Dear Shareholder:
The past year set the stage for a new chapter in our company's history as we completed the transformational merger of CVS Corporation and Caremark Rx, Inc. We are now the largest integrated provider of prescriptions and related health services in the United States, filling or managing more than a quarter of all prescriptions in the nation. Beyond the sheer scale of our operations, CVS Caremark is positioned to improve access for patients, promote better health outcomes, and control payor costs in a way that no pharmacy retailer or PBM could do separately. Our unique model provides us with a significant opportunity to gain share and create new sources of growth going forward.

It was a very successful year on a number of other fronts as well. Here are some highlights of our key accomplishments:

• CVS Caremark posted record revenue and earnings, driven by solid performance in both the retail and pharmacy services segments.
• We opened 275 new or relocated CVS/pharmacy stores and saw continued improvement in sales and profits in the stores we acquired from Albertson's, Inc., in 2006, and from J.C. Penney in 2004.
• Caremark Pharmacy Services signed up $2.1 billion in new business, a clear sign that payors understand the potential benefits of our combination.
• We opened 316 MinuteClinics, increasing our total at yearend to 462 clinics in 25 states. That's about four times the number operated by our nearest competitor.
• We attained our goal of generating $2 billion in free cash flow, and we launched a $5 billion share repurchase program that we completed in the first quarter of 2008.
• Even in the midst of all this activity, we remained keenly focused on service, execution, and expense control across the company.

Total revenues rose 74.2 percent to a record $76.3 billion. In our CVS/pharmacy segment, same store sales rose 5.3 percent. Gross margins increased in both our retail and PBM businesses, due largely to significant generic drug introductions and purchasing synergies resulting from the merger. Net earnings climbed 92.6 percent to $2.6 billion, or $1.92 per diluted share.

Turning to CVS Caremark's stock performance, the 29.3 percent total return on our shares far surpassed the modest numbers posted by the S&P 500 Index and the Dow Jones Industrial Average (DJIA) in 2007. Our three-year performance is just as impressive. While the S&P 500 and the DJIA returned 21.2 percent and 23.0 percent, respectively, CVS shares returned 78.4 percent.

We're going to offer services that no other competitor can match.
In the short time since completing our merger, we've made substantial progress in integrating our two companies. We brought Pharma- Care, CVS' legacy PBM business, under the Caremark umbrella, connected all our back-end systems, and are set to achieve more than $700 million in cost-saving synergies in 2008. That's over 50 percent higher than our original target at the time we first announced the merger.

We've also made important progress in developing differentiated offerings that we believe will lead to enhanced growth for our company over time. Obviously, we're offering payors and patients all the services they would expect from a world-class PBM; however, we plan to take those services a step further.

For example, let's take the area of compliance. One of the simplest ways for a PBM to control payor costs and improve outcomes is by encouraging patients to take the medicine prescribed to them and to renew their prescriptions promptly. Any PBM has the capability to do this by contacting these patients over the telephone or by mail.

However, face-to-face interaction is far more effective, and our CVS/pharmacy stores give us the unique capability to get closer to the consumer. We're developing programs that tap into the combined 23,000 pharmacists and MinuteClinic practitioners in our locations across the country.

We also intend to build upon our No. 1 position in the high-growth specialty pharmacy market, leverage our ExtraCare card and all its unique benefits among our millions of covered lives, enhance our health management programs, and increase use of MinuteClinic by our PBM clients. We'll implement some of our initiatives relatively quickly; others will happen over time.

We're leveraging opportunities for greater profitability in the pharmacy.
In both our retail and mail order pharmacies, we are benefiting from the aging population, greater utilization among seniors due to Medicare Part D, and the increasing use of generic drugs. Although their lower prices depress revenue growth and we continue to see pressure on pharmacy reimbursement rates, generics are more profitable than brand name drugs and help drive margin expansion. Moreover, CVS Caremark is now the largest purchaser of generic drugs in the United States, which enables us to drive down costs.

In 2007, the company had a 63 percent generic dispensing rate at retail. With approximately $70 billion in branded drug sales coming off patent in the next five years, we expect that figure to rise to 75 percent by 2012. We should see similar gains for Caremark's PBM business, whose generic dispensing rate is currently at 60 percent.

Generic versions of bioengineered drugs represent another opportunity. Currently, the United States has no procedure for approving generic versions of bioengineered drugs when they come off patent. However, we expect to see Congress enact legislation at some point in the future to create a biogeneric approval process at the U.S. Food and Drug Administration. We will be well positioned if or when this occurs.

We continue to open new stores and make the most of recent acquisitions.
Despite the past year's merger activity, we continued to execute our organic growth strategy at retail. CVS/pharmacy square footage grew by 3 percent, in line with our annual target. Of the 275 stores we opened, 139 were new locations and 136 were relocations. Factoring in closings, we enjoyed net unit growth of 95 stores. We continued to expand in our newer, high-growth areas such as Los Angeles, San Diego, Phoenix, Las Vegas, and Minneapolis.

The former Eckerd® locations that we acquired in 2004 still enjoyed same store sales growth that outpaced our overall numbers. These stores are benefiting from their locations in high-growth markets - mainly Florida and Texas - and they continue to gain share from competitors as well.

We're also very pleased with the performance of the standalone Sav-on® and Osco® stores we purchased from Albertsons. This acquisition strengthened our presence in the Midwest and provided us with an immediate leadership position in Southern California, the country's secondlargest drugstore market. In fact, our Southern California CVS/ pharmacy stores now lead the entire chain in sales. These new CVS/pharmacy stores are benefiting from an improved merchandise assortment and category focus.

The introduction of the ExtraCare card is encouraging customer loyalty and helping drive an increase in sales and margins.

In the front of the store, we're seeing sales growth across our core categories, especially in beauty, personal care, general merchandise, and digital photo. CVS store brands and proprietary brands have been important drivers of gross margins.

As solid as our front-end business is, it's worth noting that it accounts for 30 percent of our retail sales compared with 70 percent for the pharmacy. The front-end percentage becomes even smaller in the context of CVS Caremark's overall revenues. That's why we expect any impact on CVS/pharmacy from a softer economy to be limited and manageable. After all, our average front-end purchase is a little under $12, and we don't anticipate that consumers will buy less cough medicine, analgesics, or any of the other non-discretionary items that make up the majority of our front-end sales. We even stand to benefit if consumers turn to our high-quality, lower-cost CVS store brand products to save money.

We're expanding MinuteClinic as part of our broader health care offerings.
For many CVS/pharmacy customers, 2007 presented them with their first chance to visit one of our in-store MinuteClinics. Focused on treating a limited number of common ailments at a competitive price, it is helping us lower costs for health plans and self-insured employers.

MinuteClinic has seen more than 1.5 million patients since inception, and customer response has been extremely positive. It is the only retail clinic to meet the rigorous guidelines of The Joint Commission, the nation's chief standards-setting and accrediting body in health care. At least 25 percent of MinuteClinic patients have not previously been CVS/pharmacy customers. That represents a significant opportunity to introduce them to the "CVS easy" shopping experience and reap incremental sales gains in the pharmacy and the front end. As I mentioned earlier, we're also working to incorporate MinuteClinic into our PBM offerings when Caremark sits down at the table with current and potential clients.

Before closing, I want to take this opportunity to thank the outstanding management team we have across our retail and PBM businesses and the more than 190,000 people in our company who helped make the past year's accomplishments possible. I've often said we have the best people in the industry, and they proved me right again. I deeply appreciate their dedication.

I also want to acknowledge the considerable contributions Mac Crawford made at the helm of Caremark for nine years and in his subsequent role as the first chairman of the board of our combined company. Mac chose to step down in November, and I wish him a happy and healthy retirement. We shared the same vision for the future of this industry, and the core team he assembled remains the guiding force at Caremark Pharmacy Services. Former director Roger Headrick provided invaluable guidance during his 11 years on the Caremark board, and I want to thank him for his contributions as well.

We really are at a pivotal moment in our history, with CVS Caremark poised to transform the delivery of pharmacy services in this country. We've done so much more than just combine two very successful businesses. We've literally created a first-of-its-kind company - one with the ability to grow faster than either of its components would have on its own. For us, that's the real "power of one." Thank you for your confidence.