regulatory changes have impacted our ability to offer plan sponsors pricing that includes the use of retail “differential” or “spread”, which could negatively impact our future profitability. Further, changes in existing federal or state laws or regulations or the adoption of new laws or regulations relating to patent term extensions, purchase discount and rebate arrangements with pharmaceutical manufacturers, or to formulary management or other PBM services could also reduce the discounts or rebates we receive. Accordingly, margin pressure in the PBM industry resulting from these trends could adversely affect our business, financial position and results of operations.

Regulatory and business changes relating to our participation in Medicare Part D may adversely affect our business, financial position and our results of operations.

Since its inception in 2006, Medicare Part D has resulted in increased utilization and decreased pharmacy gross margin rates as higher margin business, such as cash and state Medicaid customers, migrated to Medicare Part D coverage. Further, as a result of Medicare Part D and as a result of the elimination in 2013 of the tax deductibility of the retiree drug subsidy payment received by sponsors of retiree drug plans, our PBM clients could decide to discontinue providing prescription drug benefits to their Medicare-eligible members. To the extent this occurs, the adverse effects of Medicare Part D may outweigh any opportunities for new business generated by the new benefit. In addition, if the cost and complexity of Medicare Part D exceed management’s expectations or prevent effective program implementation or administration; if changes to the regulations regarding how drug costs are reported for Medicare Part D and retiree drug subsidy purposes are implemented in a manner that impacts the profitability of our Medicare Part D business; if the government alters Medicare program requirements or reduces funding because of the higher-than-anticipated cost to taxpayers of Medicare Part D or for other reasons; if we fail to design and maintain programs that are attractive to Medicare participants; if CMS imposes sanctions or other restrictions on our Medicare Part D business as a result of audits or other regulatory actions; or if we are not successful in retaining enrollees, or winning contract renewals or new contracts under Medicare Part D’s competitive bidding process, our Medicare Part D services and the ability to expand our Medicare Part D services could be materially and adversely affected, and our business, financial position and results of operations may be adversely affected.

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Changes in industry pricing benchmarks could adversely affect our business, financial position and results of operations.

Implementation of the FDB and Medi-Span settlements, described in the Government Regulation section, have resulted in changes in the methodology used to calculate AWP, which is the pricing reference used for many of our PBM client contracts, pharmaceutical purchase agreements, retail network contracts, specialty payor agreements and other contracts with third party payors. Following these settlements, FDB has indicated that it intends to discontinue the publishing of AWP altogether in September 2011. Although Medi-Span has indicated that it intends to continue publishing AWP for the foreseeable future, we believe the pharmaceutical industry will be evaluating and/or developing an alternative pricing reference to replace AWP.

Future changes to the use of AWP or to other published pricing benchmarks used to establish pharmaceutical pricing, including changes in the basis for calculating reimbursement by federal and state health programs and/or other payors, could impact the reimbursement we receive from Medicare and Medicaid programs, the reimbursement we receive from PBM clients and other payors and/or our ability to negotiate rebates and/or discounts with pharmaceutical manufacturers, wholesalers, PBMs and retail pharmacies. The effect of these possible changes on our business cannot be predicted at this time.

The industries in which we operate are extremely competitive and competition could adversely affect our business, financial position and results of operations.

Each of the retail pharmacy business and the PBM business currently operates in a highly competitive environment. As a pharmacy retailer, we compete with other drugstore chains, supermarkets, discount retailers, independent pharmacies, membership clubs, Internet companies and retail health clinics, as well as other mail order pharmacies and PBMs. In that regard, many pharmacy benefit plans have implemented plan designs that mandate or provide incentives to fill maintenance medications through mail order pharmacies. To the extent this trend continues, our retail pharmacy business could be adversely affected (although the effect of this would likely be mitigated by an increase in our own mail order business). In addition, some of these competitors may offer services and pricing terms that we may not be willing or able to offer. Competition may also come from other sources in the future. As a result, competition could have an adverse effect on our business, financial position and results of operations.

Competitors in the PBM industry include large national PBM companies, such as Medco Health Solutions, Inc. and Express Scripts, Inc., as well as many local or regional PBMs. In addition, there are several large health insurers and managed care plans (e.g., United Healthcare and CIGNA) and retail pharmacies which have their own PBM capabilities as well as several other national and regional companies that provide some or all of the same services. Some of these competitors may offer services and pricing terms that we may not be willing or able to offer. In addition, competition may also come from other sources in the future. As a result, competition could have an adverse effect on our business, financial position and results of operations.

Reform of the U.S. health care system may adversely affect our financial performance and the services we provide.

Congressional efforts to reform the U.S. health care system finally came to fruition in 2010 with the passage of PPACA, which will bring about the most significant structural changes to the health insurance system in decades. While the bulk of the structural changes enacted by PPACA will not be implemented until 2014, and some of the key changes, such as the individual mandate, are already being challenged at the judicial and legislative levels, it is expected that there will be increased government involvement in health care and regulation of PBM or pharmacy services. This may change the way the Company or its clients do business. Health plan sponsors may react to these changes and the uncertainty surrounding them by reducing or delaying purchases of cost control mechanisms and related services that the Company would provide. The Company cannot predict what effect, if any, the PPACA changes may have on its retail and pharmacy services businesses. Other legislative or market-

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driven changes in the health care system that the Company cannot anticipate could also have an adverse effect on our business, financial position and results of operations.

Our inability to comply with a broad and complex regulatory framework could adversely affect our business, financial position and results of operations.

The PBM business and retail drugstore business are subject to numerous federal, state and local laws and regulations. See “Business – Government Regulation.” Changes in these regulations may require extensive system and operating changes that may be difficult to implement. Untimely compliance or noncompliance with applicable laws and regulations could adversely affect the continued

operation of our business, including, but not limited to: imposition of civil or criminal penalties; suspension of payments from government programs; loss of required government certifications or approvals; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; or loss of licensure. The regulations to which we are subject include, but are not limited to: the laws and regulations described in the Government Regulation section; accounting standards; tax laws and regulations; laws and regulations relating to the protection of the environment and health and safety matters, including those governing exposure to, and the management and disposal of, hazardous materials and wastes; and regulations of the FDA, the FTC, the DEA, and the Consumer Product Safety Commission, as well as state regulatory authorities, governing the sale, advertisement and promotion of products that we sell. We are also subject to the terms of the government agreements described in the Government Regulation section. In that regard, our business, financial position and results of operations could be affected by existing and new government legislative and regulatory action, including, without limitation, any one or more of the following:

• federal and state laws and regulations governing the purchase, distribution, management, dispensing and reimbursement of prescription drugs and related services, whether at retail or mail, and applicable licensing requirements;

• the effect of the expiration of patents covering brand name drugs and the introduction of generic products;

• the frequency and rate of approvals by the FDA of new brand named and generic drugs, or of over-the-counter status for brand name drugs;

• FDA regulation affecting the retail or PBM industry;

• rules and regulations issued pursuant to HIPAA and the HITECH Act; and other federal and state laws affecting the collection, use, disclosure and transmission of health or other personal information, such as federal laws on information privacy precipitated by concerns about information collection through the Internet, state security breach laws and state laws limiting the use and disclosure of prescriber information;

• administration of Medicare Part D, including legislative changes and/or CMS rulemaking and interpretation;

• government regulation of the development, administration, review and updating of formularies and drug lists;

• federal, state and local waste management laws and regulations applicable to our business, including the management of pharmaceutical wastes and photo processing solutions, as well as the storage and transportation of hazardous materials;

• state laws and regulations establishing or changing prompt payment requirements for payments to retail pharmacies;

• impact of network access legislation, including “any willing provider” laws, on our ability to manage pharmacy networks;

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• managed care reform and plan design legislation;

• insurance licensing and other insurance regulatory requirements applicable to offering Medicare Part D programs and services; and

• direct regulation of pharmacies or PBMs by regulatory and quasi-regulatory bodies.

Risks related to litigation and other legal proceedings.

Pharmacy services and retail pharmacy are highly regulated and litigious industries. Our Company is currently subject to various litigation matters and legal proceedings. Resolution of these matters could have a material adverse effect on our business and results of operations. As such, we refer you to Item 3. “Legal Proceedings” for additional information.

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 Forward-Looking Statements” at the end of such section, on pages 41 through 42 of our Annual Report to Stockholders for the year ended December 31, 2010, which section is incorporated by reference.

Item  1B. Unresolved Staff Comments

There are no unresolved SEC Staff Comments.

Item 2. Properties

We lease most of our stores under long-term leases that vary as to rental amounts, expiration dates, renewal options and other rental provisions. For additional information on the amount of our rental obligations for our leases, we refer you to the Note “Leases” on page 65 in our Annual Report to Stockholders for the year ended December 31, 2010, which section is incorporated by reference herein.

As of December 31, 2010, we owned approximately 5.0% of our 7,182 retail stores. Net selling space for our retail drugstores increased to 69.7 million square feet as of December 31, 2010. More than one half of our store base was opened or significantly remodeled within the last five years.

We own nine distribution centers located in Alabama, California, Hawaii, Rhode Island, South Carolina, Tennessee and Texas and lease ten additional facilities located in Arizona, Florida, Indiana, Michigan, New Jersey, Pennsylvania, Rhode Island, Texas and Virginia. The 19 distribution centers total approximately 10.7 million square feet as of December 31, 2010. In addition, during 2009, we began construction on two new distribution centers, one in Chemung County, New York, and one in Kapolei, Hawaii, each of which is expected to open during 2011.

As of December 31, 2010, we owned one mail service pharmacy located in Texas and leased three additional mail service pharmacies located in Florida, Illinois and Pennsylvania. We leased call centers located in Missouri, Pennsylvania, Tennessee, Texas and Puerto Rico. As of December 31, 2010, we also had 18 specialty mail order pharmacies, one of which we owned, and 44 specialty pharmacy stores, which we leased. The specialty mail order pharmacies and specialty pharmacy stores are located in 25 states, the District of Columbia and Puerto Rico. In addition, we lease a central fill facility in Sacramento, California.

We own our corporate offices located in Woonsocket, Rhode Island, which totals approximately 750,000 square feet. We are currently in the process of expanding our corporate offices in the State of Rhode Island. In addition, we lease large corporate offices in Scottsdale, Arizona, Northbrook, Illinois and Irving, Texas.

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In connection with certain business dispositions completed between 1991 and 1997, we continue to guarantee lease obligations for approximately 70 former stores. We are indemnified for these guarantee obligations by the respective purchasers. These guarantees generally remain in effect for the initial lease term and any extension thereof pursuant to a renewal option provided for in the lease prior to the time of the disposition. For additional information, we refer you to the Note “Commitments and Contingencies” on page 74 in our Annual Report to Stockholders for the year ended December 31, 2010, which section is incorporated by reference herein.

Management believes that its owned and leased facilities are suitable and adequate to meet the Company’s anticipated needs. At the end of the existing lease terms, management believes the leases can be renewed or replaced by alternate space.

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Following is a breakdown by state, District of Columbia and Puerto Rico of our retail and specialty pharmacy stores as well as our specialty mail order pharmacy locations as of December 31, 2010:

	Retail Stores		Retail Specialty Pharmacy Stores		Specialty Mail Order Pharmacies		Total
Alabama		150		1		—		151
Arizona		132		1		—		133
California		827		5		1		833
Colorado		—		1		—		1
Connecticut		137		—		—		137
Delaware		5		—		—		5
District of Columbia		57		1		—		58
Florida		708		3		1		712
Georgia		307		1		—		308
Hawaii		48		1		—		49
Iowa		10		—		—		10
Illinois		261		1		1		263
Indiana		290		—		—		290
Kansas		31		—		1		32
Kentucky		59		—		—		59
Louisiana		99		—		1		100
Maine		22		—		—		22
Maryland		166		—		2		168
Massachusetts		339		13		1		353
Michigan		243		—		1		244
Minnesota		42		—		1		43
Mississippi		43		—		—		43
Missouri		54		1		—		55
Montana		13		—		—		13
Nebraska		7		—		—		7
Nevada		85		—		—		85
New Hampshire		34		—		—		34
New Jersey		263		—		1		264
New Mexico		9		—		—		9
New York		445		4		—		449
North Carolina		303		1		1		305
North Dakota		6		—		—		6
Ohio		313		—		—		313
Oklahoma		42		—		—		42
Oregon		—		1		—		1
Pennsylvania		384		1		1		386
Puerto Rico		9		—		1		10
Rhode Island		58		2		—		60
South Carolina		192		1		—		193
Tennessee		126		1		1		128
Texas		524		3		2		529
Vermont		3		—		—		3
Virginia		254		—		—		254
Washington		—		1		1		2
West Virginia		50		—		—		50
Wisconsin		32		—		—		32
		7,182		44		18		7,244

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Item 3. Legal Proceedings

I.    Legal Proceedings

1. Caremark (the term “Caremark” being used herein to generally refer to any one or more pharmacy benefit management subsidiaries of the Company, as applicable) is a defendant in a qui tam lawsuit initially filed by a relator on behalf of various state and federal government agencies in Texas federal court in 1999. The case was unsealed in May 2005. The case seeks monetary damages and alleges that Caremark’s processing of Medicaid and certain other government claims on behalf of its clients (which allegedly resulted in underpayments from our clients to the applicable government agencies) on one of Caremark’s adjudication platforms violates applicable federal or state false claims acts and fraud statutes. The United States and the States of Texas, Tennessee, Florida, Arkansas, Louisiana and California intervened in the lawsuit, but Tennessee and Florida withdrew from the lawsuit in August 2006 and May 2007, respectively. The parties previously filed cross motions for partial summary judgment, and in August 2008, the court granted several of Caremark’s motions and denied the motions filed by the plaintiffs. The court’s rulings are favorable to Caremark and substantially limit the ability of the plaintiffs to assert false claims act allegations or statutory or common law theories of recovery based on Caremark’s processing of Medicaid and other government reimbursement requests. The court’s rulings are on appeal before the United States Court of Appeals for the Fifth Circuit. In April 2009, the State of Texas filed a purported civil enforcement action against Caremark for injunctive relief, damages and civil penalties in Travis County, Texas alleging that Caremark violated the Texas Medicaid Fraud Prevention Act and other state laws based on our processing of Texas Medicaid claims on behalf of PBM clients. The claims and issues raised in this lawsuit are related to the claims and issues pending in the federal qui tam lawsuit described above.

2. In December 2007, the Company received a document subpoena from the OIG, requesting information relating to the processing of Medicaid and other government agency claims on a different adjudication platform of Caremark. In October 2009 and October 2010, the Company received civil investigative demands from the Office of the Attorney General of the State of Texas requesting, respectively, information produced under this OIG subpoena and other information related to the processing of Medicaid claims. These civil investigative demands state that the Office of the Attorney General of the State of Texas is investigating allegations currently pending under seal relating to two of Caremark’s adjudication platforms. The Company has been producing documents on a rolling basis in response to the requests for information contained in the OIG subpoena and in these civil investigative demands. The Company cannot predict with certainty the timing or outcome of any review of such information.

3. Caremark was named in a putative class action lawsuit filed in October 2003 in Alabama state court by John Lauriello, purportedly on behalf of participants in the 1999 settlement of various securities class action and derivative lawsuits against Caremark and others. Other defendants include insurance companies that provided coverage to Caremark with respect to the settled lawsuits. The Lauriello lawsuit seeks approximately $3.2 billion in compensatory damages plus other non-specified damages based on allegations that the amount of insurance coverage available for the settled lawsuits was misrepresented and suppressed. A similar lawsuit was filed in November 2003 by Frank McArthur, also in Alabama state court, naming as defendants Caremark, several insurance companies, attorneys and law firms involved in the 1999 settlement. This lawsuit was stayed as a later-filed class action, but McArthur was subsequently allowed to intervene in the Lauriello action. The attorneys and law firms named as defendants in McArthur’s intervention pleadings have been dismissed from the case, and discovery on class certification and adequacy issues is underway.

4. Various lawsuits have been filed alleging that Caremark has violated applicable antitrust laws in establishing and maintaining retail pharmacy networks for client health plans. In August 2003, Bellevue Drug Co., Robert Schreiber, Inc. d/b/a Burns Pharmacy and Rehn-Huerbinger Drug Co. d/b/a Parkway Drugs #4, together with Pharmacy Freedom Fund and the National Community Pharmacists Association filed a putative class action against Caremark in Pennsylvania federal court, seeking treble damages and injunctive relief. This case was initially sent to arbitration based on the contract terms between the pharmacies and Caremark. In October 2003, two independent pharmacies, North Jackson Pharmacy, Inc.

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and C&C, Inc. d/b/a Big C Discount Drugs, Inc., filed a putative class action complaint in Alabama federal court against Caremark and two PBM competitors, seeking treble damages and injunctive relief. The North Jackson Pharmacy case against two of the Caremark entities named as defendants was transferred to Illinois federal court, and the case against a separate Caremark entity was sent to arbitration based on contract terms between the pharmacies and Caremark. The Bellevue arbitration was then stayed by the parties pending developments in the North Jackson Pharmacy court case.

In August 2006, the Bellevue case and the North Jackson Pharmacy case were both transferred to Pennsylvania federal court by the Judicial Panel on Multidistrict Litigation for coordinated and consolidated proceedings with other cases before the panel, including cases against other PBMs. Caremark appealed the decision which vacated the order compelling arbitration and staying the proceedings in the Bellevue case and, following the appeal, the Court of Appeals reinstated the order compelling arbitration of

the Bellevue case. Motions for class certification in the coordinated cases within the multidistrict litigation, including the North Jackson Pharmacy case, remain pending. The consolidated action is now known as the In Re Pharmacy Benefit Managers Antitrust Litigation.

5. Beginning in November 2008, the Company received and responded to several subpoenas from the DEA, Los Angeles Field Division, requesting sales data and other information regarding the Company’s distribution of products containing pseudoephedrine (“PSE”) at certain retail pharmacies and from one California distribution center. In September 2009, the United States Attorney’s Office for the Central District of California (“USAO”) and the DEA commenced discussions with the Company regarding whether, in late 2007 and 2008, the Company distributed PSE in violation of the Controlled Substances Act. In addition, the DEA issued an order to show cause against certain retail pharmacies and the Company’s La Habra, California distribution center which could have resulted in administrative action against the Company’s DEA registrations for these facilities. On October 13, 2010, the Company entered into a comprehensive resolution of this matter, resulting in the payment of $75 million in civil penalties for violations of the Controlled Substances Act and $2.6 million in criminal forfeiture relating to the sales of products containing PSE. The resolution included the entry of a non-prosecution agreement and civil settlement agreement with the USAO, the U.S. Attorney’s Office for the District of Nevada and the DOJ, as well as a memorandum of agreement with the DEA that dismisses the above-referenced orders to show cause and contains certain ongoing compliance requirements for the Company.

6. In August 2009, the Company was notified by the FTC that it is conducting a non-public investigation under the FTCA into certain of the Company’s business practices. In March 2010, the Company learned that various State Attorneys General offices and certain other government agencies are conducting a multi-state investigation of the Company regarding issues similar to those being investigated by the FTC. At this time, 24 states, the District of Columbia, and the County of Los Angeles, are known to be participating in this multi-state investigation. The Company has been cooperating in these investigations, and continues to provide documents and other information as requested. The Company is not able to predict with certainty the timing or outcome of these investigations. However, it remains confident that its business practices and service offerings (which are designed to reduce health care costs and expand consumer choice) are being conducted in compliance with the antitrust laws.

7. In March 2009, the Company received a subpoena from the OIG requesting information concerning the Medicare Part D prescription drug plans of RxAmerica, the PBM subsidiary of Longs Drug Stores Corporation which was acquired by the Company in October 2008. The Company continues to respond to the request for information and has been producing responsive documents on a rolling basis. The Company cannot predict with certainty the timing or outcome of any review by the government of such information.

8. Since March 2009, the Company has been named in a series of putative collective and class action lawsuits filed in federal courts around the country, purportedly on behalf of current and former assistant store managers working in the Company’s stores at various locations outside California. The lawsuits allege that the Company failed to pay overtime to assistant store managers as required under the Fair Labor Standards Act (“FLSA”) and under certain state statutes. The lawsuits also seek other relief, including liquidated

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damages, punitive damages, attorneys’ fees, costs and injunctive relief arising out of the state and federal claims for overtime pay. Notice has been issued to over 13,000 current and former assistant store managers offering them the opportunity to “opt in” to certain of the FLSA collective actions and over 1,900 have elected to participate in these lawsuits. At this time, the Company is not able to predict the outcome of these cases, or the possible monetary exposure associated with the lawsuits. The Company’s position, however, that the lawsuits are without merit and that the cases should not be certified as class or collective actions. The Company is vigorously defending these claims.

9. In January 2010, the Company received a subpoena from the OIG in connection with an investigation of possible false or otherwise improper claims for payment under the Medicare and Medicaid programs. The subpoena requests retail pharmacy claims data for “dual eligible” customers (i.e., customers with both Medicaid and private insurance coverage), information concerning the Company’s retail pharmacy claims processing systems, copies of pharmacy payor contracts and other documents and records. The Company has provided documents and other information in response to the subpoena and continues to engage in discussions with the government about the subject matter of the subpoena. The Company cannot predict with certainty the timing or outcome of any review by the government of such information.

10. In March 2010, the Company received a subpoena from the OIG requesting information about programs under which the Company has offered customers remuneration conditioned upon the transfer of prescriptions for drugs or medications to our pharmacies in the form of gift cards, cash, non-prescription merchandise or discounts or coupons for non-prescription merchandise, The subpoena relates to an investigation of possible false or otherwise improper claims for payment under the Medicare and Medicaid programs. The Company continues to respond to this request for information and has been producing responsive documents on a rolling basis. We cannot predict with certainty the timing or outcome of any reviews by the government of such information.

11. In November 2009, a securities class action lawsuit was filed in the United States District Court for the District of Rhode Island purportedly on behalf of purchasers of CVS Caremark Corporation stock between May 5, 2009 and November 4, 2009. The lawsuit names the Company and certain officers as defendants and includes allegations of securities fraud relating to public disclosures made by the Company concerning the PBM business and allegations of insider trading. In addition, a shareholder derivative lawsuit was filed in December 2009, in the same court against the directors and certain officers of the Company. A derivative lawsuit is a lawsuit filed by a shareholder purporting to assert claims on behalf of a corporation against directors and officers of the corporation. This lawsuit includes allegations of, among other things, securities fraud, insider trading and breach of fiduciary duties and further alleges that the Company was damaged by the purchase of stock at allegedly inflated prices under its share repurchase program. In January 2011, both lawsuits were transferred to the United States District Court for the District of New Hampshire. The Company believes these lawsuits are without merit and the Company plans to defend them vigorously.

12. The Company is also a party to other legal proceedings and inquiries arising in the normal course of its business, none of which is expected to be material to the Company. The Company can give no assurance, however, that our business, financial condition and results of operations will not be materially adversely affected, or that we will not be required to materially change our business practices, based on: (i) future enactment of new health care or other laws or regulations; (ii) the interpretation or application of existing laws or regulations, as they may relate to our business or the pharmacy services or retail industry; (iii) pending or future federal or state governmental investigations of our business or the pharmacy services or retail industry; (iv) institution of government enforcement actions against us; (v) adverse developments in any pending qui tam lawsuit against us, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed against us; or (vi) adverse developments in other pending or future legal proceedings against us or affecting the pharmacy services or retail industry.

II.    Environmental Matters

1. Item 103 of SEC Regulation S-K requires disclosure of certain environmental legal proceedings if management reasonably believes that the proceedings involve potential monetary sanctions of $100,000 or

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more. On October 22, 2010, the Company entered into a Consent Order with the State of Connecticut to address alleged noncompliance with state wastewater discharge regulations and related notices of violation issued with respect to certain of its stores in Connecticut. As part of the negotiated Order, the Company has agreed to make certain operational changes with respect to its wastewater discharges from stores within the state. In addition, the Company funded a supplemental environmental project in the amount of $45,000 and paid a $223,900 civil penalty to resolve the allegations in the Order. Negotiations remain ongoing with the State of Connecticut regarding additional environmental compliance matters unrelated to wastewater discharge. The Company cannot predict the ultimate outcome of these negotiations; however, management does not believe that the outcome will have a material adverse effect on the Company.

2. The Company has also received notices of violation and information requests from governmental authorities in California, and is currently working with several local governments regarding statewide compliance with environmental regulations governing the management of hazardous waste. The resolution of these issues may require payment of civil penalties, and operational changes within stores in California. The ultimate outcome of these matters cannot be determined at this time.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the three months ended December 31, 2010.

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Executive Officers of the Registrant

Executive Officers of the Registrant

The following sets forth the name, age and biographical information for each of our executive officers as of February 18, 2011. In each case the officer’s term of office extends to the date of the board of directors meeting following the next annual meeting of stockholders of the Company. Previous positions and responsibilities held by each of the executive officers over the past five years are indicated below:

Lisa G. Bisaccia, age 54, Senior Vice President and Chief Human Resources Officer of CVS Caremark Corporation since January 2010; Vice President, Human Resources of CVS Pharmacy, Inc. from September 2004 through December 2009.

Troyen A. Brennan, M.D., age 56, Executive Vice President and Chief Medical Officer of CVS Caremark Corporation since November 2008; Executive Vice President and Chief Medical Officer of Aetna, Inc. from February 2006 through November 2008; President and Chief Executive Officer of Brigham and Women’s Physician Hospital Organization from 1997 through February 2006; also President and Chief Executive Officer of Brigham and Women’s Physicians Organization from 2000 through February 2006.

Laird K. Daniels, age 42, Senior Vice President and Controller/Chief Accounting Officer of CVS Caremark Corporation since January 2010; Vice President of Finance and Retail Controller of CVS Pharmacy, Inc. from May 2009 through December 2009; Vice President of Finance-Corporate Budgeting and Analysis of CVS Pharmacy, Inc. from November 2006 until April 2009; Assistant Controller, Budgeting, Forecasting and Reporting of CVS Pharmacy, Inc. from June 2003 through October 2006.

David M. Denton, age 45, Executive Vice President and Chief Financial Officer of CVS Caremark Corporation and CVS Pharmacy, Inc. since January 2010; Senior Vice President and Controller/Chief Accounting Officer of CVS Caremark Corporation from March 2008 until December 2009; Senior Vice President, Financial Administration of CVS Caremark Corporation and CVS Pharmacy, Inc. from April 2007 to March 2008; Senior Vice President, Finance and Controller of PharmaCare Management Services, Inc. from October 2005 through April 2007.

Sara J. Finley, age 50, Senior Vice President and General Counsel of CVS Caremark since June 2009; Executive Vice President and General Counsel of Caremark from March 2009 through June 2009; Senior Vice President and General Counsel of Caremark from March 2007 through March 2009; Senior Vice President, Assistant General Counsel and Corporate Secretary of Caremark from August 1998 through March 2007.

Helena B. Foulkes, age 46, Executive Vice President and Chief Marketing Officer of CVS Caremark Corporation since January 2009; Senior Vice President of Health Services of CVS Caremark Corporation from May 2008 through January 2009, and of CVS Pharmacy, Inc. from October 2007 through January 2009; Senior Vice President, Marketing and Operations Services of CVS Pharmacy, Inc. from January 2007 through October 2007, and Senior Vice President, Advertising and Marketing of CVS Pharmacy, Inc. from April 2002 to January 2007.

Per G.H. Lofberg, age 63, Executive Vice President of CVS Caremark Corporation and President of Caremark Pharmacy Services since January 2010; President and Chief Executive Officer of Generation Health, Inc., a pharmacogenomics company, from November 2008 through December 2009; President and Chief Executive Officer of Merck Capital Ventures, LLC, a venture capital investment company focused on the pharmaceutical industry, from January 2001 through July 2008.

Stuart M. McGuigan, age 52, Senior Vice President and Chief Information Officer of CVS Caremark Corporation since January 2009 and Senior Vice President and Chief Information Officer of CVS Pharmacy, Inc.

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since December 2008; Senior Vice President and Chief Information Officer of Liberty Mutual Group from September 2004 to November 2008; also a director of NetScout Systems, Inc., a leading provider of integrated network and application performance management solutions.

Larry J. Merlo, age 55, President and Chief Operating Officer of CVS Caremark Corporation since May 2010 and President of CVS/pharmacy since January 2007; Executive Vice President of CVS Caremark Corporation from January 2007 through May 2010; Executive Vice President-Stores of CVS Corporation from April 2000 to January 2007; and Executive Vice President–Stores of CVS Pharmacy, Inc. from March 1998 to January 2007; also a director of CVS Caremark Corporation since May 2010. Mr. Merlo will become President and Chief Executive Officer of CVS Caremark Corporation on March 1, 2011.

Jonathan C. Roberts, age 55, Executive Vice President of CVS Caremark Corporation and Chief Operating Officer of Caremark Pharmacy Services since October 2010; Executive Vice President, Rx Purchasing, Pricing and Network Relations of CVS Caremark Corporation from January 2009 through October 2010; Senior Vice President and Chief Information Officer of CVS Caremark Corporation from May 2008 until January 2009, and of CVS Pharmacy, Inc. from January 2006 until January 2009; Senior Vice President—Store Operations of CVS Pharmacy, Inc. from August 2002 until December 2005.

Thomas M. Ryan, age 58, Chairman of the Board of CVS Caremark Corporation since November 2007 and Chief Executive Officer of CVS Caremark Corporation since May 1998; President of CVS Caremark Corporation from May 1998 through May 2010 and Chairman of CVS Corporation from April 1999 until March 2007; also a director of Yum! Brands, Inc., a quick service restaurant company. Mr. Ryan will retire as Chief Executive Officer on March 1, 2011 and will serve as non-executive Chairman of the Board until the Company’s Annual Meeting of Stockholders in May 2011, at which time he will retire from the Board.

Douglas A. Sgarro, age 51, Executive Vice President and Chief Legal Officer of CVS Caremark Corporation and CVS Pharmacy, Inc. since March 2004; President of CVS Realty Co., a real estate development company and a division of CVS Pharmacy, Inc., from October 1999 though August 2009.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed on the New York Stock Exchange under the symbol “CVS.” The table below sets forth the high and low sale prices of our common stock on the New York Stock Exchange Composite Tape and the quarterly cash dividends declared per share of common stock during the periods indicated.

		First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Fiscal Year
2010	High	$	37.32	$	37.82	$	32.09	$	35.46	$	37.82
	Low	$	30.36	$	29.22	$	26.84	$	29.45	$	26.84
	Cash dividends per common share	$	0.08750	$	0.08750	$	0.08750	$	0.08750	$	0.35000
2009	High	$	30.47	$	34.22	$	37.75	$	38.27	$	38.27
	Low	$	23.74	$	27.08	$	30.58	$	27.38	$	23.74
	Cash dividends per common share	$	0.07625	$	0.07625	$	0.07625	$	0.07625	$	0.30500

CVS Caremark has paid cash dividends every quarter since becoming a public company. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Company’s Board of Directors. As of February 11, 2011, there were 22,111 registered shareholders according to the records maintained by our transfer agent.

During the first three quarters of 2010, we repurchased 42.4 million shares of common stock for approximately $1.5 billion completing the repurchase program authorized during 2009. On June 14, 2010, our Board of Directors authorized a new share repurchase program for up to $2.0 billion of our outstanding common stock (the “2010 Repurchase Program”). The share repurchase authorization, which was effective immediately and expires at the end of 2011, permits us to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The share repurchase program may be modified, extended or terminated by the Board of Directors at any time. The Company did not make any share repurchases under the 2010 Repurchase Program through December 31, 2010.

Fiscal Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2010 through October 31, 2010		—	$	—		—	$	2,000,000
November 1, 2010 through November 30, 2010		—	$	—		—	$	2,000,000
December 1, 2010 through December 31, 2010		—	$	—		—	$	2,000,000

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Item 6. Selected Financial Data

The selected consolidated financial data of CVS Caremark Corporation as of and for the periods indicated in the five-year period ended December 31, 2010 have been derived from the consolidated financial statements of CVS Caremark Corporation. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and the audit reports of Ernst & Young LLP, which are incorporated elsewhere herein.

In millions, except per share amounts	2010(2)			2009(2)			2008(2)			2007(2) (3)			2006(2)
Statement of operations data:
Net revenues	$	96,413		$	98,729		$	87,472		$	76,330		$	43,821
Gross profit		20,257			20,380			18,290			16,108			11,742
Operating expenses(4)		14,092			13,942			12,244			11,314			9,300
Operating profit(5)		6,165			6,438			6,046			4,794			2,442
Interest expense, net		536			525			509			435			216
Income tax provision(6)		2,190			2,205			2,193			1,722			857
Income from continuing operations		3,439			3,708			3,344			2,637			1,369
Loss from discontinued operations, net of income tax benefit(7)		(15	)		(12	)		(132	)		—			—
Net income		3,424			3,696			3,212			2,637			1,369
Net loss attributable to noncontrolling interest(1)		3			—			—			—			—
Preference dividends, net of income tax benefit		—			—			(14	)		(14	)		(14	)
Net income attributable to CVS Caremark	$	3,427		$	3,696		$	3,198		$	2,623		$	1,355
Per common share data:
Basic earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.52		$	2.59		$	2.32		$	1.97		$	1.65
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)		—			—
Net income attributable to CVS Caremark	$	2.51		$	2.58		$	2.23		$	1.97		$	1.65
Diluted earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.50		$	2.56		$	2.27		$	1.92		$	1.60
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)		—			—
Net income attributable to CVS Caremark	$	2.49		$	2.55		$	2.18		$	1.92		$	1.60
Cash dividends per common share	$	0.35000		$	0.30500		$	0.25800		$	0.22875		$	0.15500
Balance sheet and other data:
Total assets	$	62,169		$	61,641		$	60,960		$	54,722		$	20,574
Long-term debt	$	8,652		$	8,756		$	8,057		$	8,350		$	2,870
Total shareholders’ equity	$	37,700		$	35,768		$	34,574		$	31,322		$	9,918
Number of stores (end of year)		7,226			7,074			6,981			6,301			6,205

(1) Represents the minority shareholders’ portion of the net loss from our majority owned subsidiary Generation Health, Inc. acquired in the fourth quarter of 2009.

(2) On December 23, 2008, our Board of Directors approved a change in our fiscal year-end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. As you review our operating performance, please consider that fiscal 2010 and 2009 include 365 days; fiscal 2008 includes 368 days, and fiscal 2007 and 2006 include 364 days.

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(3) Effective March 22, 2007, Caremark Rx, Inc. was merged into a newly formed subsidiary of CVS Corporation, with Caremark Rx, L.L.C., continuing as the surviving entity (the “Caremark Merger”). Following the Caremark Merger, the name of the Company was changed to “CVS Caremark Corporation.” By virtue of the Caremark Merger, each issued and outstanding share of Caremark common stock, par value $0.001 per share, was converted into the right to receive 1.67 shares of CVS Caremark’s common stock, par value $0.01 per share. Cash was paid in lieu of fractional shares.

(4) In 2006, the Company adopted the SEC Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements.” The adoption of this SAB resulted in a $40 million pre-tax ($25 million after-tax) decrease in operating expenses for 2006.

(5) Operating profit includes the pre-tax effect of the charge discussed in Note (4) above.

(6) Income tax provision includes the effect of the following: (i) in 2010, the recognition of $47 million of previously unrecognized tax benefits, including interest, relating to the expiration of various statutes of limitation and settlements with tax authorities, (ii) in 2009, the recognition of $167 million of previously unrecognized tax benefits, including interest, relating to the expiration of various statutes of limitation and settlements with tax authorities, and (iii) in 2006, a $11 million reversal of previously recorded tax reserves through the tax provision principally based on resolving certain state tax matters.

(7) In connection with certain business dispositions completed between 1991 and 1997, the Company continues to guarantee store lease obligations for a number of former subsidiaries, including Linens ‘n Things. On May 2, 2008, Linens Holding Co. and certain affiliates, which operate Linens ‘n Things, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The loss from discontinued operations includes lease-related costs of $15 million ($24 million, net of a $9 million income tax benefit), $12 million ($19 million, net of an $7 million income tax benefit), and $132 million ($214 million, net of an $82 million income tax benefit) in 2010, 2009 and 2008 respectively, which the Company believes is likely to be required to satisfy its obligations associated with its Linens ‘n Things lease guarantees.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We refer you to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which includes our “Cautionary Statement Concerning Forward-Looking Statements” at the end of such section, on pages 44 through 45 of our Annual Report to Stockholders for the year ended December 31, 2010, which section is incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As of December 31, 2010, the Company had no derivative financial instruments or derivative commodity instruments in place and believes that its exposure to market risk associated with other financial instruments, principally interest rate risk inherent in its debt portfolio, is not material.

Item 8. Financial Statements and Supplementary Data

We refer you to the “Consolidated Statements of Income,” “Consolidated Balance Sheets,” “Consolidated Statements of Shareholders’ Equity,” “Consolidated Statements of Cash Flows,” and “Notes to Consolidated Financial Statements,” on pages 53 through 80, and “Report of Independent Registered Public Accounting Firm” on page 83 of our Annual Report to Stockholders for the fiscal year ended December 31, 2010, which sections are incorporated by reference herein.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (f) and 15d-15(f)) as of December 31, 2010, have concluded that as of such date the Company’s disclosure controls and procedures were adequate and

40

effective and designed to ensure that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis.

Internal control over financial reporting: We refer you to “Management’s Report on Internal Control Over Financial Reporting” on page 46 and “Report of Independent Registered Public Accounting Firm” on page 47 of our Annual Report to Stockholders for the fiscal year ended December 31, 2010, which are incorporated by reference herein, for Management’s report on the Registrant’s internal control over financial reporting and the Independent Registered Public Accounting Firm’s report with respect to the effectiveness of internal control over financial reporting.

Changes in internal control over financial reporting: There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that occurred during the fourth quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

No events have occurred during the fourth quarter that would require disclosure under this item.

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PART III

Item 10. Directors and Executive Officers of the Registrant

We refer you to our Proxy Statement for the 2011 Annual Meeting of Stockholders under the captions “Committees of the Board,” “Code of Conduct,” “Director Nominations,” “Audit Committee Report,” “Biographies of our Board Nominees,” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which sections are incorporated by reference herein. Biographical information on our executive officers is contained in Part I of this Annual Report on Form 10-K.

Item  11. Executive Compensation

We refer you to our Proxy Statement for the 2011 Annual Meeting of Stockholders under the captions “Executive Compensation and Related Matters,” including “Compensation Discussion & Analysis” and “Management Planning and Development Committee Report,” which sections are incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We refer you to our Proxy Statement for the 2011 Annual Meeting of Stockholders under the captions “Share Ownership of Directors and Certain Executive Officers,” and “Share Ownership of Principal Stockholders” which sections are incorporated by reference herein, for information concerning security ownership of certain beneficial owners and management and related stockholder matters.

The following table summarizes information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of December 31, 2010.

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) (1)
Equity compensation plans approved by stockholders (2)		66,017	$	31.39		71,899
Equity compensation plans not approved by stockholders		—		—		—
Total		66,017	$	31.39		71,899

(1) Shares in thousands.

(2) The number of shares available for delivery under the 2010 Incentive Compensation Plan (the “2010 ICP”) is subject to adjustment in the event shares subject to awards under either the 2010 ICP or a predecessor plan are cancelled or forfeited; in such event the shares shall again be available for grants or awards.

Item 13. Certain Relationships and Related Transactions and Director Independence

We refer you to our Proxy Statement for the 2011 Annual Meeting of Stockholders under the caption “Independence Determinations for Directors” and “Certain Transactions with Directors and Officers,” which sections are incorporated by reference herein.

Item 14. Principal Accountant Fees and Services

We refer you to our Proxy Statement for the 2011 Annual Meeting of Stockholders under the caption “Item 2: Ratification of Appointment of Independent Registered Public Accounting Firm,” which section is incorporated by reference herein.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

A. Documents filed as part of this report:

1. Financial Statements:

The following financial statements are incorporated by reference from pages 20 through 80 and page 83 of our Annual Report to Stockholders for the fiscal year ended December 31, 2010, as provided in Item 8 hereof:

Consolidated Statements of Income for the fiscal years ended December 31, 2010, 2009 and 2008	48
Consolidated Balance Sheets as of December 31, 2010 and 2009	49
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2010, 2009 and 2008	50
Consolidated Statements of Shareholders’ Equity for the fiscal years ended December  31, 2010, 2009 and 2008	51
Notes to Consolidated Financial Statements	53
Report of Independent Registered Public Accounting Firm	81

2. Financial Statement Schedules

All financial statement schedules are omitted because they are not applicable, not required under the instructions, or the information is included in the consolidated financial statements or related notes.

B. Exhibits

Exhibits marked with an asterisk (*) are hereby incorporated by reference to exhibits or appendices previously filed by the Registrant as indicated in brackets following the description of the exhibit.

Exhibit	Description
1.1*	Underwriting Agreement dated September 5, 2008 by and among the Registrant and Lehman Brothers Inc., Banc of America Securities LLC, Deutsche Bank Securities Inc., Morgan Stanley & Co. Incorporated and Wachovia Capital Markets, LLC, as Representatives of the Underwriters [incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K dated September 5, 2008 (Commission File No. 001-01011)].
1.2*	Underwriting Agreement dated March 10, 2009 by and among the Registrant and Barclays Capital Inc., Banc of America Securities LLC, Deutsche Bank Securities Inc., Morgan Stanley & Co. Incorporated and Wachovia Capital Markets, LLC, as Representatives of the Underwriters [incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K dated March 13, 2009 (Commission File No. 001-01011)].
1.3*	Underwriting Agreement dated September 8, 2009 by and among the Registrant and Barclays Capital Inc., Banc of America Securities LLC, BNY Mellon Capital Markets, LLC, JP Morgan Securities Inc. and Wells Fargo Securities, LLC, as Representatives of the Underwriters [incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K dated September 11, 2009 (Commission File No. 001-01011)].
2.1*	Agreement and Plan of Merger dated as of November 1, 2006 among, the Registrant, Caremark Rx, Inc. and Twain MergerSub Corp. [incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement No. 333-139470 on Form S-4 filed December 19, 2006].
2.2*	Amendment No. 1 dated as of January 16, 2007 to the Agreement and Plan of Merger dated as of November 1, 2006 among the Registrant, Caremark Rx, Inc. and Twain Merger Sub Corp. [incorporated by reference to Exhibit 2.2 to the Registrant’s Registration Statement No. 333-139470 on Form S-4/A filed January 16, 2007].

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Exhibit	Description
2.3*	Waiver Agreement dated as of January 16, 2007 between the Registrant and Caremark Rx, Inc. with respect to the Agreement and Plan Merger dated as of November 1, 2006 by and between Registrant and Caremark Rx, Inc [incorporated by reference to Exhibit 2.3 to the Registrant’s Registration Statement No. 333-139470 on Form S-4/A filed January 16, 2007].
2.4*	Amendment to Waiver Agreement, dated as of February 12, 2007, between Registrant and Caremark Rx, Inc. [incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated February 13, 2007 (Commission File No. 001-01011)].
2.5*	Amendment to Waiver Agreement, dated as of March 8, 2007, between Registrant and Caremark Rx, Inc. [incorporated by reference to Exhibit 99.2 to the Registrants’ Current Report on Form 8-K dated March 8, 2007 (Commission File No. 001-01011)].
2.6*	Agreement and Plan of Merger dated as of August 12, 2008 among, the Registrant, Longs Drug Stores Corporation and Blue MergerSub Corp. [incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated August 13, 2008 (Commission File No. 001-01011)].
3.1*	Amended and Restated Certificate of Incorporation of the Registrant [incorporated by reference to Exhibit 3.1 of CVS Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (Commission File No. 001-01011)].
3.1A*	Certificate of Amendment to the Amended and Restated Certificate of Incorporation, effective May 13, 1998 [incorporated by reference to Exhibit 4.1A to Registrant’s Registration Statement No. 333-52055 on Form S-3/A dated May 18, 1998].
3.1B*	Certificate of Amendment to the Amended and Restated Certificate of Incorporation [incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated March 22, 2007 (Commission File No. 001-01011)].
3.1C*	Certificate of Merger dated May 9, 2007 [incorporated by reference to Exhibit 3.1C to Registrant’s Quarterly Report on Form 10-Q dated November 1, 2007 (Commission File No. 001-01011)].
3.1D*	Certificate of Amendment to the Amended and Restated Certificate of Incorporation [incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated May 13, 2010 (Commission File No. 001-01011)].
3.2*	By-laws of the Registrant, as amended and restated [incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K dated December 29, 2010 (Commission File No. 001-01011)].
4	Pursuant to Regulation S-K, Item 601(b)(4)(iii)(A), no instrument which defines the rights of holders of long-term debt of the Registrant and its subsidiaries is filed with this report. The Registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
4.1*	Specimen common stock certificate [incorporated by reference to Exhibit 4.1 to the Registration Statement of the Registrant on Form 8-B dated November 4, 1996 (Commission File No. 001-01011)].
4.2*	Specimen First Supplemental Indenture between Registrant and The Bank of New York Trust Company, N. A., a national banking association [incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated May 22, 2007 (Commission File No. 001-01011)].
4.3*	Specimen ECAPSSM [incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K dated May 22, 2007 (Commission File No. 001-01011)].

44

Exhibit	Description
10.1*	Stock Purchase Agreement dated as of October 14, 1995 between The TJX Companies, Inc. and Melville Corporation, as amended November 17, 1995 [incorporated by reference to Exhibits 2.1 and 2.2 to Melville’s Current Report on Form 8-K dated December 4, 1995 (Commission File No. 001-01011)].
10.2*	Stock Purchase Agreement dated as of March 25, 1996 between Melville Corporation and Consolidated Stores Corporation, as amended May 3, 1996 [incorporated by reference to Exhibits 2.1 and 2.2 to Melville’s Current Report on Form 8-K dated May 5, 1996 (Commission File No. 001-01011)].
10.3*	Distribution Agreement dated as of September 24, 1996 among Melville Corporation, Footstar, Inc. and Footstar Center, Inc. [incorporated by reference to Exhibit 99.1 to Melville’s Current Report on Form 8-K dated October 28, 1996 (Commission File No. 001-01011)].
10.4*	Tax Disaffiliation Agreement dated as of September 24, 1996 among Melville Corporation, Footstar, Inc. and certain subsidiaries named therein [incorporated by reference to Exhibit 99.2 to Melville’s Current Report on Form 8-K dated October 28, 1996 (Commission File No. 001-01011)].
10.5*	Stockholder Agreement dated as of December 2, 1996 between the Registrant, Nashua Hollis CVS, Inc. and Linens ‘n Things, Inc. [incorporated by reference to Exhibit 10(i)(6) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 001-01011)].
10.6*	Tax Disaffiliation Agreement dated as of December 2, 1996 between the Registrant and Linens ‘n Things, Inc. and certain of their respective affiliates [incorporated by reference to Exhibit 10(i)(7) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Commission File No. 001-01011)].
10.7*	Supplemental Retirement Plan for Select Senior Management of CVS Caremark Corporation I as amended and restated in December 2008 [incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 001-01011)].
10.8*	CVS Corporation 1996 Directors Stock Plan, as amended and restated November 5, 2002 [incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 (Commission File No. 001-01011)].
10.9*	CVS Caremark Deferred Stock Compensation Plan, as amended and restated [incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 001-01011)].
10.10*	1997 Incentive Compensation Plan as amended through December 2008 [incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 001-01011)].
10.11*	2007 Incentive Plan, as amended and restated through December 2008 [incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 001-01011)].
10.12*	Caremark Rx, Inc. 2004 Incentive Stock Plan [incorporated by reference to Exhibit 99.2 of the Registrant’s Registration Statement No. 333-141481 on Form S-8 filed March 22, 2007].
10.13*	Caremark Rx, Inc. Deferred Compensation Plan, effective April 1, 2005, as amended and restated through December 2008 [incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 001-01011)].

45

Exhibit	Description
10.14*	CVS Caremark Deferred Compensation Plan as amended and restated through December 2008 [incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 001-01011)].
10.15*	CVS Partnership Equity Program [incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 27, 1998 (Commission File No. 001-01011)].
10.16*	2007 Employee Stock Purchase Plan [incorporated by reference to Exhibit D of the Registrant’s Definitive Proxy Statement filed April 4, 2007 (Commission File No. 001-01011)].
10.17*	Retention Agreement dated as of August 5, 2005 between the Registrant and the Registrant’s Chief Executive Officer [incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 1, 2005 (Commission File No. 001-01011)].
10.18*	Form of Restricted Stock Unit Agreement between the Registrant and the Registrant’s Chief Executive Officer [incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 1, 2005 (Commission File No. 001-01011)].
10.19*	Five Year Credit Agreement dated as of May 12, 2006 by and among the Registrant, the lenders party thereto, Bank of America, N.A., Lehman Brothers Inc. and Wachovia Bank, N.A., as Co-Syndication Agents, Keybank N.A., as Documentation Agent, and The Bank of New York, as Administrative Agent [incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated June 2, 2006 (Commission File No. 001-01011)].
10.20*	Amended and Restated Employment Agreement dated as of December 22, 2008 between the Registrant and the Registrant’s Chairman of the Board and Chief Executive Officer [incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 001-01011)].
10.21*	Amended and Restated Employment Agreement dated as of December 22, 2008 between the Registrant and the Registrant’s President and Chief Operating Officer [incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 001-01011)].
10.22*	Amended and Restated Employment Agreement dated as of December 22, 2008 between the Registrant and the Registrant’s Executive Vice President and Chief Legal Officer [incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (Commission File No. 001-01011)].
10.23*	Five Year Credit Agreement dated as of March 12, 2007 by and among the Registrant, the lenders party thereto, Lehman Commercial Paper Inc., and Wachovia Bank, N.A., as Co-Syndication Agents, Morgan Stanley Senior Funding, Inc. as Documentation Agent, and the Bank of New York, as Administrative Agent [incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated March 22, 2007 (Commission File No. 001-01011)].
10.24*	Bridge Credit Agreement dated as of March 15, 2007 by and among the Registrant, the lenders party thereto, Lehman Commercial Paper Inc., as Administration Agent, Morgan Stanley Senior Funding, Inc., as Syndication Agent, The Bank of New York, Bank of America, N.A. and Wachovia Bank, N.A., as Co-Documentation Agents [incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated March 22, 2007 (Commission File No. 001-01011)].
10.25*	Global Amendment dated as of March 15, 2007, to (i) Five Year Credit Agreement dated as of June 11, 2004, (ii) Five Year Credit Agreement dated as of June 2, 2005, (iii) Five Year Credit Agreement dated as of May 12, 2006, (iv) Five Year Credit Agreement, dated as of March 12, 2007, and (v) 364 Day Credit Agreement, dated as of March 12, 2007 [incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated March 22, 2007 (Commission File No. 001-01011)].

46

Exhibit	Description
10.26*	Credit Agreement dated September 12, 2008 by and among the Registrant, the Lenders party thereto, Lehman Commercial Paper Inc., as Administrative Agent, Deutsche Bank Securities Inc., as Syndication Agent, and Bank of America, N.A., Morgan Stanley Bank, and Wachovia Bank, N.A., as Co-Documentation Agents [incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2008 (Commission File No. 001-01011)].
10.27*	Universal 409A Definition Document dated December 31, 2008 [incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 (Commission File No. 001-01011)].
10.28*	Form of Non-Qualified Stock Option Agreements between the Registrant and the selected employees of the Registrant. [incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (Commission File No. 001-01011)].
10.29*	Form of Restricted Stock Unit Agreement between the Registrant and the selected employees of the Registrant [incorporated by reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (Commission File No. 001-01011)].
10.30*	CVS Caremark Long-Term Incentive Plan [incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (Commission File No. 001-01011)].
10.31*	Partnership Equity Program Purchased Share, Matching Restricted Stock Unit and Stock Option Agreement between the Registrant and selected employees of the Registrant [incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (Commission File No. 001-01011)].
10.32*	2010 Incentive Compensation Plan [incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated May 13, 2010 (Commission File No. 001-01011)].
10.33*	Three Year Credit Agreement dated as of May 27, 2010 by and among the Registrant, the lenders party hereto, Barclays Capital and JP Morgan Chase Bank, N.A., as Co-Syndication Agents, Bank of America, N.A. and Wells Fargo Bank, N.A., as Co-Documentation Agents, and the Bank of New York Mellon, as Administrative Agent [incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated June 30, 2010 (Commission File No. 001-01011)].
10.34	Employment Agreement between the Registrant and the Registrant’s Executive Vice President and President of Caremark Pharmacy Services effective as of January 1, 2010.
10.35	Change in Control Agreement between the Registrant and the Registrant’s Executive Vice President and President of Caremark Pharmacy Services effective as of January 1, 2010.
10.36	2010-2012 Long Term Incentive Plan – President, Pharmacy Benefit Management.
10.37	2010-2011 Return on Net Assets Long Term Incentive Plan.
10.38	2010 Management Incentive Plan.
10.39	Change in Control Agreement dated December 22, 2008 between the Registrant and the Registrant’s Executive Vice President and Chief Financial Officer.
13	Portions of the 2010 Annual Report to Stockholders of CVS Caremark Corporation, which are specifically designated in this Form 10-K as being incorporated by reference.
21	Subsidiaries of the Registrant.
23	Consent of Ernst & Young LLP.

47

Exhibit	Description
31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the CVS Caremark Corporation Annual Report on Form 10-K for the year ended December 31, 2010 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Cash Flows and (iv) related notes.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

	CVS CAREMARK CORPORATION
Date: February 18, 2011	By:	/s/    DAVID M. DENTON
		David M. Denton
		Executive Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title(s)	Date
/s/    EDWIN M. BANKS         Edwin M. Banks	Director	February 18, 2011
/s/    C. DAVID BROWN II         C. David Brown II	Director	February 18, 2011
/s/    LAIRD K. DANIELS         Laird K. Daniels	Senior Vice President – Finance and Controller (Principal Accounting Officer)	February 18, 2011
/s/    DAVID M. DENTON         David M. Denton	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	February 18, 2011
/s/    DAVID W. DORMAN         David W. Dorman	Director	February 18, 2011
/s/    ANNE M. FINUCANE         Anne M. Finucane	Director	February 18, 2011
/s/    KRISTEN GIBNEY WILLIAMS          Kristen Gibney Williams	Director	February 18, 2011
/s/    MARIAN L. HEARD         Marian L. Heard	Director	February 18, 2011
/s/    WILLIAM H. JOYCE         William H. Joyce	Director	February 18, 2011
/s/    LARRY J. MERLO         Larry J. Merlo	Director	February 18, 2011

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Signature	Title(s)	Date
/s/    JEAN-PIERRE MILLON         Jean-Pierre Millon	Director	February 18, 2011
/s/    TERRENCE MURRAY         Terrence Murray	Director	February 18, 2011
/s/    C.A. LANCE PICCOLO         C.A. Lance Piccolo	Director	February 18, 2011
/s/    SHELI Z. ROSENBERG         Sheli Z. Rosenberg	Director	February 18, 2011
/s/    THOMAS M. RYAN         Thomas M. Ryan	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	February 18, 2011
/s/    RICHARD J. SWIFT         Richard J. Swift	Director	February 18, 2011

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EX-10.34

Exhibit 10.34

EMPLOYMENT AGREEMENT

This Employment Agreement is entered into by and between CVS Caremark Corporation, a Delaware corporation (the “Company” or “CVS”), and Per G.H. Lofberg (the “Executive”).

WHEREAS, the Company and Executive desire to enter into an agreement setting forth the terms of Executive’s employment as Executive Vice President, CVS Caremark Corporation and President, Pharmacy Benefit Services;

NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and Executive (individually a “Party” and together the “Parties”) agree as follows:

1. Term of Agreement.

(a) The term of this Agreement shall commence on January 1, 2010 (the “Effective Date”) and end on December 31, 2012 (the “Term of Agreement”), unless terminated earlier in accordance herewith.

(b) Effect of a Change in Control. In the event of a Change in Control (as that term is defined in the CVS Caremark Corporation Change in Control Agreement executed by Executive (the “CIC Agreement”), this entire Agreement, including Section 5, shall terminate immediately and shall have no further force or effect.

2. Nature of Employment, Duties and Responsibilities.

(a) Generally. Executive is employed on an at-will basis by the Company or one of its subsidiaries, and the transfer of Executive’s employment to any of the Company’s operating subsidiaries shall not be deemed a termination of employment, provided that the subsidiary that employs Executive shall directly or indirectly control substantially all of the Company’s pharmacy benefits management business. The Company shall have the right to terminate Executive’s employment at any time for any reason or no reason without any obligation to Executive except as set forth in Section 4 of this Agreement. Executive shall have the right to terminate his employment at any time for any reason or no reason, and shall have the rights and obligations set forth in this Agreement and the applicable benefit and compensation plans and equity grant agreements.

(b) Duties. Executive shall have and perform such duties, responsibilities, and authorities as are specified by the Company from time to time and as are consistent with his position as Executive Vice President, CVS Caremark and President, Pharmacy Benefit Services. Executive shall devote substantially all of his business time and attention (except for periods of vacation or absences approved by the Company), and his best efforts, abilities, experience, and talent to the business of the Company. Notwithstanding the foregoing, this Agreement shall not preclude Executive from (i) serving on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in charitable activities and community affairs, and (iii) managing his personal investments and affairs, provided that such activities do not materially interfere with the proper performance of Executive’s duties and responsibilities under this Agreement, and further provided that such activities do not violate the Executive Covenants set forth in Section 5 of this Agreement. The Company acknowledges that Executive serves on the Board of Directors of InVentiv Health, Inc. and XenoPort, Inc. which, as of the Effective Date, does not violate the Executive Covenants.

3. Compensation and Benefits

(a) Base Salary. The Executive shall be paid an annualized salary (“Base Salary”), payable in accordance with the regular payroll practices of the Company. The Executive’s initial Base Salary pursuant to this Agreement shall be $900,000.00, subject to periodic review and possible increase by the Company, but the Base Salary shall not be decreased.

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(b) Bonus Program. The Executive shall be eligible to participate in the Company’s annual Management Incentive Plan (the “MIP”). Payment of annual incentive awards shall be determined in accordance with the MIP. The Executive’s target bonus opportunity under the MIP shall be 130% of Base Salary.

(c) Stock Options and Restricted Stock Units. The Executive shall be eligible to participate in the Company’s stock option and restricted stock unit programs. Awards shall be governed by the CVS Caremark Corporation 1997 Incentive Compensation Plan, as amended, or any successor plan (collectively, the “ICP”) and the applicable award agreements. The Executive’s annual equity value target shall be $2,000,000.00, provided that the actual value of the grant shall be determined by the Company in its sole discretion. The annual equity grant for Executive shall be granted fifty per cent (50%) in stock options and fifty per cent (50%) in restricted stock units, and the grant agreements for 2010 shall be substantially in the forms attached hereto.

(d) Long-Term Incentive Plan. The Executive shall be entitled to participate in the Company’s Long-Term Incentive Plan (“LTIP”) for the period from January 1, 2010 through December 31, 2012, with a target award of $3,000,000.00, and the Company may, in its sole discretion, offer Executive the opportunity to be eligible for LTIP awards in subsequent performance periods. All LTIP awards will be governed by the terms of the LTIP.

(e) Sign-On Investment Opportunity. Executive will be entitled to participate in the Company’s Partnership Equity Program (“PEP”) and shall be credited with an initial pre-tax investment of $1,500,000.00.

(f) Employee Benefit Programs. During the Term of Agreement, the Executive shall be entitled to participate in such employee retirement and welfare benefit plans and programs of the Company as are made available to the Company’s similarly-situated executives (as determined by the Company) or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, health, medical, dental, long-term disability, and life insurance plans. The Company reserves the right to suspend, amend, or terminate any benefit plans or programs at any time in its sole discretion.

4. Termination of Employment.

(a) Termination Due to Executive’s Resignation or Death. If Executive terminates his employment for any reason or if Executive’s employment ends due to the Executive’s death, Executive will be entitled to receive his Base Salary earned through the last day of employment (the “Separation Date”). In addition, if Executive’s employment ends due to the Executive’s death, the Company shall pay Executive’s estate a pro rata MIP award for the year in which Executive’s termination occurs, determined in accordance with the MIP and paid at such time as MIP awards are paid to current employees generally. All other benefits due to Executive following the termination of employment will be determined in accordance with the applicable plans and policies and equity grant agreements.

(b) Termination by the Company for Cause.

(i) If the Company terminates the Executive’s employment for “Cause”, Executive shall be entitled to receive his Base Salary earned through the Separation Date. All other benefits due to Executive following the termination of employment will be determined in accordance with the applicable plans and policies and equity grant agreements.

(ii) “Cause” shall exist if the Executive:

(A) willfully and materially breaches Section 5 of this Agreement or any contractual or common law obligations regarding protection of the Company’s confidential information, competition with the Company or solicitation of the Company’s customers or employees;

(B) willfully and materially violates a material provision of the CVS Caremark Code of Conduct or any of the Company’s other material policies;

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(C) engages in serious misconduct unrelated to Executive’s job (e.g., drug use or criminal conviction) and that is meaningfully detrimental to the Company’s reputation and/or to Executive’s ability to perform his duties;

(D) willfully engages in conduct that is meaningfully detrimental to the Company’s reputation; or

(E) engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his duties to the Company.

(c) Termination by the Company Without Cause or by Executive for Good Reason.

(i) Severance. If Executive’s employment is terminated by the Company under circumstances that constitute a “Termination Without Cause” or by the Executive under circumstances that constitute a “Termination by Executive for Good Reason,” each as defined below, then Executive shall be entitled to and his sole remedies under this Agreement shall be:

(A) Base Salary earned through the Separation Date and benefits due to Executive upon termination in accordance with the plans and policies of the Company;

(B) severance pay in the form of Executive’s Base Salary, paid on a monthly basis at the monthly rate in effect on the Separation Date, for a period of 12 months (the “Severance Period”);

(C) pro rata MIP award for the year in which Executive’s termination occurs, determined in accordance with the MIP and paid at such time as awards are paid to current employees generally;

(D) treatment of existing stock option, restricted stock unit, LTIP and PEP awards in accordance with the ICP and the award agreements and plans, including any provisions relating to continued vesting during the Severance Period;

(E) continued participation in all medical, dental and vision insurance plans pursuant to COBRA (subject to Executive’s continued contribution at the same contribution rate as current employees receiving like coverage) until the earlier of: (A) the end of the Severance Period; or (B) the date the Executive receives coverage under the plans and programs of a subsequent employer; provided that in the event that Executive is entitled to such participation beyond the time that Executive may participate in the plans pursuant to COBRA, the Company shall pay to Executive a monthly cash amount equal, on an after-tax basis, to the amount that the Company contributed on a monthly basis to continue Executive’s coverage under COBRA.

(ii) A “Termination Without Cause” means the Company terminates Executive’s employment with the employing entity in the absence of Cause, the Executive’s resignation or the Executive’s death.

(iii) A “Termination by Executive for Good Reason” means the termination of Executive’s employment at his initiative following the occurrence, without Executive’s written consent, of one or more of the following events (except as a result of a prior termination): (A) an assignment of any duties to Executive which are materially inconsistent with Executive’s status as a member of the senior management of CVS Caremark; (B) a decrease in Executive’s annual Base Salary, or a decrease in his target annual incentive award opportunity below 130% of his Base Salary; or (C) Executive is required to perform substantially all of his duties at any Company location. Notwithstanding the foregoing, no termination of Executive’s employment shall constitute a Termination by Executive for Good Reason unless Executive notifies the Company in writing no later than ninety (90) days after the initial existence of the applicable event described above and such event is not remedied by the Company within thirty (30) days of the Company’s receipt of such notice from the Executive.

(iv) Release and Compliance With Executive Covenants. Executive’s eligibility for and receipt of the payments and benefits set forth in this Section 4(c) is contingent on (A) Executive’s execution of the severance agreement provided by the Company (which will include a full release of claims against the Company and reaffirmation of the Executive Covenants set forth in Section 5) within 30 days after the Separation Date and (B) Executive’s compliance with the Executive Covenants set forth in Section 5.

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(v) Exclusivity of Severance Payments. Upon termination of the Executive’s employment during the Term of Agreement, Executive shall not be entitled to any severance payments or severance benefits from the Company or any payments by the Company on account of any claim by Executive of wrongful termination, including claims under any federal, state or local human and civil rights or labor laws, other than the payments and benefits provided in this Section 4(c).

(vi) Sunset of Severance Entitlement. Executive shall not be entitled to the benefits and payments referred to in Section 4(c) above for any termination of employment that occurs after December 31, 2012.

5. Executive Covenants.

(a) Non-Competition. During the Executive’s employment with the Company or one of its subsidiaries and during the 24-month period following the termination of Executive’s employment for any reason (the “Non-Competition Period”), Executive will not, directly or indirectly, engage in Competition with the Company. “Competition” shall mean engaging in any activity for a Competitor of the Company, whether as a principal, agent, partner, officer, director, employee, independent contractor, investor, consultant or stockholder (except as a less-than one percent shareholder of a publicly traded company) or otherwise. A “Competitor” shall mean any person, corporation or other entity (and its parents, subsidiaries, affiliates and assigns) doing business in any geographical area in which the Company or any of its subsidiaries or affiliates are doing or have imminent plans to do business, and which is engaged in the operation of: (a) a retail business which includes or has imminent plans to include a pharmacy (i.e. the sale of prescription drugs) as an offering or component of its business, including but not limited to, chain drug store companies such as Walgreen Co. and Rite Aid Company, mass merchants such as Wal-Mart Stores, Inc. and Target Corp., and food/drug combinations such as The Kroger Co. and Supervalu Inc.; and/or (b) a business which includes or has imminent plans to include mail order prescription, specialty pharmacy and/or pharmacy benefits management or any other services offered by Caremark Rx, LLC as an offering or component of its business, such as Medco Health Solutions, Inc. or Express Scripts, Inc., and/or (c) a business which includes or has imminent plans to include offering, marketing or the sale of basic acute health care services at retail or other business locations, similar to the services provided by MinuteClinic, LLC (and excluding hospitals, private physicians’ offices or other businesses dedicated to the direct provision of health care services). During Executive’s employment by the Company or one of its subsidiaries and during the Non-Competition Period, Executive will not, directly or indirectly, engage in any activity that involves providing audit review or other consulting or advisory services with respect to any relationship between the Company and any third party.

(b) Non-Solicitation. Executive will not, directly or indirectly, during his employment or during the Non-Competition Period: (a) solicit, accept, or attempt to solicit or accept business from any customer, prospective customer, consultant, joint venture partner, independent contractor, or supplier of the Company for the purpose of offering, selling or providing products or services that, directly or indirectly, compete or interfere with the business of the Company; or (b) hire, solicit, or induce any employee of the Company or any of its subsidiaries to leave the employ of the Company or any of its subsidiaries or to reduce the services that he or she provides to the Company or any of its subsidiaries.

(c) Non-Disclosure of Confidential Information.

(i) Executive will not at any time, whether during or after the termination of Executive’s employment, reveal to any person or entity any of the trade secrets or Confidential Information concerning the organization, business or finances of the Company or of any third party which the Company is under an obligation to keep confidential, except as may be required in the ordinary course of performing Executive’s duties as an employee of the Company. The Company’s Confidential Information includes but is not limited to non-public information such as computer code generated or developed by the Company; software or programs and related documentation; strategic compilations and analysis; strategic processes; business or financial methods, practices and plans; non-public pricing; operating margins; marketing, merchandising and selling techniques and information; customer lists; details of customer agreements; pricing

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arrangements with drug manufacturers; pharmacy reimbursement rates; expansion strategies; real estate strategies; operating strategies; sources of supply; employee compensation and benefit plans, and patient records (collectively, “Confidential Information”). Executive shall keep secret all such matters entrusted to him and Executive shall not use or attempt to use any Confidential Information on behalf of any person or entity other than the Company, or in any manner which may injure or cause loss or may be calculated to injure or cause loss, whether directly or indirectly, to the Company. Excluded from the definition of Confidential Information is information (A) that is or becomes part of the public domain, other than through the breach of this Agreement by Executive or (B) regarding the Company’s business or industry properly acquired by Executive in the course of his career as an executive in the Company’s industry and independent of Executive’s employment by the Company. For this purpose, information known or available generally within the pharmacy benefit management and/or retail pharmacy industry shall be deemed to be known or available to the public.

(ii) Further, during his employment, Executive shall not make, use or permit to be used any notes, memoranda, reports, lists, records, drawings, sketches, specifications, software programs, data, documentation or other materials of any nature relating to any matter within the scope of the business of the Company or concerning any of its dealings or affairs otherwise than for the benefit of Company. Executive shall not, after the termination of his employment, use or permit to be used any such notes, memoranda, reports, lists, records, drawings, sketches, specifications, software programs, data, documentation or other materials. All of the foregoing shall be and remain the sole and exclusive property of the Company and, immediately upon the termination of his employment, Executive shall deliver all of the foregoing, and all copies thereof, to the Company at its main office.

(d) Ownership and Return of the Company’s Property. On or before the Separation Date, Executive shall return to the Company all property of the Company in Executive’s possession, custody or control, including but not limited to the originals and copies of any information provided to or acquired by Executive in connection with the performance of his duties for the Company, such as files, correspondence, communications, memoranda, e-mails, slides, records, and all other documents, no matter how produced or reproduced, all computer equipment, communication devices (including but not limited to any BlackBerry or other portable digital assistant or device), computer programs and/or files, and all office keys and access cards. It is hereby acknowledged that all of said items are the sole and exclusive property of the Company.

(e) Rights to Inventions, Works.

(i) Inventions Retained and Licensed. Executive has attached hereto, as Exhibit A, a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by Executive prior to his employment with the Company (collectively referred to as “Prior Inventions”), which belong to Executive, which relate to the Company’s proposed business, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, Executive represents that there are no such Prior Inventions. Executive agrees that Executive will not incorporate, or permit to be incorporated, any Prior Invention owned by him or in which Executive has an interest into a Company product, process or machine without the Company’s prior written consent. Notwithstanding the foregoing sentence, if, in the course of his employment with the Company, Executive incorporates into a Company product, process or machine a Prior Invention owned by Executive or in which Executive has an interest, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use and sell such Prior Invention as part of or in connection with such product, process or machine.

(ii) Assignment of Inventions. Executive will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all his right, title, and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas, trademarks or trade secrets, whether or not patentable or registrable under copyright or similar laws, which Executive may solely or jointly

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conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time Executive is in the employ of the Company (collectively referred to as “Inventions”). All original works of authorship which are made by Executive (solely or jointly with others) within the scope of and during the period of Executive’s employment with the Company and which are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act and as such are the sole property of the Company. Executive understands and agrees that the decision whether or not to commercialize or market any Invention developed by Executive solely or jointly with others is within the Company’s sole discretion and for the Company’s sole benefit and that no royalty will be due to Executive as a result of the Company’s efforts to commercialize or market any such Invention.

(iii) Maintenance of Records. Executive shall keep and maintain adequate and current written records of all Inventions made by Executive (solely or jointly with others) during the term of his employment with the Company. The records will be in the form of notes, sketches, drawings, and any other format that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times.

(iv) Patent and Copyright Registrations. Executive shall assist the Company, or its designee, at the Company’s expense, in every proper way to secure the Company’s rights in the Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and all countries, including, but not limited to, the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which the Company shall deem necessary in order to apply for and obtain such rights and in order to assign and convey to the Company, its successors, assigns, and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. Executive’s obligation to execute or cause to be executed, when it is in Executive’s power to do so, any such instrument or papers shall continue after the termination of this Agreement. If the Company is unable because of Executive’s mental or physical incapacity or for any other reason to secure Executive’s signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Inventions or original works of authorship assigned to the Company as above, then Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as his/her agent and attorney in fact, to act for and in Executive’s behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations thereon with the same legal force and effect as if executed by Executive.

(v) Exception to Assignments. The provisions of this Agreement requiring assignment of Inventions to the Company shall not apply to any invention that Executive has developed entirely on his own time without using the Company’s equipment, supplies, facilities, trade secret information or Confidential Information except for those inventions that either (i) relate at the time of conception or reduction to practice of the invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company or (ii) result from any work that Executive performed for the Company. Executive will advise the Company promptly in writing of any inventions that Executive believes meets the foregoing criteria and is not otherwise disclosed on Exhibit A.

(f) Cooperation.

(i) In the event Executive receives a subpoena, deposition notice, interview request, or any other inquiry, process or order relating to any civil, criminal or administrative investigation, suit, proceeding or other legal matter relating to the Company from any investigator, attorney or any other third party, Executive agrees to promptly notify the Company’s Chief Legal Officer by telephone and in writing. Without limiting the generality of the preceding sentence, in the event Executive receives a subpoena, deposition notice, interview request, or any other inquiry, process or order which requires or may reasonably be construed to require Executive to produce Confidential Information, Executive shall promptly: (i) notify the Company’s Chief Legal Officer of the item, document, or information sought by such subpoena,

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deposition notice, interview request, or other inquiry, process or order; (ii) furnish the Company’s Chief Legal Officer with a copy of said subpoena, deposition notice, interview request, or other inquiry, process or order; and (iii) provide reasonable cooperation with respect to any procedure that the Company may initiate to protect Confidential Information or other interests. If the Company objects to the subpoena, deposition notice, interview request, inquiry, process, or order, Executive shall cooperate to ensure that there shall be no disclosure until the court or other applicable entity has ruled upon the objection, and then only in accordance with the ruling so made. Any disclosure of Confidential Information that is legally required or may reasonably be construed to be required to be made, and that is made after following the procedures set forth above and in accordance with this Section 5(f)(i) shall not be a breach of Section 5(c) of this Agreement. Nothing in this Agreement shall be construed to prohibit Executive from testifying truthfully in any legal proceeding.

(ii) Executive shall cooperate fully with the Company, its subsidiaries and affiliates, and their legal counsel in connection with any action, proceeding, or dispute arising out of matters with which Executive was directly or indirectly involved while serving as an employee of the Company and/or its subsidiaries or affiliates. This cooperation shall include, but shall not be limited to, meeting with, and providing information to, the Company and its legal counsel, maintaining the confidentiality of any past or future privileged communications with the Company’s legal counsel (outside and in-house), and making himself available to testify truthfully by affidavit, in depositions, or in any other forum on behalf of the Company. The Company agrees to reimburse Executive for any reasonable and necessary out-of-pocket costs associated with his cooperation.

6. Breach, Injunctive Relief, and Attorneys Fees.

Executive agrees that any breach of this Agreement by Executive will cause irreparable damage to the Company and that, in the event of such breach, the Company shall have, in addition to any and all remedies of law, the right to seek an injunction, specific performance or other equitable relief to prevent the violation of Executive’s obligations hereunder, and without providing a bond to the extent permitted by the applicable rules of civil procedure. Any breach by Executive shall immediately relieve the Company of any obligation to provide Executive with any post-termination payments or benefits set forth in Section 4(c).

7. Miscellaneous

(a) No Conflicting Agreements. Executive represents that the performance of Executive’s duties with the Company and Executive’s compliance with all of the terms of this Agreement does not and will not breach any agreement to keep in confidence proprietary information acquired by Executive in confidence or in trust prior to Executive’s employment by the Company.

(b) Severability. Each provision herein shall be treated as a separate and independent clause, and the unenforceability of any one clause shall in no way impair the enforceability of any of the other clauses herein. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity, subject or otherwise so as to be unenforceable at law, such provision or provisions shall be construed by the appropriate judicial body by limiting or reducing it or them, so as to be enforceable to the maximum extent compatible with the applicable law.

(c) Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not be interpreted to preclude, prohibit or restrict the Executive’s participation in any other employee benefit or other plans or programs in which Executive currently participates.

(d) Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns. The obligations and duties of Executive hereunder are personal and not assignable by Executive.

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(e) Entire Agreement. This Agreement and the applicable benefit, equity and incentive plans and equity grant agreements, contain the entire understanding and agreement between the Parties concerning the subject matter hereof and, as of the Effective Date, supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto.

(f) Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by the Executive and an authorized officer of the Company. Except as set forth herein, no delay or omission to exercise any right, power or remedy accruing to any Party shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be.

(g) Taxation. The Company makes no guarantees or representations with respect to the taxability of any payments set forth herein. Nevertheless, the Executive and Company agree that it is the intent of the parties that this Agreement not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and that to the extent any provisions of this Agreement do not comply with such Section 409A the parties will make such changes as are mutually agreed upon in order to comply with Section 409A. In all events, to the extent required to avoid a violation of the applicable rules under all Section 409A by reason of Section 409A(a)(2)(B)(i) of the Code, payment of any amounts subject to Section 409A of the Code shall be delayed until the relevant date of payment that will result in compliance with the rules of Section 409A(a)(2)(B)(i) of the Code.

(h) Survivorship. Except as set forth in Section 1(b), the Executive Covenants set forth in Section 5 shall survive the Executive’s termination of employment, regardless of the reason for such termination.

(i) Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of Rhode Island without reference to principles of conflict of laws. The Company and the Executive hereby consent to the jurisdiction of any or all of the following courts for purposes of resolving any dispute under this Agreement: (i) the United States District Court for Rhode Island or (ii) any of the courts of the State of Rhode Island. The Company and the Executive further agree that any service of process or notice requirements in any such proceeding shall be satisfied if the rules of such court relating thereto have been substantially satisfied. The Company and the Executive hereby waive, to the fullest extent permitted by applicable law, any objection which it or he may now or hereafter have to such jurisdiction and any defense of inconvenient forum.

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(j) Notices. Any notice given to a Party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of:

If to the Company:	CVS Caremark Corporation
	One CVS Drive
	Woonsocket, Rhode Island 02895
	Attention: Corporate Secretary
If to the Executive:	Mr. Per G.H. Lofberg
	63 East 92nd Street
	New York, New York 10128
	with a copy to:
	Laurence M. Moss
	Schulte Roth & Zabel LLP
	919 Third Avenue
	New York, New York 10022

(k) Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

(l) Counterparts. This Agreement may be executed in two or more counterparts.

PER G.H. LOFBERG		CVS CAREMARK CORPORATION
	/s/ Per G.H. Lofberg	By:	/s/ V. Michael Ferdinandi
		Name: Title:	V. Michael Ferdinandi Senior Vice President and Chief Human Resources Officer

Date: Date:

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EX-10.35

Exhibit 10.35

CVS CAREMARK CORPORATION

Change in Control Agreement for

Per G.H. Lofberg

CONFIDENTIAL REVISED November 2009

		Page
1.	Definitions		2
2.	Term of Agreement		6
3.	Entitlement to Severance Benefit		6
4.	Confidentiality; Cooperation with Regard to Litigation; Non-disparagement		8
5.	Non-solicitation		9
6.	Remedies		10
7.	Effect of Agreement on Other Benefits and Obligations		10
8.	Not an Employment Agreement		10
9.	Resolution of Disputes		10
10.	Assignability; Binding Nature		10
11.	Representation		11
12.	Amendment or Waiver, Section 409A		11
13.	Severability		11
14.	Survivorship		11
15.	Beneficiaries/References		11
16.	Governing Law/Jurisdiction		12
17.	Notices		12
18.	Headings		12
19.	Counterparts		13

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This Change in Control Agreement (“Agreement”) is effective as of January 1, 2010 between CVS Pharmacy, Inc. (“CVS”) and Per G.H. Lofberg (the “Executive”).

WHEREAS, the Board of Directors (the “Board”) of CVS Caremark Corporation (“CVS Caremark” or the “Company”) believes it is necessary and desirable for the Company to be able to rely upon Executive to continue serving in his or her position with the Company in the event of a pending or actual change in control of CVS Caremark;

WHEREAS, Executive is employed by a Subsidiary of CVS Caremark, and this Agreement shall not alter Executive’s status as an employee at will;

NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, CVS and Executive (individually a “Party” and together the “Parties”) agree as follows:

1. Definitions.

a. “Base Salary” shall mean Executive’s annual rate of base salary at the time of Executive’s termination of employment or, if greater, as in effect immediately prior to a Change in Control.

b. “Cause” shall exist if:

i. Executive willfully and materially breaches Sections 4 or 5 of this Agreement;

ii. Executive is convicted of a felony involving moral turpitude; or

iii. Executive engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out Executive’s duties under this Agreement, resulting, in either case, in material harm to the financial condition or reputation of the Company.

For purposes of this Agreement, an act or failure to act on Executive’s part shall be considered “willful” if it was done or omitted to be done by Executive not in good faith, and shall not include any act or failure to act resulting from any incapacity of Executive. A termination for Cause shall not take effect absent compliance with the provisions of this paragraph. Executive shall be given written notice by the Company of its intention to terminate Executive’s employment for Cause, such notice (A) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for Cause is based and (B) to be given within 90 days of the Company’s learning of such act or acts or failure or failures to act. Executive shall have 20 days after the date that such written notice has been given to Executive in which to cure such conduct, to extent such cure is possible. If Executive fails to cure such conduct, Executive shall then be entitled to a hearing before the Committee, or an officer or officers designated by the Committee, at which Executive is entitled to appear. Such hearing shall be held within 25 days of such notice to Executive, provided Executive requests such hearing within 10 days of the written notice from the Company of the intention to terminate Executive for Cause. If, within five days following such hearing, Executive is furnished written notice by the Committee confirming that, in its judgment, grounds for Cause on the basis of the original notice exist, Executive shall thereupon be terminated for Cause. Executive’s right to cure in accordance with this provision applies only in the event of a Change in Control as defined in Section 1(c) below and does not alter Executive’s “at will” employment status.

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c. A “Change in Control” shall be deemed to have occurred if:

(i) any Person (other than (w) the Company, (x) any trustee or other fiduciary holding securities under any employee benefit plan of the Company, (y) any company owned, directly or indirectly, by the stockholders of the Company immediately after the occurrence with respect to which the evaluation is being made in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such occurrence or (z) any surviving or resulting entity from a merger or consolidation referred to in clause (iii) below that does not constitute a Change in Control under clause (iii) below) becomes the Beneficial Owner (except that a Person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants or options or otherwise, without regard to the sixty day period referred to in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or of any subsidiary owning directly or indirectly all or substantially all of the consolidated assets of the Company (a “Significant Subsidiary”), representing 30% or more of the combined voting power of the Company’s or such Significant Subsidiary’s then outstanding securities;

(ii) during any period of twelve (12) consecutive months, individuals who at the beginning of such period constitute the Board, and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the twelve (12) month period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board;

(iii) the consummation of a merger or consolidation of the Company or any Significant Subsidiary with any other entity, other than a merger or consolidation which would result in the voting securities of the Company or a Significant Subsidiary outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting power of the surviving or resulting entity outstanding immediately after such merger or consolidation; or

(iv) the consummation of a transaction (or series of transactions within a 12 month period) which constitutes the sale or disposition of all or substantially all of the consolidated assets of the Company but in no event assets having a gross fair market value of less than 40% of the total gross fair market value of all of the consolidated assets of the Company (other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such sale or disposition)

For purposes of this definition:

(A) The term “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act (including

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any successor to such Rule).

(B) The term “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

(C) The term “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including “group” as defined in Section 13(d) thereof.

d. “Committee” shall mean the Management Planning and Development Committee of the Board, or the corresponding committee of the board of directors of a successor to CVS Caremark.

e. “Company” shall mean, collectively, CVS Caremark and any Subsidiary or affiliate of CVS Caremark.

f. “Confidential Information” shall have the meaning set forth in Section 4 below.

g. “Constructive Termination Without Cause” shall mean a termination of the Executive’s employment at Executive’s initiative following the occurrence, without the Executive’s written consent, of one or more of the following events (except as a result of a prior termination):

i. an assignment of any duties to Executive that is inconsistent with Executive’s status as a member of the senior management of CVS Caremark;

ii. a decrease in Executive’s annual base salary or target annual incentive award opportunity;

iii. any failure to secure the agreement of any successor to CVS Caremark to fully assume the Company’s obligations under this Agreement; or

iv. a relocation of Executive’s principal place of employment more than 35 miles from Executive’s place of employment before such relocation.

h. “Disability” shall mean disability as that term is defined in the Company’s Long-Term Disability Plan.

i. “Effective Date” shall have the meaning set forth in Section 2 below.

j. “Original Term” shall have the meaning set forth in Section 2 below.

k. “Renewal Term” shall have the meaning set forth in Section 2 below.

l. “Severance Period” shall mean the period of 18 months following the termination of Executive’s employment with the Company.

m. “Subsidiary” shall have the meaning set forth in Section 4 below.

n. “Term” shall have the meaning set forth in Section 2 below.

o. “termination of employment”, “employment is terminated” and other similar words shall mean with respect to Executive

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(i) for any plan or arrangement that is subject to the rules of Section 409A of the Internal Revenue Code (the “Code”) a “Separation from Service” as such term is defined in the Income Tax Regulations under Section 409A (the “409A Regulations”) of the Code as modified by the rules described below:

(A) except in the case where Executive is on a bona fide leave of absence pursuant to the Company’s policies as provided below, Executive is deemed to have incurred a Separation from Service on a date if the company and Executive reasonably anticipate that the level of services to be performed by Executive after such date would be permanently reduced to 20% or less of the average services rendered by Executive during the immediately preceding 36-month period (or the total period of employment, if less than 36 months), disregarding periods during which Executive was on a bona fide leave of absence;

(B) if Executive is absent from work due to military leave, sick leave, or other bona fide leave of absence pursuant to the Company’s policies, Executive shall incur a Separation from Service on the first date that the rules of (A), above, are satisfied following the later of (i) the six-month anniversary of the commencement of the leave or (ii) the expiration of Executive’s right, if any, to reemployment under statute, contract or Company policy;

(C) Executive shall be considered to continue employment and to not have a Separation from Service while on a bona fide leave of absence pursuant to the Company’s policies if the leave does not exceed 6 consecutive months (12) months for a disability leave of absence) or, if longer, so long as the Executive retains a right to reemployment with the Company or an Affiliate under an applicable statute, contract or Company policy. For this purpose, a “disability leave of absence” is an absence due to any medically determinable physical or mental impairment of Executive that can be expected to result in death or can be expected to last for a continuous period of not less than 6 months, where such impairment causes the Participant to be unable to perform the duties of his job or a substantially similar job;

(D) for purposes of determining whether another organization is an Affiliate of the Company, common ownership of at least 50% shall be determinative;

(E) the Company specifically reserves the right to determine whether a sale or other disposition of substantial assets to an unrelated party constitutes a Separation from Service with respect to Executive providing services to the seller immediately prior to the transaction and providing services to the buyer after the transaction. Such determination shall be made in accordance with the requirements of Section 409A of the Code; or

(ii) for any plan or arrangement that is not subject to the rules of Section 409A of the Code, the complete cessation of providing service to the Company or any Affiliate as an employee.

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2. Term of Agreement.

The term of this Agreement shall commence on the date of this Agreement (the “Effective Date”) and end on the third anniversary of such date (the “Original Term”). The Original Term shall be automatically renewed for successive one-year terms (the “Renewal Terms”) unless at least 180 days prior to the expiration of the Original Term or any Renewal Term, either Party notifies the other Party in writing that he/she or it is electing to terminate this Agreement at the expiration of the then current Term. “Term” shall mean the Original Term and all Renewal Terms. If a Change in Control shall have occurred during the Term, notwithstanding any other provision of this Section 2, the Term shall not expire earlier than two years after such Change in Control.

3. Entitlement to Severance Benefit.

a. Severance Benefit. In the event Executive’s employment with the Company is Terminated Without Cause, other than due to death, or Disability, or in the event there is a Constructive Termination Without Cause within two years following a Change in Control, Executive shall be entitled to receive:

i. Base Salary through the date of termination of Executive’s employment, which shall be paid in a cash lump sum not later than 15 days following Executive’s termination of employment;

ii. An amount equal to 1.5 times Executive’s Base Salary in effect on the date of termination of Executive’s employment (or in the event a reduction in Base Salary is a basis for a Constructive Termination Without Cause, then the Base Salary in effect immediately prior to such reduction), payable in a cash lump sum promptly (but in no event later than 15 days) following Executive’s termination of employment;

iii. An amount equal to the sum of (A) the most recently established target annual cash incentive bonus amount, pro rated based on the portion of the performance year that Executive has worked as of the date of Executive’s termination, plus (B) 25% of Base Salary (which represents an amount equal to the cash value of the target annual Performance-Based Restricted Stock unit award for the year in which termination occurs), pro rated based on the portion of the performance year that Executive has worked as of the date of his/her termination. The Base Salary will be determined in accordance with Section 3.a.ii. Such payment of a pro rata annual cash incentive bonus and cash in lieu of Performance-Based Restricted Stock will be payable in a cash lump sum promptly (but in no event later than 15 days) following Executive’s termination of employment;

iv. An amount equal to 1.5 times the sum of (A) the most recently established target annual incentive cash bonus amount, plus (B) 25% of Base Salary (determined in accordance with Section 3.a.ii above), payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive’s termination of employment;

v. Elimination of all restrictions on any restricted stock or restricted stock unit awards outstanding at the time of termination of employment (other than awards under the Company’s Partnership Equity Program, which shall be governed by the terms of such awards);

vi. Immediate vesting of all outstanding stock options and the right to exercise such stock options for the remainder of the full term of such option (other than awards

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under the Company’s Partnership Equity Program, which shall be governed by the terms of such awards);

vii. The balance of any incentive awards earned as of December 31 of the prior year (but not yet paid), which shall be paid in a single lump sum not later than 15 days following Executive’s termination of employment;

viii. Settlement of all deferred compensation arrangements in accordance with any then applicable deferred compensation plan or election form;

ix. Continued participation in all medical, health and life insurance plans at the same benefit level at which Executive was participating on the date of termination of Executive’s employment until the earlier of:

1. the end of the Severance Period; or

2. the date, or dates, Executive receives equivalent coverage and benefits under the plans and programs of a subsequent employer (such coverage and benefits to be determined on a coverage-by-coverage, or benefit-by-benefit, basis);

provided that (1) if Executive is precluded from continuing Executive’s participation in any employee benefit plan or program as provided in this clause (ix) of this Section 3.a, Executive shall receive cash payments equal on an after-tax basis to the cost to Executive of obtaining the benefits provided under the plan or program in which Executive is unable to participate for the period specified in this clause (ix) of this Section 3.a, (2) such cost shall be deemed to be the lowest reasonable cost that would be incurred by Executive in obtaining such benefit on an individual basis, and (3) payment of such amounts shall be made quarterly in advance; and

x. other or additional benefits then due or earned in accordance with applicable plans and programs of the Company.

b. Change in Control Best Payments Determination. In the event the Severance Benefits described in Section 3(a) are payable to Executive in connection with a Change in Control and, if paid, could subject Executive to an excise tax under Section 4999 of the Internal Revenue Code (the “Excise Tax”), then notwithstanding the provisions of Section 3(a) the Company shall reduce the Severance Benefits (the “Benefit Reduction”) under Section 3(a) by the amount necessary to result in the Executive not being subject to the Excise Tax if such reduction would result in the Executive’s “Net After-Tax Amount” attributable to the Severance Benefits described in Section 3(a) being greater than it would be if no Benefit Reduction was effected. For this purpose “Net After-Tax Amount” shall mean the net amount of Severance Benefits Executive is entitled to receive under this Agreement after giving effect to all Federal, state and local taxes which would be applicable to such payments, including, but not limited to, the Excise Tax. The determination of whether any such Benefit Reduction shall be effected shall be made by a nationally recognized public accounting firm selected by the Company (the “Accounting Firm”) prior to the occurrence of the Change in Control and such determination shall be binding on both Executive and the Company. In the event it is determined that a Benefit Reduction is required, such reduction of items described in Section 3(a) above shall be done first by reducing cash severance determined in accordance with Section 3(a)(ii), 3(a)(iii) and 3(a)(iv); to the extent a further Benefit Reduction is necessary, then Severance Benefits will be reduced from the amounts determined in accordance with Section 3(a)(v) and 3(a)(vi), all as determined by the Accounting Firm.

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c. No Mitigation; No Offset. In the event of any termination of employment under this Section 3, Executive shall be under no obligation to seek other employment, and the amounts due Executive under this Agreement shall not be offset by any remuneration attributable to any subsequent employment that Executive may obtain.

d. Nature of Payments. Any amounts due under this Section 3 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty.

e. Exclusivity of Severance Benefit. Upon termination of Executive’s employment following a Change in Control, Executive shall not be entitled to any severance payments or severance benefits from the Company, or any other payments by the Company pursuant to any other agreement or arrangement between Executive and the Company, other than the Severance Benefit provided in this Section 3, except as required by law.

f. General Release of Claims. Executive agrees, as a condition of payment of the Severance Benefit provided for in this Section 3, that Executive will execute within 60 days of Executive’s termination of employment a separation agreement, in a form reasonably satisfactory to the Company, that includes a general release of any and all claims arising out of Executive’s employment or termination of employment with the Company, other than claims for (i) enforcement of this Agreement, (ii) enforcement of Executive’s rights under any of the Company’s incentive compensation, equity and/or employee benefit plans and programs to which Executive is entitled under this Agreement, and (iii) any tort for personal injury not arising out of or related to Executive’s employment or termination of employment.

g. Subject to the provisions of Section 12(b), all payments to be made pursuant to this Section 3 upon the termination of employment of Executive shall be made or commence, as the case may be, within 75 days after the Executive’s termination of employment provided, however, that if such termination of employment is after October 15 of a year, the payment or first payment, as the case may be, shall be made at the end of such 75 day period.

4. Confidentiality; Cooperation with Regard to Litigation; Non-disparagement.

a. During the Term and thereafter, Executive shall not, without the prior written consent of the Company, disclose to anyone (except in good faith in the ordinary course of business to a person who will be advised by Executive to keep such information confidential) or make use of any confidential information except in the performance of Executive’s duties hereunder or when required to do so by legal process, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) that requires Executive to divulge, disclose or make accessible such information. In the event that Executive is so ordered, Executive shall give prompt written notice to the Company in order to allow the Company the opportunity to object to or otherwise resist such order.

b. During the Term and thereafter, Executive shall not disclose the existence or contents of this Agreement beyond what is disclosed in the proxy statement or documents filed with the government unless and to the extent such disclosure is required by law, by a governmental agency, or in a document required by law to be filed with a governmental agency or in connection with enforcement of his/her rights under this Agreement. In the event that disclosure is so required, Executive shall give prompt written notice to the Company in order to allow the Company the opportunity to object to or otherwise resist such requirement. This restriction shall not apply to such disclosure by Executive to members of his/her immediate family, his/her tax, legal or financial advisors, any lender,

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or tax authorities, or to potential future employers to the extent necessary, each of whom shall be advised not to disclose such information.

c. “Confidential Information” shall mean all information concerning the business of the Company or any Subsidiary relating to any of their products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. Excluded from the definition of Confidential Information is information (i) that is or becomes part of the public domain, other than through the breach of this Agreement by Executive or (ii) regarding the Company’s business or industry properly acquired by Executive in the course of Executive’s career as an Executive in the Company’s industry and independent of Executive’s employment by the Company. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public.

d. “Subsidiary” shall mean any corporation or other business entity owned or controlled directly or indirectly by CVS Caremark.

e. Executive agrees to cooperate with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), by being reasonably available to testify on behalf of the Company or any Subsidiary in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to assist the Company, or any Subsidiary, in any such action, suit, or proceeding, by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company, or any Subsidiary as requested; provided, however that the same does not materially interfere with Executive’s then current professional activities. The Company agrees to reimburse Executive on an after tax basis, for all reasonable expenses actually incurred in connection with Executive’s provision of testimony or assistance.

f. Executive agrees that, during the Term and thereafter (including following Executive’s termination of employment for any reason) Executive will not make statements or representations, or otherwise communicate, directly or indirectly, in writing, orally, or otherwise, or take any action which may, directly or indirectly, disparage or be damaging to the Company or any Subsidiary or their respective officers, directors, employees, advisors, businesses or reputations. Notwithstanding the foregoing, nothing in this Agreement shall preclude Executive from making truthful statements or disclosures that are required by applicable law, regulation or legal process.

5. Non-solicitation.

During the period beginning with the Effective Date and ending 18 months following the termination of Executive’s employment with the Company, Executive, whether acting on Executive’s own behalf or by, through or on behalf of any third party, shall not (a) hire any employees of the Company or any Subsidiary, or recruit or solicit any such employees or encourage them to terminate their employment with the Company or any Subsidiary; (b) accept business from any customers of the Company or any Subsidiary, or solicit or encourage any customers, joint venture partners or investors of the Company or any Subsidiary to terminate or diminish their relationship with the Company or any Subsidiary or to violate any agreement with the Company or any Subsidiary. For purposes of subsection 5(a), an employee of the Company or any Subsidiary means any person who was employed by the Company or any Subsidiary within 180 days of such hiring, recruitment, solicitation or encouragement. Executive agrees to make any employer with whom Executive becomes employed during the 18-month period following Executive’s termination with the Company aware of this non-solicitation obligation upon commencing employment with such subsequent entity.

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6. Remedies.

In addition to whatever other rights and remedies the Company may have at equity or in law, the Company (a) shall have the right to immediately terminate all payments and benefits due under this Agreement if Executive breaches any of the provisions contained in Sections 4 or 5 above, and (b) shall have the right to seek injunctive relief in any court of competent jurisdiction if Executive breaches or threatens to breach any of the provisions contained in Sections 4 or 5 above. Executive acknowledges that such a breach would cause irreparable injury and that money damages would not provide an adequate remedy for the Company; provided, however, the foregoing shall not prevent Executive from contesting the issuance of any such injunction on the ground that no violation or threatened violation of Sections 4 or 5 has occurred.

7. Effect of Agreement on Other Benefits and Obligations.

Except as specifically provided in this Agreement, the existence of this Agreement shall not be interpreted to preclude, prohibit or restrict the Executive’s participation in any other employee benefit or other plans or programs in which he /she currently participates. Except as specifically provided in this Agreement, the terms of Sections 4 and 5 of this Agreement shall not be deemed to restrict or supersede any similar obligations Executive may have to the Company or its subsidiaries under any other agreement.

8. Not an Employment Agreement.

This Agreement is not, and nothing herein shall be deemed to create, a contract of employment between Executive and the Company. The Company may terminate the employment of Executive at any time and for any reason, subject to the terms of any employment agreement between the Company and Executive that may then be in effect.

9. Resolution of Disputes.

Any controversy or claim arising out of or relating to this Agreement or any breach or asserted breach hereof or questioning the validity and binding effect hereof arising under or in connection with this Agreement, other than seeking injunctive relief under Sections 4 or 5, shall be resolved by binding arbitration, to be held at an office closest to the Company’s principal offices in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Pending the resolution of any arbitration or court proceeding, the company shall continue payment of all amounts and benefits due Executive under this Agreement. All reasonable costs and expenses of any arbitration or court proceeding (including fees and disbursements of counsel) shall be paid on behalf of or reimbursed to Executive promptly by the Company; provided, however, that no reimbursement shall be made of such expenses if and to the extent the arbitrator(s) determine(s) that any of Executive’s litigation assertions or defenses were in bad faith or frivolous.

10. Assignability; Binding Nature.

This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and permitted assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred in connection with the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale or transfer of assets as described in the preceding sentence, it shall take whatever

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action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his/her, rights to compensation and benefits, which may be transferred only by will or operation of law, except as provided in Section 16 below.

11. Representation.

The Company represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between it and any other person, firm or organization.

12. Amendment; Waiver; Code Section 409A.

(a) No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be.

(b) Executive and Company agree that it is the intent of the parties that this Agreement not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the Code, as amended, and that to the extent any provisions of this Agreement do not comply with such Code Section 409A the parties will make such changes as are mutually agreed upon in order to comply with Code Section 409A. In all events, to the extent required to avoid a violation of any of the applicable rules under Code Section 409A by reason of Code Section 409A(a)(2)(B)(i), payment of any amounts subject to Code Section 409A shall be delayed until the relevant date of payment that will result in compliance with the rules of Code Section 409A(a)(2)(B)(i).

13. Severability.

In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.

14. Survivorship.

The respective rights and obligations of the Parties hereunder shall survive any termination of Executive’s employment to the extent necessary to the intended preservation of such rights and obligations.

15. Beneficiaries/References.

Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive’s death by giving the Company written notice thereof. In the event of Executive’s death or a judicial determination of Executive’s incompetence, references in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive’s beneficiary, estate or other legal representative.

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16. Governing Law/Jurisdiction.

This Agreement shall be governed by and construed and interpreted in accordance with the laws of Rhode Island without reference to principles of conflict of laws. Subject to Section 6, the Company and Executive hereby consent to the jurisdiction of any or all of the following courts for purposes of resolving any dispute under this Agreement: (i) the United States District Court for Rhode Island or (ii) any of the courts of the State of Rhode Island. The Company and Executive further agree that any service of process or notice requirements in such proceeding shall be satisfied if the rules of such court relating thereto have been substantially satisfied. The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which it or Executive may now or hereafter have to such jurisdiction and any defense of inconvenient forum.

17. Notices.

Any notice given to a Party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to, such changed address as such Party may subsequently give such notice of:

If to CVS:

CVS Pharmacy, Inc.

One CVS Drive

Woonsocket, RI 02895

Attention: Corporate Secretary

If to Executive:

Per G.H. Lofberg

63 East 92^nd Street

New York, New York 10128

with a copy to:

Laurence M. Moss, Esq.

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

18. Headings.

The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

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19. Counterparts.

This Agreement may be executed in two or more counterparts.

In WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the date first written above.

CVS Pharmacy, Inc.
By:	/s/ V. Michael Ferdinandi
	V. Michael Ferdinandi
	Senior Vice President, Human Resources
Date:

Per G.H. Lofberg

/s/ Per G.H. Lofberg

Executive Vice President, CVS Caremark Corporation and President, Pharmacy Benefit Services

Date:

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EX-10.36

Exhibit 10.36

2010 – 2012 LONG-TERM INCENTIVE PLAN

PRESIDENT, PHARMACY BENEFIT MANAGEMENT

1. Purpose

The purpose of the CVS Caremark (the “Company”) 2010 – 2012 Pharmacy Benefit Management Long-Term Incentive Plan, (the “PBM LTI Plan” or the “Plan”), is to motivate the Executive to achieve the 2010 – 2011 and 2011 – 2012 Earnings before Interest and Taxes Compound Annual Growth Rate (“EBIT CAGR”) goals for the Pharmacy Benefit Management (“PBM”) business unit, which have been approved by the Management Planning and Development Committee (the “Committee”) of the Board of Directors (the “Board”). Funding of incentive awards will be based on actual results measured against pre-established financial goals.

2. Administration

The Plan shall be administered by the Committee of the Board under the provisions of the 2010 Incentive Compensation Plan (the “2010 ICP”). The Committee shall have full and final authority, in each case subject to and consistent with the provisions of the 2010 ICP, to grant Awards, and determine the amount, terms and conditions and all other matters relating to Awards. In addition, the Committee shall have full and final authority, in each case, subject to and consistent with the provisions of the 2010 ICP to construe and interpret rules and regulations for the administration of the Plan, correct defects, supply omissions or reconcile inconsistencies therein, and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan.

Capitalized terms not otherwise defined herein shall have the meaning assigned to such term(s) in the 2010 ICP.

3. Eligibility

The President, Caremark Pharmacy Services (a “162(m) Eligible Person” or an “Eligible Person”) shall be eligible to receive an award under the PBM LTI Plan. Only the Committee has the authority to determine the eligibility of employees who are subject to Section 162(m) of the Internal Revenue Code (“Section 162(m)”) or who have been identified by the Committee as individuals who may be subject to Section 162(m) (collectively, “162(m) Eligible Persons” and each of whom shall also be include in the term “Eligible Persons” unless otherwise noted).

Eligibility for a Plan award is contingent upon the Eligible Person being employed by the Company on the last day of the Performance Period. The Committee may, for any reason and in its sole discretion, at any time prior to the end of the Performance Period, determine the Eligible Person’s eligibility for participation in the Plan. The Eligible Person is subject to the terms and conditions relating to incentive awards set forth in this Plan Document.

A 162(m) Eligible Person shall be subject to the limitations required to comply with the provisions of Section 162(m). Subject to the requirements of Section 162(m), the Committee shall retain sole discretion to determine a 162(m) Eligible Person’s eligibility for an award, the target award and the amount of the actual award. In no event shall a 162(m) Eligible Person’s award exceed the amount permitted by Section 162(m).

4. Performance Period

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The PBM LTI Plan shall consist of two Performance Periods, each measured by the achievement of the PBM EBIT CAGR against pre-established goals. The first Performance Period shall commence January 1, 2010 and shall end on December 31, 2011. The second Performance Period shall commence January 1, 2011 and shall end on December 31, 2012.

5. Awards

(A) The target Award opportunity for each Performance Period shall be $1,500,000.

(B) An Award is considered “earned” when such Award has been approved by the Committee (an “Earned Award”). Generally, an Award cannot be “earned” until the completion of the Performance Period for which such Award is granted.

(i) No portion of the Award shall be earned if actual performance is less than 81.5% of the target EBIT CAGR for the applicable Performance Period.

(ii) At 100% of the target EBIT CAGR, 100% of the target Award for the applicable Performance Period will be earned.

(iii) At 124.1% of the target EBIT CAGR, 200% of the target Award for the applicable Performance Period will be earned.

(iv) Pro rating of actual performance results and payouts will be done on a straight-line basis.

(C) Settlement of Earned Awards. At the end of the Performance Period, the Earned Award that shall be distributed to the President, Caremark Pharmacy Services will be distributed equally in cash and in shares of CVS Caremark common stock (the “Shares”).

(i) Any Earned Award will be granted to the Eligible Person on or before March 15 of the year following the end of the applicable Performance Period.

(ii) Any Shares to be issued in connection with an Earned Award shall be issued pursuant to the 2010 ICP. The stock portion of the Earned Award will equal the number of Shares multiplied by the Fair Market Value (the “FMV”) (the closing price) of CVS Caremark stock on the date the Award is approved by the Committee.

a. Any Shares awarded to the Eligible Person in connection with an Earned Award must be held by him until the completion of his Employment Term as such term is defined in his Employment Agreement dated January 1, 2010 (the “Employment Agreement”).

(iii) Subject to an Eligible Person’s prior election to defer any or all of the Earned Award pursuant to Section 7, the cash portion of Earned Award will be paid to the Eligible Person as soon as practicable after the Earned Award is approved by the Committee. The stock portion of the Earned Award will be settled through the issuance to the Eligible Person of a certificate for Shares.

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6. Calculation of PBM EBIT CAGR

EBIT CAGR will be calculated based on actual financial performance, as reported in accordance with GAAP, used solely for the calculation of incentive payments, as adjusted based on Permitted Financial Adjustments approved by the Committee.

7. Deferral Elections

In accordance with the rules promulgated by the Committee, an Eligible Person may elect to defer any or all of such Earned Award.

8. Termination of Employment

In the event the Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period, if the Eligible Person is or will be a covered officer in the Company’s proxy statement for 2011 or 2012 and the circumstances under which the Eligible Person’s termination occurs are not specifically outlined below, the payment of such Earned Award will be determined and administered, at the sole discretion of the Committee, in accordance with Section 162(m) in order to preserve the Company’s ability to deduct performance-based compensation.

(A) In the event the Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period, due to the Eligible Person’s Resignation, or the termination of the Eligible Person by the Company for Cause, as Resignation and Cause are each defined in Eligible Person’s Employment Agreement, any Award granted but not yet earned for the Performance Period shall be forfeited.

(B) In the event the Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period, by reason of death, any Award not yet earned in accordance with Section 5 shall be pro rated pursuant to Paragraph 8 (E) below.

(C) In the event the Eligible Person ceases to be actively employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period due to the Eligible Person becoming totally and permanently disabled (as defined in the Company’s Long-Term Disability Plan, or, if not defined in such plan, as defined by the Social Security Administration) while actively employed by Company or a subsidiary of the Company, and Award granted but not yet earned for the Performance Period shall be pro rated pursuant to Paragraph 8 (E) below.

(D) In the event the Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, due to a Termination by the Company without Cause (as defined above in Paragraph 8 (A) or a “Termination by the Executive for Good Reason” (as defined in his Employment Agreement), any Award granted but not yet earned for the Performance Period shall be pro rated pursuant to Paragraph 8 (E) below.

(E) Pro Rating.

(i) If the Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, in accordance with Paragraph 8 (B), (C) or (D) above and the Award approved by the Committee is to be pro rated the Earned Award to be paid to the Eligible Person will be calculated based on the Eligible Person’s target award in the case of Paragraph 8(B) and (C) and in the case of Paragraph 8(D) based on the Company’s actual performance

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during the applicable Performance Period and in each case then multiplied by the following fraction: (a) the numerator shall be the number of whole months elapsed since the beginning of the Performance Period and (b) the denominator shall be 24. For purposes of this calculation, the number of months in the numerator in sub-section (a) shall include any partial month in which the Eligible Person has worked.

(ii) Any payment to an Eligible Person under Paragraph 8(B) and (C) shall be made at the time of such death or disability, as the case may be, and any payment made under Paragraph 8(D) will be made after actual performance has been certified by the Committee.

9. Tax Withholding

The Company will withhold from the Eligible Person’s Earned Award, subject to the Eligible Person’s election to defer all or a portion of the Earned Award, all required federal, state and local payroll taxes, including Medicare taxes. If the Eligible Person’s Social Security wages have not reached the Social Security maximum taxable wage base at the time the Earned Award is paid or Shares are delivered, Social Security taxes will also be withheld from the Award.

If the Eligible Person elects to defer an Earned Award, the Company may require the Eligible Person to remit to the Company in advance of the actual deferral of such Earned Award, the required FICA withholding taxes, including Social Security and Medicare taxes, in order to ensure compliance with the Sarbanes-Oxley Act of 2002.

Except as may be elected by the Eligible Person, at the Settlement Date for any Shares, the number of Shares to be delivered by the Company to the Eligible Person shall be reduced by the smallest number of Shares having a FMV at least equal to the dollar amount of federal, state or local tax withholding required to be withheld by the Company with respect to such Shares on the Settlement Date. In lieu of having the number of Shares delivered reduced, the Eligible Person may elect to pay the Company by personal check or by such other means satisfactory to the Company for any amounts required to be withheld by the Company in connection with the settlement of the Shares.

10. Change in Control of the Company

Upon the occurrence of a change in control of the Company, as defined in Section 10(c) of the 2010 ICP (a “Change in Control”), the performance criteria for any the Performance Period shall be deemed to have been fully satisfied and all outstanding Awards under the PBM LTI Plan shall be come immediately nonforfeitable. The Eligible Person shall receive the Target Award for the Performance Period to be paid as soon as administratively possible, subject to the applicable Plan provisions and federal regulations governing payment of such Award(s), including but not limited to the Eligible Person’s deferral elections, and Sections 162(m), 4999 and 409A of the Internal Revenue Code (“Code”).

11. Recoupment of Awards Due to Fraud or Financial Misconduct

The provisions of this Section 11 shall apply to each Award. If the Board determines that fraud or financial misconduct has occurred in a manner that subjects the Eligible Person to recoupment of any Earned Award under the Company’s Recoupment Policy, as in effect from time to time, the Eligible Person shall immediately repay to the Company (a) the entire cash portion of the Earned Award that is subject to recoupment, or a portion thereof as determined by the Board (the “Cash Recoupment Amount”), and (b) the value, or a portion

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thereof as determined by the Board, of any pre-tax economic benefit that the Eligible Person derived from any Shares issued in connection with an Earned Award that is subject to recoupment (the “Share Recoupment Value”).

Eligible Person shall immediately repay to the Company the value of any pre-tax economic benefit that Eligible Person derived from such RSUs, if the Board determines that financial or operational results used to determine the award were meaningfully altered based on fraud or material financial misconduct in a manner which subjects Eligible Person to recoupment under the Company’s Recoupment Policy, as in effect from time to time. The amount to be repaid by Eligible Person shall be the amount necessary to disgorge the value enjoyed or realized by Eligible Person from the RSUs and the underlying Shares, as determined by the Board, or a portion of such value as may be determined by the Board in its sole discretion. In making its determinations under this paragraph, the Board may, by way of example only, (i) with respect to any Shares which have been transferred to Eligible Person in settlement of the RSUs and which are beneficially owned by Eligible Person as of a date the repayment obligation arises, require Eligible Person to repay to the Company the FMV of such Shares as of the date of such repayment and/or (ii) with respect to any Shares which were transferred to Eligible Person in settlement of the RSUs and as to which beneficial ownership has been transferred by Eligible Person as of the date a repayment obligation arises, require Eligible Person to repay to the Company the FMV of such Shares as of the date such Shares were transferred by Eligible Person. In each case the amount to be repaid by Eligible Person shall also include any dividends (including any economic benefit thereof) or distributions received by Eligible Person with respect to any RSU Shares and, in calculating the value to be repaid, adjustments may be made for stock splits or other capital changes or corporate transactions, as determined by the Board.

If Eligible Person has deferred payment of any portion of the amounts relating to an RSU that are subject to repayment hereunder, the amount of Eligible Person’s deferred stock compensation accrual shall be reduced by the amount subject to repayment, plus all Company matching amounts and earnings on such amount. If Eligible Person fails to repay the required value immediately upon request by the Board, the Company may seek reimbursement of such value from Eligible Person by reducing salary or any other payments that may be due to Eligible Person, to the extent legally permissible, and/or through initiating a legal action to recover such amount, which recovery shall include any reasonable attorneys fees incurred by the Company in bringing such action.

If the Eligible Person has deferred payment of any portion of the Cash Recoupment Amount, the amount of the Eligible Person’s deferred compensation accrual shall be reduced by the amount subject to repayment, plus all Company matching amounts and earnings on such amount. If the Eligible Person has deferred receipt of any portion of the Shares that are subject to repayment hereunder, the amount of the Eligible Person’s deferred stock compensation accrual shall be reduced by the amount subject to repayment, plus all Company matching amounts and earnings on such amount.

If the Eligible Person fails to repay the required Cash Recoupment Amount and/or the Share Recoupment Value immediately upon request by the Board, the Company may seek reimbursement of such amounts from the Eligible Person by reducing salary or any other payments that may be due to the Eligible Person, to the extent legally permissible, and/or through initiating a legal action to recover such amount, which recovery shall include any reasonable attorneys fees incurred by the Company in bringing such action.

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12. Miscellaneous

(A) Not a Contract of Employment. The adoption and maintenance of the PBM LTI Plan shall not be deemed to be a contract of between the Company and an Eligible Person and shall not be consideration for the employment of an Eligible Person. Nothing contained herein shall be deemed to give the Eligible Person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge an Eligible Person at any time nor shall the PBM LTI Plan be deemed to give the Company the right to require an Eligible Person to remain in the employ of the Company or to restrict an Eligible Person’s right to terminate their employment at any time.

(B) Non-Assignability of Benefits. No Eligible Person, Beneficiary or distributee of benefits under the PBM LTI Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder, which are expressly declared to be unassignable and nontransferable. Any such attempted assignment or transfer shall be void. No amount payable hereunder shall, prior to actual payment hereof, be subject to seizure by any creditor or any such Eligible Person, Beneficiary or other distributee for the payment of any debt judgment or other obligation, by a proceeding at law or in equity, nor transferable by operation of law in the event of the bankruptcy, insolvency or death of such Eligible Person, Beneficiary or other distributes hereunder.

(C) Amendment and Termination. The Board may amend, alter, suspend, discontinue or terminate the PBM LTI Plan or the Committee’s authority to grant Awards under the PBM LTI Plan without the consent of Eligible Persons, except that without the consent of an affected Eligible Person, no such Board action may materially and adversely affect the rights of such Eligible Person under any previously granted and outstanding Awards. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any Award(s) previously granted, except as otherwise provided in the PBM LTI Plan, provided that, without the consent of the affected Eligible Person, no such Committee action may materially and adversely affect the rights of such Eligible Person under such Award(s).

(D) Compliance with Legal and Other Requirements. Notwithstanding any PBM LTI Plan provision to the contrary, the Committee may at any time impose such restrictions on the PBM LTI Plan and participation therein as the Committee may deem advisable from time to time in order to comply with or preserve compliance with any applicable laws, including any applicable federal and state securities laws and exemptions from registrations thereunder.

Further, to the extent it would not violate an applicable provision of Section 409A of the Code the Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of CVS Caremark stock or payment of other benefits under any Earned Award until completion of such registration or qualification of such stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which such stock are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Eligible Person to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of stock or payment of other benefits in compliance with applicable laws, rules and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results

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or would result in any postponement of the issuance or delivery of stock or payment of benefits under any award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on an Eligible Person than existed on the 90th day preceding the Change in Control.

(E) Section 409A. The company intends that this PBM LTI Plan not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the Internal Revenue Code of 1986 (the “Code”), as amended, and that to the extent any provisions of the PBM LTI Plan do not comply with Code Section 409A the Company will make such changes in order to comply with Code Section 409A. In all events, the provisions of CVS Caremark Corporation’s Universal Definitions Document are hereby incorporated by this reference and to the extent required to avoid a violation of the applicable rules under all Section 409A by reason of Section 409A(a)(2)(B)(i) of the Code, payment of any amounts subject to Section 409A of the Code shall be delayed until the relevant date of payment that will result in compliance with the rules of Section 409A(a)(2)(B)(i) of the Code.

(F) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, stock, or other property), re-capitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the stock such that an adjustment is appropriate under the PBM LTI Plan, then the Committee shall, in such manner as it may deem equitable, adjust the number and kind of Shares of stock subject to or deliverable in respect of outstanding Awards.

(G) Limitation on Rights Conferred by Awards Granted under the PBM LTI Plan. Neither the PBM LTI Plan nor any action taken under the PBM LTI Plan shall be construed as conferring on an Eligible Person any of the rights of a shareholder of CVS Caremark until the Eligible Person is duly issued or transferred Shares in accordance with the terms of an Earned Award.

(H) Unfunded Status of Awards; Creation of Trusts. The PBM LTI Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to an Eligible Person or obligation to deliver stock pursuant to an Award, nothing contained in any Award shall give any such Eligible Person any rights that are greater than those of a general creditor of CVS Caremark, provided that the Committee may authorize the creation of trusts and deposit therein cash, stock, other awards or other property, or make other arrangements to meet CVS Caremark’s obligations under the PBM LTI Plan. Such trusts or other arrangements shall be consistent with the “unfunded” status of the Plan unless the Committee otherwise determines with the consent of each affected Eligible Person.

13. Governing Law

The validity, construction and effect of the PBM LTI Plan, and any rules and regulations under the PBM LTI Plan shall be determined in accordance with the Rhode Island law, without giving effect to principles of conflicts of laws, and applicable federal law.

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EX-10.37

Exhibit 10.37

2010 – 2011 RETURN ON NET ASSETS

LONG-TERM INCENTIVE PLAN

1. Purpose

The purpose of the CVS Caremark Corporation (“CVS Caremark” or the “Company”) 2010 – 2011 Return on Net Assets Long-Term Incentive Plan (the “RoNA LTI Plan”) is to motivate select executives to achieve the 2010 and 2011 goals that focus on improving the Company’s working capital, cash flow and return on working capital to enhance shareholder value. Funding of incentive awards will be based on actual results measured against pre-established financial goals.

2. Administration

The RoNA LTI Plan shall be administered by the Management Planning and Development Committee (the “Committee”) of the Board of Directors (the “Board”) of the Company under the provisions of the 2010 Incentive Compensation Plan (the “2010 ICP”). The Committee shall have full and final authority, in each case subject to and consistent with the provisions of the 2010 ICP, to grant Awards, and determine the amount, terms and conditions and all other matters relating to Awards. In addition, the Committee shall have full and final authority, in each case, subject to and consistent with the provisions of the 2010 ICP to construe and interpret rules and regulations for the administration of the RoNA LTI Plan, correct defects, supply omissions or reconcile inconsistencies therein, and to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the RoNA LTI Plan.

Capitalized terms not otherwise defined herein shall have the meaning assigned to such term(s) in the 2010 ICP.

3. Eligibility

An executive selected by the Committee shall be eligible to receive an award under the RoNA LTI Plan (an “Eligible Person”). The Committee may delegate to the Chief Executive Officer (the “CEO”) the authority to determine an Eligible Person, provided that the Committee shall determine the eligibility of employees who are subject to Section 162(m) of the Internal Revenue Code (“Section 162(m)”) or who have been identified by the Committee as individuals who may be subject to Section 162(m) (collectively, “162(m) Eligible Persons” and each of whom shall also be included in the term “Eligible Persons” unless otherwise noted).

Eligibility for a RoNA LTI Plan award is contingent upon the Eligible Person being employed by the Company on the last day of the Performance Period. The CEO (or, as to 162(m) Eligible Participants, the Committee) may, for any reason and in his or her sole discretion, at any time prior to the end of the Performance Period, determine an executive’s eligibility for participation in the RoNA LTI Plan. Eligible Persons are subject to the terms and conditions relating to incentive awards set forth in this RoNA LTI Plan.

(i) 162(m) Eligible Persons shall be subject to the limitations required to comply with the provisions of Section 162(m). Subject to the requirements of Section 162(m), the Committee shall retain sole discretion to determine a 162(m) Eligible Person’s eligibility for an award, the target award and the amount of

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the actual award. In no event shall a 162(m) Eligible Person’s award exceed the amount permitted by Section 162(m).

4. Performance Period and Performance Goal

The RoNA LTI Plan performance period shall commence July 1, 2010 and shall end on December 31, 2011.

The Return on Net Assets performance goal for the performance period shall be 23.50%. The Plan shall have a minimum performance threshold of 22.96%, at and below which no performance awards will be made; the Plan shall have a maximum performance goal of 24.10%, at and above which performance awards will be equal to two times the performance award at target. Performance awards at levels in between minimum and maximum levels will be calculated in accordance with the chart as shown in Exhibit I.

5. Awards

(A) Prior to the beginning of the performance period, the Committee shall have determined the Eligible Persons to whom Awards shall be granted and the terms and conditions relating to the Awards, including but not limited to the target amount of each Eligible Person’s Award, the range of each Eligible Person’s Award that may be earned based on the Company’s performance, the performance period relating to such Awards, the performance criteria that will be used to determine if and to what extent such Awards may be earned by Eligible Persons participating in the RoNA LTI Plan and any other provisions as the Committee deems appropriate.

(i) Provided the executive is not a 162(m) Eligible Person, the CEO may, in his or her sole discretion, determine the terms and conditions relating to an Award for an Eligible Person, except that the CEO may not change the performance criteria that will be used to determine if and to what extent such an Award may be earned by an Eligible Person.

(B) An Award is considered “earned” when such Award has been approved by the Committee (an “Earned Award”). Generally, an Award cannot be “earned” until the completion of the Performance Period for which such Award is granted.

(C) Settlement of Earned Awards. At the end of the Performance Period, the Earned Award that shall be distributed to each Eligible Person will be distributed equally in cash and in shares of CVS Caremark common stock (the “Shares”).

(i) Any Earned Award will be distributed to Eligible Persons on or before March 15, 2012.

(ii) Any Shares to be issued in connection with an Earned Award shall be issued pursuant to the CVS Caremark Corporation 2010 Incentive Compensation Plan (the “2010 ICP”). The stock portion of the Earned Award will equal the number of Shares multiplied by the Fair Market Value (the “FMV”) (the closing price) of CVS Caremark stock on the date the Award is approved by the Committee.

a. Shares are subject to a two-year restriction from sale or transfer once earned.

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(iii) Subject to an Eligible Person’s prior election to defer any or all of the Earned Award pursuant to Section 7, the cash portion of Earned Award will be paid to the Eligible Person as soon as practicable after the Earned Award is approved by the Committee and the stock portion of the Earned Award will be settled through the issuance to each Eligible Person of a certificate for Shares, in each case no later than March 15, 2012.

6. Calculation of Return on Net Assets

Return on Net Assets will be determined by dividing Net Operating Profit after Tax by the sum of Fixed Assets plus Current Assets less Current Liabilities (excluding debt), as adjusted based on Permitted Financial Adjustments approved by the Committee.

7. Deferral Elections

In accordance with the rules promulgated by the Committee, an Eligible Person may elect to defer any or all of such Earned Award.

8. Termination of Employment

In the event a 162(m) Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period and the circumstances under which such Eligible Person’s termination occurs are not specifically outlined below, the payment of such Earned Award will be determined and administered, at the direction of the Committee, in accordance with Section 162(m) in order to preserve the Company’s ability to deduct performance-based compensation.

(A) In the event an Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period, due to an Eligible Person’s voluntary termination of employment, or the termination of an Eligible Person by the Company for Cause (as defined below), any Award granted but not yet earned for the Performance Period shall be forfeited.

(i) “Cause” is defined as (x) an Eligible Person’s willful material breach of those provisions of the Eligible Person’s Employment Agreement that pertain to confidentiality, cooperation with regard to litigation, non-disparagement; non-competition; and non-solicitation if such Eligible Person is party to an Employment Agreement with the Company; or (y) Section 1(b) of the CVS Caremark Corporation Change in Control Agreement if such Eligible Person is party to a Change in Control Agreement with the Company.

(B) In the event an Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period, by reason of death, any Award not yet earned in accordance with Section 5 shall be pro rated pursuant to Paragraph 8 (F) below.

(C) In the event an Eligible Person ceases to be actively employed by the Company, or any subsidiary of the Company, prior to the completion of the Performance Period due to an Eligible Person becoming totally and permanently disabled (as defined in the Company’s Long-Term Disability Plan, or, if not defined in such plan, as defined by the Social Security Administration) while actively employed by Company or a subsidiary of the Company, any Award granted but not yet earned for the Performance Period shall be pro rated pursuant to Paragraph 8 (F) below.

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(D) In the event an Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, due to a Termination by the Company without Cause (as defined above in Paragraph 8 (A) (i), or a “Constructive Termination without Cause” (defined below), any Award granted but not yet earned for the Performance Period shall be pro rated pursuant to Paragraph 8 (F) below.

(i) “Constructive Termination without Cause” shall mean a termination of the Eligible Person’s employment at his or her initiative as provided under the definition of either “Constructive Termination without Cause” or “Termination by Executive for Good Reason” set forth in the most recent Employment Agreement, as amended, Change in Control Agreement, or other comparable agreement, between the Company and the Eligible Person. If there is no such Agreement between the Company and the Eligible Person, then Constructive Termination without Cause shall have the same meaning for the Eligible Person as is defined for a similarly-situated Eligible Person in his or her Employment or Change in Control Agreement.

(E) In the event an Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, due to an Eligible Person’s Normal Retirement or Approved Early Retirement, prior to the completion of the Performance Period, any Award granted but not yet earned for the Performance Period shall be pro rated pursuant to Paragraph 8 (F) below.

(i) “Normal Retirement” and “Approved Early Retirement” each shall have the meaning ascribed to it in an Eligible Person’s Employment Agreement, as amended, or if such Eligible Person is not party to an Employment Agreement with the Company in which retirement is defined, “Normal Retirement” shall mean (a) an Eligible Person’s voluntary termination of employment with the Company at or after attaining age sixty (60) with at least five (5) years of service; and “Early Retirement” shall mean (b) an Eligible Person’s voluntary termination of employment with the Company at or after attaining age fifty-five (55) and at least ten (10) years of service.

(F) Pro Rating.

(i) If an Eligible Person ceases to be employed by the Company, or any subsidiary of the Company, in accordance with Paragraph 8 (B), (C), (D), or (E) above and the Award approved by the Committee is to be pro rated the Earned Award to be paid to the Eligible Person will be calculated based on the Eligible Person’s target award in the case of Paragraph 8(B) and (C) and in the case of Paragraph 8(D) and (E) based on the Company’s actual performance during the applicable Performance Period and in each case then multiplied by the following fraction: (a) the numerator shall be the number of whole months elapsed since the beginning of the Performance Period and (b) the denominator shall be the total number of months in the Performance Period. For purposes of this calculation, the number of months in the numerator in sub-section (a) shall include any partial month in which an Eligible Person has worked.

(ii) Any payment to an Eligible Person under Paragraph 8(B) and (C) shall be made at the time of such death or disability, as the case may be, and any payment made under Paragraph 8(D) and (E) will be made after actual

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performance has been certified by the Committee and at the same time as payment is made to other Eligible Persons.

9. Tax Withholding

The Company will withhold from an Eligible Person’s Earned Award, subject to an Eligible Person’s election to defer all or a portion of the Earned Award, all required federal, state and local payroll taxes, including Medicare taxes. If an Eligible Person’s Social Security wages have not reached the Social Security maximum taxable wage base at the time the Earned Award is paid or Shares are delivered, Social Security taxes will also be withheld from the Award.

If an Eligible Person elects to defer an Earned Award, the Company may require the Eligible Person to remit to the Company in advance of the actual deferral of such Earned Award, the required FICA withholding taxes, including Social Security and Medicare taxes.

Except as may be elected by an Eligible Person, at the Settlement Date for any Shares, the number of Shares to be delivered by the Company to an Eligible Person shall be reduced by the smallest number of Shares having a FMV at least equal to the dollar amount of federal, state or local tax withholding required to be withheld by the Company with respect to such Shares on the Settlement Date. In lieu of having the number of Shares delivered reduced, an Eligible Person may elect to pay the Company by personal check or by such other means satisfactory to the Company for any amounts required to be withheld by the Company in connection with the settlement of the Shares.

10. Change in Control of the Company

Upon the occurrence of a change in control of the Company, as defined in Section 10(c) of the 2010 ICP (a “Change in Control”), the performance criteria for any the Performance Period shall be deemed to have been fully satisfied and all outstanding Awards under the RoNA LTI Plan shall be come immediately nonforfeitable. Each Eligible Person shall receive the Target Award for the Performance Period to be paid as soon as administratively possible, subject to the applicable RoNA LTI Plan provisions and federal regulations governing payment of such Award(s), including but not limited to the Eligible Person’s deferral elections, and Sections 162(m), 4999 and 409A of the Internal Revenue Code (“Code”).

11. Recoupment of Awards Due to Fraud or Financial Misconduct

The provisions of this Section 11 shall apply to each Award. If the Board determines that fraud or financial misconduct has occurred in a manner that subjects an Eligible Person to recoupment of any Earned Award under the Company’s Recoupment Policy, as in effect from time to time, the Eligible Person shall immediately repay to the Company (a) the entire cash portion of the Earned Award that is subject to recoupment, or a portion thereof as determined by the Board (the “Cash Recoupment Amount”), and (b) the value, or a portion thereof as determined by the Board, of any pre-tax economic benefit that the Eligible Person derived from any Shares issued in connection with an Earned Award that is subject to recoupment (the “Share Recoupment Value”). In each case the amount to be repaid by the Eligible Person shall also include any dividends (including any economic benefit thereof) or distributions received by the Eligible Person with respect to any Shares and, in calculating the value to be repaid, adjustments may be made for stock splits or other capital changes or corporate transactions, as determined by the Board.

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If an Eligible Person has deferred payment of any portion of the amounts relating to an RSU that are subject to repayment hereunder, the amount of the Eligible Person’s deferred stock compensation accrual shall be reduced by the amount subject to repayment, plus all Company matching amounts and earnings on such amount.

If an Eligible Person has deferred payment of any portion of the Cash Recoupment Amount, the amount of the Eligible Person’s deferred compensation accrual shall be reduced by the amount subject to repayment, plus all Company matching amounts and earnings on such amount.

If the Eligible Person fails to repay the required Cash Recoupment Amount and/or the Share Recoupment Value immediately upon request by the Board, the Company may seek reimbursement of such amounts from the Eligible Person by reducing salary or any other payments that may be due to the Eligible Person, to the extent legally permissible, and/or through initiating a legal action to recover such amount, which recovery shall include any reasonable attorneys fees incurred by the Company in bringing such action.

12. Miscellaneous

(A) Not a Contract of Employment. The adoption and maintenance of the RoNA LTI Plan shall not be deemed to be a contract of between the Company and an Eligible Person. Nothing contained herein shall be deemed to give an Eligible Person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge an Eligible Person at any time nor shall the RoNA LTI Plan be deemed to give the Company the right to require an Eligible Person to remain in the employ of the Company or to restrict an Eligible Person’s right to terminate their employment at any time.

(B) Non-Assignability of Benefits. No Eligible Person, Beneficiary or distributee of benefits under the RoNA LTI Plan shall have any power or right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable hereunder, which are expressly declared to be unassignable and nontransferable. Any such attempted assignment or transfer shall be void. No amount payable hereunder shall, prior to actual payment hereof, be subject to seizure by any creditor or any such Eligible Person, Beneficiary or other distributee for the payment of any debt judgment or other obligation, by a proceeding at law or in equity, nor transferable by operation of law in the event of the bankruptcy, insolvency or death of such Eligible Person, Beneficiary or other distributes hereunder.

(C) Amendment and Termination. The Board may amend, alter, suspend, discontinue or terminate the RoNA LTI Plan or the Committee’s authority to grant Awards under the RoNA LTI Plan without the consent of Eligible Persons, except that without the consent of an affected Eligible Person, no such Board action may materially and adversely affect the rights of such Eligible Person under any previously granted and outstanding Awards. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any Award(s) previously granted, except as otherwise provided in the RoNA LTI Plan, provided that, without the consent of an affected Eligible Person, no such Committee action may materially and adversely affect the rights of such Eligible Person under such Award(s).

(D) Compliance with Legal and Other Requirements. Notwithstanding any RoNA LTI Plan provision to the contrary, the Committee may at any time impose such restrictions on the RoNA LTI Plan and participation therein as the Committee may deem advisable from time to

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time in order to comply with or preserve compliance with any applicable laws, including any applicable federal and state securities laws and exemptions from registrations thereunder.

Further, to the extent it would not violate an applicable provision of Section 409A of the Code the Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of CVS Caremark stock or payment of other benefits under any Earned Award until completion of such registration or qualification of such stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which such stock are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Eligible Person to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of stock or payment of benefits under any award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on an Eligible Person than existed on the 90th day preceding the Change in Control.

(E) Section 409A. The Company intends that this RoNA LTI Plan not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the Internal Revenue Code of 1986 (the “Code”), as amended, and that to the extent any provisions of the LTIP do not comply with Code Section 409A the Company will make such changes in order to comply with Code Section 409A. In all events, the provisions of CVS Caremark Corporation’s Universal Definitions Document are hereby incorporated by this reference and to the extent required to avoid a violation of the applicable rules under all Section 409A by reason of Section 409A(a)(2)(B)(i) of the Code, payment of any amounts subject to Section 409A of the Code shall be delayed until the relevant date of payment that will result in compliance with the rules of Section 409A(a)(2)(B)(i) of the Code.

(F) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, stock, or other property), re-capitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the stock such that an adjustment is appropriate under the RoNA LTI Plan, then the Committee shall, in such manner as it may deem equitable, adjust the number and kind of Shares of stock subject to or deliverable in respect of outstanding Awards.

(G) Limitation on Rights Conferred by Awards Granted under RoNA LTI Plan. Neither the RoNA LTI Plan nor any action taken under the RoNA LTI Plan shall be construed as conferring on an Eligible Person any of the rights of a shareholder of CVS Caremark until the Eligible Person is duly issued or transferred Shares in accordance with the terms of an Earned Award.

(H) Unfunded Status of Awards; Creation of Trusts. The RoNA LTI Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to an Eligible Person or obligation to deliver stock pursuant to an Award, nothing contained in any Award shall give any such Eligible Person any rights that are greater than those of a general creditor of CVS Caremark, provided that the Committee

-7-

may authorize the creation of trusts and deposit therein cash, stock, other awards or other property, or make other arrangements to meet CVS Caremark’s obligations under the RoNA LTI Plan. Such trusts or other arrangements shall be consistent with the “unfunded” status of the Plan unless the Committee otherwise determines with the consent of each affected Eligible Person.

13. Governing Law

The validity, construction and effect of the RoNA LTI Plan, and any rules and regulations under the RoNA LTI Plan shall be determined in accordance with the Rhode Island law, without giving effect to principles of conflicts of laws, and applicable federal law.

-8-

EX-10.38

Exhibit 10.38

2010 Management Incentive Plan

I. Objectives and Summary

CVS Caremark Corporation’s Management Incentive Plan (the “MIP”) is designed to reward incentive-eligible employees (“Eligible Participants”) of CVS Caremark Corporation and its subsidiaries (together, “the Company”) for their role in driving performance and to encourage Eligible Participants’ continued employment with the Company. Funding of incentive awards will be based on actual results measured against pre-established financial goals. Incentive awards will be based on the performance of the Company business unit in which each Eligible Participant works as well as the performance of individual Eligible Participants.

The Management Planning and Development Committee (the “Committee”) of the Board of Directors (the “Board”) may delegate to officers of CVS Caremark the authority to perform administrative functions under the MIP as the Committee may determine and may appoint officers and others to assist it in administering the MIP.

II. Plan Year

The MIP is a calendar year plan, which runs from January 1 to December 31, 2010 (“Plan Year”). All dates in this document occur during the Plan Year unless otherwise stated.

III. Eligibility

A. Eligibility for Participation

The Chief Executive Officer of CVS Caremark Corporation (“CEO”) will determine which employees are eligible for participation in the MIP, provided that the Committee shall determine the eligibility of employees who are subject to Section 162(m) of the Internal Revenue Code (“Section 162(m)”) or who have been identified by the Committee as individuals who may be subject to Section 162(m) (collectively, “162(m) Eligible Participants” and each of whom will also be included in the term “Eligible Participants” unless otherwise noted). In general, Eligible Participants include all exempt employees who are not covered under any other incentive plans.

Eligibility for participation in the MIP is contingent upon the Eligible Participant being employed in an incentive-eligible position on the last day of the Plan Year. The CEO (or, as to 162(m) Eligible Participants, the Committee) may, for any reason and in his or her sole discretion, at any time prior to the end of the Plan Year, determine an employee’s eligibility for participation in the Plan. Eligible Participants are subject to the terms and conditions relating to incentive awards set forth in this MIP.

B. 162(m) Eligible Participants

162(m) Eligible Participants shall be subject to the limitations required to comply with the provisions of Section 162(m). Subject to the requirements of Section 162(m), the Committee shall retain sole discretion to determine a 162(m) Eligible Participant’s eligibility for an award, the target award, and the amount of the actual award. In no event shall a 162(m) Eligible Participant’s award exceed the amount permitted by Section 162(m).

C. Newly-Eligible Employees

An employee will be eligible for a prorated incentive award if he or she becomes an Eligible Participant on or before November 1 of the Plan Year; provided, however, that a 162(m) Eligible Participant shall be eligible for an award for the Plan Year in which he or she was hired or otherwise becomes a 162(m) participant only to the extent that such award does not violate the requirements of Section 162(m).

D. Transfers

Participants who become newly eligible during the Plan Year may be eligible for a prorated MIP award. If a change in assignments results in an Eligible Participant being eligible for the MIP for part of the Plan Year and other incentives during other parts of the Plan Year, the participant may be eligible to receive a prorated award for the amount of time in each incentive eligible position, subject to the terms of the other applicable incentive plans. Change in assignments from one MIP-eligible position to another during the Plan Year does not result in pro rata award but rather an award funded on the base salary of the Eligible Participant on December 31 and the individual award opportunity as of that date.

E. Demotions

If a previously Eligible Participant is demoted to a non-incentive eligible position due to his or her violation of CVS Caremark policy or his/her performance, or if he or she voluntarily transfers to a non-incentive eligible position during the Plan Year, and is in the non-incentive eligible position on the last day of the Plan Year, he or she will not be eligible to earn an incentive award for the Plan Year under this plan.

F. Terminations

Unless otherwise stated in Section VII of the MIP, if an Eligible Participant’s employment terminates prior to the final determination of incentive awards for the Plan Year, he or she will not be eligible to receive an incentive award under the MIP.

G. Rehires

Eligible Participants who are rehired on or before November 1 of the Plan Year may be eligible for a prorated incentive award. For purposes of proration, credit will only be given for time worked during the Plan Year in incentive-eligible positions.

IV. Administration

A. Funding and Performance Measures

MIP funding is based on Consolidated Company Performance, calculated as 80% Operating Profit, 10% Pharmacy Services Customer Satisfaction, and 10% Retail Customer Service.

1. Operating Profit

The incentive awards under the MIP will be funded based on consolidated CVS Caremark operating profit as adjusted based on permitted financial adjustments approved by the Committee (the “Operating Profit”). Operating Profit will be used to calculate the available pool for incentive awards (the “Total Pool”). If Operating Profit falls below the minimum threshhold as set forth in Exhibit A, no formulaic funding will be made available for awards and there is no requirement that incentive awards be paid under the MIP.

2010 Management Incentive Plan 2 Confidential & Proprietary

2. Pharmacy Services Customer Satisfaction

Achievement of the Customer Satisfaction segment of the incentive will be determined by the aggregate actual performance against target of the weighted composite of the following surveys:

• Client Relationship and Loyalty Survey (weight = 50%)

• Customer Care Survey (weight = 20%)

• Mail Service Pharmacy Survey (weight = 20%)

• Specialty Survey (weight = 10%)

Pharmacy Services Customer Satisfaction funding is subject to adjustment based on the Operating Profit.

3. Retail Customer Service

The Retail Customer Service segment of the incentive will be measured using the Total Triple ‘S’ actual performance against the target. The Triple ‘S’ Score Card consists of performance in three elements of customer satisfaction: Stock, Shop and Service.

Retail Customer Service funding is subject to adjustment based on the Operating Profit.

Measurement	Percent Weight	Measurement Tool	Achievement Measured Against	Modifier
Consolidated Operating Profit	80%	Earnings Before Interest & Taxes	2010 EBIT Goal	CEO & Committee Discretion Approved Permitted Financial Adjustments
Pharmacy Services Customer Satisfaction	10%	Client Relationship and Loyalty, Customer Care, Mail Service and Specialty Surveys	2010 PBM Customer Satisfaction Target	Operating Profit funding
Retail Customer Service	10%	Triple “S” Scorecard	2010 Triple “S” Target	Operating Profit Funding

B. Fund Allocation

After the funding of the MIP has been established and the Total Pool has been created, the following criteria will be used in determining individual incentive awards for the Plan Year:

1. Business Unit

The Business Unit Performance is based on Business Unit EBIT results compared to target and a discretionary assessment resulting from (a) input from the President/COO, Business Unit Presidents and Finance regarding the performance of the Business Unit to assist the CEO and the Committee in their assessment of the overall performance; and (b) the CEO’s (or, in the case of 162(m) Eligible Participants’s, the Committee’s) assessment of the achievement of Plan Year performance goals by the business unit.

2. Management discretion

The Total Pool will be available for managers to award to Eligible Participants, taking into account all components of the Plan. The amount, if any, of the calculated incentive award for an Eligible Participant shall be detemined in the sole discretion of CVS Caremark management. The amount, if any, of the calculated incentive award for a 162(m) Eligible Participant shall be determined in the sole discretion of the Committee.

2010 Management Incentive Plan 3 Confidential & Proprietary

V. MIP Earnings and Payout

A. Timing

Incentive awards will be paid to Eligible Participants as soon as administratively feasible following the date the Total Pool is funded and calculation of incentive payments may be ascertained, which will be in the year following the Plan Year, on or before March 15. Payments may be subject to delay to comply with garnishments and other state or federal requirements.

B. Calculations

Calculations for full and partial awards will be based on each Eligible Participant’s annual base salary and individual target opportunity on the last day of the Plan Year.

For purposes of proration, the 15^th of the month will be used to determine if the month is included or excluded from the incentive calculation.

Examples:

1. An Eligible Participant is hired on September 14^th. Because the Eligible Participant is actively employed prior to the 15^th of September, the month of September will be included in his/her prorated incentive award and the Eligible Participant will receive a prorated incentive award covering a total of four months. The award will be calculated using the participants individual award opportunity target and base salary as of December 31^st.

2. An Eligible Participant begins a personal leave of absence on June 3^rd and returns to active status on July 22^nd. Assuming the Eligible Participant was incentive eligible for the entire year, the months of June and July will be excluded from the Eligible Participant’s incentive award and the Eligible Participant will receive a prorated incentive award covering a total of 10 months. The award will be calculated using the participants individual award opportunity target and base salary as of December 31^st.

C. Award Opportunity

Individual target awards will be determined by position and typically will vary based on the Eligible Participant’s level in the organization.

D. Obligation to Pay Total Pool

Eligible Participants, as a group, have a right to receive an amount at least equal to the Total Pool, but no individual Eligible Participant shall be entitled to receive an award or any specific amount of the Total Pool. In no event will the aggregate of the total awards paid from the MIP be less than the amount of the Total Pool.

VI. Corrections to Incentive Awards

Any corrections to incentive calculations must be submitted through the Human Resources Business Partner to Compensation by April 15 of the year following the Plan Year.

2010 Management Incentive Plan 4 Confidential & Proprietary

VII. Eligible Participant Status

A. Eligible Participant Performance

An Eligible Participant must be employed in good standing (e.g., not on probation, written warning or any disciplinary/ performance action plan) throughout the Plan Year and at all times prior to the final determination of the Eligible Participant’s incentive award to be eligible to earn an incentive award.

B. Leaves of Absence

An Eligible Participant on a Company-approved leave of absence at any time during the Plan Year who remains employed in an eligible position as of the last day of the Plan Year will earn a prorated incentive award based on the number of months worked during the Plan Year, provided he or she meets all other eligibility criteria for an incentive award. For purposes of proration, the 15^th of the month will be used to determine if the month is included or excluded from the incentive calculation.

C. Reduction in Force, Retirement and Death

1. Reduction in Force

If an Eligible Participant is separated from employment on or before the last day of the Plan Year due to a reduction in force, he or she will earn a prorated incentive award based on the number of months worked during the Plan Year, provided the Eligible Participant meets all other eligibility criteria for an incentive award. For purposes of proration, the 15^th of the month will be used to determine if the month is included or excluded from the incentive calculation.

2. Retirement

If an Eligible Participant is at least age 55 and has a minimum of 10 years of service with CVS Caremark or a predecessor company/subsidiary or is at least age 60 and has a minimum of 5 years of service with CVS Caremark or a predecessor company/subsidiary and the MIP Participant retires before the end of the Plan Year, he/she will earn a prorated incentive based on the number of months worked during the Plan Year, provided he/she meets all other eligibility criteria for an incentive award. Earned incentives will be paid at the same time as other incentives are paid under this Plan. Eligible Participants who do not meet the minimum retirement requirements at the time of retirement and who retire before the end of the Plan Year will not be eligible to earn an incentive award.

3. Death

In case of the death of an Eligible Participant, a pro rated incentive award shall be paid to the Eligible Participant’s spouse, if living; otherwise, in equal shares to surviving children of the Eligible Participant. If there are no surviving children, the benefit shall be paid to the Eligible Participant’s parents in equal shares; and in the event none of the above-named individuals survives the Eligible Participant, the death benefit shall be paid to the executor or administrator of the Eligible Participant’s estate. The incentive award will be prorated based on the number of months the Eligible Participant worked during the Plan Year and shall be paid as soon as administratively practicable following the death of the Eligible Participant but no later than March 15 of the year following the Plan Year. If final performance numbers are not available at the time of the employee’s death, the incentive award will be calculated using the incentive target and the number of months worked.

VIII. Employment Rights

The MIP does not create an express or implied contract of employment between CVS Caremark and an Eligible Participant. Both CVS Caremark and the Eligible Participant retain the right to terminate the employment relationship at will, at any time and for any reason.

2010 Management Incentive Plan 5 Confidential & Proprietary

A. Rights are Non-Assignable

Neither the Eligible Participant, nor any beneficiary, nor any other person shall have any right to assign, in whole or in part, the right to receive payments under the MIP. Payments are non-assignable and non-transferable, whether voluntarily or involuntarily.

B. Compliance with Applicable Regulations

An Eligible Participant must comply with all applicable state and federal regulations and CVS Caremark policies to be eligible to receive an incentive award under the MIP.

C. Change in Control

In the event of a change in control of CVS Caremark, as defined in the 1997 Incentive Compensation Plan, the MIP shall remain in full force and effect. Any amendments, modifications, termination or dissolution of the MIP by the acquiring entity may only occur prospectively and will not affect incentive earnings or eligibility before the date of the change in control, or such date as it may be modified or dissolved by the acquiring entity.

Provisions regarding the payment of annual incentive awards that are set forth in Change in Control agreements shall supersede those appearing in the MIP.

D. 2007 Incentive Plan

Capitalized terms not otherwise defined herein shall have the meaning assigned to such defined term(s) in the 2007 Incentive Plan. In the event of any conflict between the 2007 Incentive Plan and the MIP, the terms of the 2007 Incentive Plan shall govern.

E. Withholding

All required deductions will be withheld from the incentive awards prior to distribution. This includes all applicable federal, state, or local taxes, as well as any eligible 401(k) deductions and deferred compensation contributions as defined by the applicable plans. Incentive awards that are deferred will be taxed according to applicable federal and state tax law.

F. MIP Amendment/Modification/Termination

CVS Caremark retains the right to amend, modify, or terminate the MIP at any time on or before the last day of the Plan Year for any reason, with or without notice to Eligible Participants.

G. MIP Interpretation

All requests for interpretation of any provision in the MIP must be submitted to the CVS Caremark Compensation Department. Failure to submit a request for resolution of a dispute or question within 30 days of distribution of the incentive award may result in a waiver of the Eligible Participant’s rights to dispute the MIP provision or amount of the incentive award.

CVS Caremark will comply with all applicable laws concerning incentive awards; the MIP and its administration are not intended to conflict with any applicable state or federal law.

2010 Management Incentive Plan 6 Confidential & Proprietary

H. Recoupment of Incentive Awards Due to Fraud or Financial Misconduct

If the Board determines that fraud or financial misconduct has occurred in a manner which subjects a recipient of a MIP award to recoupment under the Company’s recoupment policy, as in effect from time to time, the MIP award recipient shall immediately repay to the Company the entire incentive award received by the MIP award recipient, or a portion thereof as determined by the Board. If a MIP award recipient fails to repay his or her incentive award (or portion thereof) immediately upon request by the Board, the Company may seek reimbursement of such amount from the MIP award recipient by reducing salary or any other payments that may be due to the MIP award recipient, to the extent legally permissible, and/or through initiating a legal action to recover such amount, which recovery shall include any reasonable attorneys fees incurred by the Company in bringing such action. If a MIP award recipient has deferred payment of any portion of an incentive award that is subject to repayment hereunder, the amount of the MIP award recipient’s deferred compensation accrual shall be reduced by the amount subject to repayment, plus all Company matching amounts and earnings on such amount.

I. Section 409A of the Internal Revenue Code

The Company intends that this Plan not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the Internal Revenue Code of 1986 (the “Code”), as amended, and that to the extent any provisions of the 162(m) Plan do not comply with Code Section 409A the Company will make such changes in order to comply with Code Section 409A. In all events, to the extent required to avoid a violation of the applicable rules under Section 409A by reason of Section 409A(a)(2)(B)(i) of the Code, payment of any amounts subject to Section 409A of the Code shall be delayed until the relevant date of payment that will result in compliance with the rules of Section 409A(a)(2)(B)(i) of the Code.

2010 Management Incentive Plan 7 Confidential & Proprietary

Exhibit A

Operating Profit		Customer Service Retail Triple ‘S’ (10%)		PBM Customer Satisfaction (10%)
Results	% Payout	Results	% Payout	Results	% Payout
106%	200%	100.0%	100%	100.0%	100%
105%	180%	99.0%	95%	99.0%	95%
104%	160%	98.0%	90%	98.0%	90%
103%	140%	97.0%	85%	97.0%	85%
102%	120%	96.0%	80%	96.0%	80%
99% -101%	100%	95.0%	75%	95.0%	75%
98%	90%	94.0%	70%	94.0%	70%
97%	83%	93.0%	65%	93.0%	65%
96%	75%	92.0%	60%	92.0%	60%
95%	68%	91.0%	55%	91.0%	55%
94%	60%	90.0%	50%	90.0%	50%
93%	53%	89.0%	25%	89.0%	25%
92%	45%	<89.0%	0%	<89.0%	0%
91%	38%
90%	30%
89%	25%
<89%	0%

2010 Management Incentive Plan 8 Confidential & Proprietary

EX-10.39

Exhibit 10.39

CVS CAREMARK CORPORATION

Change in Control Agreement for

DAVID DENTON

CONFIDENTIAL REVISED November 2008

		Page
1.	Definitions.		2
2.	Term of Agreement.		6
3.	Entitlement to Severance Benefit.		6
4.	Confidentiality; Cooperation with Regard to Litigation; Non-disparagement.		9
5.	Non-solicitation.		11
6.	Remedies.		11
7.	Effect of Agreement on Other Benefits.		11
8.	Not an Employment Agreement.		11
9.	Resolution of Disputes.		11
10.	Assignability; Binding Nature.		12
11.	Representation.		12
12.	Entire Agreement.		12
13.	Amendment or Waiver, Section 409A.		12
14.	Severability.		12
15.	Survivorship.		13
16.	Beneficiaries/References.		13
17.	Governing Law/Jurisdiction.		13
18.	Notices.		13
19.	Headings.		13
20.	Counterparts.		13

1

This Change in Control Agreement (“Agreement”) is made and entered into as of December 22, 2008 between CVS Pharmacy, Inc. (“CVS”) and David Denton (the “Executive”).

WHEREAS, the Board of Directors (the “Board”) of CVS Caremark Corporation (“CVS Caremark” or the “Company”) believes it is necessary and desirable for the Company to be able to rely upon Executive to continue serving in his or her position with the Company in the event of a pending or actual change in control of CVS Caremark;

WHEREAS, Executive is employed by a Subsidiary of CVS Caremark, and this Agreement shall not alter Executive’s status as an employee at will;

NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, CVS and Executive (individually a “Party” and together the “Parties”) agree as follows:

1. Definitions.

a. “Base Salary” shall mean Executive’s annual rate of base salary at the time of Executive’s termination of employment or, if greater, as in effect immediately prior to a Change in Control.

b. “Cause” shall exist if:

i. Executive willfully and materially breaches Sections 4 or 5 of this Agreement;

ii. Executive is convicted of a felony involving moral turpitude; or

iii. Executive engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out Executive’s duties under this Agreement, resulting, in either case, in material harm to the financial condition or reputation of the Company.

For purposes of this Agreement, an act or failure to act on Executive’s part shall be considered “willful” if it was done or omitted to be done by Executive not in good faith, and shall not include any act or failure to act resulting from any incapacity of Executive. A termination for Cause shall not take effect absent compliance with the provisions of this paragraph. Executive shall be given written notice by the Company of its intention to terminate Executive’s employment for Cause, such notice (A) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for Cause is based and (B) to be given within 90 days of the Company’s learning of such act or acts or failure or failures to act. Executive shall have 20 days after the date that such written notice has been given to Executive in which to cure such conduct, to extent such cure is possible. If Executive fails to cure such conduct, Executive shall then be entitled to a hearing before the Committee, or an officer or officers designated by the Committee, at which Executive is entitled to appear. Such hearing shall be held within 25 days of such notice to Executive, provided Executive requests such hearing within 10 days of the written notice from the Company of the intention to terminate Executive for Cause. If, within five days following such hearing, Executive is furnished written notice by the Committee confirming that, in its judgment, grounds for Cause on the basis of the original notice exist, Executive shall thereupon be terminated for Cause. Executive’s right to cure in accordance with this provision applies only in the event of a Change in Control as defined in Section 1(c) below and does not alter Executive’s “at will” employment status.

2

c. A “Change in Control” shall be deemed to have occurred if:

(i) any Person (other than (w) the Company, (x) any trustee or other fiduciary holding securities under any employee benefit plan of the Company, (y) any company owned, directly or indirectly, by the stockholders of the Company immediately after the occurrence with respect to which the evaluation is being made in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such occurrence or (z) any surviving or resulting entity from a merger or consolidation referred to in clause (iii) below that does not constitute a Change in Control under clause (iii) below) becomes the Beneficial Owner (except that a Person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants or options or otherwise, without regard to the sixty day period referred to in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or of any subsidiary owning directly or indirectly all or substantially all of the consolidated assets of the Company (a “Significant Subsidiary”), representing 30% or more of the combined voting power of the Company’s or such Significant Subsidiary’s then outstanding securities;

(ii) during any period of twelve (12) consecutive months, individuals who at the beginning of such period constitute the Board, and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the twelve (12) month period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board;

(iii) the consummation of a merger or consolidation of the Company or any Significant Subsidiary with any other entity, other than a merger or consolidation which would result in the voting securities of the Company or a Significant Subsidiary outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting power of the surviving or resulting entity outstanding immediately after such merger or consolidation; or

(iv) the consummation of a transaction (or series of transactions within a 12 month period) which constitutes the sale or disposition of all or substantially all of the consolidated assets of the Company but in no event assets having a gross fair market value of less than 40% of the total gross fair market value of all of the consolidated assets of the Company (other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such sale or disposition).

3

For purposes of this definition:

(A) The term “Beneficial Owner” shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act (including any successor to such Rule).

(B) The term “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

(C) The term “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including “group” as defined in Section 13(d) thereof.

d. “Committee” shall mean the Management Planning and Development Committee of the Board, or the corresponding committee of the board of directors of a successor to CVS Caremark.

e. “Company” shall mean, collectively, CVS Caremark and any Subsidiary or affiliate of CVS Caremark.

f. “Confidential Information” shall have the meaning set forth in Section 4 below.

g. “Constructive Termination Without Cause” shall mean a termination of the Executive’s employment at Executive’s initiative following the occurrence, without the Executive’s written consent, of one or more of the following events (except as a result of a prior termination):

i. an assignment of any duties to Executive that is inconsistent with Executive’s status as a member of the senior management of CVS Caremark;

ii. a decrease in Executive’s annual base salary or target annual incentive award opportunity;

iii. any failure to secure the agreement of any successor to CVS Caremark to fully assume the Company’s obligations under this Agreement; or

iv. a relocation of Executive’s principal place of employment more than 35 miles from Executive’s place of employment before such relocation.

h. “Disability” shall mean disability as that term is defined in the Company’s Long-Term Disability Plan.

i. “Effective Date” shall have the meaning set forth in Section 2 below.

j. “Original Term” shall have the meaning set forth in Section 2 below.

k. “Renewal Term” shall have the meaning set forth in Section 2 below.

l. “Severance Period” shall mean the period of 18 months following the termination of Executive’s employment with the Company.

m. “Subsidiary” shall have the meaning set forth in Section 4 below.

n. “Term” shall have the meaning set forth in Section 2 below.

4

o. “termination of employment”, “employment is terminated” and other similar words shall mean with respect to Executive:

(i) for any plan or arrangement that is subject to the rules of Section 409A of the Internal Revenue Code (the “Code”) a “Separation from Service” as such term is defined in the Income Tax Regulations under Section 409A (the “409A Regulations”) of the Code as modified by the rules described below:

(A) except in the case where Executive is on a bona fide leave of absence pursuant to the Company’s policies as provided below, Executive is deemed to have incurred a Separation from Service on a date if the company and Executive reasonably anticipate that the level of services to be performed by Executive after such date would be permanently reduced to 20% or less of the average services rendered by Executive during the immediately preceding 36-month period (or the total period of employment, if less than 36 months), disregarding periods during which Executive was on a bona fide leave of absence;

(B) if Executive is absent from work due to military leave, sick leave, or other bona fide leave of absence pursuant to the Company’s policies, Executive shall incur a Separation from Service on the first date that the rules of (A), above, are satisfied following the later of (i) the six-month anniversary of the commencement of the leave or (ii) the expiration of Executive’s right, if any, to reemployment under statute, contract or Company policy;

(C) Executive shall be considered to continue employment and to not have a Separation from Service while on a bona fide leave of absence pursuant to the Company’s policies if the leave does not exceed 6 consecutive months (12) months for a disability leave of absence) or, if longer, so long as the Executive retains a right to reemployment with the Company or an Affiliate under an applicable statute, contract or Company policy. For this purpose, a “disability leave of absence” is an absence due to any medically determinable physical or mental impairment of Executive that can be expected to result in death or can be expected to last for a continuous period of not less than 6 months, where such impairment causes the Participant to be unable to perform the duties of his job or a substantially similar job;

(D) for purposes of determining whether another organization is an Affiliate of the Company, common ownership of at least 50% shall be determinative;

(E) the Company specifically reserves the right to determine whether a sale or other disposition of substantial assets to an unrelated party constitutes a Separation from Service with respect to Executive providing services to the seller immediately prior to the transaction and providing services to the buyer after the transaction. Such determination shall be made in accordance with the requirements of Section 409A of the Code; or

(ii) for any plan or arrangement that is not subject to the rules of Section 409A of the Code, the complete cessation of providing service to the Company or any Affiliate as an employee.

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2. Term of Agreement.

The term of this Agreement shall commence on the date of this Agreement (the “Effective Date”) and end on the third anniversary of such date (the “Original Term”). The Original Term shall be automatically renewed for successive one-year terms (the “Renewal Terms”) unless at least 180 days prior to the expiration of the Original Term or any Renewal Term, either Party notifies the other Party in writing that he/she or it is electing to terminate this Agreement at the expiration of the then current Term. “Term” shall mean the Original Term and all Renewal Terms. If a Change in Control shall have occurred during the Term, notwithstanding any other provision of this Section 2, the Term shall not expire earlier than two years after such Change in Control.

3. Entitlement to Severance Benefit.

a. Severance Benefit. In the event Executive’s employment with the Company is Terminated Without Cause, other than due to death, or Disability, or in the event there is a Constructive Termination Without Cause within two years following a Change in Control, Executive shall be entitled to receive:

i. Base Salary through the date of termination of Executive’s employment, which shall be paid in a cash lump sum not later than 15 days following Executive’s termination of employment;

ii. An amount equal to 1.5 times Executive’s Base Salary in effect on the date of termination of Executive’s employment (or in the event a reduction in Base Salary is a basis for a Constructive Termination Without Cause, then the Base Salary in effect immediately prior to such reduction), payable in a cash lump sum following Executive’s termination of employment;

iii. An amount equal to the sum of (A) the most recently established target annual cash incentive bonus amount, pro rated based on the portion of the performance year that Executive has worked as of the date of Executive’s termination, plus (B) 25% of Base Salary (which represents an amount equal to the cash value of the target annual Performance-Based Restricted Stock unit award for the year in which termination occurs, pro rated based on the portion of the performance year that Executive has worked as of the date of his/her termination). The Base Salary will be determined in accordance with Section 3.a.ii. Such payment of a pro rata annual cash incentive bonus and cash in lieu of Performance-Based Restricted Stock will be payable in a cash lump sum following Executive’s termination of employment;

iv. An amount equal to 1.5 times the sum of (A) the most recently established target annual incentive cash bonus amount, plus (B) 25% of Base Salary (determined in accordance with Section 3.a.ii above), payable in a cash lump sum following the Executive’s termination of employment;

v. Elimination of all restrictions on any restricted stock or restricted stock unit awards outstanding at the time of termination of employment (other than awards under the Company’s Partnership Equity Program, which shall be governed by the terms of such awards);

vi. Immediate vesting of all outstanding stock options and the right to exercise such stock options for the remainder of the full term of such option (other than awards under the Company’s Partnership Equity Program, which shall be governed by the terms of such awards);

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vii. The balance of any incentive awards earned as of December 31 of the prior year (but not yet paid), which shall be paid in a single lump sum not later than 15 days following Executive’s termination of employment;

viii. Settlement of all deferred compensation arrangements in accordance with any then applicable deferred compensation plan or election form;

ix. Continued participation in all medical, health and life insurance plans at the same benefit level at which Executive was participating on the date of termination of Executive’s employment until the earlier of:

1. the end of the Severance Period; or

2. the date, or dates, Executive receives equivalent coverage and benefits under the plans and programs of a subsequent employer (such coverage and benefits to be determined on a coverage-by-coverage, or benefit-by-benefit, basis);

provided that (1) if Executive is precluded from continuing Executive’s participation in any employee benefit plan or program as provided in this clause (ix) of this Section 3.a, Executive shall receive cash payments equal on an after-tax basis to the cost to Executive of obtaining the benefits provided under the plan or program in which Executive is unable to participate for the period specified in this clause (ix) of this Section 3.a, (2) such cost shall be deemed to be the lowest reasonable cost that would be incurred by Executive in obtaining such benefit on an individual basis, and (3) payment of such amounts shall be made quarterly in advance; and

x. other or additional benefits then due or earned in accordance with applicable plans and programs of the Company.

b. Excise Tax Gross-Up. If while a member of the Business Planning Committee of the Company Executive becomes entitled to one or more payments (with a “payment” including, without limitation, the vesting of an option or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or any affiliated company (the “Total Payments”), which are or become subject to the tax imposed by Code Section 4999 (or any similar tax that may hereafter be imposed) (the “Excise Tax”), the Company shall pay to Executive at the time specified below an additional amount (the “Gross-up Payment”) (which shall include, without limitation, reimbursement for any penalties and interest that may accrue in respect to such Excise Tax) such that the net amount retained by the Executive, after reduction for any Excise Tax (including any penalties or interest thereon) on the Total Payments and any federal, state and local income or employment tax and Excise Tax on the Gross-up Payment provided for by this Section 3.b., but before reduction for any federal, state, or local income or employment tax on the Total Payments, shall be equal to the sum of (a) the Total Payments, and (b) an amount equal to the product of any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Gross-up Payment in Executive’s adjusted gross income multiplied by the highest applicable marginal rate of federal, state, or local income taxation, respectively, for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax:

(i) The Total Payments shall be treated as “parachute payments” within the meaning of Code Section 280G(b)(2), and all “excess parachute payments” within the meaning of Code Section 280G(b)(1) shall be treated as subject to

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the Excise Tax, unless, and except to the extent that, in the written opinion of independent compensation consultants, counsel or auditors of nationally recognized standing (“Independent Advisors”) selected by the Company and reasonably accepted to the Executive, the Total Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Code Section 280G(b)(4) in excess of the base amount within the meaning of Code Section 280G(b)(3) or are otherwise not subject to the Excise Tax;

(ii) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the total amount of excess parachute payments within the meaning of Code Section 280G(b)(1) (after applying clause (i) above); and

(iii) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Code Sections 280G(d)(3) and (4).

For purposes of determining the amount of the Gross-up Payment, Executive shall be deemed (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made; (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payments is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of Executive’s adjusted gross income); and (C) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in Executive’s adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Executive shall repay to the Company at the time that the amount of such deduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to Executive or otherwise realized as a benefit by Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been applied in initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Code Section 1274(b)(2)(B). In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect to such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined.

The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Total Payments (or any portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined by the Independent Advisors, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code Section 1274(b)(2)(B)), as soon as the amount can be determined. In the event that

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the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Code Section 1274(b)(2)(B)). If more than one Gross-up Payment is made, the amount of each Gross-up Payment shall be computed so as not to duplicate any prior Gross-up Payment. The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company’s control over any such proceedings shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder, and Executive shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. Executive shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any portion or action that would materially increase the amount of any Gross-Up Payment hereunder.

c. No Mitigation; No Offset. In the event of any termination of employment under this Section 3, Executive shall be under no obligation to seek other employment, and the amounts due Executive under this Agreement shall not be offset by any remuneration attributable to any subsequent employment that Executive may obtain.

d. Nature of Payments. Any amounts due under this Section 3 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty.

e. Exclusivity of Severance Benefit. Upon termination of Executive’s employment during the Term, Executive shall not be entitled to any severance payments or severance benefits from the Company, or any other payments by the Company, other than the Severance Benefit provided in this Section 3, except as required by law.

f. General Release of Claims. Executive agrees, as a condition of payment of the Severance Benefit provided for in this Section 3, that Executive will execute within 60 days of Executive’s termination of employment a separation agreement, in a form reasonably satisfactory to the Company, that includes a general release of any and all claims arising out of Executive’s employment or termination of employment with the Company, other than claims for (i) enforcement of this Agreement, (ii) enforcement of Executive’s rights under any of the Company’s incentive compensation, equity and/or employee benefit plans and programs to which Executive is entitled under this Agreement, and (iii) any tort for personal injury not arising out of or related to Executive’s employment or termination of employment.

g. Subject to the provisions of Section 13(b), all payments to be made pursuant to this Section 3 upon the termination of employment of Executive shall be made or commence, as the case may be, within 75 days after the Executive’s termination of employment provided, however, that if such termination of employment is after October 17 of a year, the payout or first payment, as the case may be, shall be made at the end of such 75 day period.

4. Confidentiality; Cooperation with Regard to Litigation; Non-disparagement.

a. During the Term and thereafter, Executive shall not, without the prior written consent of the Company, disclose to anyone (except in good faith in the ordinary course of business to a person who will be advised by Executive to keep such information confidential) or make use of any confidential information except in the performance of

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Executive’s duties hereunder or when required to do so by legal process, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) that requires Executive to divulge, disclose or make accessible such information. In the event that Executive is so ordered, Executive shall give prompt written notice to the Company in order to allow the Company the opportunity to object to or otherwise resist such order.

b. During the Term and thereafter, Executive shall not disclose the existence or contents of this Agreement beyond what is disclosed in the proxy statement or documents filed with the government unless and to the extent such disclosure is required by law, by a governmental agency, or in a document required by law to be filed with a governmental agency or in connection with enforcement of his/her rights under this Agreement. In the event that disclosure is so required, Executive shall give prompt written notice to the Company in order to allow the Company the opportunity to object to or otherwise resist such requirement. This restriction shall not apply to such disclosure by Executive to members of his/her immediate family, his/her tax, legal or financial advisors, any lender, or tax authorities, or to potential future employers to the extent necessary, each of whom shall be advised not to disclose such information.

c. “Confidential Information” shall mean all information concerning the business of the Company or any Subsidiary relating to any of their products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. Excluded from the definition of Confidential Information is information (i) that is or becomes part of the public domain, other than through the breach of this Agreement by Executive or (ii) regarding the Company’s business or industry properly acquired by Executive in the course of Executive’s career as an Executive in the Company’s industry and independent of Executive’s employment by the Company. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public.

d. “Subsidiary” shall mean any corporation or other business entity owned or controlled directly or indirectly by CVS Caremark.

e. Executive agrees to cooperate with the Company, during the Term and thereafter (including following Executive’s termination of employment for any reason), by being reasonably available to testify on behalf of the Company or any Subsidiary in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to assist the Company, or any Subsidiary, in any such action, suit, or proceeding, by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company, or any Subsidiary as requested; provided, however that the same does not materially interfere with Executive’s then current professional activities. The Company agrees to reimburse Executive on an after tax basis, for all reasonable expenses actually incurred in connection with Executive’s provision of testimony or assistance.

f. Executive agrees that, during the Term and thereafter (including following Executive’s termination of employment for any reason) Executive will not make statements or representations, or otherwise communicate, directly or indirectly, in writing, orally, or otherwise, or take any action which may, directly or indirectly, disparage or be damaging to the Company or any Subsidiary or their respective officers, directors, employees, advisors, businesses or reputations. Notwithstanding the foregoing, nothing in this Agreement shall preclude Executive from making truthful statements or disclosures that are required by applicable law, regulation or legal process.

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5. Non-solicitation.

During the period beginning with the Effective Date and ending 18 months following the termination of Executive’s employment with the Company, Executive, whether acting on Executive’s own behalf or by, through or on behalf of any third party, shall not (a) hire any employees of the Company or any Subsidiary, or recruit or solicit any such employees or encourage them to terminate their employment with the Company or any Subsidiary; (b) accept business from any customers of the Company or any Subsidiary, or solicit or encourage any customers, joint venture partners or investors of the Company or any Subsidiary to terminate or diminish their relationship with the Company or any Subsidiary or to violate any agreement with the Company or any Subsidiary. For purposes of subsection 5(a), an employee of the Company or any Subsidiary means any person who was employed by the Company or any Subsidiary within 180 days of such hiring, recruitment, solicitation or encouragement. Executive agrees to make any employer with whom Executive becomes employed during the 18-month period following Executive’s termination with the Company aware of this non-solicitation obligation upon commencing employment with such subsequent entity.

6. Remedies.

In addition to whatever other rights and remedies the Company may have at equity or in law, the Company (a) shall have the right to immediately terminate all payments and benefits due under this Agreement if Executive breaches any of the provisions contained in Sections 4 or 5 above, and (b) shall have the right to seek injunctive relief in any court of competent jurisdiction if Executive breaches or threatens to breach any of the provisions contained in Sections 4 or 5 above. Executive acknowledges that such a breach would cause irreparable injury and that money damages would not provide an adequate remedy for the Company; provided, however, the foregoing shall not prevent Executive from contesting the issuance of any such injunction on the ground that no violation or threatened violation of Sections 4 or 5 has occurred.

7. Effect of Agreement on Other Benefits.

Except as specifically provided in this Agreement, the existence of this Agreement shall not be interpreted to preclude, prohibit or restrict the Executive’s participation in any other employee benefit or other plans or programs in which he /she currently participates.

8. Not an Employment Agreement.

This Agreement is not, and nothing herein shall be deemed to create, a contract of employment between Executive and the Company. The Company may terminate the employment of Executive at any time and for any reason, subject to the terms of any employment agreement between the Company and Executive that may then be in effect.

9. Resolution of Disputes.

Any controversy or claim arising out of or relating to this Agreement or any breach or asserted breach hereof or questioning the validity and binding effect hereof arising under or in connection with this Agreement, other than seeking injunctive relief under Sections 4 or 5, shall be resolved by binding arbitration, to be held at an office closest to the Company’s principal offices in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Pending the resolution of any arbitration or court proceeding, the Company shall continue payment of all amounts and benefits due Executive under this Agreement. All reasonable costs and expenses of any arbitration or court proceeding (including fees and disbursements of counsel) shall be paid on behalf of or reimbursed to Executive promptly by

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the Company; provided, however, that no reimbursement shall be made of such expenses if and to the extent the arbitrator(s) determine(s) that any of Executive’s litigation assertions or defenses were in bad faith or frivolous.

10. Assignability; Binding Nature.

This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and permitted assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred in connection with the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale or transfer of assets as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his/her, rights to compensation and benefits, which may be transferred only by will or operation of law, except as provided in Section 16 below.

11. Representation.

The Company represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between it and any other person, firm or organization.

12. Entire Agreement.

This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto.

13. Amendment; Waiver; Code Section 409A.

(a) No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be.

(b) Executive and Company agree that it is the intent of the parties that this Agreement not violate any applicable provision of, or result in any additional tax or penalty under, Section 409A of the Code, as amended, and that to the extent any provisions of this Agreement do not comply with such Code Section 409A the parties will make such changes as are mutually agreed upon in order to comply with Code Section 409A. In all events, to the extent required to avoid a violation the applicable rules under all Section 409A by reason of Code Section 409A(a)(2)(B)(i), payment of any amounts subject to Code Section 409A shall be delayed until the relevant date of payment that will result in compliance with the rules of Code Section 409A(a)(2)(B)(i).

14. Severability.

In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement

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shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law.

15. Survivorship.

The respective rights and obligations of the Parties hereunder shall survive any termination of Executive’s employment to the extent necessary to the intended preservation of such rights and obligations.

16. Beneficiaries/References.

Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive’s death by giving the Company written notice thereof. In the event of Executive’s death or a judicial determination of his/her incompetence, references in this Agreement to Executive shall be deemed, where appropriate, to refer to his/her beneficiary, estate or other legal representative.

17. Governing Law/Jurisdiction.

This Agreement shall be governed by and construed and interpreted in accordance with the laws of Rhode Island without reference to principles of conflict of laws. Subject to Section 6, the Company and Executive hereby consent to the jurisdiction of any or all of the following courts for purposes of resolving any dispute under this Agreement: (i) the United States District Court for Rhode Island or (ii) any of the courts of the State of Rhode Island. The Company and Executive further agree that any service of process or notice requirements in such proceeding shall be satisfied if the rules of such court relating thereto have been substantially satisfied. The Company and Executive hereby waive, to the fullest extent permitted by applicable law, any objection which it or Executive may now or hereafter have to such jurisdiction and any defense of inconvenient forum.

18. Notices.

Any notice given to a Party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to, such changed address as such Party may subsequently give such notice of:

If to CVS:

CVS Pharmacy, Inc.

One CVS Drive

Woonsocket, RI 02895

Attention: Corporate Secretary

If to Executive:

David Denton

38 Locksley Rd.

Newton, MA 02459

19. Headings.

The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement.

20. Counterparts.

This Agreement may be executed in two or more counterparts.

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In WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.

CVS Pharmacy, Inc.
By:
	Name:	V. Michael Ferdinandi
	Title:	Senior Vice President
		Human Resources, Corporate Communications and Community Relations

Executive

David Denton

Senior Vice President, Finance & Controller

CVS Caremark

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EX-13

Exhibit 13

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

The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and Cautionary Statement Concerning Forward-Looking Statements that are included in this Annual Report.

Overview of Our Business

CVS Caremark Corporation (“CVS Caremark”, the “Company”, “we” or “us”), together with its subsidiaries is the largest pharmacy health care provider in the United States. As a fully integrated pharmacy services company, we believe we can drive value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our pharmacy benefit management, mail order and specialty pharmacy division, CVS Caremark Pharmacy Services^® (“Caremark”); our approximately 7,200 CVS/pharmacy^® retail stores; our retail-based health clinic subsidiary, MinuteClinic^®; and our online pharmacy, CVS.com^®. The Company has three business segments: Pharmacy Services, Retail Pharmacy and Corporate.

Overview of Our Pharmacy Services Segment

Our Pharmacy Services business provides a full range of pharmacy benefit management (“PBM”) services including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. Our clients are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the United States.

As a pharmacy benefits manager, we manage the dispensing of pharmaceuticals through our mail order pharmacies and national network of approximately 65,000 retail pharmacies (which include our CVS/pharmacy stores) to eligible members in the benefit plans maintained by our clients and utilize our information systems to perform, among other things, safety checks, drug interaction screenings and brand to generic substitutions.

Our specialty pharmacies support individuals that require complex and expensive drug therapies. Our specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS Caremark^® and CarePlus CVS/pharmacy^® names. Substantially all of our mail service specialty pharmacies have been accredited by The Joint Commission.

We also provide health management programs, which include integrated disease management for 28 conditions, through our strategic alliance with Alere, L.L.C. and our Accordant^® health management offering. The majority of these integrated programs are accredited by the National Committee for Quality Assurance.

In addition, through our SilverScript Insurance Company (“SilverScript”) and Accendo Insurance Company (“Accendo”) subsidiaries, we are a national provider of drug benefits to eligible beneficiaries under the Federal Government’s Medicare Part D program. The Company acquired Accendo in the Longs Acquisition (defined later in this document), and, effective January 1, 2009, Accendo replaced RxAmerica^® as the Medicare-approved prescription drug plan for the RxAmerica Medicare Part D drug benefit plans. In December 2010, the Company announced it had entered into an agreement to acquire the Medicare Part D business of Universal American Corp. (“UAC”) for approximately $1.25 billion. The transaction is subject to customary closing conditions, including necessary regulatory approvals, as well as approval by UAC shareholders. The Company currently expects that the transaction will close by the end of the second quarter of 2011.

Our Pharmacy Services segment generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription drugs are dispensed by our mail order pharmacies, specialty

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pharmacies and national network of retail pharmacies. Net revenues are also generated by providing additional services to clients, including administrative services such as claims processing and formulary management, as well as health care related services such as disease management.

The Pharmacy Services segment operates under the CVS Caremark Pharmacy Services, Caremark^®, CVS Caremark^®, CarePlus CVS/pharmacy^®, CarePlus™, RxAmerica^®, Accordant Care™ and TheraCom^® names. As of December 31, 2010, the Pharmacy Services segment operated 44 retail specialty pharmacy stores, 18 specialty mail order pharmacies and four mail service pharmacies located in 25 states, Puerto Rico and the District of Columbia.

Overview of Our Retail Pharmacy Segment

Our Retail Pharmacy segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods through our CVS/pharmacy and Longs Drugs^® retail stores and online through CVS.com. Our Retail Pharmacy segment derives the majority of its revenues through the sale of prescription drugs, which are dispensed by our more than 20,000 retail pharmacists. The role of our retail pharmacists is shifting from primarily dispensing prescriptions to also providing services, including flu vaccinations as well as face-to-face patient counseling with respect to adherence to drug therapies, closing gaps in care, and more cost-effective drug therapies. Our integrated pharmacy services model enables us to enhance access to care while helping to lower overall health care costs and improve health outcomes.

CVS/pharmacy is one of the nation’s largest retail pharmacy chains. With more than 40 years of dynamic growth in the retail pharmacy industry, the Retail Pharmacy segment generates more than two-thirds of its revenue from prescription sales and is committed to providing superior customer service by being the easiest pharmacy retailer for customers to use.

Our Retail Pharmacy segment also provides health care services through our MinuteClinic health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions, and deliver vaccinations. We believe our clinics provide quality services that are quick, affordable and convenient.

Our proprietary loyalty card program, ExtraCare^®, has well over 67 million active cardholders, making it one of the largest and most successful retail loyalty card programs in the country.

Effective October 20, 2008, we acquired Longs Drug Stores Corporation, which included 529 retail drug stores (the “Longs Drug Stores”), RxAmerica, LLC (“RxAmerica”), which provides pharmacy benefit management services and, Medicare Part D benefits, and other related assets (the “Longs Acquisition”).

As of December 31, 2010, our Retail Pharmacy segment included 7,182 retail drugstores (of which 7,123 operated a pharmacy) located in 41 states, the District of Columbia, and Puerto Rico operating primarily under the CVS/pharmacy or Longs Drugs names, our online retail website, CVS.com and 560 retail health care clinics operating under the MinuteClinic name (of which 550 were located in CVS/pharmacy stores).

Overview of Our Corporate Segment

The Corporate segment provides management and administrative services to support the Company. The Corporate segment consists of certain aspects of our executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments.

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Results of Operations

Fiscal Year Change - On December 23, 2008, the Board of Directors of the Company approved a change in the Company’s fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect the Company’s position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of 2008.

As you review our operating performance, please consider the impact of the fiscal year change as set forth below:

Fiscal Year	Fiscal Year-End	Fiscal Period	Fiscal Period Includes
2010	December 31, 2010	January 1, 2010 - December 31, 2010	365 days
2009	December 31, 2009	January 1, 2009 - December 31, 2009	365 days
2008	December 31, 2008	December 30, 2007 - December 31, 2008	368 days

Unless otherwise noted, all references to years relate to the above fiscal years.

Summary of our Consolidated Financial Results

	Fiscal Year
In millions, except per common share amounts	2010			2009			2008
Net revenues	$	96,413		$	98,729		$	87,472
Gross profit		20,257			20,380			18,290
Operating expenses		14,092			13,942			12,244
Operating profit		6,165			6,438			6,046
Interest expense, net		536			525			509
Income before income tax provision		5,629			5,913			5,537
Income tax provision		2,190			2,205			2,193
Income from continuing operations		3,439			3,708			3,344
Loss from discontinued operations, net of income tax benefit		(15	)		(12	)		(132	)
Net income		3,424			3,696			3,212
Net loss attributable to noncontrolling interest		3			—			—
Preference dividend, net of income tax benefit		—			—			(14	)
Net income attributable to CVS Caremark	$	3,427		$	3,696		$	3,198
Diluted earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.50		$	2.56		$	2.27
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)
Net income attributable to CVS Caremark	$	2.49		$	2.55		$	2.18

Net revenues decreased $2.3 billion in 2010 and increased $11.3 billion in 2009. As you review our performance in this area, we believe you should consider the following important information:

• During 2010, net revenues in our Retail Pharmacy segment increased by 3.6% which was offset by a decline in our Pharmacy Services segment of 6.4%, compared to the prior year. The increase in our generic dispensing rates in both of our operating segments had an adverse effect on net revenue in 2010 as compared to 2009, as well as in 2009 as compared to 2008.

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• Three fewer days in the 2009 fiscal year negatively impacted net revenues by $671 million, compared to 2008.

• During 2009, the Longs Acquisition increased net revenues by $6.6 billion, compared to 2008. The results for 2008 includes net revenues from the Longs Drug Stores and RxAmerica from the acquisition date (October 20, 2008) forward.

Please see the Segment Analysis later in this document for additional information about our net revenues.

Gross profit decreased $0.1 billion in 2010, to $20.3 billion or 21.0% of net revenues, as compared to 2009. Gross profit increased $2.1 billion in 2009 to $20.4 billion or 20.6% of net revenues, as compared to 2008. As you review our performance in this area, we believe you should consider the following important information:

• During 2010, gross profit in our Retail Pharmacy segment increased by 2.7% offset by declines in our Pharmacy Services segment of 12.6%, compared to the prior year.

• During 2009, the Longs Acquisition increased gross profit dollars by $1.1 billion, but negatively impacted our gross profit rate compared to 2008.

• Three fewer days in the 2009 fiscal year, negatively impacted gross profit by $146 million, compared to 2008.

• The results for 2008 include gross profit from the Longs Drug Stores and RxAmerica from the acquisition date (October 20, 2008) forward.

• In addition, for the three years 2008 through 2010, our gross profit continued to benefit from the increased utilization of generic drugs (which normally yield a higher gross profit rate than equivalent brand name drugs) in both the Pharmacy Services and Retail Pharmacy segments.

Please see the Segment Analysis later in this document for additional information about our gross profit.

Operating expenses increased $151 million and $1.7 billion during 2010 and 2009, respectively. As you review our performance in this area, we believe you should consider the following important information:

• During 2010, operating expenses increased as a result of increases in our Corporate segment expenses of $87 million, and an increase in our Retail Pharmacy segment expenses of $68 million, partially offset by a decrease in our Pharmacy Services segment expenses of $5 million, compared to the prior year.

• During 2009, the Longs Acquisition increased operating expenses by $1.0 billion, but positively impacted our operating expense rate as a percentage of net revenues compared to 2008.

• Three fewer days in the 2009 fiscal year, positively impacted operating expenses by $97 million, compared to 2008.

• The results of 2008 include operating expenses from the Longs Drug Stores and RxAmerica from the acquisition date (October 20, 2008) forward.

Please see the Segment Analysis later in this document for additional information about operating expenses.

Interest expense, net consisted of the following:

In millions	2010			2009			2008
Interest expense	$	539		$	530		$	530
Interest income		(3	)		(5	)		(21	)
Interest expense, net	$	536		$	525		$	509

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During 2010, net interest expense increased by $11 million, to $536 million compared to 2009, due to an increase in our average debt balances and average interest rates. During 2009, net interest expense increased by $16 million, compared to 2008, due to lower interest income associated with our temporary investments.

Income tax provision - Our effective income tax rate was 38.9% in 2010, 37.3% in 2009 and 39.6% in 2008. The annual fluctuations in our effective income tax rate are primarily related to changes in permanent items, state income tax expense and the recognition of previously unrecognized tax benefits relating to the expiration of various statutes of limitation and settlements with tax authorities. In 2010 we recognized a $47 million income tax benefit related to the expiration of various statutes of limitation and settlements with tax authorities. Similarly, in 2009 we recognized a $167 million income tax benefit relating to the expiration of various statutes of limitation and settlements with tax authorities.

Income from continuing operations decreased $269 million or 7.2% to $3.4 billion in 2010. This compares to $3.7 billion in 2009 and $3.3 billion in 2008. As previously noted, income from continuing operations in 2010 and 2009 both benefited from previously unrecognized tax benefit.

Loss from discontinued operations - In connection with certain business dispositions completed between 1991 and 1997, the Company continues to guarantee store lease obligations for a number of former subsidiaries, including Linens ‘n Things. On May 2, 2008, Linens Holding Co. and certain affiliates, which operate Linens ‘n Things, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company’s loss from discontinued operations includes lease-related costs of $15 million ($24 million, net of a $9 million income tax benefit), $12 million ($19 million, net of a $7 million income tax benefit) and $132 million ($214 million, net of an $82 million income tax benefit) in 2010, 2009 and 2008, respectively.

Net loss attributable to noncontrolling interest represents the minority shareholders’ portion of the net loss from our majority owned subsidiary, Generation Health, Inc., which we acquired late in the fourth quarter of 2009. The net loss attributable to noncontrolling interest for the year ended December 31, 2010 was $3 million and was de minimis in 2009.

Net income attributable to CVS Caremark decreased $269 million or 7.3% to $3.4 billion (or $2.49 per diluted share) in 2010. This compares to $3.7 billion (or $2.55 per diluted share) in 2009 and $3.2 billion (or $2.18 per diluted share) in 2008. As previously noted, net income attributable to CVS Caremark in 2010 and 2009 both benefited from previously unrecognized tax benefit.

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Segment Analysis

We evaluate the performance of our Pharmacy Services and Retail Pharmacy segments based on net revenues, gross profit and operating profit before the effect of certain intersegment activities and charges. The Company evaluates the performance of its Corporate segment based on operating expenses before the effect of discontinued operations and certain intersegment activities and charges. The following is a reconciliation of the Company’s business segments to the consolidated financial statements:

In millions	Pharmacy Services Segment  (1)(2)		Retail Pharmacy Segment  (2)		Corporate Segment			Intersegment Eliminations(2)			Consolidated Totals
2010:
Net revenues	$	47,780	$	57,345	$	—		$	(8,712	)	$	96,413
Gross profit		3,353		17,039		—			(135	)		20,257
Operating profit		2,389		4,537		(626	)		(135	)		6,165
2009:
Net revenues	$	51,065	$	55,355	$	—		$	(7,691	)	$	98,729
Gross profit		3,835		16,593		—			(48	)		20,380
Operating profit		2,866		4,159		(539	)		(48	)		6,438
2008:
Net revenues	$	43,769	$	48,990	$	—		$	(5,287	)	$	87,472
Gross profit		3,550		14,741		—			(1	)		18,290
Operating profit		2,755		3,753		(461	)		(1	)		6,046

(1) Net revenues of the Pharmacy Services segment include approximately $6.6 billion, $6.9 billion and $6.3 billion of Retail Co-Payments for 2010, 2009 and 2008, respectively. Please see Note 1 to the consolidated financial statements for additional information about Retail Co-Payments.

(2) Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue on a standalone basis, and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services segment customers, through the Company’s intersegment activities (such as the Maintenance Choice^® program), elect to pick-up their maintenance prescriptions at Retail Pharmacy segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. As a result, both the Pharmacy Services and the Retail Pharmacy segments include the following results associated with this activity: net revenues of $1,794 million, $692 million and $8 million for the years ended December 31, 2010, 2009 and 2008, respectively; gross profit and operating profit of $135 million, $48 million and $1 million for the years ended December 31, 2010, 2009 and 2008, respectively.

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Pharmacy Services Segment

The following table summarizes our Pharmacy Services segment’s performance for the respective periods:

	Fiscal Year Ended
In millions	2010			2009			2008(4)
Net revenues	$	47,780		$	51,065		$	43,769
Gross profit		3,353			3,835			3,550
Gross profit % of net revenues		7.0	%		7.5	%		8.1	%
Operating expenses		964			969			795
Operating expenses % of net revenues		2.0	%		1.9	%		1.8	%
Operating profit		2,389			2,866			2,755
Operating profit % of net revenues		5.0	%		5.6	%		6.3	%
Net revenues(1) :
Mail choice(2)	$	16,675		$	16,711		$	14,909
Pharmacy network(3)		30,681			34,004			28,482
Other		424			350			378
Pharmacy claims processed(1) :
Total		584.8			658.5			633.4
Mail choice(2)		64.2			66.0			60.9
Pharmacy network(3)		520.6			592.5			572.5
Generic dispensing rate(1) :
Total		71.5	%		68.2	%		65.1	%
Mail choice(2)		61.3	%		56.5	%		54.4	%
Pharmacy network(3)		72.7	%		69.3	%		66.2	%
Mail choice penetration rate		25.8	%		23.8	%		22.9	%

(1) Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within the mail choice category.

(2) Mail choice is defined as claims filled at a Pharmacy Services’ mail facility, which includes specialty mail claims, as well as 90-day claims filled at retail under the Maintenance Choice program.

(3) Pharmacy network is defined as claims filled at retail pharmacies, including CVS/pharmacy stores.

(4) 2008 includes the results of RxAmerica from the October 20, 2008 acquisition date.

During 2009, the Pharmacy Services segment’s results of operations include a full year of RxAmerica results compared to 2008, which includes RxAmerica results from the acquisition date (October 20, 2008) forward.

Net revenues in our Pharmacy Services Segment decreased $3.3 billion, or 6.4%, to $47.8 billion for the year ended December 31, 2010, as compared to the prior year. The decrease in 2010 was primarily due to the termination of a few large client contracts effective January 1, 2010 and the decrease of covered lives under our Medicare Part D program as a result of the 2010 Medicare Part D competitive bidding process, partially offset by new client starts on January 1, 2010. Additionally, the increase in our generic dispensing rate had a negative impact on our revenue in 2010.

Net revenues increased $7.3 billion, or 16.7%, to $51.1 billion for the year ended December 31, 2009, as compared to the prior year. The increase in 2009 was primarily due to the inclusion of RxAmerica which accounted for approximately $3.2 billion of the increase, which included the impact of converting the RxAmerica retail pharmacy network contract to the Caremark contract structure discussed below. Additionally the increase in revenue was attributable to favorable net new business.

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As you review our Pharmacy Services segment’s revenue performance, we believe you should consider the following important information:

• The Pharmacy Services segment recognizes revenues for its pharmacy network transactions based on individual contract terms. In accordance with ASC 605, Revenue Recognition (formerly Emerging Issues Task Force (“EITF”) EITF No. 99-19, “Reporting Revenue Gross as a Principal vs Net as an Agent”), Caremark’s contracts are predominantly accounted for using the gross method. Prior to April 1, 2009, RxAmerica’s contracts were accounted for using the net method. Effective April 1, 2009, we converted a number of RxAmerica’s retail pharmacy network contracts and a large health plan to the Caremark contract structure, which resulted in those contracts being accounted for using the gross method. As a result, net revenues increased by $1.1 billion during 2010 as compared to 2009, and by $2.5 billion during 2009 as compared to 2008.

• Three fewer days in the 2009 fiscal year negatively impacted net revenues by $268 million, compared to 2008.

• During 2010, our mail choice claims processed decreased 2.7% to 64.2 million claims. This decrease was primarily due to the termination of a few large client contracts effective January 1, 2010, partially offset by new client starts on January 1, 2010. During 2009, our mail choice claims processed increased 8.3% to 66.0 million claims. This increase was primarily due to favorable net new business and the significant adoption of the mail choice plan design.

• During 2010 and 2009, our average revenue per mail choice claim increased by 2.6% and 3.5%, compared to 2009 and 2008, respectively. This increase was primarily due to drug cost inflation and claims mix, partially offset by an increase in the percentage of generic prescription drugs dispensed and changes in client pricing.

• During 2010, our mail choice generic dispensing rate increased to 61.3%, compared to our mail choice generic dispensing rate of 56.5% in 2009. During 2009, our mail choice generic dispensing rate increased to 56.5% compared to our mail choice generic dispensing rate of 54.4% in 2008. This continued increase was primarily due to new generic prescription drug introductions and our continuous effort to encourage plan members to use generic prescription drugs when they are available.

• During 2010, our pharmacy network claims processed decreased 12.1% to 520.6 million compared to 592.5 million pharmacy network claims processed in 2009. The decrease in 2010 was primarily due to the termination of a few large client contracts effective January 1, 2010 and the decrease of covered lives under our Medicare Part D program as a result of the 2010 Medicare Part D competitive bidding process. During 2009, our pharmacy network claims processed increased 3.5% or 20.0 million from 572.5 million in 2008. The increase in 2009 was primarily due to an increase in RxAmerica claims of 61.0 million compared with 2008. The RxAmerica increase was partially offset by the reduction in claims due to the termination of two large health plan clients effective January 1, 2009 and having three fewer days in 2009 compared to 2008.

• During 2010, our average revenue per pharmacy network claim processed increased by 2.7%, compared to 2009. The increase was primarily due to the conversion of RxAmerica’s pharmacy network contracts from net to gross on April 1, 2009, (ii) a change in the revenue recognition method from net to gross for a large health plan on March 1, 2009 and (iii) higher drug costs, partially offset by an increase in our pharmacy network generic dispensing rate and changes in client pricing.

• During 2009, our average revenue per pharmacy network claim processed increased by 15.4%, compared to 2008. The increase was primarily due to (i) the inclusion of RxAmerica results, whose retail pharmacy network contracts were accounted for using the net revenue recognition method prior to April 1, 2009, as discussed above; (ii) higher drug costs, which normally result in higher claim revenues, and (iii) claims mix; partially offset by client pricing, and changes in the percentage of generic drugs dispensed.

• During 2010, our pharmacy network generic dispensing rate increased to 72.7% compared to our pharmacy network generic dispensing rate of 69.3% in 2009. During 2009, our pharmacy network generic dispensing rate increased to 69.3%, compared to our pharmacy network generic dispensing rate of 66.2% in 2008. These continued increases were primarily due to the impact of new generic drug introductions and our continuous

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efforts to encourage plan members to use generic drugs when they are available. Additionally, the increase in 2009 as compared to 2008 was partially attributable to the full-year impact of RxAmerica claims which increased our generic dispensing rate by approximately 120 basis points in 2009 compared to 2008. We believe our generic dispensing rates will continue to increase in future periods. This increase will be affected by, among other things, the number of new generic drug introductions and our success at encouraging plan members to utilize generic drugs when they are available.

• During 2010, 2009 and 2008, we generated net revenues from our participation in the administration of the Medicare Part D drug benefit by providing PBM services to our health plan clients and other clients that have qualified as a Medicare Part D Prescription Drug Plan (a “PDP”) under regulations promulgated by the Centers for Medicare and Medicaid Services (“CMS”). We are also a national provider of drug benefits to eligible beneficiaries under the Medicare Part D program through our subsidiaries, SilverScript and Accendo (which have been approved by CMS as PDPs), and in 2008, through a joint venture with Universal American Corp. (“UAC”), which sponsored a CMS approved PDP. The Company and UAC dissolved this joint venture at the end of 2008 and divided the responsibility for providing Medicare Part D services to the affected plan members beginning with the 2009 plan year. In December 2010, the Company announced it had entered into an agreement to acquire the Medicare Part D business of UAC for approximately $1.25 billion. The transaction is subject to customary closing conditions, including necessary regulatory approvals, as well as approval by UAC shareholders. The Company currently expects that the transaction will close by the end of the second quarter of 2011. In addition, we assist employer, union and other health plan clients that qualify for the retiree drug subsidy under Medicare Part D by collecting eligibility data from and submitting drug cost data to CMS in order for them to obtain the subsidy.

Gross profit in our Pharmacy Services Segment includes net revenues less cost of revenues. Cost of revenues includes (i) the cost of pharmaceuticals dispensed, either directly through our mail service and specialty retail pharmacies or indirectly through our pharmacy network, (ii) shipping and handling costs and (iii) the operating costs of our mail service pharmacies, customer service operations and related information technology support. Gross profit as a percentage of revenues was 7.0%, 7.5% and 8.1% in 2010, 2009 and 2008, respectively.

During 2010, gross profit decreased $482 million, or 12.6%, to $3.4 billion for the year ended December 31, 2010, as compared to the prior year. Gross profit as a percentage of net revenues was 7.0% for the year ended December 31, 2010, compared to 7.5% for the prior year period. The decrease in our gross profit dollars is a result of the loss of “differential” or “spread” resulting from a change in CMS regulations described more fully below, the termination of a few large client contracts effective January 1, 2010 and the decrease of covered lives under our Medicare Part D program, partially offset by new client starts on January 1, 2010. The decrease in gross profit as a percentage of net revenues is primarily due to the loss of “differential” or “spread”, pricing compression related to a large client renewal that took effect during the third quarter of 2010, and the change in the revenue recognition method from net to gross associated with the RxAmerica pharmacy network contracts on April 1, 2009 and a large health plan on March 1, 2009. This was partially offset by an increase in our generic dispensing rate for the year ended December 31, 2010, as compared to the prior year.

During 2009, gross profit increased $285 million, or 8.0%, to $3.8 billion for the year ended December 31, 2009, as compared to the prior year. Gross profit as a percentage of net revenues was 7.5% for the year ended December 31, 2009, compared to 8.1% for 2008. The increase in our gross profit dollars is a result of the full year impact of RxAmerica and new client starts on January 1, 2009, partially offset by the loss of two large health plan clients effective January 1, 2009, three fewer days in the 2009 fiscal year compared to 2008 and changes in client pricing. The decrease in gross profit as a percentage of net revenues is primarily due to the change in the revenue recognition method from net to gross associated with the RxAmerica pharmacy network contracts on April 1, 2009 and a large health plan on March 1, 2009 and pricing compression related to new clients and the retention of existing clients. This was partially offset by an increase in our generic dispensing rate for the year ended December 31, 2009, as compared to the prior year period.

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As you review our Pharmacy Services segment’s performance in this area, we believe you should consider the following important information:

• Our gross profit dollars and gross profit rates continued to be impacted by our efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the purchase discounts we received from manufacturers, wholesalers and retail pharmacies. In particular, competitive pressures in the PBM industry have caused us and other PBMs to share a larger portion of rebates and/or discounts received from pharmaceutical manufacturers. During the 2008 and 2009 selling seasons, the Company renewed a number of existing clients and obtained new clients at lower rates, which resulted in gross profit compression during 2009, and 2010. In addition, market dynamics and regulatory changes have affected our ability to offer plan sponsors pricing terms that include the use of retail network “differential” or “spread”, which has impacted our profitability. We expect these trends to continue.

• As discussed previously in this document, we review our network contracts on an individual basis to determine if the related revenues should be accounted for using the gross method or net method under the applicable accounting rules. Caremark’s network contracts are predominantly accounted for using the gross method, which results in higher revenues, higher cost of revenues and lower gross profit rates. The conversion of certain RxAmerica contracts to the Caremark contract structure increased our net revenues, increased our cost of revenues and lowered our gross profit rates. Although this change did not affect our gross profit dollars, it did reduce our gross profit rates by approximately 40 basis points in each of 2010 and 2009, and 35 basis points in 2008.

• Our gross profit as a percentage of revenues benefited from the increase in our total generic dispensing rate, which increased to 71.5% and 68.2% in 2010 and 2009, respectively, compared to our generic dispensing rate of 65.1% in 2008. These increases were primarily due to new generic drug introductions and our continued efforts to encourage plan members to use generic drugs when they are available. The inclusion of RxAmerica claims increased our total generic dispensing rate by approximately 120 and 20 basis points during 2009 and 2008, respectively.

• Effective January 1, 2010, CMS issued a regulation requiring that any difference between the drug price charged to Medicare Part D plan sponsors by a PBM and the price paid for the drug by the PBM to the dispensing provider (commonly called “differential” or “spread”) be reported as an administrative cost rather than a drug cost of the plan sponsor for purposes of calculating certain government subsidy payments and the drug price to be charged to enrollees. As noted above, these changes have impacted our ability to offer Medicare Part D plan sponsors pricing that includes the use of retail network “differential” or “spread.” This change impacted both our gross profit dollars and gross profit as a percentage of net revenues in 2010.

• In conjunction with a class action settlement with two entities that publish the Average Wholesale Price (“AWP”) of pharmaceuticals (a pricing benchmark widely used in the pharmacy industry), the AWP for many brand-name and some generic prescription drugs were reduced effective September 26, 2009. We reached understandings with most of our commercial third-party payors where we participate as pharmacy providers to adjust reimbursements to account for this change in methodology, but most state Medicaid programs that utilize AWP as a pricing reference did not take action to make similar adjustments.

• Three fewer days in the 2009 fiscal year negatively impacted gross profit by $23 million, compared to 2008.

Operating expenses in our Pharmacy Services Segment, which include selling, general and administrative expenses, depreciation and amortization related to selling, general and administrative activities and retail specialty pharmacy store and administrative payroll, employee benefits and occupancy costs, increased to 2.0% of net revenues in 2010, compared to 1.9% and 1.8% in 2009 and 2008, respectively.

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As you review our Pharmacy Services segment’s performance in this area, we believe you should consider the following important information:

• During 2010, the decrease in operating expenses of $5 million or approximately 1.0%, to $964 million compared to 2009, is primarily related to lower bad debt expense, and lower operating costs associated with our Medicare Part D program, partially offset by an increase in costs associated with changes designed to streamline our business.

• During 2009, the increase in operating expenses of $174 million, or 21.8%, to $969 million compared to 2008, is primarily related to (i) increased litigation reserves, (ii) the dissolution of our joint venture with UAC at the end of fiscal 2008, the income from which was historically an offset to operating expenses, and (iii) the inclusion of a full year of RxAmerica’s operating expenses during 2009.

Retail Pharmacy Segment

The following table summarizes our Retail Pharmacy segment’s performance for the respective periods:

	Fiscal Year Ended
In millions	2010			2009			2008(1)
Net revenues	$	57,345		$	55,355		$	48,990
Gross profit		17,039			16,593			14,741
Gross profit % of net revenues		29.7	%		30.0	%		30.1	%
Operating expenses		12,502			12,434			10,988
Operating expenses % of net revenues		21.8	%		22.5	%		22.4	%
Operating profit		4,537			4,159			3,753
Operating profit % of net revenues		7.9	%		7.5	%		7.7	%
Net revenue increase:
Total		3.6	%		13.0	%		8.7	%
Pharmacy		4.1	%		13.1	%		8.1	%
Front Store		2.6	%		12.7	%		9.9	%
Same store sales increase:(2)
Total		2.1	%		5.0	%		4.5	%
Pharmacy		2.9	%		6.9	%		4.8	%
Front Store		0.5	%		1.2	%		3.6	%
Generic dispensing rates		73.0	%		69.9	%		67.4	%
Pharmacy % of net revenues		68.0	%		67.5	%		67.5	%
Third party % of pharmacy revenue		97.4	%		96.9	%		96.1	%
Retail prescriptions filled		636.3			616.5			559.0

(1) 2008 includes the results of Longs Drug Stores subsequent to the October 20, 2008 acquisition date.

(2) Same store sales increase includes the Longs Drug Stores beginning in November 2009.

Net revenues in our Retail Pharmacy Segment increased $2.0 billion, or 3.6% to $57.3 billion for the year ended December 31, 2010, as compared to the prior year. This increase was primarily driven by the same store sales increase of 2.1%, and net revenues from new stores, which accounted for approximately 140 basis points of our total net revenue percentage increase for the year ended December 31, 2010. Additionally, we continue to see a positive impact on our net revenues due to the growth of our Maintenance Choice program.

Net revenues increased $6.4 billion, or 13.0% to $55.4 billion for the year ended December 31, 2009, as compared to the prior year. The increase was primarily driven by the same store sales increase of 5.0%, the inclusion of the Longs Acquisition for a full year, as well as net revenue from new stores and a positive impact related to the growth of our Maintenance Choice program.

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As you review our Retail Pharmacy segment’s performance in this area, we believe you should consider the following important information:

• During 2009, net revenues from the Longs Drug Stores increased net revenues by $3.4 billion, compared to 2008. This increase is primarily due to a full year of net revenues associated with Longs Drug Stores versus a partial fourth quarter in 2008.

• Three fewer days in the 2009 fiscal year negatively impacted net revenues by $403 million, compared to 2008.

• As of December 31, 2010, we operated 7,182 retail stores, compared to 7,025 retail stores on December 31, 2009, and 6,923 retail stores on December 31, 2008. Total net revenues from new stores (excluding acquired stores) contributed approximately 1.4%, 1.6% and 1.5% to our total net revenue percentage increase in 2010, 2009 and 2008, respectively.

• Pharmacy revenue growth continued to benefit from the introduction of a prescription drug benefit under Medicare Part D, the ability to attract and retain managed care customers and favorable industry trends. These trends include an aging American population; many “baby boomers” are now in their fifties and sixties and are consuming a greater number of prescription drugs. In addition, the increased use of pharmaceuticals as the first line of defense for individual health care also contributed to the growing demand for pharmacy services. We believe these favorable industry trends will continue.

• Pharmacy revenue dollars continue to be negatively impacted in all years by the conversion of brand named drugs to equivalent generic drugs, which typically have a lower selling price. In addition, our pharmacy growth has also been affected by a decline in the number of significant new brand named drug introductions, higher consumer co-payments and co-insurance arrangements, and an increase in the number of over-the-counter remedies that were historically only available by prescription.

Gross profit in our Retail Pharmacy Segment includes net revenues less the cost of merchandise sold during the reporting period and the related purchasing costs, warehousing costs, delivery costs and actual and estimated inventory losses.

Gross profit increased $446 million, or 2.7%, to $17.0 billion for the year ended December 31, 2010, as compared to the prior year. Gross profit as a percentage of net revenues decreased to 29.7% for the year ended December 31, 2010, compared to 30.0% for the prior year. The decline in gross profit as a percentage of net revenues was driven by declines in the gross profit of our pharmacy sales, partially offset by increases in the gross profit of our front store sales.

Gross profit increased $1.9 billion, or 12.6%, to $16.6 billion for the year ended December 31, 2009, as compared to the prior year. Gross profit as a percentage of net revenues decreased to 30.0% for the year ended December 31, 2009, compared to 30.1% for the prior year.

As you review our Retail Pharmacy segment’s performance in this area, we believe you should consider the following important information:

• Three fewer days in the 2009 fiscal year negatively impacted gross profit by $123 million, compared to 2008.

• On average, our gross profit on front-store revenues is higher than our average gross profit on pharmacy revenues. During 2010, our front-store revenues were 32.0% of total revenues, compared to 32.5% in both 2009 and 2008. During 2010, our pharmacy revenues were 68.0% of total revenues, compared to 67.5% in both 2009 and 2008. This shift in sales mix had a negative effect on our overall gross profit for the year ended December 31, 2010.

• During 2010, our front-store gross profit rate was positively impacted by increases in private label and proprietary brand product sales, which normally yield a higher gross profit rate than other front-store products. During 2009, our front-store gross profit rate was negatively impacted by increased sales of promotional related items, which were partially offset by increases in private label and proprietary brand product sales.

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• During 2010, 2009 and 2008, our pharmacy gross profit rate continued to benefit from an increase in generic drug revenues, which normally yield a higher gross profit rate than equivalent brand name drug revenues.

• Our pharmacy gross profit rates have been adversely affected by the efforts of managed care organizations, pharmacy benefit managers and governmental and other third-party payors to reduce their prescription drug costs. In the event this trend continues, we may not be able to sustain our current rate of revenue growth and gross profit dollars could be adversely impacted.

• The increased use of generic drugs has augmented the efforts of third party payors to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which we expect to continue, reduces the benefit we realize from brand to generic product conversions.

• Sales to customers covered by third party insurance programs have continued to increase and, thus, have become a larger component of our total pharmacy business. On average, our gross profit on third party pharmacy revenues is lower than our gross profit on cash pharmacy revenues. Third party pharmacy revenues were 97.4% of pharmacy revenues in 2010, compared to 96.9% and 96.1% of pharmacy revenues in 2009 and 2008, respectively. We expect this trend to continue.

• The Federal Government’s Medicare Part D benefit is increasing prescription utilization. However, it is also decreasing our pharmacy gross profit rates as our higher gross profit business (e.g., cash customers) continued to migrate to Part D coverage during 2010 and 2009.

• The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, “PPACA”) made several significant changes to Medicaid rebates and reimbursement. One of these changes was to revise the definition of Average Manufacturer Price and the reimbursement formula for multi-source drugs. CMS has not yet issued regulations implementing these changes. Therefore, we cannot predict the effect these changes will have on Medicaid reimbursement or their impact on the Company.

• In conjunction with a class action settlement with two entities that publish the AWP of pharmaceuticals, the AWP for many brand-name and some generic prescription drugs were reduced effective September 26, 2009. We reached understandings with virtually all of our commercial third-party payors where we participate as pharmacy providers to adjust reimbursements to account for this change in methodology, but most state Medicaid programs that utilize AWP as a pricing reference did not take action to make similar adjustments. Accordingly, state Medicaid reimbursement was adversely impacted in 2010.

Operating expenses in our Retail Pharmacy Segment include store and administrative payroll, employee benefits, store and administrative occupancy costs, selling expenses, advertising expenses, administrative expenses and depreciation and amortization expense.

Operating expenses increased $68 million, or less than 1%, to $12.5 billion for the year ended December 31, 2010, as compared to the prior year. Operating expenses as a percentage of net revenues decreased to 21.8% for the year ended December 31, 2010, compared to 22.5% for the prior year. The increase in operating expenses in 2010 was the result of higher store operating costs associated with our increased store count, partially offset by the absence of costs incurred related to the integration of the Longs Acquisition.

Operating expenses increased $1.4 billion, or 13.2%, to $12.4 billion for the year ended December 31, 2009, as compared to the prior year. Operating expenses as a percentage of net revenues increased to 22.5% for the year ended December 31, 2009, compared to 22.4% for the prior year. The increase in operating expenses in 2009 was the result of higher store operating costs associated with our increased store count including the Longs Acquisition stores that we owned for a full year in 2009 versus a partial year in 2008, as well as integration costs associated with the Longs Acquisition, partially offset by a positive impact of approximately $92 million due to three fewer days in the 2009 fiscal year as compared to 2008.

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Corporate Segment

Operating expenses increased $87 million, or 16.3% and $78 million, or 16.9% during 2010 and 2009, respectively. Operating expenses within the Corporate segment include executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance related costs.

Operating expenses increased during 2010 and 2009 primarily due to higher professional fees, primarily for legal services associated with increased litigation activity, information technology services associated with enterprise initiatives, compensation and benefit costs, and depreciation.

Liquidity and Capital Resources

We maintain a level of liquidity sufficient to allow us to cover our cash needs in the short-term. Over the long-term, we manage our cash and capital structure to maximize shareholder return, strengthen our financial position and maintain flexibility for future strategic initiatives. We continuously assess our working capital needs, debt and leverage levels, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. We believe our operating cash flows, commercial paper program, sale-leaseback program, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives.

Net cash provided by operating activities increased to approximately $4.8 billion in 2010. This compares to approximately $4.0 billion and $3.9 billion in 2009 and 2008, respectively. The increase in net cash provided by operating activities during 2010 was primarily due to increases in cash receipts from customers, decreases in inventory purchases, partially offset by cash paid to other suppliers. 2009 includes a full year of net cash provided by operating activities from the Longs Acquisition compared to 2008. 2008 also includes net cash provided by operating activities from the Longs Acquisition from the acquisition date (October 20, 2008) forward.

Net cash used in investing activities increased to approximately $1.6 billion in 2010. This compares to approximately $1.1 billion and $4.6 billion in 2009 and 2008, respectively. The increase in net cash used in investing activities was primarily due to a reduction in the amount of proceeds received from sale-leaseback transactions, partially offset by less cash used for purchases of property and equipment. The decrease in net cash used in investing activities in 2009 was primarily due to a reduction in acquisition activities in 2009 and an increase in sale-leaseback transactions.

Gross capital expenditures totaled approximately $2.0 billion during 2010, compared to approximately $2.5 billion in 2009 and $2.2 billion 2008. The decrease in gross capital expenditures during 2010 was primarily due to the absence of spending which occurred in 2009 related to resets of stores acquired as part of the Longs Acquisition. During 2010, approximately 52.0% of our total capital expenditures were for new store construction, 14.5% were for store expansion and improvements and 33.5% were for technology and other corporate initiatives.

Proceeds from sale-leaseback transactions totaled $507 million in 2010. This compares to $1.6 billion in 2009 and $204 million in 2008. Under the sale-leaseback transactions, the properties are generally sold at net book value, which generally approximates fair value, and the resulting leases qualify and are accounted for as operating leases. The specific timing and amount of future sale-leaseback transactions will vary depending on future market conditions and other factors. The decrease in 2010 was primarily due to higher transaction volume in 2009 as a result of a deferral of transactions from 2008, due to market conditions. This deferral was the primary reason for the significant increase in 2009 as compared to 2008.

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Following is a summary of our store development activity for the respective years:

	2010(3)			2009(3)			2008(3)
Total stores (beginning of year)		7,074			6,981			6,301
New and acquired stores(1)		179			175			719
Closed stores		(27	)		(82	)		(39	)
Total stores (end of year)		7,226			7,074			6,981
Relocated stores(2)		106			110			129

(1) 2008 includes 529 Longs Drug Stores that were acquired as part of the Longs Acquisition.

(2) Relocated stores are not included in new or closed store totals.

(3) Excludes specialty mail order facilities.

Net cash used in financing activities was approximately $2.8 billion in 2010, compared to net cash used in financing activities of $3.2 billion in 2009 and net cash provided by financing activities of $929 million in 2008. Net cash used in financing activities during 2010, was primarily due to the repayment of long term debt, of approximately $2.1 billion, $1.5 billion of share repurchases associated with the share repurchase programs described below, partially offset by the proceeds received of $991 million related to the issuance of long-term debt. Net cash used in financing activities during 2009 was primarily due to approximately $2.5 billion of share repurchases associated with the share repurchase programs described below, the net reduction of approximately $2.2 billion of our outstanding commercial paper borrowings, the repayment of $500 million of borrowings outstanding under our bridge credit facility used to finance the Longs Acquisition, and the payment of $439 million of dividends on our common stock. This was partially offset by the net increase in long-term debt of approximately $2.1 billion and proceeds from the exercise of stock options of $250 million. Net cash provided by financing activities during 2008 was primarily due to increased short-term and long-term borrowings used to fund the Longs Acquisition and to retire $353 million of debt assumed as part of the Longs Acquisition.

Share repurchase programs - On June 14, 2010, our Board of Directors authorized a new share repurchase program for up to $2.0 billion of our outstanding common stock (the “2010 Repurchase Program”). The share repurchase authorization, which was effective immediately and expires at the end of 2011, permits us to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The share repurchase program may be modified, extended or terminated by the Board of Directors at any time. The Company did not make any share repurchases under the 2010 Repurchase Program through December 31, 2010.

On November 4, 2009, our Board of Directors authorized a share repurchase program for up to $2.0 billion of our outstanding common stock (the “2009 Repurchase Program”). In 2009, we repurchased 16.1 million shares of common stock for approximately $500 million pursuant to the 2009 Repurchase Program. During 2010, we repurchased 42.4 million shares of common stock for approximately $1.5 billion, completing the 2009 Repurchase Program.

On May 7, 2008, our Board of Directors authorized, effective May 21, 2008, a share repurchase program for up to $2.0 billion of our outstanding common stock (the “2008 Repurchase Program”). From May 21, 2008 through December 31, 2008, we repurchased approximately 0.6 million shares of common stock for $23 million under the 2008 Repurchase Program. During the year ended December 31, 2009, we repurchased approximately 57.0 million shares of common stock for approximately $2.0 billion completing the 2008 Repurchase Program.

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 “2007 Repurchase Program”). The 2007 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

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approximately 67.5 million shares of common stock; an open market repurchase program, which concluded in November 2007 and resulted in approximately 5.3 million shares of common stock being repurchased for approximately $212 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 treasury stock 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 treasury stock as of March 29, 2008.

Recently announced business combination - In December 2010, the Company announced it had entered into an agreement to acquire the Medicare Part D business of UAC for approximately $1.25 billion. The transaction is subject to customary closing conditions, including necessary regulatory approvals, as well as approval by UAC shareholders. The Company currently expects that the transaction will close by the end of the second quarter of 2011. We believe our cash flows from operations, commercial paper program and other available credit will be sufficient to fund this acquisition.

Short-term borrowings - We had $300 million of commercial paper outstanding at a weighted average interest rate of 0.40% as of December 31, 2010. In connection with our commercial paper program, we maintain a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011, a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012, and a $1.0 billion three-year unsecured back-up credit facility, which expires on May 27, 2013. The credit facilities allow for borrowings at various rates that are dependent, in part, on our public debt rating. There were no borrowings outstanding under the back-up credit facilities. We intend to renew our back-up credit facility which expires in May 2011.

Long-term borrowings - On May 13, 2010, we issued $550 million of 3.25% unsecured senior notes due May 18, 2015 and issued $450 million of 4.75% unsecured senior notes due May 18, 2020 (collectively, the “2010 Notes”) for total proceeds of $991 million, which was net of discounts and underwriting fees. The 2010 Notes pay interest semiannually and may be redeemed, in whole at any time, or in part from time to time, at the Company’s option at a defined redemption price plus accrued and unpaid interest to the redemption date. The net proceeds of the 2010 Notes were used to repay a portion of the Company’s outstanding commercial paper borrowings, certain other corporate debt and for general corporate purposes.

On September 8, 2009, we issued $1.5 billion of 6.125% unsecured senior notes due September 15, 2039 (the “September 2009 Notes”). The September 2009 Notes pay interest semi-annually and may be redeemed, in whole or in part, at a defined redemption price plus accrued interest. The net proceeds were used to repay a portion of our outstanding commercial paper borrowings, $650 million of unsecured senior notes and for general corporate purposes.

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

On July 1, 2009, we issued a $300 million unsecured floating rate senior note due January 30, 2011 (the “2009 Floating Rate Note”). The 2009 Floating Rate Note pays interest quarterly. The net proceeds from the 2009 Floating Rate Note were used for general corporate purposes.

On September 10, 2008, we issued $350 million of floating rate senior notes due September 10, 2010 (the “2008 Notes”). The 2008 Notes pay interest quarterly 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 2008 Notes were used to fund a portion of the Longs Acquisition.

Our backup credit facility, unsecured senior notes and Enhanced Capital Advantaged Preferred Securities (see Note 5 to the Consolidated Financial Statements) contain customary restrictive financial and operating covenants.

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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 December 31, 2010 and 2009 we had no freestanding derivatives in place.

Debt Ratings - As of December 31, 2010, our long-term debt was rated “Baa2” by Moody’s with a stable outlook and “BBB+” by Standard & Poor’s with a negative outlook, and our commercial paper program was rated “P-2” by Moody’s and “A-2” 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, our historical acquisition activity 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.

Quarterly Dividend Increase - In January 2010, our Board of Directors authorized a 15% increase in our quarterly common stock dividend to $0.0875 per share. This increase equates to an annual dividend rate of $0.35 per share. On January 11, 2011, our Board of Directors authorized a 43% increase in our quarterly common stock dividend to $0.125 per share. This increase equate to an annual dividend rate of $0.50 per share.

Off-Balance Sheet Arrangements

In connection with executing operating leases, we provide a guarantee of the lease payments. We also finance a portion of our new store development through sale-leaseback transactions, which involve selling stores to unrelated parties and then leasing the stores back under leases that qualify and are accounted for as operating leases. We do not have any retained or contingent interests in the stores, and we do not provide any guarantees, other than a guarantee of the lease payments, in connection with the transactions. In accordance with generally accepted accounting principles, our operating leases are not reflected on our consolidated balance sheets.

Between 1991 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores, Linens‘n Things, Marshalls, Kay-Bee Toys, This End Up and Footstar. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the store’s lease obligations. When the subsidiaries were disposed of, the Company’s guarantees remained in place, although each initial purchaser has indemnified the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the former subsidiaries were to become insolvent and failed to make the required payments under a store lease, the Company could be required to satisfy these obligations.

As of December 31, 2010, the Company guaranteed approximately 70 such store leases (excluding the lease guarantees related to Linens ‘n Things), with the maximum remaining lease term extending through 2019. Management believes the ultimate disposition of any of the remaining lease guarantees will not have a material adverse effect on the Company’s consolidated financial condition or future cash flows. Please see “Loss from Discontinued Operations” previously in this document for further information regarding our guarantee of certain Linens ‘n Things’ store lease obligations.

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Following is a summary of our significant contractual obligations as of December 31, 2010:

	Payments Due by Period
In millions	Total		2011		2012 to 2013		2014 to 2015		Thereafter
Operating leases	$	26,803	$	2,013	$	4,088	$	3,512	$	17,190
Leases from discontinued operations		151		29		46		37		39
Long-term debt		9,605		1,103		3		1,100		7,399
Interest payments on long-term debt(1)		7,280		532		1,008		959		4,781
Other long-term liabilities reflected in our consolidated balance sheet		505		118		83		74		230
Capital lease obligations		340		19		38		39		244
	$	44,684	$	3,814	$	5,266	$	5,721	$	29,883

(1) Interest payments on long-term debt are calculated on outstanding balances and interest rates in effect on December 31, 2010.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with generally accepted accounting principles, which require management to make certain estimates and apply judgment. We base our estimates and judgments on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, we review our accounting policies and how they are applied and disclosed in our consolidated financial statements. While we believe the historical experience, current trends and other factors considered, support the preparation of our consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from our estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 1 to our consolidated financial statements. We believe the following accounting policies include a higher degree of judgment and/or complexity and, thus, are considered to be critical accounting policies. The critical accounting policies discussed later in this document are applicable to each of our business segments. We have discussed the development and selection of our critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to them.

Revenue Recognition

Pharmacy Services Segment

Our Pharmacy Services segment sells prescription drugs directly through our mail service pharmacies and indirectly through our retail pharmacy network. We recognize revenues in our Pharmacy Services segment from prescription drugs sold by our mail service pharmacies and under retail pharmacy network contracts where we are the principal using the gross method at the contract prices negotiated with our clients. Net revenue from our Pharmacy Services segment includes: (i) the portion of the price the client pays directly to us, net of any volume-related or other discounts paid back to the client, (ii) the price paid to us (“Mail Co-Payments”) or a third party pharmacy in our retail pharmacy network (“Retail Co-Payments”) by individuals included in our clients’ benefit plans, and (iii) administrative fees for retail pharmacy network contracts where we are not the principal.

We recognize revenue in the Pharmacy Services segment when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We recognize revenues generated from prescription drugs sold by mail service pharmacies when the prescription is shipped. At the time of shipment, we have performed substantially all of our obligations under the client contract and do not experience a significant level of reshipments. We recognize revenues generated from prescription drugs sold by third party pharmacies in our

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retail pharmacy network and associated administrative fees are recognized at the point-of-sale, which is when we adjudicate the claim in our online claims processing system.

We determine whether we are the principal or agent for our retail pharmacy network transactions on a contract by contract basis. In the majority of our contracts, we have determined we are the principal due to us: (i) being the primary obligor in the arrangement, (ii) having latitude in establishing the price, changing the product or performing part of the service, (iii) having discretion in supplier selection, (iv) having involvement in the determination of product or service specifications, and (v) having credit risk. Our obligations under our client contracts for which revenues are reported using the gross method are separate and distinct from our obligations to the third party pharmacies included in our retail pharmacy network contracts. Pursuant to these contracts, we are contractually required to pay the third party pharmacies in our retail pharmacy network for products sold, regardless of whether we are paid by our clients. Our responsibilities under these client contracts typically include validating eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible adverse drug interactions for the pharmacist to address with the physician prior to dispensing, suggesting clinically appropriate generic alternatives where appropriate and approving the prescription for dispensing. Although we do not have credit risk with respect to Retail Co-Payments, we believe that all of the other indicators of gross revenue reporting are present. For contracts under which we act as an agent, we record revenues using the net method.

We deduct from our revenues the manufacturers’ rebates that are earned by our clients based on their members’ utilization of brand-name formulary drugs. We estimate these rebates at period-end based on actual and estimated claims data and our estimates of the manufacturers’ rebates earned by our clients. We base our estimates on the best available data at period-end and recent history for the various factors that can affect the amount of rebates due to the client. We adjust our rebates payable to clients to the actual amounts paid when these rebates are paid or as significant events occur. We record any cumulative effect of these adjustments against revenues as identified, and adjust our estimates prospectively to consider recurring matters. Adjustments generally result from contract changes with our clients or manufacturers, differences between the estimated and actual product mix subject to rebates or whether the product was included in the applicable formulary. Historically, the effect of these adjustments has not been material to our results of operations. We also deduct from our revenues pricing guarantees and guarantees regarding the level of service we will provide to the client or member as well as other payments made to our clients.

We participate in the Federal Government’s Medicare Part D program as a Prescription Drug Plan (“PDP”). Our net revenues include insurance premiums earned by the PDP, which are determined based on the PDP’s annual bid and related contractual arrangements with the Centers for Medicare and Medicaid Services (“CMS”). The insurance premiums include a beneficiary premium, which is the responsibility of the PDP member, but is subsidized by CMS in the case of low-income members, and a direct premium paid by CMS. Premiums collected in advance are initially deferred as accrued expenses and are then recognized ratably as revenue over the period in which members are entitled to receive benefits.

In addition to these premiums, our net revenues include co-payments, deductibles and co-insurance (collectively, the “Member Co-Payments”) related to PDP members’ actual prescription claims. In certain cases, CMS subsidizes a portion of these Member Co-Payments and we are paid an estimated prospective Member Co-Payment subsidy, each month. The prospective Member Co-Payment subsidy amounts received from CMS are also included in our net revenues. We assume no risk for these amounts, which represented 2.6%, 3.5% and 1.3% of consolidated net revenues in 2010, 2009 and 2008, respectively. If the prospective Member Co-Payment subsidies received differ from the amounts based on actual prescription claims, the difference is recorded in either accounts receivable or accrued expenses. We account for CMS obligations and Member Co-Payments (including the amounts subsidized by CMS) using the gross method consistent with our revenue recognition policies for Mail Co-Payments and Retail Co-Payments. We have recorded estimates of various assets and liabilities arising from our participation in the Medicare Part D program based on information in our claims management and enrollment systems. Significant estimates arising from our participation in the Medicare Part D

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program include: (i) estimates of low-income cost subsidy and reinsurance amounts ultimately payable to or receivable from CMS based on a detailed claims reconciliation, (ii) an estimate of amounts payable to CMS under a risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been incurred but have not yet been reported. Actual amounts of Medicare Part D-related assets and liabilities could differ significantly from amounts recorded. Historically, the effect of these adjustments has not been material to our results of operations.

Retail Pharmacy Segment

Our Retail Pharmacy segment recognizes revenue from the sale of merchandise (other than prescription drugs) at the time the merchandise is purchased by the retail customer. We recognize revenue from the sale of prescription drugs at the time the prescription is filled, which is or approximates when the retail customer picks up the prescription. Customer returns are not material. Revenue from the performance of services in our health care clinics is recognized at the time the services are performed.

We have not made any material changes in the way we recognize revenue during the past three years.

Vendor Allowances and Purchase Discounts

Pharmacy Services Segment

Our Pharmacy Services segment receives purchase discounts on products purchased. Contractual arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services segment to receive purchase discounts from established list prices in one, or a combination of, the following forms: (i) a direct discount at the time of purchase, (ii) a discount for the prompt payment of invoices or (iii) when products are purchased indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy), a discount (or rebate) paid subsequent to dispensing. These rebates are recognized when prescriptions are dispensed and are generally calculated and billed to manufacturers within 30 days of the end of each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected has not been material to the results of operations. We account for the effect of any such differences as a change in accounting estimate in the period the reconciliation is completed. The Pharmacy Services segment also receives additional discounts under its wholesaler contract if it exceeds contractually defined annual purchase volumes. In addition, the Pharmacy Services segment receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of “Cost of revenues”.

Retail Pharmacy Segment

Vendor allowances received by the Retail Pharmacy segment reduce the carrying cost of inventory and are recognized in cost of revenues when the related inventory is sold, unless they are specifically identified as a reimbursement of incremental costs for promotional programs and/or other services provided. Amounts that are directly linked to advertising commitments are recognized as a reduction of advertising expense (included in operating expenses) when the related advertising commitment is satisfied. Any such allowances received in excess of the actual cost incurred also reduce the carrying cost of inventory. The total value of any upfront payments received from vendors that are linked to purchase commitments is initially deferred. The deferred amounts are then amortized to reduce cost of revenues over the life of the contract based upon purchase volume. The total value of any upfront payments received from vendors that are not linked to purchase commitments is also initially deferred. The deferred amounts are then amortized to reduce cost of revenues on a straight-line basis over the life of the related contract.

We have not made any material changes in the way we account for vendor allowances and purchase discounts during the past three years.

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Inventory

Our inventory is stated at the lower of cost or market on a first-in, first-out basis using the retail method of accounting to determine cost of sales and inventory in our CVS/pharmacy stores, weighted average cost to determine cost of sales and inventory in our mail service and specialty pharmacies and the cost method of accounting on a first-in, first-out basis to determine inventory in our distribution centers. Under the retail method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to the ending retail value of our inventory. Since the retail value of our inventory is adjusted on a regular basis to reflect current market conditions, our carrying value should approximate the lower of cost or market. In addition, we reduce the value of our ending inventory for estimated inventory losses that have occurred during the interim period between physical inventory counts. Physical inventory counts are taken on a regular basis in each store and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated. The accounting for inventory contains uncertainty since we must use judgment to estimate the inventory losses that have occurred during the interim period between physical inventory counts. When estimating these losses, we consider a number of factors, which include, but are not limited to, historical physical inventory results on a location-by-location basis and current physical inventory loss trends.

Our total reserve for estimated inventory losses covered by this critical accounting policy was $120 million as of December 31, 2010. Although we believe we have sufficient current and historical information available to us to record reasonable estimates for estimated inventory losses, it is possible that actual results could differ. In order to help you assess the aggregate risk, if any, associated with the uncertainties discussed above, a ten percent (10%) pre-tax change in our estimated inventory losses, which we believe is a reasonably likely change, would increase or decrease our total reserve for estimated inventory losses by about $12 million as of December 31, 2010.

We have not made any material changes in the accounting methodology used to establish our inventory loss reserves during the past three years. Although we believe that the estimates discussed above are reasonable and the related calculations conform to generally accepted accounting principles, actual results could differ from our estimates, and such differences could be material.

Goodwill and Intangible Assets

Identifiable intangible assets consist primarily of trademarks, client contracts and relationships, favorable leases and covenants not to compete. These intangible assets arise primarily from the allocation of the purchase price of businesses acquired to identifiable intangible assets based on their respective fair market values at the date of acquisition.

Amounts assigned to identifiable intangible assets, and their related useful lives, are derived from established valuation techniques and management estimates. Goodwill represents the excess of amounts paid for acquisitions over the fair value of the net identifiable assets acquired.

We evaluate the recoverability of certain long-lived assets, including intangible assets with finite lives, but excluding goodwill and intangible assets with indefinite lives, which are tested for impairment using separate tests, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We group and evaluate these long-lived assets for impairment at the lowest level at which individual cash flows can be identified. When evaluating these long-lived assets for potential impairment, we first compare the carrying amount of the asset group to the asset group’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group’s carrying value that exceeds the asset group’s

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estimated future cash flows (discounted and with interest charges). Our long-lived asset impairment loss calculation contains uncertainty since we must use judgment to estimate each asset group’s future sales, profitability and cash flows. When preparing these estimates, we consider historical results and current operating trends and our consolidated sales, profitability and cash flow results and forecasts.

These estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns.

Goodwill and indefinitely-lived intangible assets are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that the carrying value may not be recoverable.

Indefinitely-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized and the asset is written down to its estimated fair value.

Our indefinitely-lived intangible asset impairment loss calculation contains uncertainty since we must use judgment to estimate the fair value based on the assumption that in lieu of ownership of an intangible asset, the Company would be willing to pay a royalty in order to utilize the benefits of the asset. Value is estimated by discounting the hypothetical royalty payments to their present value over the estimated economic life of the asset. These estimates can be affected by a number of factors including, but not limited to, general economic conditions, availability of market information as well as the profitability of the Company.

Goodwill is tested for impairment on a reporting unit basis using a two-step process. The first step of the impairment test is to identify potential impairment by comparing the reporting unit’s fair value with its net book value (or carrying amount), including goodwill. The fair value of our reporting units is estimated using a combination of the discounted cash flow valuation model and comparable market transaction models. If the fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is not performed. If the carrying amount of the reporting unit’s carrying amount exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess.

The determination of the fair value of our reporting units requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates, terminal growth rates; and forecasts of revenue, operating profit, depreciation and amortization, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, we consider each reporting unit’s historical results and current operating trends and our consolidated revenues, profitability and cash flow results and forecasts. Our estimates can be affected by a number of factors including, but not limited to, general economic and regulatory conditions, our market capitalization, efforts of third party organizations to reduce their prescription drug costs and/or increase member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns.

The carrying value of goodwill and other intangible assets covered by this critical accounting policy was $25.7 billion and $9.8 billion as of December 31, 2010, respectively. We did not record any impairment losses related to goodwill or other intangible assets during 2010, 2009 or 2008. During the third quarter of 2010, we performed our required annual impairment tests of goodwill and indefinitely-lived trademarks. The results of the impairment tests concluded that there was no impairment of goodwill or trademarks. The goodwill impairment

41

test resulted in the fair value of our Retail Pharmacy reporting unit exceeding its carrying value by a substantial margin and the fair value of our Pharmacy Services reporting unit exceeding its carrying value by approximately 12%. The carrying value of goodwill as of December 31, 2010, in our Retail Pharmacy and Pharmacy Services reporting units was $6.8 billion and $18.9 billion, respectively.

Although we believe we have sufficient current and historical information available to us to test for impairment, it is possible that actual results could differ from the estimates used in our impairment tests.

We have not made any material changes in the methodologies utilized to test the carrying values of goodwill and intangible assets for impairment during the past three years.

Closed Store Lease Liability

We account for closed store lease termination costs when a leased store is closed. When a leased store is closed, we record a liability for the estimated present value of the remaining obligation under the noncancelable lease, which includes future real estate taxes, common area maintenance and other charges, if applicable. The liability is reduced by estimated future sublease income.

The initial calculation and subsequent evaluations of our closed store lease liability contain uncertainty since we must use judgment to estimate the timing and duration of future vacancy periods, the amount and timing of future lump sum settlement payments and the amount and timing of potential future sublease income. When estimating these potential termination costs and their related timing, we consider a number of factors, which include, but are not limited to, historical settlement experience, the owner of the property, the location and condition of the property, the terms of the underlying lease, the specific marketplace demand and general economic conditions.

Our total closed store lease liability covered by this critical accounting policy was $451 million as of December 31, 2010. This amount is net of $288 million of estimated sublease income that is subject to the uncertainties discussed above. Although we believe we have sufficient current and historical information available to us to record reasonable estimates for sublease income, it is possible that actual results could differ.

In order to help you assess the risk, if any, associated with the uncertainties discussed above, a ten percent (10%) pre-tax change in our estimated sublease income, which we believe is a reasonably likely change, would increase or decrease our total closed store lease liability by about $29 million as of December 31, 2010.

We have not made any material changes in the reserve methodology used to record closed store lease reserves during the past three years.

Self-Insurance Liabilities

We are self-insured for certain losses related to general liability, workers’ compensation and auto liability, although we maintain stop loss coverage with third party insurers to limit our total liability exposure. We are also self-insured for certain losses related to health and medical liabilities.

The estimate of our self-insurance liability contains uncertainty since we must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. When estimating our self-insurance liability, we consider a number of factors, which include, but are not limited to, historical claim experience, demographic factors, severity factors and other standard insurance industry actuarial assumptions. On a quarterly basis, we review to determine if our self-insurance liability is adequate as it relates to our general liability, workers’ compensation and auto liability. Similar reviews are conducted semi-annually to determine if our self-insurance liability is adequate for our health and medical liability.

Our total self-insurance liability covered by this critical accounting policy was $474 million as of December 31, 2010. Although we believe we have sufficient current and historical information available to us to record

42

reasonable estimates for our self-insurance liability, it is possible that actual results could differ. In order to help you assess the risk, if any, associated with the uncertainties discussed above, a ten percent (10%) pre-tax change in our estimate for our self-insurance liability, which we believe is a reasonably likely change, would increase or decrease our self-insurance liability by about $47 million as of December 31, 2010.

We have not made any material changes in the accounting methodology used to establish our self-insurance liability during the past three years.

Recently Adopted Accounting Pronouncements

Effective January 1, 2009, we adopted Accounting Standards Codification (“ASC”) 805 Business Combinations (“ASC 805”) (formerly Statement of Financial Accounting Standard (“SFAS”) No. 141 (R), “Business Combinations”). ASC 805 establishes the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The guidance also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of business combinations. ASC 805 requires that income tax benefits related to business combinations that are not recorded at the date of acquisition are recorded as an income tax benefit in the statement of operations when subsequently recognized. Previously, unrecognized income tax benefits related to business combinations were recorded as an adjustment to the purchase price allocation when recognized. We recognized approximately $34 million and $147 million of previously unrecognized income tax benefits related to business combinations (after considering the federal benefit of state taxes), plus interest, due to the expiration of various statutes of limitation and settlements with tax authorities in 2010 and 2009, respectively. The Company had approximately $10 million and $20 million, in 2010 and 2009, respectively, of unrecognized tax benefits (after considering the federal benefit of state taxes), plus interest, related to business combinations that would have been treated as an adjustment to the purchase price allocation if they would have been recognized under the previous business combination guidance.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that amends ASC 810 Consolidations (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). The amendment requires a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. The determination of whether a company is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and a company’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. Additional disclosures are required to identify a company’s involvement with the VIE and any significant changes in risk exposure due to such involvement. The amendment is effective for all new and existing VIEs as of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of this standard did not have a material impact on our consolidated results of operations, financial position or cash flows.

In January 2010, the FASB issued guidance which expanded the required disclosures about fair value measurements. In particular, this guidance requires (i) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers, (ii) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3 fair value measurements, (iii) expanded fair value measurement disclosures for each class of assets and liabilities and (iv) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. This guidance is effective for annual reporting periods beginning after December 15, 2009 except for (ii) above which is effective for fiscal years beginning after December 15, 2010. The adoption of this standard did not have a material impact on our consolidated results of operations, financial position or cash flows.

43

Recently Proposed Accounting Standard Update

In August 2010, the FASB issued a proposed accounting standard update on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed accounting standard update states that lessees and lessors should apply a “right-of-use model” in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. The lease term is defined as the longest possible term that is “more likely than not” to occur. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. Comments on this exposure draft were due December 15, 2010 and the final standard is expected to be issued sometime in 2011. While we believe that the proposed standard, as currently drafted, will likely have a material impact on our reported financial position and reported results of operations, it will not have a material impact on our liquidity; however, until the proposed standard is finalized, such evaluation cannot be completed.

Cautionary Statement Concerning Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of CVS Caremark Corporation. The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to stockholders. Generally, the inclusion of the words “believe,” “expect,” “intend,” “estimate,” “project,” “anticipate,” “will,” “should” and similar expressions identify statements that constitute forward-looking statements. All statements addressing operating performance of CVS Caremark Corporation or any subsidiary, events or developments that the Company expects or anticipates will occur in the future, including statements relating to revenue growth, earnings or earnings per common share growth, adjusted earnings or adjusted earnings per common share growth, free cash flow, debt ratings, inventory levels, inventory turn and loss rates, store development, relocations and new market entries, as well as statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the Reform Act.

The forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including, but not limited to:

• Our business is affected by the economy in general including changes in consumer purchasing power, preferences and/or spending patterns. These changes could affect drug utilizations trends, the number of covered lives and the financial health of our PBM clients. Further, interest rate fluctuations, changes in capital market conditions and regulatory changes may affect our ability to obtain necessary financing on acceptable terms, our ability to secure suitable store locations under acceptable terms and our ability to execute future sale-leaseback transactions under acceptable terms;

• Our ability to realize the anticipated long-term strategic benefits from our integrated pharmacy services model;

• Our ability to realize the planned benefits associated with the pending acquisition of UAC’s Medicare Part D business in accordance with the expected timing;

• The continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates, particularly with respect to generic pharmaceuticals;

44

• The possibility of client loss and/or the failure to win new client business;

• Risks related to the frequency and rate of the introduction of generic drugs and brand name prescription products;

• The effect on our Pharmacy Services business of a declining margin environment attributable to increased competition in the pharmacy benefit management industry and increased client demands for lower prices, enhanced service offerings and/or higher service levels;

• Risks related to our inability to earn and retain purchase discounts and/or rebates from pharmaceutical manufacturers and to earn and retain retail network “differential” or “spread”;

• Risks regarding the impact of the Medicare prescription drug benefit on our business;

• Risks related to the change in industry pricing benchmarks that could adversely affect our financial performance;

• Increased competition from other drugstore chains, supermarkets, discount retailers, membership clubs and Internet companies, as well as changes in consumer preferences or loyalties;

• Risks related to PPACA and other health care reform laws and the regulations promulgated under those laws;

• Litigation, legislative and regulatory risks associated with our business or the retail pharmacy business, retail clinic operations and/or pharmacy benefit management industry generally;

• The risks relating to changes in laws and regulations, including changes in accounting standards and taxation requirements (including tax rate changes, new tax laws and revised tax law interpretations);

• The risks relating to adverse developments in the health care or pharmaceutical industry generally, including, but not limited to, developments in any investigation related to the pharmaceutical industry that may be conducted by any governmental authority; and

• Other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

The foregoing list is not exhaustive. There can be no assurance that the Company has correctly identified and appropriately assessed all factors affecting its business. Additional risks and uncertainties not presently known to the Company or that it currently believes to be immaterial also may adversely impact the Company. Should any risks and uncertainties develop into actual events, these developments could have material adverse effects on the Company’s business, financial condition and results of operations. For these reasons, you are cautioned not to place undue reliance on the Company’s forward-looking statements.

45

Management’s Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting. Our Company’s internal control over financial reporting includes those policies and procedures that pertain to the Company’s ability to record, process, summarize and report a system of internal accounting controls and procedures to provide reasonable assurance, at an appropriate cost/benefit relationship, that the unauthorized acquisition, use or disposition of assets are prevented or timely detected and that transactions are authorized, recorded and reported properly to permit the preparation of financial statements in accordance with generally accepted accounting principles (GAAP) and receipt and expenditures are duly authorized. In order to ensure the Company’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2010.

We conducted an assessment of the effectiveness of our internal controls over financial reporting based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation, evaluation of the design effectiveness and testing of the operating effectiveness of controls. Our system of internal control over financial reporting is enhanced by periodic reviews by our internal auditors, written policies and procedures and a written Code of Conduct adopted by our Company’s Board of Directors, applicable to all employees of our Company. In addition, we have an internal Disclosure Committee, comprised of management from each functional area within the Company, which performs a separate review of our disclosure controls and procedures. There are inherent limitations in the effectiveness of any system of internal controls over financial reporting.

Based on our assessment, we conclude our Company’s internal control over financial reporting is effective and provides reasonable assurance that assets are safeguarded and that the financial records are reliable for preparing financial statements as of December 31, 2010.

Ernst & Young LLP, independent registered public accounting firm, is appointed by the Board of Directors and ratified by our Company’s shareholders. They were engaged to render an opinion regarding the fair presentation of our consolidated financial statements as well as conducting an audit of internal control over financial reporting. Their accompanying report is based upon an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).

February 18, 2011

46

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

CVS Caremark Corporation

We have audited CVS Caremark Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CVS Caremark Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on CVS Caremark Corporation’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, CVS Caremark Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CVS Caremark Corporation as of December 31, 2010 and 2009 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2010 of CVS Caremark Corporation and our report dated February 18, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 18, 2011

47

Consolidated Statements of Income

	Year Ended December 31,
In millions, except per share amounts	2010			2009			2008
Net revenues	$	96,413		$	98,729		$	87,472
Cost of revenues		76,156			78,349			69,182
Gross profit		20,257			20,380			18,290
Operating expenses		14,092			13,942			12,244
Operating profit		6,165			6,438			6,046
Interest expense, net		536			525			509
Income before income tax provision		5,629			5,913			5,537
Income tax provision		2,190			2,205			2,193
Income from continuing operations		3,439			3,708			3,344
Loss from discontinued operations, net of income tax benefit		(15	)		(12	)		(132	)
Net income		3,424			3,696			3,212
Net loss attributable to noncontrolling interest		3			—			—
Preference dividends, net of income tax benefit		—			—			(14	)
Net income attributable to CVS Caremark	$	3,427		$	3,696		$	3,198
Basic earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.52		$	2.59		$	2.32
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)
Net income attributable to CVS Caremark	$	2.51		$	2.58		$	2.23
Weighted average common shares outstanding		1,367			1,434			1,434
Diluted earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.50		$	2.56		$	2.27
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)
Net income attributable to CVS Caremark	$	2.49		$	2.55		$	2.18
Weighted average common shares outstanding		1,377			1,450			1,469
Dividends declared per common share	$	0.350		$	0.305		$	0.258

See accompanying notes to consolidated financial statements.

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Consolidated Balance Sheets

In millions, except per share amounts	December 31,
	2010			2009
Assets:
Cash and cash equivalents	$	1,427		$	1,086
Short-term investments		4			5
Accounts receivable, net		4,925			5,457
Inventories		10,695			10,343
Deferred income taxes		511			506
Other current assets		144			140
Total current assets		17,706			17,537
Property and equipment, net		8,322			7,923
Goodwill		25,669			25,680
Intangible assets, net		9,784			10,127
Other assets		688			374
Total assets	$	62,169		$	61,641
Liabilities:
Accounts payable	$	4,026		$	3,560
Claims and discounts payable		2,569			3,075
Accrued expenses		3,070			3,246
Short-term debt		300			315
Current portion of long-term debt		1,105			2,104
Total current liabilities		11,070			12,300
Long-term debt		8,652			8,756
Deferred income taxes		3,655			3,678
Other long-term liabilities		1,058			1,102
Commitments and contingencies (Note 12)
Redeemable noncontrolling interest		34			37
Shareholders’ equity:
Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding		—			—
Common stock, par value $0.01: 3,200 shares authorized; 1,624 shares issued and 1,363 shares outstanding at December 31, 2010 and 1,612 shares issued and 1,391 shares outstanding at December 31, 2009		16			16
Treasury stock, at cost: 259 shares at December 31, 2010 and 219 shares at December 31, 2009		(9,030	)		(7,610	)
Shares held in trust: 2 shares at December 31, 2010 and 2009		(56	)		(56	)
Capital surplus		27,610			27,198
Retained earnings		19,303			16,355
Accumulated other comprehensive loss		(143	)		(135	)
Total shareholders’ equity		37,700			35,768
Total liabilities and shareholders’ equity	$	62,169		$	61,641

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

	Year Ended December 31,
In millions	2010			2009			2008
Cash flows from operating activities:
Cash receipts from revenues	$	94,503		$	93,568		$	82,250
Cash paid for inventory and prescriptions dispensed by retail network pharmacies		(73,143	)		(73,536	)		(64,131	)
Cash paid to other suppliers and employees		(13,778	)		(13,121	)		(11,832	)
Interest and dividends received		4			5			20
Interest paid		(583	)		(542	)		(574	)
Income taxes paid		(2,224	)		(2,339	)		(1,786	)
Net cash provided by operating activities		4,779			4,035			3,947
Cash flows from investing activities:
Additions to property and equipment		(2,005	)		(2,548	)		(2,180	)
Proceeds from sale-leaseback transactions		507			1,562			204
Acquisitions (net of cash acquired) and other investments		(177	)		(101	)		(2,651	)
Purchase of short-term investments		—			(5	)		—
Proceeds from sale or maturity of short-term investments		1			—			28
Proceeds from sale or disposal of assets		34			23			19
Net cash used in investing activities		(1,640	)		(1,069	)		(4,580	)
Cash flows from financing activities:
Increase (decrease) in short-term debt		(15	)		(2,729	)		959
Repayment of debt assumed in acquisition		—			—			(353	)
Issuance of long-term debt		991			2,800			350
Repayments of long-term debt		(2,103	)		(653	)		(2	)
Dividends paid		(479	)		(439	)		(383	)
Derivative settlements		(5	)		(3	)		—
Proceeds from exercise of stock options		285			250			328
Excess tax benefits from stock-based compensation		28			19			53
Repurchase of common stock		(1,500	)		(2,477	)		(23	)
Net cash provided by (used in) financing activities		(2,798	)		(3,232	)		929
Net increase (decrease) in cash and cash equivalents		341			(266	)		296
Cash and cash equivalents at beginning of year		1,086			1,352			1,056
Cash and cash equivalents at end of year	$	1,427		$	1,086		$	1,352
Reconciliation of net income to net cash provided by operating activities:
Net income	$	3,424		$	3,696		$	3,212
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,469			1,389			1,274
Stock-based compensation		150			165			92
Deferred income taxes and other noncash items		30			48			(3	)
Change in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net		532			(86	)		(291	)
Inventories		(352	)		(1,199	)		(488	)
Other current assets		(4	)		48			12
Other assets		(210	)		(2	)		19
Accounts payable		(40	)		4			(64	)
Accrued expenses		(176	)		(66	)		183
Other long-term liabilities		(44	)		38			1
Net cash provided by operating activities	$	4,779		$	4,035		$	3,947

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Shareholders’ Equity

	Shares									Dollars
	Year Ended December 31,									Year Ended December 31,
In millions	2010			2009			2008			2010			2009			2008
Preference stock:
Beginning of year		—			4			4		$	—		$	191		$	202
Conversion to common stock		—			(4	)		—			—			(191	)		(11	)
End of year		—			—			4		$	—		$	—		$	191
Common stock:
Beginning of year		1,612			1,603			1,590		$	16		$	16		$	16
Stock options exercised and stock awards		12			9			13			—			—			—
End of year		1,624			1,612			1,603		$	16		$	16		$	16
Treasury stock:
Beginning of year		(219	)		(165	)		(154	)	$	(7,610	)	$	(5,812	)	$	(5,620	)
Purchase of treasury shares		(42	)		(73	)		(7	)		(1,500	)		(2,477	)		(33	)
Conversion of preference stock		—			17			1			—			583			35
Transfer from shares held in trust		—			—			(7	)		—			—			(272	)
Employee stock purchase plan issuances		2			2			2			80			96			78
End of year		(259	)		(219	)		(165	)	$	(9,030	)	$	(7,610	)	$	(5,812	)
Guaranteed ESOP obligation:
Beginning of year										$	—		$	—		$	(44	)
Reduction of guaranteed ESOP obligation											—			—			44
End of year										$	—		$	—		$	—
Shares held in trust:
Beginning of year		(2	)		(2	)		(9	)	$	(56	)	$	(56	)	$	(301	)
Transfer to treasury stock		—			—			7			—			—			245
End of year		(2	)		(2	)		(2	)	$	(56	)	$	(56	)	$	(56	)
Capital surplus:
Beginning of year										$	27,198		$	27,280		$	26,832
Conversion of shares held in trust to treasury stock											—			—			27
Stock option activity and stock awards											384			291			392
Tax benefit on stock options and stock awards											28			19			53
Conversion of preference stock											—			(392	)		(24	)
End of year										$	27,610		$	27,198		$	27,280

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Shareholders’ Equity

	Shares			Dollars
	Year Ended December 31,			Year Ended December 31,
In millions	2010	2009	2008	2010			2009			2008
Retained earnings:
Beginning of year				$	16,355		$	13,098		$	10,287
Net income (excludes net loss attributable to noncontrolling interest of $3 in 2010)					3,427			3,696			3,212
Common stock dividends					(479	)		(439	)		(370	)
Preference stock dividends					—			—			(14	)
Tax benefit on preference stock dividends					—			—			1
Adoption of ASC 715-60 (formerly EITF 06-04 and 06-10)					—			—			(18	)
End of year				$	19,303		$	16,355		$	13,098
Accumulated other comprehensive loss:
Beginning of year				$	(135	)	$	(143	)	$	(50	)
Net cash flow hedges, net of income tax					(1	)		1			3
Pension liability adjustment, net of income tax					(7	)		7			(96	)
End of year				$	(143	)	$	(135	)	$	(143	)
Total shareholders’ equity				$	37,700		$	35,768		$	34,574
Comprehensive income:
Net income				$	3,424		$	3,696		$	3,212
Net cash flow hedges, net of income tax					(1	)		1			3
Pension liability adjustment, net of income tax					(7	)		7			(96	)
Comprehensive income					3,416			3,704			3,119
Comprehensive loss attributable to noncontrolling interest					3			—			—
Comprehensive income attributable to CVS Caremark				$	3,419		$	3,704		$	3,119

See accompanying notes to consolidated financial statements.

52

Notes to Consolidated Financial Statements

1 Significant Accounting Policies

Description of business - CVS Caremark Corporation and its subsidiaries (the “Company”) comprise the largest pharmacy health care provider (based on revenues and prescriptions filled) in the United States.

Pharmacy Services Segment (the “PSS”) - The PSS provides a full range of pharmacy benefit management services including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. The Company’s clients are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the United States.

As a pharmacy benefits manager, the PSS manages the dispensing of pharmaceuticals through the Company’s mail order pharmacies and national network of approximately 65,000 retail pharmacies to eligible members in the benefits plans maintained by the Company’s clients and utilizes its information systems to perform, among other things, safety checks, drug interaction screenings and brand to generic substitutions.

The PSS’s specialty pharmacies support individuals that require complex and expensive drug therapies. The specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS Caremark^® and CarePlus CVS/pharmacy^TM names.

The PSS also provides health management programs, which include integrated disease management for 28 conditions, through Alere, L.L.C. and the Company’s Accordant^® health management offering.

In addition, through the Company’s SilverScript Insurance Company (“SilverScript”) and Accendo Insurance Company (“Accendo”) subsidiaries, the PSS is a national provider of drug benefits to eligible beneficiaries under the Federal Government’s Medicare Part D program. The PSS acquired Accendo in the Longs Acquisition (defined later in Note 2), and, effective January 1, 2009, Accendo replaced RxAmerica^® as the Medicare-approved prescription drug plan for the RxAmerica Medicare Part D drug benefit plans.

The pharmacy services business generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription drugs are dispensed by the mail order pharmacies, specialty pharmacies and national network of retail pharmacies. Net revenues are also generated by providing additional services to clients, including administrative services such as claims processing and formulary management, as well as health care related services such as disease management.

The pharmacy services business operates under the CVS Caremark Pharmacy Services^®, Caremark^®, CVS Caremark^TM , CarePlus CVS/pharmacy, CarePlus^TM , RxAmerica^®, Accordant^® and TheraCom^® names. As of December 31, 2010, the Pharmacy Services segment operated 44 retail specialty pharmacy stores, 18 specialty mail order pharmacies and four mail service pharmacies located in 25 states, Puerto Rico and the District of Columbia.

Retail Pharmacy Segment (the “RPS”) - The RPS sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods, through the Company’s CVS/pharmacy^® and Longs Drugs^® retail stores and online through CVS.com^®.

The RPS also provides health care services through its MinuteClinic^® health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations.

As of December 31, 2010, the retail pharmacy business included 7,182 retail drugstores (of which 7,123 operated a pharmacy) located in 41 states the District of Columbia and Puerto Rico operating primarily under the

53

Notes to Consolidated Financial Statements (continued)

CVS/ pharmacy name, the online retail website, CVS.com and 560 retail health care clinics operating under the MinuteClinic name (of which 550 were located in CVS/pharmacy stores).

Corporate Segment - The Corporate segment provides management and administrative services to support the Company. The Corporate segment consists of certain aspects of the Company’s executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments.

Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated.

Reclassifications - Certain reclassifications have been made to the 2009 and 2008 consolidated financial statements to conform to the current year presentation.

Fiscal Year Change - On December 23, 2008, the Board of Directors of the Company approved a change in the Company’s fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect the Company’s position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008.

Following is a summary of the impact of the fiscal year change:

Fiscal Year	Fiscal Year-End	Fiscal Period	Fiscal Period Includes
2010	December 31, 2010	January 1, 2010 - December 31, 2010		365 days
2009	December 31, 2009	January 1, 2009 - December 31, 2009		365 days
2008	December 31, 2008	December 30, 2007 - December 31, 2008		368 days

Unless otherwise noted, all references to years relate to the above fiscal years.

Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value Hierarchy - The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

• Level 1 - Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

• Level 2 - Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

• Level 3 - Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

Cash and cash equivalents - Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased. The Company invests in short-term money market funds,

54

Notes to Consolidated Financial Statements (continued)

commercial paper, time deposits, as well as other debt securities that are classified as cash and cash equivalents within the accompanying consolidated balance sheets, as these funds are highly liquid and readily convertible to known amounts of cash. These investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

Short-term investments - The Company’s short-term investments consist of certificate of deposits with initial maturities of greater than three months when purchased. These investments, which were classified as available-for-sale within Level 1 of the fair value hierarchy, were carried at historical cost, which approximated fair value at December 31, 2010 and 2009.

Fair value of financial instruments - As of December 31, 2010, the Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term debt. Due to the short-term nature of these instruments, the Company’s carrying value approximates fair value. The carrying amount and estimated fair value of long-term debt was $9.8 billion and $10.5 billion, respectively, as of December 31, 2010. The fair value of long-term debt was estimated based on rates currently offered to the Company for debt with similar terms and maturities. The Company had outstanding letters of credit, which guaranteed foreign trade purchases, with a fair value of $6 million and $9 million as of December 31, 2010 and 2009, respectively. There were no outstanding investments in derivative financial instruments as of December 31, 2010 and 2009.

Accounts receivable - Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes trade amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), clients and members, as well as vendors and manufacturers.

The activity in the allowance for doubtful trade accounts receivable is as follows:

	Fiscal Year Ended December 31,
In millions	2010			2009			2008
Opening balance	$	224		$	189		$	108
Additions charged to bad debt expense		73			135			121
Write-offs charged to allowance		(115	)		(100	)		(40	)
Ending balance	$	182		$	224		$	189

Inventories - Inventories are stated at the lower of cost or market on a first-in, first-out basis using the retail method of accounting to determine cost of sales and inventory in the Company’s CVS/pharmacy stores, weighted average cost to determine cost of sales and inventory in the Company’s mail service and specialty pharmacies and the cost method of accounting on a first-in, first-out basis to determine inventory in the Company’s distribution centers. Physical inventory counts are taken on a regular basis in each store and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated. During the interim period between physical inventory counts, the Company accrues for anticipated physical inventory losses on a location-by-location basis based on historical results and current trends.

Property and equipment - Property, equipment and improvements to leased premises are depreciated using the straight-line method over the estimated useful lives of the assets, or when applicable, the term of the lease, whichever is shorter. Estimated useful lives generally range from 10 to 40 years for buildings, building improvements and leasehold improvements and 3 to 10 years for fixtures, equipment and internally developed

55

Notes to Consolidated Financial Statements (continued)

software. Repair and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Application development stage costs for significant internally developed software projects are capitalized and depreciated.

The following are the components of property and equipment at December 31:

In millions	2010			2009
Land	$	1,247		$	1,076
Building and improvements		2,265			2,020
Fixtures and equipment		7,148			6,322
Leasehold improvements		2,866			2,673
Software		757			853
		14,283			12,944
Accumulated depreciation and amortization		(5,961	)		(5,021	)
	$	8,322		$	7,923

The gross amount of property and equipment under capital leases was $191 million as of December 31, 2010 and 2009, respectively.

Goodwill - Goodwill and other indefinite-lived assets are not amortized, but are subject to impairment reviews annually, or more frequently if necessary. See Note 3 for additional information on goodwill.

Intangible assets - Purchased customer contracts and relationships are amortized on a straight-line basis over their estimated useful lives between 10 and 20 years. Purchased customer lists are amortized on a straight-line basis over their estimated useful lives of up to 10 years. Purchased leases are amortized on a straight-line basis over the remaining life of the lease. See Note 3 for additional information about intangible assets.

Impairment of long-lived assets - The Company groups and evaluates fixed and finite-lived intangible assets, excluding goodwill, for impairment at the lowest level at which individual cash flows can be identified. When evaluating assets for potential impairment, the Company first compares the carrying amount of the asset group to the estimated future cash flows associated with the asset group (undiscounted and without interest charges). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows (discounted and with interest charges).

Redeemable noncontrolling interest - The Company has an approximately 60% ownership interest in Generation Health, Inc. (“Generation Health”) and consolidates Generation Health in its consolidated financial statements. The noncontrolling shareholders of Generation Health hold put rights for the remaining interest in Generation Health that if exercised would require the Company to purchase the remaining interest in Generation Health in 2015 for a minimum of $27 million and a maximum of $159 million, depending on certain financial metrics of Generation Health in 2014. Since the noncontrolling shareholders of Generation Health have a redemption feature as a result of the put right, the Company has classified the redeemable noncontrolling interest in Generation Health in the mezzanine section of the consolidated balance sheet outside of shareholders’ equity. The Company initially recorded the redeemable noncontrolling interest at a fair value of $37 million on the date of acquisition. At the end of each reporting period, if the estimated accreted redemption value exceeds the carrying value of the noncontrolling interest, the difference is recorded as a reduction of retained earnings. Any such reductions in retained earnings would also reduce income attributable to CVS Caremark in the Company’s earnings per share calculations.

56

Notes to Consolidated Financial Statements (continued)

The following is a reconciliation of the changes in the redeemable noncontrolling interest:

In millions	2010			2009
Beginning balance	$	37		$	—
Acquisition of Generation Health		—			37
Net loss attributable to noncontrolling interest		(3	)		—
Ending balance	$	34		$	37

Revenue Recognition:

Pharmacy Services Segment - The PSS sells prescription drugs directly through its mail service pharmacies and indirectly through its retail pharmacy network. The PSS recognizes revenues from prescription drugs sold by its mail service pharmacies and under retail pharmacy network contracts where the PSS is the principal using the gross method at the contract prices negotiated with its clients. Net revenue from the PSS includes: (i) the portion of the price the client pays directly to the PSS, net of any volume-related or other discounts paid back to the client (see “Drug Discounts” later in this document), (ii) the price paid to the PSS (“Mail Co-Payments”) or a third party pharmacy in the PSS’ retail pharmacy network (“Retail Co-Payments”) by individuals included in its clients’ benefit plans and (iii) administrative fees for retail pharmacy network contracts where the PSS is not the principal as discussed below.

The PSS recognizes revenue when: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable and (iv) collectability is reasonably assured. The Company has established the following revenue recognition policies for the PSS:

• Revenues generated from prescription drugs sold by mail service pharmacies are recognized when the prescription is shipped. At the time of shipment, the Company has performed substantially all of its obligations under its client contracts and does not experience a significant level of reshipments.

• Revenues generated from prescription drugs sold by third party pharmacies in the PSS’ retail pharmacy network and associated administrative fees are recognized at the PSS’ point-of-sale, which is when the claim is adjudicated by the PSS’ online claims processing system.

The PSS determines whether it is the principal or agent for its retail pharmacy network transactions on a contract by contract basis. In the majority of its contracts, the PSS has determined it is the principal due to it: (i) being the primary obligor in the arrangement, (ii) having latitude in establishing the price, changing the product or performing part of the service, (iii) having discretion in supplier selection, (iv) having involvement in the determination of product or service specifications and (v) having credit risk. The PSS’ obligations under its client contracts for which revenues are reported using the gross method are separate and distinct from its obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these contracts, the PSS is contractually required to pay the third party pharmacies in its retail pharmacy network for products sold, regardless of whether the PSS is paid by its clients. The PSS’ responsibilities under its client contracts typically include validating eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible adverse drug interactions for the pharmacist to address with the physician prior to dispensing, suggesting clinically appropriate generic alternatives where appropriate and approving the prescription for dispensing. Although the PSS does not have credit risk with respect to Retail Co-Payments, management believes that all of the other indicators of gross revenue reporting are present. For contracts under which the PSS acts as an agent, the PSS records revenues using the net method.

57

Notes to Consolidated Financial Statements (continued)

Drug Discounts - The PSS deducts from its revenues any rebates, inclusive of discounts and fees, earned by its clients. The PSS pays rebates to its clients in accordance with the terms of its client contracts, which are normally based on fixed rebates per prescription for specific products dispensed or a percentage of manufacturer discounts received for specific products dispensed. The liability for rebates due to the PSS’ clients is included in “Claims and discounts payable” in the accompanying consolidated balance sheets.

Medicare Part D - The PSS participates in the Federal Government’s Medicare Part D program as a Prescription Drug Plan (“PDP”). The PSS’ net revenues include insurance premiums earned by the PDP, which are determined based on the PDP’s annual bid and related contractual arrangements with the Centers for Medicare and Medicaid Services (“CMS”). The insurance premiums include a beneficiary premium, which is the responsibility of the PDP member, but is subsidized by CMS in the case of low-income members, and a direct premium paid by CMS. Premiums collected in advance are initially deferred in accrued expenses and are then recognized in net revenues over the period in which members are entitled to receive benefits.

In addition to these premiums, the PSS’ net revenues include co-payments, deductibles and co-insurance (collectively, the “Member Co-Payments”) related to PDP members’ actual prescription claims. In certain cases, CMS subsidizes a portion of these Member Co-Payments and pays the PSS an estimated prospective Member Co-Payment subsidy amount each month. The prospective Member Co-Payment subsidy amounts received from CMS are also included in the PSS’ net revenues. The Company assumes no risk for these amounts, which represented 2.6%, 3.5% and 1.3% of consolidated net revenues in 2010, 2009 and 2008, respectively. If the prospective Member Co-Payment subsidies received differ from the amounts based on actual prescription claims, the difference is recorded in either accounts receivable or accrued expenses.

The PSS accounts for CMS obligations and Member Co-Payments (including the amounts subsidized by CMS) using the gross method consistent with its revenue recognition policies for Mail Co-Payments and Retail Co-Payments (discussed previously in this document). See Note 7 for additional information about Medicare Part D.

Retail Pharmacy Segment - The RPS recognizes revenue from the sale of merchandise (other than prescription drugs) at the time the merchandise is purchased by the retail customer. Revenue from the sale of prescription drugs is recognized at the time the prescription is filled, which is or approximates when the retail customer picks up the prescription. Customer returns are not material. Revenue generated from the performance of services in the RPS’ health care clinics is recognized at the time the services are performed. See Note 13 for additional information about the revenues of the Company’s business segments.

Cost of revenues:

Pharmacy Services Segment - The PSS’ cost of revenues includes: (i) the cost of prescription drugs sold during the reporting period directly through its mail service pharmacies and indirectly through its retail pharmacy network, (ii) shipping and handling costs and (iii) the operating costs of its mail service pharmacies and client service operations and related information technology support costs including depreciation and amortization. The cost of prescription drugs sold component of cost of revenues includes: (i) the cost of the prescription drugs purchased from manufacturers or distributors and shipped to members in clients’ benefit plans from the PSS’ mail service pharmacies, net of any volume-related or other discounts (see “Drug Discounts” previously in this document) and (ii) the cost of prescription drugs sold (including Retail Co-Payments) through the PSS’ retail pharmacy network under contracts where it is the principal, net of any volume-related or other discounts.

Retail Pharmacy Segment - The RPS’ cost of revenues includes: the cost of merchandise sold during the reporting period and the related purchasing costs, warehousing and delivery costs (including depreciation and amortization) and actual and estimated inventory losses. See Note 13 for additional information about the cost of revenues of the Company’s business segments.

58

Notes to Consolidated Financial Statements (continued)

Vendor allowances and purchase discounts:

The Company accounts for vendor allowances and purchase discounts as follows:

Pharmacy Services Segment - The PSS receives purchase discounts on products purchased. The PSS’ contractual arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the PSS to receive purchase discounts from established list prices in one, or a combination of, the following forms: (i) a direct discount at the time of purchase, (ii) a discount for the prompt payment of invoices or (iii) when products are purchased indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy), a discount (or rebate) paid subsequent to dispensing. These rebates are recognized when prescriptions are dispensed and are generally calculated and billed to manufacturers within 30 days of the end of each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected has not been material to the PSS’ results of operations. The PSS accounts for the effect of any such differences as a change in accounting estimate in the period the reconciliation is completed. The PSS also receives additional discounts under its wholesaler contract if it exceeds contractually defined annual purchase volumes. In addition, the PSS receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of “Cost of revenues”.

Retail Pharmacy Segment - Vendor allowances received by the RPS reduce the carrying cost of inventory and are recognized in cost of revenues when the related inventory is sold, unless they are specifically identified as a reimbursement of incremental costs for promotional programs and/or other services provided. Amounts that are directly linked to advertising commitments are recognized as a reduction of advertising expense (included in operating expenses) when the related advertising commitment is satisfied. Any such allowances received in excess of the actual cost incurred also reduce the carrying cost of inventory. The total value of any upfront payments received from vendors that are linked to purchase commitments is initially deferred. The deferred amounts are then amortized to reduce cost of revenues over the life of the contract based upon purchase volume. The total value of any upfront payments received from vendors that are not linked to purchase commitments is also initially deferred. The deferred amounts are then amortized to reduce cost of revenues on a straight-line basis over the life of the related contract. The total amortization of these upfront payments was not material to the accompanying consolidated financial statements.

Insurance - The Company is self-insured for certain losses related to general liability, workers’ compensation and auto liability. The Company obtains third party insurance coverage to limit exposure from these claims. The Company is also self-insured for certain losses related to health and medical liabilities. The Company’s self-insurance accruals, which include reported claims and claims incurred but not reported, are calculated using standard insurance industry actuarial assumptions and the Company’s historical claims experience.

Facility opening and closing costs - New facility opening costs, other than capital expenditures, are charged directly to expense when incurred. When the Company closes a facility, the present value of estimated unrecoverable costs, including the remaining lease obligation less estimated sublease income and the book value of abandoned property and equipment, are charged to expense. The long-term portion of the lease obligations associated with facility closings was $368 million and $424 million in 2010 and 2009, respectively.

Advertising costs - Advertising costs are expensed when the related advertising takes place. Advertising costs, net of vendor funding (included in operating expenses), were $234 million, $317 million and $324 million in 2010, 2009 and 2008, respectively.

Interest expense, net - Interest expense, net of capitalized interest, was $539 million, $530 million and $530 million, and interest income was $3 million, $5 million and $21 million in 2010, 2009 and 2008, respectively. Capitalized interest totaled $47 million, $39 million and $28 million in 2010, 2009 and 2008, respectively.

59

Notes to Consolidated Financial Statements (continued)

Shares held in trust - The Company maintains grantor trusts, which held approximately 2 million shares of its common stock at December 31, 2010 and 2009. These shares are designated for use under various employee compensation plans. Since the Company holds these shares, they are excluded from the computation of basic and diluted shares outstanding.

Accumulated other comprehensive loss - Accumulated other comprehensive loss consists of changes in the net actuarial gains and losses associated with pension and other postretirement benefit plans, and unrealized losses on derivatives. The amount included in accumulated other comprehensive loss related to the Company’s pension and postretirement plans was $217 million pre-tax ($132 million after-tax) as of December 31, 2010 and $203 million pre-tax ($125 million after-tax) as of December 31, 2009. The net impact on cash flow hedges totaled $18 million pre-tax ($11 million after-tax) and $15 million pre-tax ($10 million after-tax) as of December 31, 2010 and 2009, respectively.

Stock-based compensation - Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the stock award (generally 3 to 5 years) using the straight-line method. Stock-based compensation costs are included in selling, general and administrative expenses.

Income taxes - The Company provides for federal and state income taxes currently payable, as well as for those deferred because of timing differences between reported income and expenses for financial statement purposes versus tax purposes. Federal and state tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. The effect of a change in tax rates is recognized as income or expense in the period of the change.

Loss from discontinued operations - In connection with certain business dispositions completed between 1991 and 1997, the Company continues to guarantee store lease obligations for a number of former subsidiaries, including Linens ‘n Things. On May 2, 2008, Linens Holding Co. and certain affiliates, which operate Linens ‘n Things, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company’s loss from discontinued operations includes lease related costs of $15 million ($24 million, net of a $9 million income tax benefit), $12 million ($19 million, net of a $7 million income tax benefit) and $132 million ($214 million, net of an $82 million income tax benefit) for the years ended December 31, 2010, 2009 and 2008, respectively, associated with the Linens ‘n Things lease guarantee’s.

Earnings per common share - Basic earnings per common share is computed by dividing: (i) net earnings, after deducting the after-tax Employee Stock Ownership Plan (“ESOP”) preference dividends, by (ii) the weighted average number of common shares outstanding during the year (the “Basic Shares”).

When computing diluted earnings per common share for fiscal year 2008, the Company assumed that the ESOP preference stock was converted into common stock and all dilutive stock awards were exercised. After the assumed ESOP preference stock conversion, the ESOP Trust would hold common stock rather than ESOP preference stock and would receive common stock dividends ($0.25800 per share in 2008) rather than ESOP preference stock dividends ($3.90 per share). Since the ESOP Trust used the dividends it received to service its debt, the Company had to increase its contribution to the ESOP Trust to compensate it for the lower dividends. This additional contribution reduced the Company’s net earnings, which in turn, reduced the amounts that would be accrued under the Company’s incentive compensation plans.

60

Notes to Consolidated Financial Statements (continued)

Diluted earnings per common share is computed by dividing: (i) net income attributable to CVS Caremark, after accounting for the difference between the dividends on the ESOP preference stock and common stock and after making adjustments for the incentive compensation plans, by (ii) Basic Shares plus the additional shares that would be issued assuming that all dilutive stock awards are exercised and the ESOP preference stock is converted into common stock. Options to purchase 34.3 million, 37.7 million and 20.9 million shares of common stock were outstanding as of December 31, 2010, 2009 and 2008, respectively, but were not included in the calculation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. See Note 8 for additional information about the ESOP.

Recently Adopted Accounting Pronouncements

Effective January 1, 2009, the Company adopted Accounting Standards Codification (“ASC”) 805 Business Combinations (“ASC 805”) (formerly Statement of Financial Accounting Standard (“SFAS”) No. 141 (R), “Business Combinations”). ASC 805 establishes the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The guidance also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of business combinations. ASC 805 requires that income tax benefits related to business combinations that are not recorded at the date of acquisition are recorded as an income tax benefit in the statement of income when subsequently recognized. Previously, unrecognized income tax benefits related to business combinations were recorded as an adjustment to the purchase price allocation when recognized. The Company recognized approximately $34 million and $147 million of previously unrecognized income tax benefits related to business combinations (after considering the federal benefit of state taxes), plus interest, due to the expiration of various statutes of limitation and settlements with tax authorities in 2010 and 2009, respectively. As of December 31, 2010 and 2009, the Company had approximately $10 million and $20 million, respectively, of unrecognized tax benefits (after considering the federal benefit of state taxes), plus interest, related to business combinations that would have been treated as an adjustment to the purchase price allocation if they would have been recognized under the previous business combination guidance.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that amends ASC 810 Consolidations (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”). The amendment requires a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. The determination of whether a company is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and a company’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. Additional disclosures are required to identify a company’s involvement with the VIE and any significant changes in risk exposure due to such involvement. The amendment is effective for all new and existing VIEs as of the beginning of the first fiscal year that begins after November 15, 2009. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In January 2010, the FASB issued guidance which expanded the required disclosures about fair value measurements. In particular, this guidance requires (i) separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements along with the reasons for such transfers, (ii) information about purchases, sales, issuances and settlements to be presented separately in the reconciliation for Level 3 fair value measurements, (iii) expanded fair value measurement disclosures for each class of assets and liabilities and (iv) disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. This guidance is effective for annual reporting periods beginning after December 15, 2009 except for (ii) above which is effective for fiscal years beginning after December 15, 2010. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

61

Notes to Consolidated Financial Statements (continued)

Recently Proposed Accounting Standard Update

In August 2010, the FASB issued a proposed accounting standard update on lease accounting that would require entities to recognize assets and liabilities arising from lease contracts on the balance sheet. The proposed accounting standard update states that lessees and lessors should apply a “right-of-use model” in accounting for all leases. Under the proposed model, lessees would recognize an asset for the right to use the leased asset, and a liability for the obligation to make rental payments over the lease term. The lease term is defined as the longest possible term that is “more likely than not” to occur. The accounting by a lessor would reflect its retained exposure to the risks or benefits of the underlying leased asset. A lessor would recognize an asset representing its right to receive lease payments based on the expected term of the lease. Comments on this exposure draft were due December 15, 2010 and the final standard is expected to be issued sometime in 2011. While the Company believes that the proposed standard, as currently drafted, will likely have a material impact on its reported financial position and reported results of operations, it will not have a material impact on its liquidity; however, until the proposed standard is finalized, such evaluation cannot be completed.

2 Business Combinations

Effective October 20, 2008, the Company acquired Longs Drug Stores Corporation for approximately $2.6 billion (the “Longs Acquisition”). The fair value of the assets acquired and liabilities assumed were $4.4 billion and $1.8 billion, respectively. The Longs Acquisition included 529 retail drug stores, RxAmerica, LLC, which provides pharmacy benefit management services and Medicare Part D benefits and other related assets. The Company’s results of operations and cash flows include the Longs Acquisition beginning October 20, 2008.

Effective December 30, 2009, the Company acquired an approximately 60% interest in Generation Health, a genetic benefit management company for approximately $34 million in cash and issued certain put rights to the remaining noncontrolling shareholders. The put rights allow the noncontrolling shareholders to require the Company to buy their shares for cash in the future, depending on certain financial metrics of Generation Health. The fair value of the redeemable noncontrolling interest including put rights on the date of acquisition was approximately $37 million which was determined using inputs classified as Level 3 in the fair value hierarchy. The Company’s results of operations and cash flows include the Generation Health acquisition beginning December 30, 2009.

3 Goodwill and Other Intangibles

Goodwill and other indefinitely-lived assets are not amortized, but are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate impairment may exist.

When evaluating goodwill for potential impairment, the Company first compares the fair value of its two reporting units, the PSS and RPS, to their respective carrying amounts. The Company estimates the fair value of its reporting units using a combination of a future discounted cash flow valuation model and a comparable market transaction model. As the Company utilizes internal financial projections for the determination of future cash flows, the fair value methodology is considered to use inputs classified as Level 3 in the fair value hierarchy. If the estimated fair value of the reporting unit is less than its carrying amount, an impairment loss calculation is prepared. The impairment loss calculation compares the implied fair value of a reporting unit’s goodwill with the carrying amount of its goodwill. If the carrying amount of the goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to the excess. During the third quarter of 2010, the Company performed its required annual goodwill impairment tests. The Company concluded there were no goodwill impairments as of the testing date. The carrying amount of goodwill was $25.7 billion as of December 31, 2010 and 2009.

Indefinitely-lived intangible assets are tested for impairment by comparing the estimated fair value of the asset to its carrying value. The Company estimates the fair value of its indefinitely-lived trademark using the relief from

62

Notes to Consolidated Financial Statements (continued)

royalty method under the income approach. As this method of estimating fair value utilizes internal financial projections for determination of future cash flows, the fair value methodology is considered to use inputs classified as Level 3 in the fair value hierarchy. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized and the asset is written down to its estimated fair value. During the third quarter of 2010, the Company performed its annual impairment test of the indefinitely-lived trademark and concluded there was no impairment as of the testing date. The carrying amount of indefinitely-lived assets was $6.4 billion as of December 31, 2010 and 2009. Intangible assets with finite useful lives are amortized over their estimated useful lives.

The Company amortizes intangible assets with finite lives over the estimated useful lives of the respective assets, which have a weighted average useful life of 13.3 years. The weighted average useful lives of the Company’s customer contracts and relationships and covenants not to compete are 12.9 years. The weighted average of the Company’s favorable leases and other intangible assets are 16.3 years. Amortization expense for intangible assets totaled $427 million, $430 million and $405 million in 2010, 2009 and 2008, respectively. The anticipated annual amortization expense for these intangible assets is $419 million in 2011, $399 million in 2012, $376 million in 2013, $344 million in 2014 and $316 million in 2015.

The following table is a summary of the Company’s intangible assets as of December 31:

	2010							2009
In millions	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trademarks (indefinitely-lived)	$	6,398	$	—		$	6,398	$	6,398	$	—		$	6,398
Customer contracts and relationships and covenants not to compete		4,903		(1,982	)		2,921		4,828		(1,604	)		3,224
Favorable leases and other		762		(297	)		465		756		(251	)		505
	$	12,063	$	(2,279	)	$	9,784	$	11,982	$	(1,855	)	$	10,127

4 Share Repurchase Programs

On June 14, 2010, the Company’s Board of Directors authorized a new share repurchase program for up to $2.0 billion of outstanding common stock (the “2010 Repurchase Program”). The share repurchase authorization, which was effective immediately and expires at the end of 2011, permits the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The share repurchase program may be modified, extended or terminated by the Board of Directors at any time. The Company did not make any share repurchases under the 2010 Repurchase Program through December 31, 2010.

On November 4, 2009, the Company’s Board of Directors authorized, effective immediately, a share repurchase program for up to $2.0 billion of its outstanding common stock (the “2009 Repurchase Program”). From November 4, 2009 through December 31, 2009, the Company repurchased 16.1 million shares of common stock for approximately $500 million under the 2009 Repurchase Program. During the year ended December 31, 2010, the Company repurchased 42.4 million shares of common stock for approximately $1.5 billion completing the 2009 Repurchase Program.

On May 7, 2008, the Company’s Board of Directors authorized, effective May 21, 2008, a share repurchase program for up to $2.0 billion of its outstanding common stock (the “2008 Repurchase Program”). From May 21, 2008 through December 31, 2008, the Company repurchased approximately 0.6 million shares of common stock for $23 million under the 2008 Repurchase Program. During the year ended December 31, 2009, the Company repurchased approximately 57.0 million shares of common stock for approximately $2.0 billion completing the 2008 Repurchase Program.

63

Notes to Consolidated Financial Statements (continued)

On May 9, 2007, the Company’s Board of Directors authorized a share repurchase program for up to $5.0 billion of its 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 approximately 67.5 million shares of common stock; an open market repurchase program, which concluded in November 2007 and resulted in approximately 5.3 million shares of common stock being repurchased for approximately $212 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 treasury stock as of December 29, 2007. The final settlement under the November ASR agreement occurred on March 28, 2008 and resulted in the Company receiving an additional 5.7 million shares of common stock, which were placed into treasury stock as of March 29, 2008.

5 Borrowing and Credit Agreements

The following table is a summary of the Company’s borrowings as of December 31:

In millions	2010			2009
Commercial paper	$	300		$	315
Floating rate notes due 2010		—			350
Floating rate notes due 2010		—			1,750
5.75% senior notes due 2011		800			800
Floating rate note due 2011(1)		300			300
4.875% senior notes due 2014		550			550
3.250% senior notes due 2015		550			—
6.125% senior notes due 2016		700			700
5.75% senior notes due 2017		1,750			1,750
6.60% senior notes due 2019		1,000			1,000
4.75% senior notes due 2020		450			—
6.25% senior notes due 2027		1,000			1,000
6.125% note due 2039		1,500			1,500
6.302% Enhanced Capital Advantage Preferred Securities(2)		1,000			1,000
Mortgage notes payable		6			6
Capital lease obligations		151			154
		10,057			11,175
Less:
Short-term debt (commercial paper)		(300	)		(315	)
Current portion of long-term debt		(1,105	)		(2,104	)
	$	8,652		$	8,756

(1) As of December 31, 2010, the interest rate for the Company’s floating rate note due in 2011 was 1.663%.

(2) The Enhanced Capital Advantaged Preferred Securities (“ECAPS”) are due June 1, 2062, and bear interest at 6.302% per year until June 1, 2012 at which time they will pay interest based on a floating rate. The ECAPS pay interest semi-annually and may be redeemed at any time, in whole or in part at a defined redemption price plus accrued interest.

In connection with its commercial paper program, the Company maintains a $1.4 billion, five-year unsecured back-up credit facility, which expires on May 12, 2011, a $1.3 billion, five-year unsecured back-up credit facility, which expires on March 12, 2012, and a $1.0 billion, three-year unsecured back-up credit facility which expires on May 27, 2013. The credit facilities allow for borrowings at various rates depending on the Company’s public debt ratings and require the Company to pay a quarterly facility fee of 0.1%, regardless of usage. As of December 31, 2010, the Company had no outstanding borrowings against the back-up credit facilities. The weighted average interest rate for short-term debt was 0.40% as of December 31, 2010 and 0.31% as of December 31, 2009.

64

Notes to Consolidated Financial Statements (continued)

On May 13, 2010, the Company issued $550 million of 3.25% unsecured senior notes due May 18, 2015 and issued $450 million of 4.75% unsecured senior notes due May 18, 2020 (collectively, the “2010 Notes”) for total proceeds of $991 million, which was net of discounts and underwriting fees. The 2010 Notes pay interest semiannually and may be redeemed, in whole at any time, or in part from time to time, at the Company’s option at a defined redemption price plus accrued and unpaid interest to the redemption date. The net proceeds of the 2010 Notes were used to repay a portion of the Company’s outstanding commercial paper borrowings, certain other corporate debt and for general corporate purposes.

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

On July 1, 2009, the Company issued a $300 million unsecured floating rate senior note due January 30, 2011 (the “2009 Floating Rate Note”). The 2009 Floating Rate Note pays interest quarterly. The net proceeds from the 2009 Floating Rate Note were used for general corporate purposes.

On September 8, 2009, the Company issued $1.5 billion of 6.125% unsecured senior notes due September 15, 2039 (the “September 2009 Notes”). The September 2009 Notes pay interest semi-annually and may be redeemed, in whole or in part, at a defined redemption price plus accrued interest. The net proceeds were used to repay a portion of the Company’s outstanding commercial paper borrowings, $650 million of unsecured senior notes and for general corporate purposes.

On September 10, 2008, the Company issued $350 million of floating rate senior notes due September 10, 2010 (the “2008 Notes”). The 2008 Notes pay interest quarterly. The net proceeds from the 2008 Notes were used to fund a portion of the Longs Acquisition.

The credit facilities, back-up credit facilities, unsecured senior notes and ECAPS contain customary restrictive financial and operating covenants. The covenants do not materially affect the Company’s financial or operating flexibility.

The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2010 are $1.1 billion in 2011, $2 million in 2012, $1 million in 2013, $550 million in 2014, and $550 million in 2015.

6 Leases

The Company leases most of its retail and mail order locations, ten of its distribution centers and certain corporate offices under non-cancelable operating leases, with initial terms of 15 to 25 years and with options that permit renewals for additional periods. The Company also leases certain equipment and other assets under noncancelable operating leases, with initial terms of 3 to 10 years. Minimum rent is expensed on a straight-line basis over the term of the lease. In addition to minimum rental payments, certain leases require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed when incurred.

65

Notes to Consolidated Financial Statements (continued)

The following table is a summary of the Company’s net rental expense for operating leases for the respective years:

In millions	2010			2009			2008
Minimum rentals	$	2,001		$	1,857		$	1,691
Contingent rentals		53			61			58
		2,054			1,918			1,749
Less: sublease income		(19	)		(19	)		(25	)
	$	2,035		$	1,899		$	1,724

The following table is a summary of the future minimum lease payments under capital and operating leases as of December 31, 2010:

In millions	Capital Leases			Operating Leases(1)
2011	$	19		$	2,013
2012		19			2,096
2013		19			1,992
2014		19			1,788
2015		20			1,724
Thereafter		244			17,190
Total future lease payments		340		$	26,803
Less: imputed interest		(189	)
Present value of capital lease obligations	$	151

(1) Future operating lease payments have not been reduced by minimum sublease rentals of $266 million due in the future under noncancelable subleases.

The Company finances a portion of its store development program through sale-leaseback transactions. The properties are generally sold at net book value, which generally approximates fair value, and the resulting leases qualify and are accounted for as operating leases. The operating leases that resulted from these transactions are included in the above table. The Company does not have any retained or contingent interests in the stores and does not provide any guarantees, other than a guarantee of lease payments, in connection with the sale-leaseback transactions. Proceeds from sale-leaseback transactions totaled $507 million in 2010, $1.6 billion in 2009 and $204 million in 2008.

7 Medicare Part D

The Company offers Medicare Part D benefits through SilverScript and Accendo, which have contracted with CMS to be a PDP and, pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), must be risk-bearing entities regulated under state insurance laws or similar statutes.

SilverScript and Accendo are licensed domestic insurance companies under the applicable laws and regulations. Pursuant to these laws and regulations, SilverScript and Accendo must file quarterly and annual reports with the National Association of Insurance Commissioners (“NAIC”) and certain state regulators, must maintain certain minimum amounts of capital and surplus under a formula established by the NAIC and must, in certain circumstances, request and receive the approval of certain state regulators before making dividend payments or other capital distributions to the Company. The Company does not believe these limitations on dividends and distributions materially impact its financial position.

66

Notes to Consolidated Financial Statements (continued)

The Company has recorded estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims management and enrollment systems. Significant estimates arising from its participation in this program include: (i) estimates of low-income cost subsidy and reinsurance amounts ultimately payable to or receivable from CMS based on a detailed claims reconciliation that will occur in 2011; (ii) an estimate of amounts receivable from or payable to CMS under a risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been incurred but have not yet been reported.

8 Employee Stock Ownership Plan

The Company sponsored a defined contribution Employee Stock Ownership Plan (the “ESOP”) that covered full-time employees with at least one year of service.

In 1989, the ESOP Trust issued and sold $358 million of 20-year, 8.52% notes, which were due and retired on December 31, 2008 (the “ESOP Notes”). The proceeds from the ESOP Notes were used to purchase 7 million shares of Series One ESOP Convertible Preference Stock (the “ESOP Preference Stock”) from the Company. Since the ESOP Notes were guaranteed by the Company, the outstanding balance was reflected as long-term debt, and a corresponding guaranteed ESOP obligation was reflected in shareholders’ equity in the consolidated balance sheet.

Each share of ESOP Preference Stock had a guaranteed minimum liquidation value of $53.45, was convertible into 4.628 shares of common stock and was entitled to receive an annual dividend of $3.90 per share.

The ESOP Trust used the dividends received and contributions from the Company to repay the ESOP Notes. As the ESOP Notes were repaid, ESOP Preference Stock was allocated to plan participants based on (i) the ratio of each year’s debt service payment to total current and future debt service payments multiplied by (ii) the number of unallocated shares of ESOP Preference Stock in the plan.

As of December 31, 2010 and 2009, no shares of ESOP Preference Stock were outstanding and allocated to plan participants. On January 30, 2009, pursuant to the Company’s Amended and Restated Certificate of Incorporation (the “Charter”), the Company informed the trustee of the ESOP Trust of its intent to redeem for cash all of the outstanding shares of ESOP Preference Stock on February 24, 2009 (the “Redemption Date”). Under the Charter, at any time prior to the Redemption Date, the trustee had the right to convert the ESOP Preference Stock into shares of the Company’s Common Stock. The conversion rate at the time of the notice was 4.628 shares of Common Stock for each share of ESOP Preference Stock. The trustee exercised its right of conversion on February 23, 2009, and all outstanding shares of ESOP Preference Stock were converted into Common Stock.

Annual ESOP expense recognized is equal to (i) the interest incurred on the ESOP Notes plus (ii) the higher of (a) the principal repayments or (b) the cost of the shares allocated, less (iii) the dividends paid. Similarly, the guaranteed ESOP obligation is reduced by the higher of (i) the principal payments or (ii) the cost of shares allocated.

9 Pension Plans and Other Postretirement Benefits

Defined Contribution Plans

The Company sponsors voluntary 401(k) savings plans that cover substantially all employees who meet plan eligibility requirements. The Company makes matching contributions consistent with the provisions of the plans.

67

Notes to Consolidated Financial Statements (continued)

At the participant’s option, account balances, including the Company’s matching contribution, can be moved without restriction among various investment options, including the Company’s common stock. The Company also maintains a nonqualified, unfunded Deferred Compensation Plan for certain key employees. This plan provides participants the opportunity to defer portions of their eligible compensation and receive matching contributions equivalent to what they could have received under the CVS Caremark 401(k) and Employee Stock Ownership Plan absent certain restrictions and limitations under the Internal Revenue Code. The Company’s contributions under the above defined contribution plans totaled $186 million, $173 million and $117 million in 2010, 2009 and 2008, respectively.

Other Postretirement Benefits

The Company provides postretirement health care and life insurance benefits to certain retirees who meet eligibility requirements. The Company’s funding policy is generally to pay covered expenses as they are incurred. For retiree medical plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates. As of December 31, 2010 and 2009, the Company’s postretirement medical plans have an accumulated postretirement benefit obligation of $17 million. Net periodic benefit costs related to these postretirement medical plans were approximately $1 million for 2010, 2009 and 2008, respectively.

Pension Plans

The Company sponsors nine defined benefit pension plans that cover certain full-time employees. Three of the plans are tax-qualified plans that are funded based on actuarial calculations and applicable federal laws and regulations. The other six plans are unfunded nonqualified supplemental retirement plans. All of the plans were frozen in prior periods, except one of the nonqualified plans.

As of December 31, 2010, the Company’s pension plans had a projected benefit obligation of $659 million and plan assets of $426 million. As of December 31, 2009, the Company’s pension plans had a projected benefit obligation of $612 million and plan assets of $372 million. Net periodic pension costs related to these pension plans were $36 million, $16 million and $9 million in 2010, 2009 and 2008, respectively. The net periodic pension costs for 2010 includes settlements of $12 million.

The discount rate is determined by examining the current yields observed on the measurement date of fixed-interest, high quality investments expected to be available during the period to maturity of the related benefits on a plan by plan basis. The discount rate for the plans was 5.5% in 2010 and 6.0% in 2009. The expected long-term rate of return on plan assets is determined by using the plan’s target allocation and historical returns for each asset class on a plan by plan basis. The expected long-term rate of return for all plans was 7.25% in 2010 and 8.5% in 2009 and 2008.

Historically, the Company used an investment strategy, which emphasized equities in order to produce higher expected returns, and in the long run, lower expected expense and cash contribution requirements. The qualified pension plan asset allocation targets were 60% equity and 40% fixed income. As the result of a detailed asset liability study performed during 2009, the Company revised the pension plan target asset allocation to 50% equity and 50% fixed income with the transition to the new targets to begin during 2010.

As of December 31, 2010, the Company’s qualified defined benefit pension plan assets consisted of 57% equity, 42% fixed income, and 1% money market securities of which 71% were classified as Level 1 and 29% as Level 2 in the fair value hierarchy. The Company’s qualified defined benefit pension plan assets as of December 31, 2009 consisted of 64% equity, 35% fixed income, and 1% money market securities of which 67% were classified as Level 1 and 33% as Level 2 in the fair value hierarchy.

68

Notes to Consolidated Financial Statements (continued)

The Company contributed $65 million, $50 million and $8 million to the pension plans during 2010, 2009 and 2008, respectively. The Company plans to make approximately $90 million in contributions to the pension plans during 2011.

Pursuant to various labor agreements, the Company is also required to make contributions to certain union-administered pension and health and welfare plans that totaled $58 million, $57 million and $49 million in 2010, 2009 and 2008, respectively.

10 Stock Incentive Plans

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the applicable requisite service period of the stock award (generally three to five years) using the straight-line method. Stock-based compensation costs are included in selling, general and administrative expenses.

Compensation expense related to stock options, which includes the 1999 Employee Stock Purchase Plan (the “1999 ESPP”) and the 2007 Employee Stock Purchase Plan (the “2007 ESPP” and collectively, the “ESPP”) totaled $127 million, $136 million and $106 million for 2010, 2009 and 2008, respectively. The recognized tax benefit was $42 million, $45 million and $33 million for 2010, 2009 and 2008, respectively. Compensation expense related to restricted stock awards totaled $23 million, $29 million and $19 million for 2010, 2009 and 2008, respectively.

The 1999 ESPP provides for the purchase of up to 15 million shares of common stock. As a result of the 1999 ESPP not having sufficient shares available for the program to continue beyond 2007, the Board of Directors adopted, and shareholders approved, the 2007 ESPP. Under the 2007 ESPP, eligible employees may purchase common stock at the end of each six-month offering period, at a purchase price equal to 85% of the lower of the fair market value on the first day or the last day of the offering period and provides for the purchase of up to 15 million shares of common stock. During 2010, 3 million shares of common stock were purchased, under the provisions of the 2007 ESPP, at an average price of $25.97 per share. As of December 31, 2010, 15 million and 7 million shares of common stock have been issued under the 1999 ESPP and 2007 ESPP, respectively.

The fair value of stock-based compensation associated with the Company’s ESPP is estimated on the date of grant (i.e., the beginning of the offering period) using the Black-Scholes Option Pricing Model.

The following table is a summary of the assumptions used to value the ESPP awards for each of the respective periods:

	2010			2009			2008
Dividend yield (1)		0.57	%		0.50	%		0.32	%
Expected volatility(2)		32.58	%		48.89	%		25.22	%
Risk-free interest rate(3)		0.21	%		0.31	%		2.75	%
Expected life (in years)(4)		0.5			0.5			0.5
Weighted-average grant date fair value	$	7.31		$	8.51		$	8.73

(1) The dividend yield is calculated based on semi-annual dividends paid and the fair market value of the Company’s stock at the grant date.

(2) The expected volatility is based on the historical volatility of the Company’s daily stock market prices over the previous six month period.

(3) The risk-free interest rate is based on the Treasury constant maturity interest rate whose term is consistent with the expected term of ESPP options (i.e., 6 months).

(4) The expected life is based on the semi-annual purchase period.

69

Notes to Consolidated Financial Statements (continued)

In 2007, the Board of Directors adopted and shareholders approved the 2007 Incentive Plan. The terms of the 2007 Incentive Plan provide for grants of annual incentive and long-term performance awards to executive officers and other officers and employees of the Company or any subsidiary of the Company. The payment of such annual incentive and long-term performance awards will be in cash, stock, other awards or other property, in the discretion of the Management Planning and Development Committee of the Company’s Board of Directors, with any payment in stock to be pursuant to the Company’s 1997 Incentive Compensation Plan (the “1997 ICP”).

The Company’s 1997 ICP provided for the granting of up to 153 million shares of common stock in the form of stock options and other awards to selected officers, employees and directors of the Company. The 1997 ICP allowed for up to 7 million restricted shares to be issued. The Company’s restricted awards are considered non-vested share awards and require no payment from the employee. Compensation cost is recorded based on the market price on the grant date and is recognized on a straight-line basis over the requisite service period.

In May 2010, the Company’s Board of Directors adopted and the shareholders approved the 2010 Incentive Compensation Plan (the “2010 ICP”). The 2010 ICP allows for a maximum of 74 million shares to be reserved and available for grants, plus the number of shares subject to awards under the Company’s 1997 ICP which become available due to cancellation or forfeiture. Following approval and adoption of the 2010 ICP, no new grants can be made under the 1997 ICP. The 2010 ICP is the only compensation plan under which the Company grants stock options, restricted stock and other stock-based awards to its employees, with the exception of the Company’s 2007 ESPP. As of December 31, 2010, there were 72 million shares available for future grants under the 2010 ICP.

The Company granted 1,095,000, 1,284,000 and 1,274,000 restricted stock units with a weighted average fair value of $35.25, $27.77 and $40.70 in 2010, 2009 and 2008, respectively. As of December 31, 2010, there was $34 million of total unrecognized compensation costs related to the restricted stock units that are expected to vest. These costs are expected to be recognized over a weighted-average period of 1.80 years.

The following table is a summary of the restricted unit and restricted share award activity under the ICPs as of December 31:

	2010					2009
Units in thousands	Units			Weighted Average Grant Date Fair Value		Units			Weighted Average Grant Date Fair Value
Nonvested at beginning of year		3,347		$	32.90		4,052		$	31.88
Granted		1,095			35.25		1,284			27.77
Vested		(1,618	)		32.35		(1,807	)		26.49
Forfeited		(136	)		33.58		(182	)		37.55
Nonvested at end of year		2,688		$	34.16		3,347		$	32.90

All grants under the 2010 ICP are awarded at fair market value on the date of grant. The fair value of stock options is estimated using the Black-Scholes Option Pricing Model and stock-based compensation is recognized on a straight-line basis over the requisite service period. Options granted prior to 2004 generally become exercisable over a four-year period from the grant date and expire ten years after the date of grant. Options granted during and subsequent to fiscal 2004 generally become exercisable over a three-year period from the grant date and expire seven years after the date of grant.

Excess tax benefits of $28 million, $19 million and $53 million were included in financing activities in the accompanying consolidated statements of cash flow during 2010, 2009 and 2008, respectively. Cash received

70

Notes to Consolidated Financial Statements (continued)

from stock options exercised, which includes the ESPP, totaled $285 million, $250 million and $328 million during 2010, 2009 and 2008, respectively. The total intrinsic value of options exercised was $118 million, $104 million and $250 million in 2010, 2009 and 2008, respectively.

The fair value of each stock option is estimated using the Black-Scholes Option Pricing Model based on the following assumptions at the time of grant:

	2010			2009			2008
Dividend yield (1)		1.00	%		1.07	%		0.60	%
Expected volatility(2)		33.15	%		31.34	%		22.98	%
Risk-free interest rate(3)		1.85	%		1.65	%		2.28	%
Expected life (in years)(4)		4.3			4.3			4.3
Weighted-average grant date fair value	$	9.49		$	7.20		$	8.53

(1) The dividend yield is based on annual dividends paid and the fair market value of the Company’s stock at the grant date.

(2) The expected volatility is estimated using the Company’s historical volatility over a period equal to the expected life of each option grant after adjustments for infrequent events such as stock splits.

(3) The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options being valued.

(4) The expected life represents the number of years the options are expected to be outstanding from grant date based on historical option holder exercise experience.

As of December 31, 2010, unrecognized compensation expense related to unvested options totaled $156 million, which the Company expects to be recognized over a weighted-average period of 1.66 years. After considering anticipated forfeitures, the Company expects approximately 28 million of the unvested options to vest over the requisite service period.

The following table is a summary of the Company’s stock option activity for the year ended December 31, 2010:

Shares in thousands	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at December 31, 2009		66,269		$	29.14		4.39		345,068,000
Granted		14,168		$	35.16		—		—
Exercised		(10,463	)	$	21.71		—		—
Forfeited		(2,332	)	$	33.50		—		—
Expired		(1,625	)	$	31.83		—		—
Outstanding at December 31, 2010		66,017		$	31.39		4.16	$	313,163,000
Exercisable at December 31, 2010		36,789		$	29.64		3.03	$	235,843,000

71

Notes to Consolidated Financial Statements (continued)

11 Income Taxes

The income tax provision consisted of the following for the respective years:

In millions	2010			2009		2008
Current: Federal	$	1,894		$	1,766	$	1,680
State		345			397		365
		2,239			2,163		2,045
Deferred: Federal		(44	)		38		133
State		(5	)		4		15
		(49	)		42		148
Total	$	2,190		$	2,205	$	2,193

The following table is a reconciliation of the statutory income tax rate to the Company’s effective income tax rate for the respective years:

	2010			2009			2008
Statutory income tax rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal tax benefit		4.1			4.5			4.1
Other		0.6			0.6			0.5
Recognition of previously unrecognized tax benefits		(0.8	)		(2.8	)		—
Effective income tax rate		38.9	%		37.3	%		39.6	%

The following table is a summary of the significant components of the Company’s deferred tax assets and liabilities as of December 31:

In millions	2010			2009
Deferred tax assets:
Lease and rents	$	325		$	334
Inventory		69			55
Employee benefits		261			250
Allowance for bad debt		96			130
Retirement benefits		99			94
Net operating losses		6			8
Other		307			287
Total deferred tax assets		1,163			1,158
Deferred tax liabilities:
Depreciation and amortization		(4,307	)		(4,330	)
Net deferred tax liabilities	$	(3,144	)	$	(3,172	)

72

Notes to Consolidated Financial Statements (continued)

Net deferred tax assets (liabilities) are presented on the consolidated balance sheets as follows as of December 31:

In millions	2010			2009
Deferred tax assets—current	$	511		$	506
Deferred tax liabilities—noncurrent		(3,655	)		(3,678	)
Net deferred tax liabilities	$	(3,144	)	$	(3,172	)

The Company believes it is more likely than not the deferred tax assets will be realized during future periods.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

In millions	2010			2009
Beginning balance	$	61		$	257
Additions based on tax positions related to the current year		1			1
Additions based on tax positions related to prior years		2			12
Reductions for tax positions of prior years		(10	)		(6	)
Expiration of statutes of limitation		(16	)		(155	)
Settlements		(3	)		(48	)
Ending balance	$	35		$	61

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and local jurisdictions. Substantially all material income tax matters have been concluded for fiscal years through 2002. The Company and its subsidiaries anticipate that a number of income tax examinations will conclude and statutes of limitation for open years will expire over the next twelve months, which may cause a utilization or reduction of the Company’s reserve for uncertain tax positions of up to approximately $24 million.

During 2010, the Internal Revenue Service (the “IRS”) completed an examination of the Company’s 2009 consolidated U.S. income tax return pursuant to the Compliance Assurance Process (“CAP”) program. The CAP program is a voluntary program under which taxpayers seek to resolve all or most issues with the IRS prior to or soon after the filing of their U.S. income tax returns, in lieu of being audited in the traditional manner. Additionally, in 2010, the Company resolved a protest it had previously filed with the IRS Appeals Office regarding various assessments made in connection with the IRS examinations of Caremark’s consolidated U.S. income tax returns for 2006 and for its short tax year ended March 22, 2007.

The IRS is currently examining the Company’s 2010 consolidated U.S. income tax year pursuant to the CAP program. The Company and its subsidiaries are also currently under income tax examinations by a number of state and local tax authorities. As of December 31, 2010, no examination has resulted in any proposed adjustments that would result in a material change to the Company’s results of operations, financial condition or liquidity.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. During the year ended December 31, 2010, the Company recognized interest of approximately $3 million. The Company had approximately $11 million accrued for interest and penalties as of December 31, 2010.

There are no material reserves established at December 31, 2010 for income tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. If present,

73

Notes to Consolidated Financial Statements (continued)

such items would impact deferred tax accounting, not the annual effective income tax rate, and would accelerate the payment of cash to the taxing authority to an earlier period.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately $23 million, after considering the federal benefit of state income taxes.

12 Commitments and Contingencies

Between 1991 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores, Linens ‘n Things, Marshalls, Kay-Bee Toys, Wilsons, This End Up and Footstar. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the store’s lease obligations. When the subsidiaries were disposed of, the Company’s guarantees remained in place, although each initial purchaser has indemnified the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the former subsidiaries were to become insolvent and failed to make the required payments under a store lease, the Company could be required to satisfy these obligations.

As of December 31, 2010, the Company guaranteed approximately 70 such store leases (excluding the lease guarantees related to Linens ‘n Things, which are discussed in Note 1 previously in this document), with the maximum remaining lease term extending through 2019. Management believes the ultimate disposition of any of the remaining guarantees will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or future cash flows.

Caremark (the term “Caremark” being used herein to generally refer to any one or more of the pharmacy benefit management subsidiaries of the Company, as applicable) is a defendant in a qui tam lawsuit initially filed by a relator on behalf of various state and federal government agencies in Texas federal court in 1999. The case was unsealed in May 2005. The case seeks monetary damages and alleges that Caremark’s processing of Medicaid and certain other government claims on behalf of its clients (which allegedly resulted in underpayments from our clients to the applicable government agencies) on one of Caremark’s adjudication platforms violates applicable federal or state false claims acts and fraud statutes. The United States and the States of Texas, Tennessee, Florida, Arkansas, Louisiana and California intervened in the lawsuit, but Tennessee and Florida withdrew from the lawsuit in August 2006 and May 2007, respectively. The parties previously filed cross motions for partial summary judgment, and in August 2008, the court granted several of Caremark’s motions and denied the motions filed by the plaintiffs. The court’s rulings are favorable to Caremark and substantially limit the ability of the plaintiffs to assert false claims act allegations or statutory or common law theories of recovery based on Caremark’s processing of Medicaid and other government reimbursement requests. The court’s rulings are on appeal before the United States Court of Appeals for the Fifth Circuit. In April 2009, the State of Texas filed a purported civil enforcement action against Caremark for injunctive relief, damages and civil penalties in Travis County, Texas alleging that Caremark violated the Texas Medicaid Fraud Prevention Act and other state laws based on our processing of Texas Medicaid claims on behalf of PBM clients. The claims and issues raised in this lawsuit are related to the claims and issues pending in the federal qui tam lawsuit described above.

In December 2007, the Company received a document subpoena from the Office of Inspector General, United States Department of Health and Human Services (“OIG”), requesting information relating to the processing of Medicaid and other government agency claims on a different adjudication platform of Caremark. In October 2009 and October 2010, the Company received civil investigative demands from the Office of the Attorney General of the State of Texas requesting, respectively, information produced under this OIG subpoena, and other information related to the processing of Medicaid claims. The civil investigative demands state that the Office of the Attorney General of the State of Texas is investigating allegations currently pending under seal relating to two of Caremark’s adjudication platforms. The Company has been producing documents on a rolling basis in

74

Notes to Consolidated Financial Statements (continued)

response to the requests for information contained in the OIG subpoena and in these two civil investigative demands. The Company cannot predict with certainty the timing or outcome of any review of such information.

Caremark was named in a putative class action lawsuit filed in October 2003 in Alabama state court by John Lauriello, purportedly on behalf of participants in the 1999 settlement of various securities class action and derivative lawsuits against Caremark and others. Other defendants include insurance companies that provided coverage to Caremark with respect to the settled lawsuits. The Lauriello lawsuit seeks approximately $3.2 billion in compensatory damages plus other non-specified damages based on allegations that the amount of insurance coverage available for the settled lawsuits was misrepresented and suppressed. A similar lawsuit was filed in November 2003 by Frank McArthur, also in Alabama state court, naming as defendants Caremark, several insurance companies, attorneys and law firms involved in the 1999 settlement. This lawsuit was stayed as a later-filed class action, but McArthur was subsequently allowed to intervene in the Lauriello action. The attorneys and law firms named as defendants in McArthur’s intervention pleadings have been dismissed from the case, and discovery on class certification and adequacy issues is underway.

Various lawsuits have been filed alleging that Caremark has violated applicable antitrust laws in establishing and maintaining retail pharmacy networks for client health plans. In August 2003, Bellevue Drug Co., Robert Schreiber, Inc. d/b/a Burns Pharmacy and Rehn-Huerbinger Drug Co. d/b/a Parkway Drugs #4, together with Pharmacy Freedom Fund and the National Community Pharmacists Association filed a putative class action against Caremark in Pennsylvania federal court, seeking treble damages and injunctive relief. In October 2003, two independent pharmacies, North Jackson Pharmacy, Inc. and C&C, Inc. d/b/a Big C Discount Drugs, Inc. filed a putative class action complaint in Alabama federal court against Caremark and two PBM competitors, seeking treble damages and injunctive relief. The North Jackson Pharmacy case was transferred to Illinois federal court, and the Bellevue case was sent to arbitration based on contract terms between the pharmacies and Caremark. The Bellevue arbitration was then stayed by the parties pending developments in the North Jackson Pharmacy court case.

In August 2006, the Bellevue case and the North Jackson Pharmacy case were both transferred to Pennsylvania federal court by the Judicial Panel on Multidistrict Litigation for coordinated and consolidated proceedings with other cases before the panel, including cases against other PBMs. Caremark appealed the decision which vacated the order compelling arbitration and staying the proceedings in the Bellevue case and, following the appeal, the Court of Appeals reinstated the order compelling arbitration of the Bellevue case. Motions for class certification in the coordinated cases within the multidistrict litigation, including the North Jackson Pharmacy case, remain pending. The consolidated action is now known as the In Re Pharmacy Benefit Managers Antitrust Litigation.

Beginning in November 2008, the Company received and responded to several subpoenas from the Drug Enforcement Administration (“DEA”), Los Angeles Field Division, requesting sales data and other information regarding the Company’s distribution of products containing pseudoephedrine (“PSE”) at certain retail pharmacies and from one California distribution center. In September 2009, the United States Attorney’s Office for the Central District of California (“USAO”) and the DEA commenced discussions with the Company regarding whether, in late 2007 and 2008, the Company distributed PSE in violation of the Controlled Substances Act. In addition, the DEA issued an order to show cause against certain retail pharmacies and the Company’s La Habra, California distribution center which could have resulted in administrative action against the Company’s DEA registrations for these facilities. On October 13, 2010, the Company entered into a comprehensive resolution of this matter, resulting in the payment of $75 million in civil penalties for violations of the Controlled Substances Act and $2.6 million in criminal forfeiture relating to the sales of products containing PSE. The resolution included the entry of a non-prosecution agreement and civil settlement agreement with the USAO, the U.S. Attorney’s Office for the District of Nevada and the U.S. Department of Justice, as well as a memorandum of agreement with the DEA that dismisses the above-referenced orders to show cause and contains certain ongoing compliance requirements for the Company.

75

Notes to Consolidated Financial Statements (continued)

In August 2009, the Company was notified by the Federal Trade Commission (the “FTC”) that it is conducting a non-public investigation under the Federal Trade Commission Act into certain of the Company’s business practices. In March 2010, the Company learned that various State Attorneys General offices and certain other government agencies are conducting a multi-state investigation of the Company regarding issues similar to those being investigated by the FTC. At this time, 24 states, the District of Columbia, and the County of Los Angeles are known to be participating in this multi-state investigation. The Company has been cooperating in these investigations, and continues to provide documents and other information as requested. The Company is not able to predict with certainty the timing or outcome of these investigations. However, it remains confident that its business practices and service offerings (which are designed to reduce health care costs and expand consumer choice) are being conducted in compliance with the antitrust laws.

In March 2009, the Company received a subpoena from the OIG requesting information concerning the Medicare Part D prescription drug plans of RxAmerica, the PBM subsidiary of Longs Drug Stores Corporation which was acquired by the Company in October 2008. The Company continues to respond to this request for information and has been producing responsive documents on a rolling basis. The Company cannot predict with certainty the timing or outcome of any review by the government of such information.

Since March 2009, the Company has been named in a series of putative collective and class action lawsuits filed in federal courts around the country, purportedly on behalf of current and former assistant store managers working in the Company’s stores at various locations outside California. The lawsuits allege that the Company failed to pay overtime to assistant store managers as required under the Fair Labor Standards Act (“FLSA”) and under certain state statutes. The lawsuits also seek other relief, including liquidated damages, punitive damages, attorneys’ fees, costs and injunctive relief arising out of the state and federal claims for overtime pay. Notice has been issued to over 13,000 current and former assistant store managers offering them the opportunity to “opt in” to certain of the FLSA collective actions and over 1,900 have elected to participate in these lawsuits. At this time, the Company is not able to predict the outcome of these cases, or the possible monetary exposure associated with the lawsuits. The Company’s position, however, is that the lawsuits are without merit and that the cases should not be certified as class or collective actions. The Company is vigorously defending these claims, but can not predict with certainty the timing or outcome of this matter.

In January 2010, the Company received a subpoena from the OIG in connection with an investigation of possible false or otherwise improper claims for payment under the Medicare and Medicaid programs. The subpoena requests retail pharmacy claims data for “dual eligible” customers (i.e., customers with both Medicaid and private insurance coverage), information concerning the Company’s retail pharmacy claims processing systems, copies of pharmacy payor contracts and other documents and records. The Company has provided documents and other information in response to the subpoena and continues to engage in discussions with the government about the subject matter of the subpoena. The Company cannot predict with certainty the timing or outcome of any review by the government of such information.

In March 2010, the Company received a subpoena from the OIG requesting information about programs under which the Company has offered customers remuneration conditioned upon the transfer of prescriptions for drugs or medications to our pharmacies in the form of gift cards, cash, non-prescription merchandise or discounts or coupons for non-prescription merchandise, The subpoena relates to an investigation of possible false or otherwise improper claims for payment under the Medicare and Medicaid programs. The Company continues to respond to this request for information and has been producing responsive documents on a rolling basis. We cannot predict with certainty the timing or outcome of any reviews by the government of such information.

In November 2009, a securities class action lawsuit was filed in the United States District Court for the District of Rhode Island purportedly on behalf of purchasers of CVS Caremark Corporation stock between May 5, 2009 and November 4, 2009. The lawsuit names the Company and certain officers as defendants and includes

76

Notes to Consolidated Financial Statements (continued)

allegations of securities fraud relating to public disclosures made by the Company concerning the PBM business and allegations of insider trading. In addition, a shareholder derivative lawsuit was filed in December 2009, in the same court against the directors and certain officers of the Company. A derivative lawsuit is a lawsuit filed by a shareholder purporting to assert claims on behalf of a corporation against directors and officers of the corporation. This lawsuit includes allegations of, among other things, securities fraud, insider trading and breach of fiduciary duties and further alleges that the Company was damaged by the purchase of stock at allegedly inflated prices under its share repurchase program. In January 2011, both lawsuits were transferred to the United States District Court for the District of New Hampshire. The Company believes these lawsuits are without merit and the Company plans to defend them vigorously.

The Company cannot predict the ultimate outcome of the legal matters disclosed above. Management does not believe, however, that the outcome of any of these legal matters will have a material adverse effect on the Company’s operating results or financial condition.

The Company is also a party to other legal proceedings and inquiries arising in the normal course of its business, none of which is expected to be material to the Company. The Company can give no assurance, however, that our business, financial condition and results of operations will not be materially adversely affected, or that we will not be required to materially change our business practices, based on: (i) future enactment of new health care or other laws or regulations; (ii) the interpretation or application of existing laws or regulations, as they may relate to our business or the pharmacy services or retail industry; (iii) pending or future federal or state governmental investigations of our business or the pharmacy services or retail industry; (iv) institution of government enforcement actions against us; (v) adverse developments in any pending qui tam lawsuit against us, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed against us; or (vi) adverse developments in other pending or future legal proceedings against us or affecting the pharmacy services or retail industry.

13 Segment Reporting

The Company currently has three segments: Pharmacy Services, Retail Pharmacy and Corporate.

The Company evaluates its Pharmacy Services and Retail Pharmacy segment performance based on net revenue, gross profit and operating profit before the effect of certain intersegment activities and charges. The Company evaluates the performance of its Corporate segment based on operating expenses before the effect of discontinued operations and certain intersegment activities and charges. See Note 1 for a description of the Pharmacy Services, Retail Pharmacy and Corporate segments and related significant accounting policies.

77

Notes to Consolidated Financial Statements (continued)

The following table is a reconciliation of the Company’s business segments to the consolidated financial statements:

In millions	Pharmacy  Services Segment(1)(2)		Retail  Pharmacy Segment(2)		Corporate Segment			Intersegment Eliminations(2)			Consolidated Totals
2010:
Net revenues	$	47,780	$	57,345	$	—		$	(8,712	)	$	96,413
Gross profit		3,353		17,039		—			(135	)		20,257
Operating profit		2,389		4,537		(626	)		(135	)		6,165
Depreciation and amortization		390		1,016		63			—			1,469
Total assets		32,254		28,927		1,439			(451	)		62,169
Goodwill		18,868		6,801		—			—			25,669
Additions to property and equipment		234		1,708		63			—			2,005
2009:
Net revenues	$	51,065	$	55,355	$	—		$	(7,691	)	$	98,729
Gross profit		3,835		16,593		—			(48	)		20,380
Operating profit		2,866		4,159		(539	)		(48	)		6,438
Depreciation and amortization		377		965		47			—			1,389
Total assets		33,082		28,302		774			(517	)		61,641
Goodwill		18,879		6,801		—			—			25,680
Additions to property and equipment		218		2,183		147			—			2,548
2008:
Net revenues	$	43,769	$	48,990	$	—		$	(5,287	)	$	87,472
Gross profit		3,550		14,741		—			(1	)		18,290
Operating profit		2,755		3,753		(461	)		(1	)		6,046
Depreciation and amortization		357		881		36			—			1,274
Total assets		32,850		27,406		1,053			(349	)		60,960
Goodwill		18,818		6,676		—			—			25,494
Additions to property and equipment		228		1,840		112			—			2,180

(1) Net revenues of the Pharmacy Services segment include approximately $6.6 billion, $6.9 billion and $6.3 billion of Retail co-payments for the fiscal years ended December 31, 2010, 2009 and 2008, respectively.

(2) Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services segment clients use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue on a standalone basis and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services segment clients, through the Company’s intersegment activities (such as the Maintenance Choice program), elect to pick up their maintenance prescriptions at Retail Pharmacy segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. As a result, both the Pharmacy Services and the Retail Pharmacy segments include the following results associated with this activity: net revenues of $1,794 million, $692 million and $8 million for the years ended December 31, 2010, 2009 and 2008, respectively; gross profit and operating profit of $135 million, $48 million and $1 million for the years ended December 31, 2010, 2009 and 2008, respectively.

78

Notes to Consolidated Financial Statements (continued)

14 Earnings Per Common Share

The following is a reconciliation of basic and diluted earnings per common share for the respective fiscal years:

In millions, except per share amounts	2010			2009			2008
Numerator for earnings per common share calculation:
Income from continuing operations	$	3,439		$	3,708		$	3,344
Net loss attributable to noncontrolling interest		3			—			—
Preference dividends, net of income tax benefit		—			—			(14	)
Income from continuing operations attributable to CVS Caremark, basic		3,442			3,708			3,330
Loss from discontinued operations, net of income tax benefit		(15	)		(12	)		(132	)
Net income attributable to CVS Caremark, basic	$	3,427		$	3,696		$	3,198
Income from continuing operations	$	3,439		$	3,708		$	3,344
Net loss attributable to noncontrolling interest		3			—			—
Dilutive earnings adjustments		—			—			(3	)
Income from continuing operations attributable to CVS Caremark, diluted		3,442			3,708			3,341
Loss from discontinued operations attributable to CVS Caremark, net of income tax benefit		(15	)		(12	)		(132	)
Net income attributable to CVS Caremark, diluted	$	3,427		$	3,696		$	3,209
Denominator for earnings per common share calculation:
Weighted average common shares, basic		1,367			1,434			1,434
Preference stock		—			1			17
Stock options		8			10			13
Restricted stock units		2			5			5
Weighted average common shares, diluted		1,377			1,450			1,469
Basic earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.52		$	2.59		$	2.32
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)
Net income attributable to CVS Caremark	$	2.51		$	2.58		$	2.23
Diluted earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.50		$	2.56		$	2.27
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)
Net income attributable to CVS Caremark	$	2.49		$	2.55		$	2.18

79

Notes to Consolidated Financial Statements (continued)

15 Quarterly Financial Information (Unaudited)

In millions, except per share amounts	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Fiscal Year
2010:
Net revenues	$	23,760		$	24,007		$	23,875		$	24,771		$	96,413
Gross profit		4,746			5,020			5,024			5,467			20,257
Operating profit		1,410			1,501			1,484			1,770			6,165
Income from continuing operations		772			822			819			1,026			3,439
Loss from discontinued operations, net of income tax benefit		(2	)		(1	)		(11	)		(1	)		(15	)
Net income		770			821			808			1,025			3,424
Net loss attributable to noncontrolling interest		1			—			1			1			3
Net income attributable to CVS Caremark	$	771		$	821		$	809			1,026			3,427
Basic earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	0.56		$	0.61		$	0.60		$	0.75		$	2.52
Loss from discontinued operations attributable to CVS Caremark		—			—			(0.01	)		—			(0.01	)
Net income attributable to CVS Caremark	$	0.56		$	0.61		$	0.59		$	0.75		$	2.51
Diluted Earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	0.55		$	0.60		$	0.60		$	0.75		$	2.50
Loss from discontinued operations attributable to CVS Caremark		—			—			(0.01	)		—			(0.01	)
Net income attributable to CVS Caremark	$	0.55		$	0.60		$	0.59		$	0.75		$	2.49
Dividends per common share	$	0.08750		$	0.08750		$	0.08750		$	0.08750		$	0.35000
Stock price: (New York Stock Exchange)
High	$	37.32		$	37.82		$	32.09		$	35.46		$	37.82
Low	$	30.36		$	29.22		$	26.84		$	29.45		$	26.84
2009:
Net revenues	$	23,394		$	24,871		$	24,642		$	25,822		$	98,729
Gross profit		4,748			5,052			5,012			5,568			20,380
Operating profit		1,377			1,600			1,566			1,895			6,438
Income from continuing operations		744			890			1,023			1,051			3,708
Loss from discontinued operations, net of income tax benefit		(5	)		(3	)		(2	)		(2	)		(12	)
Net income attributable to CVS Caremark		739			887			1,021			1,049			3,696
Basic earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	0.51		$	0.61		$	0.72		$	0.75		$	2.59
Loss from discontinued operations attributable to CVS Caremark		—			—			(0.01	)		—			(0.01	)
Net income attributable to CVS Caremark	$	0.51		$	0.61		$	0.71		$	0.75		$	2.58
Diluted Earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	0.51		$	0.60		$	0.71		$	0.74		$	2.56
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		—			—			—			(0.01	)
Net income attributable to CVS Caremark	$	0.50		$	0.60		$	0.71		$	0.74		$	2.55
Dividends per common share	$	0.07625		$	0.07625		$	0.07625		$	0.07625		$	0.30500
Stock price: (New York Stock Exchange)
High	$	30.47		$	34.22		$	37.75		$	38.27		$	38.27
Low	$	23.74		$	27.08		$	30.58		$	27.38		$	23.74

80

Five-Year Financial Summary

In millions, except per share amounts	2010(1)			2009(1)			2008(1)			2007( 1)(2)			2006(1)
Statement of operations data:
Net revenues	$	96,413		$	98,729		$	87,472		$	76,330		$	43,821
Gross profit		20,257			20,380			18,290			16,108			11,742
Operating expenses(3)		14,092			13,942			12,244			11,314			9,300
Operating profit(4)		6,165			6,438			6,046			4,794			2,442
Interest expense, net		536			525			509			435			216
Income tax provision(5)		2,190			2,205			2,193			1,722			857
Income from continuing operations		3,439			3,708			3,344			2,637			1,369
Loss from discontinued operations, net of tax benefit(6)		(15	)		(12	)		(132	)		—			—
Net income		3,424			3,696			3,212			2,637			1,369
Net loss attributable to noncontrolling interest(7)		3			—			—			—			—
Preference dividends, net of income tax benefit		—			—			(14	)		(14	)		(14	)
Net income attributable to CVS Caremark	$	3,427		$	3,696		$	3,198		$	2,623		$	1,355
Per common share data:
Basic earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.52		$	2.59		$	2.32		$	1.97		$	1.65
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)		—			—
Net income attributable to CVS Caremark	$	2.51		$	2.58		$	2.23		$	1.97		$	1.65
Diluted earnings per common share:
Income from continuing operations attributable to CVS Caremark	$	2.50		$	2.56		$	2.27		$	1.92		$	1.60
Loss from discontinued operations attributable to CVS Caremark		(0.01	)		(0.01	)		(0.09	)		—			—
Net income attributable to CVS Caremark	$	2.49		$	2.55		$	2.18		$	1.92		$	1.60
Cash dividends per common share	$	0.35000		$	0.30500		$	0.25800		$	0.22875		$	0.15500
Balance sheet and other data:
Total assets	$	62,169		$	61,641		$	60,960		$	54,722		$	20,574
Long-term debt	$	8,652		$	8,756		$	8,057		$	8,350		$	2,870
Total shareholders’ equity	$	37,700		$	35,768		$	34,574		$	31,322		$	9,918
Number of stores (at end of year)		7,226			7,074			6,981			6,301			6,205

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year-end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. As you review our operating performance, please consider that fiscal 2010 and 2009 include 365 days; fiscal 2008 includes 368 days, and fiscal 2007 and 2006 include 364 days.

(2) Effective March 22, 2007, Caremark Rx, Inc. was merged into a newly formed subsidiary of CVS Corporation, with Caremark Rx, L.L.C., continuing as the surviving entity (the “Caremark Merger”). Following the Caremark Merger, the name of the Company was changed to “CVS Caremark Corporation.” By virtue of the Caremark Merger, each issued and outstanding share of Caremark common stock, par value $0.001 per share, was converted into the right to receive 1.67 shares of CVS Caremark’s common stock, par value $0.01 per share. Cash was paid in lieu of fractional shares.

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(3) In 2006, the Company adopted the SEC Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements.” The adoption of this SAB resulted in a $40 million pre-tax ($25 million after-tax) decrease in operating expenses for 2006.

(4) Operating profit includes the pre-tax effect of the charge discussed in Note (3) above.

(5) Income tax provision includes the effect of the following: (i) in 2010, the recognition of $47 million of previously unrecognized tax benefits, including interest, realting to the expiration of various statutes of limitation and settlements with tax authorities, (ii) in 2009, the recognition of $167 million of previously unrecognized tax benefits, including interest, relating to the expiration of various statutes of limitation and settlements with tax authorities, and (iii) in 2006, a $11 million reversal of previously recorded tax reserves through the tax provision principally based on resolving certain state tax matters.

(6) In connection with certain business dispositions completed between 1991 and 1997, the Company continues to guarantee store lease obligations for a number of former subsidiaries, including Linens ‘n Things. On May 2, 2008, Linens Holding Co. and certain affiliates, which operate Linens ‘n Things, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The loss from discontinued operations includes lease-related costs of $15 million ($24 million, net of a $9 million income tax benefit), $12 million ($19 million, net of an $7 million income tax benefit) and $132 million ($214 million, net of an $82 million income tax benefit) in 2010, 2009 and 2008, respectively, which the Company believes is likely to be required to satisfy its obligations associated with its Linens ‘n Things lease guarantees.

(7) Represents the minority shareholders’ portion of the net loss from our majority owned subsidiary Generation Health, Inc. acquired in the fourth quarter of 2009.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

CVS Caremark Corporation

We have audited the accompanying consolidated balance sheets of CVS Caremark Corporation as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CVS Caremark Corporation at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2009 CVS Caremark Corporation adopted ASC 805, Business Combinations (formerly Statement of Financial Accounting Standards No. 141(R), Business Combinations).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CVS Caremark Corporation’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 2011 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 18, 2011

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EX-21

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

As of December 31, 2010, CVS Caremark Corporation had the following significant subsidiaries:

CVS Pharmacy, Inc. (a Rhode Island corporation)⁽¹⁾

Holiday CVS, L.L.C. (a Florida limited liability company)

Garfield Beach CVS, L.L.C. (a California limited liability company)

CVS Albany, L.L.C. (a New York limited liability company)

Longs Drug Stores California, L.L.C. (a California limited liability company)

Caremark Rx, L.L.C. (a Delaware limited liability company)⁽²⁾

Caremark, L.L.C. (a California limited liability company)

CaremarkPCS Health, L.L.C. (a Delaware limited liability company)

CVS Caremark Part D Services, L.L.C. (a Delaware limited liability company)

SilverScript Insurance Company (a Tennessee corporation)

Accendo Insurance Company (a Utah corporation)

Caremark PhC, L.L.C. (a Delaware limited liability company)

RxAmerica, LLC (a Delaware limited liability company)

(1) CVS Pharmacy, Inc. is the immediate parent of approximately 37 entities that operate drugstores, all of which drugstores are in the United States and its territories.

(2) Caremark Rx, L.L.C., the parent of the Registrant’s pharmacy services subsidiaries, is the immediate or indirect parent of several mail order, specialty mail and retail specialty pharmacy subsidiaries, all of which operate in the United States and its territories.

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Nos. 333-49407, 333-34927, 333-28043, 333-91253, 333-63664, 333-139470, 333-141481, and 333-167746 on Form S-8 and 333-165672 on Form S-3) of CVS Caremark Corporation and in the related Prospectuses of our reports dated February 18, 2011, with respect to the consolidated financial statements of CVS Caremark Corporation, and the effectiveness of internal control over financial reporting of CVS Caremark Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2010 and to the reference to our firm under the heading “Selected Financial Data”, included therein, filed with the Securities and Exchange Commission.

/s/ Ernst & Young LLP

Boston, Massachusetts

February 18, 2011

EX-31.1

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas M. Ryan, Chairman of the Board and Chief Executive Officer of CVS Caremark Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of CVS Caremark Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 18, 2011	By:	/S/     THOMAS M. RYAN
		Thomas M. Ryan Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David M. Denton, Executive Vice President and Chief Financial Officer of CVS Caremark Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of CVS Caremark Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 18, 2011	By:	/S/     DAVID M. DENTON
		David M. Denton
		Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Annual Report of CVS Caremark Corporation (the “Company”) on Form 10-K for the period ended December 31, 2010 (the “Report”), for the purpose of complying with Rule 13(a)-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, Thomas M. Ryan, Chairman of the Board and Chief Executive Officer of the Company, certify that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

February 18, 2011	/S/    THOMAS M. RYAN
	Thomas M. Ryan
	Chairman of the Board and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Annual Report of CVS Caremark Corporation (the “Company”) on Form 10-K for the period ended December 31, 2010 (the “Report”), for the purpose of complying with Rule 13(a)-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

I, David M. Denton, Executive Vice President and Chief Financial Officer of the Company, certify that, to the best of my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

February 18, 2011	/S/    DAVID M. DENTON
	David M. Denton
	Executive Vice President and Chief Financial Officer