I'm delighted to report on another year of significant accomplishments for CVS Corporation, highlighted by record revenues and earnings, substantial free cash flow generation, and continued organic growth. In June, we acquired 700 standalone Sav-on and Osco drugstores from Albertson's, Inc., providing immediate leadership in southern California, and we have made great progress in rapidly integrating and converting the stores to the CVS/pharmacy® brand. We also acquired MinuteClinic®, the pioneer and largest provider of retail healthcare in the United States, and have already nearly doubled the number of clinics as we execute our aggressive rollout across the nation. At year end, CVS operated 6,202 retail and specialty pharmacy stores, more than any other U.S. pharmacy retailer.

Total sales for 2006 rose 18.4 percent to a record $43.8 billion. Meanwhile, net earnings per share climbed 10.3 percent to $1.4 billion, or $1.60 per diluted share. Same store sales increased 8.2 percent, rising 9.1 percent in the pharmacy and 6.2 percent in the front end. Gross margins also increased, largely due to significant generic drug introductions, increased private label penetration in the front of the store, and the use of our ExtraCare® loyalty program to focus promotional spending. CVS generated approximately $570 million in free cash flow. That has allowed us, among other things, to announce a 26 percent dividend increase for 2007. Our 176,000 CVS colleagues across the country helped us achieve these excellent results. I want to thank them all for their hard work in making things "CVS easy" for our customers.

Turning to our stock's performance, the 17.6 percent total return on CVS shares in 2006 outpaced that of both the S&P 500 Index and the Dow Jones Industrial Average (DJIA). Over the past three years, our shares returned 74 percent, significantly outperforming the 28 percent and 19 percent returns of the S&P 500 and the DJIA, respectively.

Even with all the positive news outlined above, more good things are on the way in 2007 and beyond. We moved swiftly to integrate the Sav-on and Osco stores, completing the systems conversions in September 2006. The remodeling of the stores will be complete in March 2007. We've made these stores "CVS easy" by reducing shelf heights, resetting merchandise layouts, installing our hallmark CVS carpet, enhancing the lighting, and improving the signage.

Sales trends have moved in line with expectations. We expect the numbers to climb with the introduction of the CVS brand to these markets and the disruption of the store conversions behind us. As noted at the time of purchase, the Sav-on and Osco stores were operationally in better shape than the Eckerd stores we acquired from J.C. Penney in 2004. Still, we are executing against a significant opportunity to produce higher-quality sales through improvements in merchandise assortment and category focus. We will also leverage the CVS ExtraCare card to encourage customer loyalty and increase sales and margins.

Looking at the former Eckerd stores acquired in 2004, same store sales increased 14 percent in 2006. The front end rose 13 percent, with the pharmacy up 15 percent. This impressive performance comes on top of the strong gains we posted in 2005. Although same store sales growth for these stores will moderate going forward, they are still expected to outpace our overall results for the foreseeable future.

Even as CVS completed two major acquisitions in as many years, organic square footage increased by 3.2 percent in 2006. We opened 265 stores, including 147 new locations and 118 relocations. Factoring in closings, we experienced net unit growth of 103 stores. We continued to expand in our newer, high-growth markets, including those in Florida and Texas as well as Las Vegas, Los Angeles, Chicago, Minneapolis, and Phoenix. All our new stores in these markets are running at or above plan, with both the front end and pharmacy performing well.

CVS/pharmacy stores now fill 16 percent of all U.S. retail drug prescriptions. The Medicare Part D prescription drug benefit and generic drug launches are among the positive industry factors contributing to our growth. Medicare Part D, rolled out in January 2006, has led to increased utilization of prescription drugs. Since enrolled seniors make the same co-payment regardless of the pharmacy they choose, many are opting for the convenience of the CVS/pharmacy located right in their neighborhoods. Despite a competitor's rollout of a $4 program for selected generic drugs, we actually experienced a rise in net prescription transfers in from leading mass merchant retailers and continued to gain pharmacy share.

Use of generic drugs continues to climb, and they now account for more than 60 percent of prescriptions filled. Although their lower prices depress revenue growth, generics are more profitable and help fuel our margin gains. They also help reduce overall healthcare costs for patients and payors.

Our PharmaCare pharmacy benefits management (PBM) and specialty pharmacy business turned in an excellent performance in 2006. Revenue rose 24.6 percent to $3.7 billion while operating profit increased by 43 percent. Prescription Pathways®, PharmaCare's Medicare Part D joint venture with Universal American Financial Corp., now administers prescription drug benefits for 460,000 seniors and Medicare-eligible individuals. That number places it among the nation's top 10 prescription drug plans for Medicare Part D beneficiaries.

In the front of the store, our continued focus on the health, personal care, and beauty categories drove industry-leading same store sales growth. The average front-end transaction grew to approximately $11 in 2006. Moreover, the ExtraCare loyalty program continued to increase in popularity with card use exceeding 63 percent of front-end sales.

Our acquisition of MinuteClinic, completed in September, allows CVS to provide customers with convenient, cost-effective, and high-quality care for common family ailments right in our stores. The high level of patient satisfaction received to date has solidified our belief that this is the right concept for consumers, payors, and providers. We made the decision to buy MinuteClinic, already a strategic partner, because we wanted control of its brand as well as personnel decisions, hours of operation, and expansion rate. Most importantly, we saw an opportunity to benefit from additional revenues and profits. Since the acquisition, we have almost doubled the number of MinuteClinics from 83 to 155 across 19 states. Furthermore, we plan to open approximately 300 MinuteClinics in 2007 with well over 2,500 CVS/pharmacy stores slated to have MinuteClinics over the long term.

As this report goes to press, we are also close to a shareholder vote on our proposed merger of equals with Caremark Rx, Inc. If successful, the resulting entity, CVS/Caremark Corporation, will combine our unmatched retail footprint and PharmaCare subsidiary with Caremark's leading PBM business. Together, we will create the nation's premier pharmacy services provider, broadening our respective healthcare missions and positioning ourselves to drive many of the changes that will reshape our industry in the coming years.

Shareholders of both companies have yet to vote on the merger, but we are optimistic about the outcome. Regardless, CVS/pharmacy and PharmaCare have proven how powerful a combined retail/PBM model can be. We will aggressively leverage these twin strengths in the future, because they will allow us to pursue new opportunities and help improve the delivery of healthcare in the United States. Consumers want convenience, choice, and to get more for their healthcare dollar. Employers and health plans want to give plan members access to a full range of integrated pharmacy services, promote better health outcomes, and control costs at the same time.

Managing the significant costs of specialty pharmacy care remains a critical area of concern for employers and other plan sponsors. We are well-positioned to address this issue through end-to-end participation - from plan design to delivery of value-added pharmacy services via face-to-face interaction with customers. We can accomplish this on a broader platform through our proposed merger with Caremark or through accelerated organic growth of our retail/PBM model. We will carefully evaluate all our opportunities to ensure that we help drive the changes necessary to improve our industry.

With the retail and healthcare environments changing rapidly, we've made some organizational changes to help ensure continued success. Most significantly, we promoted Larry Merlo and Chris Bodine to the roles of President of CVS/pharmacy - Retail, and President of CVS Health Services, respectively. Larry is a seasoned retail pharmacy executive with more than 28 years of experience. He has spent 16 of them with CVS. Larry has consistently delivered results in every position he has held within our company while never losing sight of our most important assets - our customers and our colleagues. Chris' retail and healthcare experience spans more than 20 years at CVS. He's a leader who has combined the ability to drive strategy and innovation with a focus on execution and results. Larry and Chris have the values, the vision, and the passion for customer service to help lead CVS in the years ahead.

At the board level, David Dorman and Richard Swift joined us as directors in 2006. David is the former Chairman of the Board and Chief Executive Officer of AT&T Corporation, and his knowledge and experience should serve us well. Dick is the former Chairman, President and CEO of Foster Wheeler, and he has also served as Chairman of the Financial Accounting Standards Advisory Council. As a new member of the Audit Committee, Dick only enhances the rigorous approach to financial reporting that our board has long made a priority.

After more than 12 years of dedicated service, Don Cornwell retired from the board. On behalf of CVS, I thank him for his valued contributions over the years. Don served with distinction on the board's Management Planning and Development Committee as well as the Audit Committee.

In closing, we have begun 2007 with a great deal of momentum and enthusiasm for the opportunities before us. Our core business is performing well as we work our way through the first quarter. Recent retail acquisitions have given us leading shares in high-growth markets, and we will leverage the CVS/pharmacy brand and our operational strength to drive growth. In MinuteClinic, we took an important step in broadening our healthcare offerings. Finally, our pending merger with Caremark would position us to be the low-cost provider and to offer payors, insurers, and consumers greater choice in prescription delivery and new, value-added services. We look forward to keeping you apprised of our progress, and thank you for your continued confidence.

Thomas M. Ryan
Chairman of the Board, President, and Chief Executive Officer

February 27, 2007