Chairman, President, and CEO Tom Ryan

To Our Shareholders:

The past year will certainly be remembered as one of considerable accomplishment for our company. We swiftly and successfully completed the integration of nearly 1,100 former Eckerd stores, along with the former Eckerd Health Services, acquired in 2004. At the same time, we opened approximately 300 new or relocated stores in both existing and new markets. Throughout this activity, we never lost focus on our core business, as evidenced by our same store sales growth and market share gains. Our PharmaCare pharmacy benefits manager (PBM) also hit new heights, recording total revenue of just under $3 billion.

Our company's total sales rose 21 percent to a record $37 billion, while diluted earnings per share climbed 32 percent, to $1.45. Same store sales, which now include the 2004 acquired stores, increased 6.5 percent, with front-end same store sales up a stellar 5.5 percent and pharmacy same store sales up 7.0 percent. I'm also pleased to report that we generated more than $650 million in free cash flow, reflecting the quality of our growth. Our shares produced a 17.9 percent total return, far outdistancing the 4.9 percent return posted by the S&P 500 Index.

All signs point to growth in 2006 and beyond

The nation's largest pharmacy chain by store count, we were operating 5,420 CVS/pharmacy® locations by year-end plus 51 PharmaCare specialty pharmacies. We opened many of our new stores in important growth markets such as Chicago, Minneapolis, Las Vegas, Los Angeles, Orange County, and Phoenix. All of those are newer markets entered by CVS during the past five years. I'm happy to report that we surpassed our sales and profitability targets in all of them. We expect to open 250 to 275 new or relocated stores in 2006, adding 100 to 125 net new locations.

Meanwhile, we're delighted with the performance of the former Eckerd stores acquired in 2004. Concentrated largely in Florida and Texas, they have met or exceeded expectations on every front. All operations have been fully integrated, from marketing, distribution, and human resources to information systems and the successful combination of the acquired PBM operations under the PharmaCare banner. Yet, as far and as fast as we've come, it's important to note that we believe much of the acquisition's benefits still lie ahead of us. By employing our operational expertise and technology, we are taking advantage of a multi-year opportunity to drive top-line growth, improve margins, and reduce inventory shrinkage. Furthermore, a new distribution center similar to our Ennis, Texas, facility is set to open in Florida during the second half of 2006. Highly cost-effective, its storage and retrieval systems will be capable of servicing the same volume and number of stores as a facility twice its size.

Our planned acquisition of 700 standalone Sav-on® and Osco® drugstores from Albertson's, Inc., announced in January 2006, will further strengthen our position as America's No. 1 retail pharmacy. Upon completion of the transaction, which is expected to occur mid-2006, we will operate approximately 6,100 stores across 42 states. Almost half the stores we are acquiring are located in Southern California, which will make us the No. 1 drugstore in that fast-growing region. Most of the rest are high-volume stores in states where we already have a presence, providing many No. 1 or No. 2 market positions. We will also acquire a distribution center in La Habra, California. The transaction is expected to be accretive to both earnings and cash flow in its first full year.

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Leveraging new opportunities in pharmacy

CVS now fills 14 percent of all U.S. retail drug prescriptions. Generics account for well over half of all the prescriptions we fill. With several blockbuster drugs poised to lose patent protection over the next several years, the demand for generics should continue to climb. While depressing top-line growth, the increasing adoption of generic pharmaceuticals is helping drive margin gains.

The Medicare Part D Prescription Drug Plan, launched in January 2006, should increase usage of pharmaceuticals over time by making them more affordable for seniors. Some 42 million Medicare beneficiaries are eligible for the new plan, and we've worked hard to position ourselves as a key information source. More than 15,000 CVS pharmacists have undergone extensive training to help seniors navigate the variety of options available to them. We've formed marketing alliances with three of the nation's leading managed care organizations: UnitedHealth Group, through its Ovations business unit, Aetna, and Humana. We've also hosted free educational seminars and set up Medicare Information Centers in stores across the country. As a result, we are already seeing new customers in our stores.

With the industry's leading retail presence and our PBM, we are in an excellent position to benefit from Medicare Part D. Our PharmaCare subsidiary has grown into the nation's fourth-largest, full-service PBM since its launch in 1994. An attractive business, it has low capital requirements and high return characteristics. PharmaCare has focused from the outset on providing clients with high-quality, low-cost solutions. It has also been at the leading edge of providing an integrated PBM/specialty pharmacy offering. In addition to its significant mail order pharmacy business, PharmaCare operates specialty stores across the country as well as a state-of-the-art specialty mail order facility. During 2005, PharmaCare announced a strategic alliance with Universal American Financial Corp., a leading health insurance company, under which PharmaCare will provide a full array of PBM services to Universal American-sponsored Medicare prescription plans.

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Gaining share in all key, front-store categories

CVS gained share in the front of the store in all key categories, including health, beauty, vitamins, greeting cards, and general merchandise, while also increasing sales of private label products. Our ExtraCare® loyalty card has become a powerful tool, and customers tell us that they love the benefits. Impressively, they use the card for approximately 60 percent of front-store transactions. A laser focus on customer service is at the heart of our front-store strategy. Along with our loyalty program, new proprietary and exclusive products, and smarter promotions, our focus on making things "CVS easy®" for customers is driving our growth. Our customer research tells us that our service profile has strengthened. We are earning high marks for shopability, value, hours of operation, being in-stock, and overall customer service. Among our latest "CVS easy" initiatives, we've teamed up with MinuteClinic to offer in-store treatment for common family ailments through certified nurse practitioners and physician's assistants. As of February 2006, approximately 50 CVS/pharmacy stores included these independently operated clinics, and we expect that number to rise as the year progresses. Early reports indicate that customers enjoy the convenience.

On the pages that follow, you can read about our growth opportunities in more detail. Before signing off, though, I want to thank our 148,000 CVS colleagues and our board of directors for their invaluable contributions. We could not have accomplished all we did without their tremendous dedication. They waged an impressive group effort around the integration of our 2004 acquisition while never losing focus on our existing business. Above and beyond their official responsibilities, CVS colleagues also took their civic responsibilities seriously. Their response to the devastation caused by Hurricane Katrina was quick, effective, and passionate, as they tried to make life easier for the many victims. I couldn't be more proud of the many contributions made by our team.

I also want to pay tribute to my friend and mentor Stanley Goldstein, who is stepping down from our board in May 2006. Stanley, along with his late brother Sid and Ralph Hoagland, had the vision to open the first CVS store in Lowell, Massachusetts, back in 1963. During his tenure as President of CVS/pharmacy and then President of Melville Corporation, Stanley helped transform the retail landscape. After stepping down as Chairman of CVS Corporation in 1999 and right up to the present, he has continued to provide valuable perspective and sage counsel. It has been my pleasure and privilege to know Stanley and work alongside him for nearly three decades. He has left a legacy that will help guide our company well into the future.

In closing, the bright opportunities before us mean that all signs point to growth for CVS. We expect to reap multi-year benefits from the turnaround of our acquired properties. Our retail pharmacies will leverage our leadership in the industry as well as the broader healthcare trends working in our favor. Furthermore, the combination of our stores and our PharmaCare PBM business offers payors a pharmacy solution unmatched by any competitor. Finally, our strong cash flow means that more CVS/pharmacy stores in more markets are on the way. Thank you for your confidence.

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

March 14, 2006

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