The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein.

           AmerisourceBergen Corporation (the "Company") is a leading national wholesale distributor of pharmaceutical products and related healthcare services and solutions with approximately $35 billion in annualized operating revenue. The Company was formed in connection with the merger of AmeriSource Health Corporation ("AmeriSource") and Bergen Brunswig Corporation ("Bergen"), which was consummated on August 29, 2001 (the "Merger").

           The Merger was accounted for as an acquisition of Bergen under the purchase method of accounting using the new guidelines for business combinations issued by the Financial Accounting Standards Board (see Note 2). Under the purchase method of accounting, the estimated cost of approximately $2.4 billion to acquire Bergen, including transaction costs, was allocated to its underlying net assets based on their respective estimated fair values. The $2.3 billion excess of the purchase price over the estimated fair value of the tangible net assets acquired was recorded as goodwill and intangible assets.

           The Company is organized based upon the products and services it provides to its customers. The Company's operating segments have been aggregated into two reportable segments: Pharmaceutical Distribution and PharMerica.

           The Pharmaceutical Distribution segment includes AmerisourceBergen Drug Company ("ABDC") and AmerisourceBergen Specialty Group ("ABSG"). ABDC includes the full-service pharmaceutical distribution facilities, American Health Packaging, and other healthcare related businesses. ABDC sells pharmaceuticals, over-the-counter medicines, health and beauty aids, and other health-related products to hospitals, managed care facilities, and independent and chain retail pharmacies. American Health Packaging packages oral solid medications for nearly any need in virtually all settings of patient care. ABDC also provides promotional, inventory management and information services to its customers. ABSG sells specialty pharmaceutical products to physicians, clinics and other providers in the nephrology, oncology, plasma and vaccines sectors. ABSG also provides third party logistics and reimbursement consulting services to healthcare product manufacturers.

           The PharMerica segment consists solely of the Company's PharMerica operations. PharMerica provides institutional pharmacy products and services to patients in long-term care and alternate site settings, including skilled nursing facilities, assisted living facilities, and residential living communities. It also provides mail order and on-line pharmacy services to injured workers who are receiving workers' compensation benefits, homebound catastrophically-ill patients, and other consumers.

           The accompanying historical consolidated statements of operations and statements of cash flows for fiscal 2000 and fiscal 1999 and the consolidated balance sheet as of September 30, 2000, reflect only the results of AmeriSource, as predecessor to the Company. As a result, the Company's historical operating results and cash flows for fiscal 2000 and fiscal 1999 and the Company's financial position as of September 30, 2000 are not comparable to fiscal 2001 because of the Merger. Fiscal 2001 results include a full year of AmeriSource and approximately one month of Bergen's results. Accordingly, in order to enhance comparability, the following discussion of results of operations includes pro forma revenue information. For purposes of this discussion, pro forma refers to the combined results of AmeriSource and Bergen in each respective fiscal year.

           Operating revenue, which excludes bulk deliveries, for the fiscal year ended September 30, 2001 increased 36% to $15.8 billion from $11.6 billion in the prior fiscal year primarily due to increased operating revenue in the Pharmaceutical Distribution segment. Excluding the revenue impact from the Merger, operating revenue increased 20% for the full fiscal year. On a pro forma combined basis operating revenue increased 14% versus the prior year.

           The Company reports as revenue bulk deliveries to customer warehouses, whereby the Company acts as an intermediary in the ordering and delivery of pharmaceutical products. As a result of the merger, bulk deliveries increased to $368.7 million in fiscal 2001 from $35.0 million in fiscal 2000. Excluding the impact from the Merger, bulk deliveries would have decreased to $1.1 million for fiscal 2001. On a pro forma combined basis revenue from bulk deliveries of $4.5 billion in fiscal 2001 increased 7% versus the prior year. Due to the insignificant service fees generated from these bulk deliveries, fluctuations in volume have no significant impact on operating margins.

           Gross profit of $700.1 million in fiscal 2001 increased by 35% as compared to the prior year. As a percentage of operating revenue, the gross profit in fiscal 2001 was 4.42% as compared to 4.48% in the prior year. The decline in gross profit percentage was primarily the result of a 29 basis point decrease in the Pharmaceutical Distribution segment, which was offset, in part, by the impact of the inclusion of one month of PharMerica's results. PharMerica, due to the nature of its prescription fulfillment business, has significantly higher gross margins and operating expense ratios than the Company's Pharmaceutical Distribution segment. Excluding the impact of the Merger, gross profit increased 12% for the full fiscal year, and as a percentage of operating revenue was 4.16% in fiscal 2001 as compared to 4.48% in the prior year.

           Distribution, selling and administrative expenses, depreciation and amortization increased by $100.9 million or 32% in fiscal 2001 as compared to the prior year, and decreased as a percentage of operating revenue to 2.65% in fiscal 2001 from 2.74% in fiscal 2000 due to a 29 basis point decrease in the Pharmaceutical Distribution segment ratio offset in part by the inclusion of one month of PharMerica results. Excluding the impact of the Merger, distribution, selling and administrative expenses, and depreciation and amortization increased 7% for the full fiscal year, and decreased as a percentage of operating revenue to 2.44% in fiscal 2001 from 2.74% in fiscal 2000.

           In connection with the Merger, the Company has developed integration plans to consolidate its distribution network and eliminate duplicate administrative functions, which are expected to result in synergies of approximately $150 million annually at the end of the third year following the Merger. The Company intends to reduce the number of distribution facilities from 51 at September 30, 2001, to approximately 30 over the next three to four years and has announced plans to close seven facilities in fiscal 2002. A charge of $10.9 million was recognized in the fourth quarter of fiscal 2001 related to these plans, and included $6.2 million of severance for approximately 260 warehouse and administrative personnel to be terminated, $2.3 million in lease cancellations, and $2.4 million in the write-down of assets related to the facilities to be closed. Accrued expenses of $7.1 million related to this charge are included in the consolidated balance sheet at September 30, 2001. Additional shut-down charges for integ ration initiatives will be recognized in subsequent periods as facilities to be consolidated are identified and specific plans are approved and announced.

           In connection with its acquisition of Bergen, the Company incurred merger costs of $13.1 million in fiscal 2001, consisting primarily of consulting fees of $5.6 million and a $6.5 million charge for the accelerated vesting of AmeriSource stock options. Additional merger costs, including merger integration and employee retention costs, will be charged to expense in subsequent periods when incurred. These costs are expected to be between $20 million and $30 million in fiscal 2002.

           The Company's AmeriSource Corporation subsidiary is subject to contingencies pursuant to environmental laws and regulations at one of its former distribution centers that may require the Company to make remediation efforts. In fiscal 1994, the Company accrued $4.1 million to cover future consulting, legal, remediation and ongoing monitoring costs. During fiscal 2001, environmental reserves of $2.7 million were reversed into income based on a new engineering analysis prepared by outside consultants that was completed in September 2001. The remaining liability of $1.0 million at September 30, 2001, is reflected in other liabilities in the accompanying consolidated balance sheet. This accrued liability represents the current estimate of the extent of contamination and choice of remedy based on existing technology and presently enacted laws and regulations. However, changes in remediation standards, improvements in cleanup technology and discovery of additional information concerning the site could affect th e estimated liability in the future.

           During fiscal 2000, severance accruals of $1.1 million relating to the fiscal 1999 facility consolidation and 1998 restructuring efforts were reversed into income after employees expected to be severed either left the Company before receiving their benefits or were retained in other positions within the Company.

           Operating income of $259.4 million for the year ended September 30, 2001 increased by 28% from the prior year. Excluding the facility consolidations and employee severance charge, the merger costs and the environmental remediation credit ("special items") in both years described above and the impact of the Merger in fiscal 2001, the increase in operating income was 19% and the Company's operating margin was 1.72% in fiscal 2001 as compared to 1.73% in fiscal 2000.

           Equity in losses of affiliates and other were $10.9 million in fiscal 2001 and $0.6 million in fiscal 2000. These results primarily reflect the full-year impact of the Company's equity investment in HealthNexis, LLC that was accounted for on the equity method and the write-down of the Company's investment in a technology company. HealthNexis, LLC subsequently merged with the Global Health Exchange in November 2001.

           Interest expense of $45.7 million in fiscal 2001 represents an increase of 9% compared to the prior year. Excluding the impact of the Merger, interest expense in fiscal 2001 decreased 11% compared to the prior-year period. This decrease reflects the positive impact of $300.0 million of 5% fixed-rate convertible notes issued by the Company in December of 2000 and a decrease of approximately 50 basis points in average borrowing rates under the Company's variable-rate debt facilities, which more than offset the increase in average levels of debt. Excluding the impact of the Merger and the related refinancings described below, average borrowings during the year ended September 30, 2001 were $614 million as compared to average borrowings of $612 million in the prior year.

           Income tax expense of $77.7 million in fiscal 2001 reflected an effective tax rate of 38.3% versus 38.0% in the prior fiscal year. This slight increase in the effective rate reflects the inclusion of one month of Bergen's operating results. The Company expects the effective tax rate to be between 39% and 40% in fiscal 2002 as a result of the Merger.

           Net income of $123.8 million represents an increase of 25% over the prior year. Excluding special items in both years, adjusted net income of $137.0 million increased 39% compared to the prior fiscal year. Diluted earnings per share increased 11% to $2.10 per share as compared to $1.90 per share in the prior year. Diluted earnings per share excluding special items increased 22% to $2.31 per share as compared to $1.89 per share in the prior year. Diluted earnings per share for fiscal 2001 includes the impact of the shares issued to effect the Merger and the shares assumed issued under the 5% convertible subordinated notes.

           Operating revenue for the Pharmaceutical Distribution segment for the fiscal year ended September 30, 2001 increased 36% to $15.8 billion from $11.6 billion in the prior fiscal year. Excluding the impact of the Merger, operating revenue increased 20%. During the year ended September 30, 2001, 53% of operating revenue was from sales to institutional customers and the remaining 47% was from retail customers. In fiscal 2000, the customer mix was 51% institutional and 49% retail. During the year ended September 30, 2001, sales to institutional customers increased 42% and sales to retail customers increased 29%. Excluding the impact of the Merger, institutional operating revenue increased 26% and retail operating revenue increased 14%. The increase in institutional operating revenue was primarily due to revenue growth with the Novation group purchasing organization ("GPO") and the Veterans Administration as well as significant increases in the alternate site customer group. During calendar 2000, members of the Novation GPO went through a distributor selection process and, as a result, the Company added over $500 million in annualized operating revenue in fiscal 2001. Operating revenue from the Veterans Administration accounted for approximately 30% of total institutional operating revenue. Alternate site sales increased 54% during fiscal 2001 due to the full-year impact of a mail order customer added in the third quarter of the prior year which accounted for 20% of the increase. In addition, numerous new alternate site accounts were added during the year. The increase in retail operating revenue was consistent with overall industry growth rates. Future operating revenue growth may be impacted by customer consolidation and competition within the industry, as well as industry growth rates.

           In the Pharmaceutical Distribution segment, gross profit of $660.4 million in fiscal 2001 increased by 27% as compared to the prior year. As a percentage of operating revenue, the gross profit in fiscal 2001 was 4.19% as compared to 4.48% in the prior year. The year-to-year decline reflects the net impact of a number of factors including the change in customer mix to a higher level of larger institutional, mail order and chain accounts, and the continuing competitive pricing environment, offset, in part, by higher buy-side margins than in the prior year. Downward pressures on sell-side gross profit margin are expected to continue and there can be no assurance that increases in the buy-side component of the gross margin, including manufacturer price increases and negotiated deals, will be available in the future to fully or partially offset the anticipated decline. Gross profit was adversely impacted in fiscal 2001 by a $5.6 million write down of inventory, primarily related to the Company's decision to exi t the designer fragrance business at its cosmetic distribution subsidiary.

           Total operating expenses, excluding special items, increased 21% in the Pharmaceutical Distribution segment to $386.2 million, primarily the result of the Merger. As a percentage of operating revenue, operating expenses decreased to 2.45% in fiscal 2001 from 2.74% in the prior year. This decrease reflects the changing customer mix described above, and efficiencies of scale, as well as the continued elimination of costs and productivity improvements throughout the Company's distribution network.

           Total operating income before special items increased 36% in the Pharmaceutical Distribution segment to $274.2 million. As a percentage of operating revenue, operating income before special items was 1.74% in fiscal 2001 and 1.73% in the prior year, reflecting the net effect of the decline in gross margins offset by the reduction in operating expenses discussed above. While management historically has been able to lower expense ratios and expects to continue to do so, there can be no assurance that reductions will occur in the future, or that expense-ratio reductions will exceed possible declines in gross margins. Additionally, there can be no assurance that merger integration efforts will proceed as planned and result in the desired synergies.

           The PharMerica segment was acquired in connection with the Merger and its operating revenue of $116.7 million and operating income of $6.5 million for the year ended September 30, 2001 reflects approximately one month of operating results. On a pro forma basis, PharMerica's fiscal 2001 operating revenue increased 6% to $1.35 billion from $1.27 billion in the prior year.

           These amounts represent the elimination of the Pharmaceutical Distribution segment's sales to PharMerica. AmerisourceBergen Drug Company is the principal supplier of pharmaceuticals to PharMerica.

           Operating revenue for the fiscal year ended September 30, 2000 increased 19% to $11.6 billion from $9.8 billion in the prior fiscal year. During the fiscal year ended September 30, 2000, sales to health systems increased 22%, sales to alternate site facilities increased 59%, sales to independent drugstore customers increased 11% and sales to the chain drugstore customer group increased 12% compared to the prior year. During the year ended September 30, 2000, sales to health systems and alternate site facilities accounted for 51% of total operating revenue, while sales to independent community pharmacies accounted for 37% and sales to chain drugstores accounted for 12% of the total. The increase in health systems revenue was primarily due to 37% revenue growth with the Veterans Administration, which accounted for 19% and 17% of the total operating revenue for the fiscal years ended September 30, 2000 and 1999, respectively. The balance of the health systems growth was due to growth from existing relationships with group purchasing organizations. Several new alternate site customers were added as a result of the Company's sales reorganization in the prior year, which created a national and regional alternate site sales force. Approximately 15% of the alternate site revenue growth was from a new contract with a mail order facility, which started in the third quarter of fiscal 2000. The increase in independent community pharmacy and chain drugstore revenue was consistent with overall industry growth.

           The Company reports as revenue bulk deliveries to customer warehouses, whereby the Company acts as an intermediary in the ordering and delivery of pharmaceutical products. Bulk deliveries decreased 26% to $35.0 million in fiscal 2000 compared to fiscal 1999. Due to the insignificant service fees generated from these bulk deliveries, fluctuations in volume have no significant impact on operating margins.

           Gross profit of $519.6 million in fiscal 2000 increased by 10% as compared to the prior year due primarily to the increase in operating revenue. As a percentage of operating revenue, the gross profit in fiscal 2000 was 4.48% as compared to 4.85% in the prior-year period. The decline in gross profit percentage was primarily due to changes in the customer mix, which included more lower-margin health systems business than in the prior year, and price competition within the pharmaceutical distribution industry.

           Distribution, selling and administrative expenses, and depreciation and amortization increased by $19.4 million or 6% in fiscal 2000 as compared to the prior year, and decreased as a percentage of operating revenue to 2.73% in fiscal 2000 from 3.04% in fiscal 1999. This improvement reflects the changing customer mix to more health systems business, including the Veterans Administration, which is lower gross margin business, but requires lower operating expense as a percentage of revenue to service. The improvement also reflects warehouse efficiencies and cost reductions related to the Company's fiscal 1998 and 1999 restructuring efforts. These factors were offset in part by an increase in the bad debt provision to $10.3 million for fiscal 2000 compared to a $7.0 million provision in the prior year. The bad debt increase was primarily due to certain customer business failures during the year.

           In fiscal 1999, the Company acquired C.D. Smith Healthcare, Inc. During fiscal 2000, the Company closed C.D. Smith's Chicago, Illinois pharmaceutical distribution facility and completed the consolidation of C.D. Smith's pharmaceutical packaging business. In addition, the Company completed the conversion of the remaining two C.D. Smith facilities to a centralized system for data processing and other administrative services. A charge of $12.8 million was recognized in the fourth quarter of fiscal 1999 related to these efforts, which included a $7.2 million write-down of goodwill and fixed assets related to the Chicago facility, $3.5 million of contract and lease cancellations and other costs primarily relating to the expected termination of a noncancelable supply contract, and $2.1 million of severance for approximately 90 warehouse and administrative personnel to be terminated as a result of the facility consolidation and centralization. As of September 30, 2000, all of the restructuring efforts were complete d except for the final resolution of the noncancelable supply contract which was settled in November 2000. Severance accruals of $0.5 million related to the fiscal 1999 charge were reversed into income during the third quarter of fiscal 2000 primarily related to the decision to retain a manager previously anticipated to be terminated.

           In the fourth quarter of fiscal 1998, the Company began to centralize its data processing, accounting, contract administration and purchasing functions, reorganize its pharmaceutical distribution facilities into five regions, and consolidate two pharmaceutical distribution facilities. A charge of $8.3 million was recognized in the fourth quarter of fiscal 1998 related to these efforts and included severance of $3.3 million for approximately 350 administrative and warehouse personnel and asset write-downs and lease cancellation costs of $5.0 million. As of September 30, 2000, all of the Company's pharmaceutical distribution facilities were converted to the centralized system and substantially all of the 350 positions have been eliminated. In the third quarter of fiscal 2000, the Company reversed restructuring accruals related to the fiscal 1998 charge of approximately $0.6 million representing severance not paid to employees because they either left the Company before receiving their benefits or took other po sitions within the Company. This $0.6 million reversal, combined with the $0.5 million reversal of the fiscal 1999 charge described above, is included in the facility consolidations and employee severance line in the Company's statement of operations. In fiscal 1999, the Company reversed $1.1 million of cost originally accrued during fiscal 1997 for facility consolidations and employee severance due to $0.8 million of proceeds in excess of estimates for disposed assets and $0.3 million of severance settled for less than original estimates.

           Operating income of $202.1 million in the year ended September 30, 2000 increased by 27% from the prior year in part because of the $1.1 million restructuring charge reversal in fiscal 2000 as compared to the $14.9 million in facility consolidations, employee severance and merger costs in fiscal 1999. Excluding these items in both years, the increase in operating income was 15% and the Company's operating margin was 1.73% in fiscal 2000 as compared to 1.78% in fiscal 1999. The decrease is due to the reduction in gross margin described above offset in part by the decrease in distribution, selling and administrative expenses, and depreciation and amortization as a percentage of operating revenue.

           Interest expense of $41.9 million in fiscal 2000 represents an increase of 6% compared to the prior year. The increase from the prior-year expense reflects higher interest rates offset in part by lower average levels of debt and lower borrowing spreads. The increase in average market interest rates during fiscal 2000 was approximately 106 basis points compared to fiscal 1999. Average borrowings during the year ended September 30, 2000 were $612 million as compared to average borrowings of $625 million in the prior fiscal year.

           Income tax expense of $60.7 million in fiscal 2000 reflected an effective tax rate of 38.0% versus 40.6% in the prior fiscal year. The reduction in the effective rate was primarily due to the effect of the nondeductible goodwill write-down and merger costs which occurred in fiscal 1999.

           Income before extraordinary items of $99.0 million represents an increase of 40% over the prior year. Excluding facility consolidation and employee severance and merger costs in both years, income before extraordinary items of $98.3 million increased 19% compared to the prior fiscal year. Diluted earnings per share increased 45% from the prior year to $1.90 per share as compared to $1.31 per share in the prior year.

           The following table illustrates the Company's debt structure at September 30, 2001, including availability under revolving credit agreements and receivable securitization facilities.

           The Senior Credit Agreement consists of a $1.0 billion revolving credit facility (the "Revolving Facility") and a $300 million term loan facility (the "Term Facility"), both maturing in August 2006. The Term Facility has scheduled maturities on a quarterly basis beginning December 31, 2002, totaling $60 million in each of fiscal 2003 and 2004, and $80 million and $100 million in fiscal 2005 and 2006, respectively. Interest on borrowings under the Senior Credit Agreement accrues at specified rates based on the Company's debt ratings. Such rates range from 1.0% to 2.5% over LIBOR or 0% to 1.5% over prime. Currently, the rate is 1.5% over LIBOR or .50% over prime. Availability under the Revolving Facility is reduced by the amount of outstanding letters of credit ($63.1 million at September 30, 2001). The Company pays quarterly commitment fees to maintain the availability under the Revolving Facility at specified rates based on the Company's debt ratings ranging from .25% to .50% of the unused availability. Curr ently, the rate is .375%. The Senior Credit Agreement contains customary covenants and restrictions as described in Note 4 to the consolidated financial statements. The Company can choose to repay or reduce its commitments under the Senior Credit Facility at any time.

           In December 2000, the Company issued $300.0 million of 5% convertible subordinated notes due December 1, 2007. The notes have an annual interest rate of 5%, payable semiannually, and are convertible into common stock of the Company at $52.97 per share at any time before their maturity or their prior redemption or repurchase by the Company. On or after December 3, 2004, the Company has the option to redeem all or a portion of the notes that have not been previously converted. Net proceeds from the notes of approximately $290.6 million were used to repay existing borrowings, and for working capital and other general corporate purposes. In connection with the issuance of the notes, the Company incurred approximately $9.4 million of financing fees which were deferred and are being amortized over the seven-year term of the notes.

           At September 30, 2001, borrowings under the AmeriSource $400 million receivables securitization financing were $22.0 million. The facility has an expiration date of May 2004 and interest rates are based on prevailing market rates for short-term commercial paper plus a program fee of 38.5 basis points. In addition, in connection with the Merger, the Company assumed the $450 million Bergen securitization financing. This facility expires in December 2005, and interest rates are based on prevailing market rates for short-term commercial paper plus a program fee of 75 basis points. In December 2001, the Company increased its availability under the facility to $600 million through June 2002. The receivables securitization facilities represent financing vehicles utilized by the Company because of the availability of attractive interest rates relative to other financing sources. The Company securitizes its trade accounts and notes receivable, which are generally non-interest bearing, in transactions that are acc ounted for as financing transactions under Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."

           In connection with the Merger, the Company assumed Bergen's Capital I Trust (the "Trust"), a wholly owned subsidiary of Bergen. In May 1999, the Trust issued 12,000,000 shares of 7.80% trust originated preferred securities (SM) (TOPrS(SM)) (the "Trust Preferred Securities") at $25 per security. The proceeds of such issuances were invested by the Trust in $300 million aggregate principal amount of Bergen's 7.80% subordinated deferrable interest notes due June 30, 2039 (the "Subordinated Notes"). The Subordinated Notes represent the sole assets of the Trust and bear interest at the annual rate of 7.80%, payable quarterly, and are redeemable by the Company beginning in May 2004 at 100% of the principal amount thereof. The Trust paid quarterly cash distributions of $5.9 million in September 2001. The obligations of the Trust related to the Trust Preferred Securities are fully and unconditionally guaranteed by the Company.

           Holders of the Trust Preferred Securities are entitled to cumulative cash distributions at an annual rate of 7.80% of the liquidation amount of $25 per security. The Trust Preferred Securities will be redeemable upon any repayment of the Subordinated Notes at 100% of the liquidation amount beginning in May 2004.

           The Company, under certain conditions, may cause the Trust to defer the payment of distributions for successive periods of up to 20 consecutive quarters. During such periods, accrued distributions on the Trust Preferred Securities will compound quarterly at an annual rate of 7.80%. Also during such periods, the Company may not declare or pay distributions on its capital stock; may not redeem, purchase or make a liquidation payment on any of its capital stock; and may not make interest, principal or premium payments on, or repurchase or redeem, any of its debt securities that rank equal with or junior to the Subordinated Notes.

           The Company's most significant market risk is the effect of changing interest rates. The Company manages this risk by using a combination of fixed- and variable-rate debt. At September 30, 2001, the Company had approximately $1.2 billion of fixed-rate debt with a weighted average interest rate of 7.2% and $392 million of variable-rate debt with a weighted average interest rate of 4.9%. The amount of variable-rate debt fluctuates during the year based on the Company's working capital requirements. The Company periodically evaluates various financial instruments that could mitigate a portion of its exposure to variable interest rates. However, there are no assurances that such instruments will be available on terms acceptable to the Company. There were no such financial instruments in effect at September 30, 2001. For every $100 million of unhedged variable-rate debt outstanding, a 49 basis-point increase in interest rates would increase the Company's annual interest expense by $.49 million.

           The Company's operating results have generated sufficient cash flow which, together with borrowings under its debt agreements and credit terms from suppliers, have provided sufficient capital resources to finance working capital and cash operating requirements, fund capital expenditures, and fund the payment of interest on outstanding debt. The Company's primary ongoing cash requirements will be to finance working capital, fund the payment of interest on indebtedness, finance Merger integration initiatives and fund capital expenditures and routine growth and expansion through new business opportunities. Future cash flows from operations and borrowings are expected to be sufficient to fund the Company's ongoing cash requirements.

           During the year ended September 30, 2001, the Company's operating activities used $40.0 million in cash as compared to $216.6 million cash generated in fiscal 2000. Cash used in operations in fiscal 2001 resulted from increases of $726.1 million in merchandise inventories and $151.6 million in accounts receivable partially offset by an increase in accounts payable, accrued expenses and income taxes of $619.2 million. The increase in merchandise inventories reflected necessary inventories to support the strong revenue increase, and inventory purchased to take advantage of buy-side gross profit margin opportunities including manufacturer price increases and negotiated deals. Additionally, inventories at September 30, 2001 included safety stock purchased due to uncertainties regarding possible increased customer demands or disruptions in the supply stream as the result of the terrorist events of September 11, 2001. The increase in accounts payable, accrued expenses and income taxes of $619.2 million was reduce d by merger-related payments of approximately $58.8 million, primarily executive compensation payments made in August 2001.

           During the year ended September 30, 2000, the Company's operating activities generated $216.6 million in cash as compared to $3.0 million generated in fiscal 1999. Cash generation from operations in fiscal 2000 resulted from an increase of $416.0 million in accounts payable, accrued expenses and income taxes offset by increases in accounts receivable of $23.8 million and merchandise inventories of $327.4 million. The increase in accounts payable, accrued expenses and income taxes in excess of the increase in merchandise inventories was due to a 4% increase in days payable outstanding during the year due to the centralization of accounts payable processing and the timing of vendor purchases. Accounts receivable (net) increased only 2% despite the 19% revenue increase due to the change in customer mix to quicker paying health systems customers and the collection of a disputed receivable. Merchandise inventories increased 26% reflecting the changes in customer mix and to support anticipated new customer contrac ts, including additional business with the Novation group purchasing organization, and seasonal buying opportunities.

           During the year ended September 30, 1999, the Company's operating activities generated $3.0 million in cash. Cash generation from operations in fiscal 1999 was impacted by an increase in accounts receivable of $111.7 million primarily due to the 15% growth in operating revenue in the fourth quarter of fiscal 1999 as compared to the similar period in the prior year as well as the $289.1 million increase in merchandise inventories which was offset in part by the $246.3 increase in accounts payable, accrued expenses and income taxes. Merchandise inventories increased to support new customer contracts, provide for seasonal buying opportunities and provide for year 2000 supply concerns. A decrease in restricted cash of $41.8 million in fiscal 1999 due to the extinguishment of the Company's prior receivables securitization facility also offset the increase in receivables and inventories.

           The Company paid a total of $2.9 million, $3.6 million and $5.2 million of severance, contract, and lease cancellation and other costs in fiscal 2001, 2000 and 1999, respectively, related to its fiscal 2001, 1999, 1998 and 1997 cost reduction plans discussed above. Severance accruals of $5.1 million and remaining contract and lease obligations of $2.0 million at September 30, 2001 are included in accrued expenses and other in the consolidated balance sheet.

           Capital expenditures for the years ended September 30, 2001, 2000 and 1999 were $23.4 million, $16.6 million and $15.8 million, respectively, and relate principally to investments in warehouse improvements, information technology and warehouse automation. Capital expenditures of approximately $85 million to $95 million reflecting a full year of the merged company are expected in fiscal 2002.

           During fiscal 2001, the Company sold the net assets of one of its specialty products distribution facilities for approximately $13.0 million.

           The Company currently intends to pay quarterly dividends on its Common Stock of $0.025 per share. The first dividend of $0.025 was declared by the board of directors on October 31, 2001, and was paid on December 3, 2001 to stockholders of record at the close of business on November 19, 2001.

           During fiscal 2000, the Company and three other healthcare distributors formed an Internet-based company that is an independent, commercially neutral healthcare product information exchange focused on streamlining the process involved in identifying, purchasing and distributing healthcare products and services. The Company contributed $6.5 million and $3.7 million to the joint venture in fiscal 2001 and 2000, respectively, and its ownership interest of approximately 22% is accounted for under the equity method. This entity merged in November 2001 with the Global Health Exchange, a similar venture, and the Company's ongoing ownership interest in the Global Health Exchange is 4%.

           Cash provided by financing activities in fiscal 2001 primarily represents the net effect of borrowings to fund working capital requirements, the refinancing and merger costs described above. In fiscal 2000, cash used by financing activities represented net repayments of the Company's revolving credit facility from cash provided by operations. Cash provided by financing activities during fiscal 1999 represents borrowings under the Company's revolving credit and receivable securitization facilities primarily to fund its working capital requirements. In connection with its acquisition of C.D. Smith in fiscal 1999, the Company extinguished approximately $78 million of C.D. Smith's long-term debt with borrowings under its revolving credit facility.

           In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 applies to all business combinations completed after June 30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. The Company accounted for the Merger, which was consummated in August 2001, in accordance with SFAS No. 141. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment on at least an annual basis. In accordance with the transition provisions of SFAS No. 142, the Company did not amortize goodwill arising from the Merger in fiscal 2001. The Company will fully adopt SFAS No. 142 on October 1, 2001, at which time it will no longer amortize its other goodwill balances (such amortization expen se amounted to approximately $1.5 million in fiscal 2001). The Company will complete its initial impairment testing of goodwill by March 31, 2002, as required by SFAS No. 142, and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.

           In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This standard sets forth the accounting for the impairment of long-lived assets, whether they are held and used or are disposed of by sale or other means. It also broadens and modifies the presentation of discontinued operations. The standard will be effective for the Company's fiscal year 2003, although early adoption is permitted, and its provisions are generally to be applied prospectively. The Company is in the process of evaluating the adoption of this standard, but does not believe it will have a material impact on its consolidated financial statements.

           Certain information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements (as defined in Section 27A of the Securities Act and Section 21E of the Exchange Act) that reflect the Company's current views with respect to future events and financial performance. Certain factors such as competitive pressures, success of integration, restructuring or systems initiatives, market interest rates, regulatory changes, changes in customer mix, changes in pharmaceutical manufacturers' pricing and distribution policies, changes in U.S. Government policies, customer insolvencies, or the loss of one or more key customer or supplier relationships could cause actual results to differ materially from those in forward-looking statements.