CARDINAL HEALTH INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarter Ended March 31, 2004 Commission File Number 1-11373

CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)

OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices and zip code)

(614) 757-5000
(Registrant's telephone number, including area code)

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 is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes X No
--------- --------

The number of Registrant's Common Shares outstanding at the close of
business on April 30, 2004 was as follows:

Common Shares, without par value: 430,394,041
-----------

CARDINAL HEALTH, INC. AND SUBSIDIARIES

Index *

Page No.
--------

Part I. Financial Information:
---------------------

Item 1. Financial Statements:

Condensed Consolidated Statements of Earnings for the Three and Nine Months
Ended March 31, 2004 and 2003 (unaudited).......................................... 3

Condensed Consolidated Balance Sheets at March 31, 2004 and
June 30, 2003 (unaudited).......................................................... 4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2004 and 2003 (unaudited)................................................ 5

Notes to Condensed Consolidated Financial Statements............................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations...................................................................... 22

Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 29

Item 4. Controls and Procedures............................................................ 29

Part II. Other Information:
-----------------

Item 1. Legal Proceedings.................................................................. 30

Item 2. Change in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.... 31

Item 6. Exhibits and Reports on Form 8-K................................................... 31

Signatures ................................................................................... 33

* Items not listed are inapplicable.

Page 2

PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)

See notes to condensed consolidated financial statements.

Page 3

CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)

MARCH 31, JUNE 30,
2004 2003
---------------- -----------------

ASSETS
Current assets:
Cash and equivalents $ 527.2 $ 1,724.0
Trade receivables, net 3,497.8 2,784.4
Current portion of net investment in sales-type leases 256.1 171.8
Inventories 8,652.1 7,623.3
Prepaid expenses and other 739.6 776.0
Assets held for sale from discontinued operations 139.0 170.1
---------------- -----------------

Total current assets 13,811.8 13,249.6
---------------- -----------------

Property and equipment, at cost 4,030.8 3,755.3
Accumulated depreciation and amortization (1,797.3) (1,665.8)
---------------- -----------------
Property and equipment, net 2,233.5 2,089.5

Other assets:
Net investment in sales-type leases, less current portion 538.4 557.3
Goodwill and other intangibles, net 3,002.5 2,332.3
Other 373.2 292.7
---------------- -----------------

Total $ 19,959.4 $ 18,521.4
================ =================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 1.2 $ -
Current portion of long-term obligations 53.2 228.7
Accounts payable 6,998.2 5,288.4
Other accrued liabilities 1,704.2 1,733.0
Liabilities from discontinued operations 60.9 64.3
---------------- -----------------

Total current liabilities 8,817.7 7,314.4
---------------- -----------------

Long-term obligations, less current portion 2,477.0 2,471.9
Deferred income taxes and other liabilities 1,007.3 977.0

Shareholders' equity:
Preferred Shares, without par value
Authorized - 0.5 million shares, Issued - none - -
Common Shares, without par value
Authorized - 755.0 million shares, Issued - 471.2 million
shares and 467.2 million shares at March 31, 2004
and June 30, 2003, respectively 2,542.3 2,403.7
Retained earnings 7,610.4 6,517.3
Common Shares in treasury, at cost, 42.0 million shares
and 18.8 million shares at March 31, 2004 and
June 30, 2003, respectively (2,548.5) (1,135.8)
Other comprehensive income/(loss) 59.8 (19.2)
Other (6.6) (7.9)
---------------- -----------------
Total shareholders' equity 7,657.4 7,758.1
---------------- -----------------

Total $ 19,959.4 $ 18,521.4
================ =================

See notes to condensed consolidated financial statements.

Page 4

CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)

NINE MONTHS ENDED
MARCH 31,
2004 2003
--------------- ----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations $ 1,140.2 $ 1,040.7
Adjustments to reconcile earnings from continuing operations
to net cash from operating activities:
Depreciation and amortization 220.4 195.2
Provision for bad debts 1.6 15.8
Change in operating assets and liabilities, net of effects from
acquisitions:
Increase in trade receivables (614.9) (474.3)
Increase in inventories (960.1) (1,386.7)
(Increase)/decrease in net investment in sales-type leases (65.4) 61.7
Increase in accounts payable 1,611.9 895.6
Other accrued liabilities and operating items, net 1.7 167.8
--------------- ----------------

Net cash provided by operating activities 1,335.4 515.8
--------------- ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired and proceeds
from divestitures (561.2) (3.2)
Proceeds from sale of property, equipment and other assets 8.3 41.7
Additions to property and equipment (272.0) (264.1)
Proceeds from sale of discontinued operations 5.1 7.8
--------------- ----------------

Net cash used in investing activities (819.8) (217.8)
--------------- ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt (0.9) 6.7
Reduction of long-term obligations (442.8) (50.9)
Proceeds from long-term obligations, net of issuance costs 86.7 9.4
Proceeds from issuance of Common Shares 144.3 125.3
Repurchase of Common Shares (1,460.3) (1,191.7)
Dividends on Common Shares (39.4) (33.6)
--------------- ----------------

Net cash used in financing activities (1,712.4) (1,134.8)
--------------- ----------------

NET DECREASE IN CASH AND EQUIVALENTS (1,196.8) (836.8)

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,724.0 1,382.0
--------------- ----------------

CASH AND EQUIVALENTS AT END OF PERIOD $ 527.2 $ 545.2
=============== ================

See notes to condensed consolidated financial statements.

Page 5

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION. The condensed consolidated financial statements
of Cardinal Health, Inc. (the "Company") include the accounts of all
majority-owned subsidiaries and all significant inter-company amounts have been
eliminated.

These condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the information
and disclosures required by generally accepted accounting principles for interim
reporting. In the opinion of management, all adjustments necessary for a fair
presentation have been included. Except as disclosed elsewhere herein, all such
adjustments are of a normal and recurring nature.

The condensed consolidated financial statements included herein should
be read in conjunction with the audited consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003 (the "2003 Form 10-K"). Without limiting the
generality of the foregoing, Note 1 of the "Notes to Consolidated Financial
Statements" from the 2003 Form 10-K is specifically incorporated herein by
reference.

RECENT FINANCIAL ACCOUNTING STANDARDS. In December 2003, the Financial
Accounting Standards Board ("FASB") issued a revision to Statement of Financial
Accounting Standards ("SFAS") No. 132, "Employers Disclosures about Pensions and
Other Postretirement Benefits." The revision relates to employers' disclosures
about pension plans and other postretirement benefit plans. The revision does
not alter the measurement or recognition provisions of the original SFAS No.
132. The revision requires additional disclosures regarding assets, obligations,
cash flows and net periodic benefit costs of pension plans and other defined
benefit postretirement plans. Excluding certain disclosure requirements, the
revised SFAS No. 132 is effective for financial statements with fiscal years
ended after December 15, 2003. Interim period disclosures are effective for
interim periods beginning after December 15, 2003 (see Note 12 for the Company's
interim period disclosures).

In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities." This revised Interpretation
defines when a business enterprise must consolidate a variable interest entity.
The revised Interpretation provisions are effective for variable interest
entities commonly referred to as special-purpose entities for periods ending
after December 15, 2003. The revised Interpretation provisions apply to all
other types of variable interest entities for financial statement periods ending
after March 15, 2004. As of March 31, 2004, the Company did not hold a
significant variable interest in a variable interest entity in which the Company
is not the primary beneficiary. See Note 4 in the "Notes to Consolidated
Financial Statements" in the 2003 Form 10-K for discussion of the Company's
special purpose accounts receivable and financing entity which is included in
the consolidated financial statements as the Company is the primary beneficiary
of the variable interest entity. Adoption of the subsequent provisions of the
Interpretation did not have a material impact on the Company's financial
position or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the financial accounting and reporting requirements as originally
established in SFAS No. 133 for derivative instruments and hedging activities.
SFAS No. 149 provides greater clarification of the characteristics of a
derivative instrument so that contracts with similar characteristics will be
accounted for consistently. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, as well as for hedging relationships designated
after June 30, 2003, excluding certain implementation issues that have been
effective prior to this date under SFAS No. 133. The adoption of SFAS No. 149
did not have a material effect on the Company's financial position or results of
operations.

Page 6

ACCOUNTING FOR STOCK-BASED COMPENSATION. At March 31, 2004, the Company
maintained several stock incentive plans for the benefit of certain employees.
The Company accounts for these plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Except for costs related to restricted stock and restricted
stock units, no compensation expense has been recognized in net earnings, as all
options granted had an exercise price equal to the market value of the
underlying stock on the date of grant. The following tables illustrate the
effect on net earnings and earnings per Common Share after adjusting for
anticipated plan changes if the Company adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation":

2. EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY

Basic earnings per Common Share ("Basic EPS") is computed by dividing net
earnings (the numerator) by the weighted average number of Common Shares
outstanding during each period (the denominator). Diluted earnings per Common
Share ("Diluted EPS") is similar to the computation for Basic EPS, except that
the denominator is increased by the dilutive effect of stock options
outstanding, computed using the treasury stock method.

The following table reconciles the number of Common Shares used to compute
Basic EPS and Diluted EPS for the three and nine months ended March 31, 2004 and
2003:

Page 7

The potentially dilutive employee stock options that were antidilutive for
the three months ended March 31, 2004 and 2003, were 19.2 million and 23.7
million, respectively, and for the nine months ended March 31, 2004 and 2003,
were 20.2 million and 23.0 million, respectively.

On February 27, 2004, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500.0 million.
Pursuant to this authorization, the Company repurchased approximately 6.9
million Common Shares under an accelerated share repurchase program having an
aggregate cost of approximately $460.3 million during the three months ended
March 31, 2004. The initial price paid per share was $66.80. The approximately
6.9 million shares repurchased under the program were subject to a future
contingent purchase price adjustment to be settled during the fourth quarter of
fiscal 2004. The purchase price adjustment is based upon the volume weighted
average price during the actual repurchase period and is subject to certain
provisions which establish a cap and a floor for the average share price in the
Company's agreement with its broker-dealer who executed the repurchase
transactions.

The accelerated share repurchase program was completed on May 11, 2004. The
final volume weighted average price was $70.07. As a result, the Company will
settle the forward contract for $22.5 million in cash during the fourth quarter,
which cost will be included in the amount associated with Common Shares in
treasury. The Company intends to use the remaining $17.2 million of the initial
authorization to repurchase additional shares. The repurchased shares were
placed into treasury to be used for general corporate purposes.

On August 1, 2003, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $1.0 billion. Pursuant
to this authorization, the Company repurchased approximately 17.0 million Common
Shares having an aggregate cost of approximately $1.0 billion during the three
months ended September 30, 2003. The average price paid per share was $58.65.
This repurchase was completed during the first quarter of fiscal 2004, and the
repurchased shares were placed into treasury to be used for general corporate
purposes.

3. COMPREHENSIVE INCOME

The following is a summary of the Company's comprehensive income for the
three and nine months ended March 31, 2004 and 2003:

For the Three Months Ended For the Nine Months Ended
March 31, March 31,
(in millions) 2004 2003 2004 2003
------------ ------------- ------------ -------------

Net earnings $ 428.1 $ 383.1 $ 1,132.5 $ 1,038.9
Foreign currency translation adjustment 26.1 9.3 76.0 37.5
Net unrealized gain/(loss) on derivative
instruments 3.1 (11.5) 3.3 0.9
Unrealized loss on investment (0.1) - (0.3) -
------------ ------------- ------------ -------------
Total comprehensive income $ 457.2 $ 380.9 $ 1,211.5 $ 1,077.3
============ ============= ============ =============

Page 8

4. BUSINESS COMBINATION COSTS, MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS

The following is a summary of the special items for the three and nine
months ended March 31, 2004 and 2003.

Special Items Expense/(Income) Three Months Ended Nine Months Ended
March 31, March 31,
- ----------------------------------------------------------------------------------------------------------------
(in millions, except per Common Share amounts) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------

Merger-Related Costs:
Employee-related costs $ 1.4 $ 2.5 $ 8.5 $ 17.5
Pharmaceutical distribution center consolidation - 6.8 0.1 16.6
Asset impairments & other exit costs 0.4 0.1 0.8 2.1
Purchase acquisition foreign exchange hedge - - (3.0) -
Other integration costs 5.4 6.5 17.2 13.1
- ---------------------------------------------------------------------------------------------------------------
Total merger-related costs $ 7.2 $ 15.9 $ 23.6 $ 49.3
- ---------------------------------------------------------------------------------------------------------------

Other Special Items:
Employee-related costs $ 0.5 $ 0.1 $ 2.1 $ 1.5
Manufacturing facility closures & restructurings 3.0 0.2 9.2 21.4
Litigation settlements (3.8) (6.8) (30.7) (99.6)
Asset impairments & other 1.4 0.4 13.8 18.3
- ---------------------------------------------------------------------------------------------------------------
Total other special items $ 1.1 $ (6.1) $ (5.6) $ (58.4)
- ---------------------------------------------------------------------------------------------------------------

Total special items $ 8.3 $ 9.8 $ 18.0 $ (9.1)
Tax effect of special items (3.4) (3.4) (7.7) 9.0
- ---------------------------------------------------------------------------------------------------------------
Net effect of special items $ 4.9 $ 6.4 $ 10.3 $ (0.1)
===============================================================================================================
Net decrease in Diluted EPS $ 0.01 $ 0.01 $ 0.02 $ -
===============================================================================================================

MERGER-RELATED COSTS
Costs of integrating the operations of various merged companies are
recorded as merger-related costs when incurred. The merger-related costs
recognized during the three and nine months ended March 31, 2004, were primarily
a result of the acquisition of Syncor International Corporation (now known as
Cardinal Health 414, Inc. and referred to in this Form 10-Q as "Syncor"). The
merger-related costs recognized during the three and nine months ended March 31,
2003, were primarily a result of the acquisitions of Bindley Western Industries,
Inc. (now known as Cardinal Health 100, Inc. and referred to in this Form 10-Q
as "Bindley") and R.P. Scherer Corporation (now known as Cardinal Health 409,
Inc. and referred to in this Form 10-Q as "Scherer"). The following paragraphs
provide additional detail regarding the types of merger-related costs incurred
by the Company.

EMPLOYEE-RELATED COSTS. During the periods shown in the table above, the
Company incurred employee-related costs associated with certain merger and
acquisition transactions. For the three and nine months ended March 31, 2004,
the employee-related costs of $1.4 million and $8.5 million, respectively,
consisted primarily of retention bonuses and severance paid as a result of the
Syncor acquisition. The Syncor acquisition is expected to result in
approximately 150 employees being terminated, of which approximately 100
employees had been terminated as of March 31, 2004. For the nine months ended
March 31, 2003, $8.8 million related to an approved plan to curtail certain
defined benefit pension plans within the Pharmaceutical Technologies and
Services segment. The remaining employee-related costs for the three and nine
months ended March 31, 2003, primarily related to amortization expense of
non-compete agreements associated with the Bindley and Allegiance Corporation
("Allegiance") merger transactions.

PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. During the nine months
ended March 31, 2004, the Company incurred charges of $0.1 million associated
with its plan to close and consolidate Bindley distribution centers, Bindley's
corporate office and one of the Company's data centers as a result of the
acquisition of Bindley, as compared to $6.8 million and $16.6 million,
respectively, for the three and nine months ended March 31, 2003. The charges
for the nine months ended March 31, 2004, and the three and nine months ended
March 31, 2003, included: (1) employee-related costs, primarily from the
termination of approximately 1,250 employees due to the distribution center
closures; (2) exit costs to consolidate and close the various facilities
mentioned above, including asset impairment charges, inventory move costs, and
contract/lease termination costs; and (3) duplicate salary costs incurred during
the shutdown periods.

page 9

ASSET IMPAIRMENTS & OTHER EXIT COSTS. During the three and nine months
ended March 31, 2004, the Company incurred asset impairments and other exit
costs of $0.4 million and $0.8 million, respectively, as compared to $0.1
million and $2.1 million, respectively, during the comparable periods in fiscal
2003. The charges incurred during the three and nine months ended March 31,
2004, related primarily to exit costs associated with plans to consolidate
operations as a result of the Syncor acquisition. Charges during the three and
nine months ended March 31, 2003, related primarily to asset impairments and
lease terminations incurred internationally as a result of the Scherer
acquisition, as well as expenses incurred to relocate physical assets due to the
closure and consolidation of Bergen Brunswig Medical Corporation ("BBMC")
facilities.

PURCHASE ACQUISITION FOREIGN EXCHANGE HEDGE. During the second quarter of
fiscal 2004, the Company recorded special item income of approximately $3.0
million related to two foreign currency hedges purchased in connection with The
Intercare Group, plc ("Intercare") acquisition (see Note 10 for additional
information regarding this acquisition). The Company paid premiums of
approximately $1.1 million to purchase two hedges protecting against foreign
currency fluctuations associated with the Intercare purchase price. These hedges
settled during the second quarter of fiscal 2004 for $4.1 million and resulted
in a net gain of approximately $3.0 million.

OTHER INTEGRATION COSTS. The Company incurred other integration costs
during the three and nine months ended March 31, 2004, of $5.4 million and $17.2
million, respectively, as compared to $6.5 million and $13.1 million,
respectively, during the comparable periods in fiscal 2003. The costs included
in this category for the three and nine months ended March 31, 2004 and 2003,
generally relate to expenses incurred to integrate the merged or acquired
company's operations and systems into the Company's pre-existing operations and
systems. These costs include, but are not limited to, the integration of
information systems, employee benefits and compensation, accounting/finance,
tax, treasury, internal audit, risk management, compliance, administrative
services, sales and marketing and others.

OTHER SPECIAL ITEMS
EMPLOYEE-RELATED COSTS. During the three months ended March 31, 2004, the
Company recorded $0.5 million of employee-related costs associated with a
previously approved plan to consolidate information technology service centers.
The charges primarily represent severance accrued upon communication of terms to
employees. The restructuring plan is expected to be completed during the first
half of fiscal 2005 and will result in the termination of approximately 20
employees.

During the first six months of fiscal 2004, the Company recorded $1.6
million of employee-related costs associated with various restructuring plans
within the Pharmaceutical Technologies and Services segment.

During the three and nine months ended March 31, 2003, the Company incurred
$0.1 million and $1.5 million, respectively, of employee-related costs
associated with the restructuring of certain operations within the
Pharmaceutical Distribution and Provider Services segment. The charges primarily
represent severance accrued upon communication of terms to employees. The
restructuring plan was completed by June 30, 2003, and resulted in the
termination of approximately 30 employees.

MANUFACTURING FACILITY CLOSURES & RESTRUCTURINGS. During the three and nine
months ended March 31, 2004, the Company recorded a total of $3.0 million and
$9.2 million, respectively, as special items related to the closure and/or
restructuring of certain manufacturing facilities, as compared to $0.2 million
and $21.4 million, respectively, during the comparable periods in fiscal 2003.
These closure and/or restructuring activities occurred within the Medical
Products and Services, Pharmaceutical Technologies and Services and Automation
and Information Services segments.

During fiscal 2003 and 2004, the Company initiated plans to close and/or
restructure certain manufacturing facilities within the Medical Products and
Services segment. In connection with the implementation of these plans, the
Company incurred costs totaling $1.8 million and $7.1 million, respectively,
during the three and nine months ended March 31, 2004, as compared to $0.2
million and $16.4 million, respectively, during the comparable periods in fiscal
2003. These charges included asset impairment costs of $0.2 million and $2.1
million, respectively, during the three and nine months ended March 31, 2004, as
compared to $8.9 million during the nine months ended March 31, 2003. The
restructuring charges during the three and nine months ended March 31, 2004,
also included employee-related costs of $1.4 million and $4.2 million,
respectively, as compared to $4.6 million during the nine months ended March 31,
2003, the majority of which represent severance accrued upon communication of
terms to employees. The remaining charges during the three and nine months ended
March 31, 2004 and 2003, primarily related to exit costs incurred to relocate
physical assets. Some of the restructuring plans were completed during fiscal
2003, while other plans will be completed throughout fiscal 2004 and 2005. These
restructuring plans will

Page 10

result in the termination of approximately 1,600 employees, of which
approximately 1,075 employees had been terminated as of March 31, 2004.

During the three and nine months ended March 31, 2004, the Company recorded
charges of $0.9 million and $1.8 million, respectively, related to the cost to
vacate facilities as part of previously announced restructuring plans within the
Pharmaceutical Technologies and Services segment.

During the nine months ended March 31, 2003, the Company incurred costs of
$5.0 million related to plans to close and/or restructure certain manufacturing
facilities within the Pharmaceutical Technologies and Services segment. In
connection with the implementation of these plans, the Company incurred asset
impairment charges, severance costs and exit costs, primarily related to
dismantling machinery and equipment and transferring certain technologies to
other existing facilities within the Company. As a result of these restructuring
plans, the Company terminated approximately 75 employees. These restructuring
plans were substantially completed during fiscal 2003 and the first half of
fiscal 2004.

During the third quarter of fiscal 2004, the Company recorded charges of
$0.3 million related to plans to close a manufacturing facility within the
Automation and Information Services segment. These charges represent
employee-related costs, asset impairments and facility exit costs directly
resulting from the closure plan.

LITIGATION SETTLEMENTS. During the three and nine months ended March 31,
2004, the Company recorded income from litigation settlements of $3.8 million
and $30.7 million, respectively, as special items, as compared to $6.8 million
and $99.6 million, respectively, during the comparable periods in fiscal 2003.
During the three and nine months ended March 31, 2004, the Company recorded
settlements of $3.8 million and $6.5 million, respectively, as compared to $6.8
million and $99.6 million, respectively, during the comparable periods in fiscal
2003, resulting from the recovery of antitrust claims against certain vitamin
manufacturers for amounts overcharged in prior years. The total recovery of
antitrust claims against certain vitamin manufacturers through March 31, 2004
was $144.7 million (net of attorney fees, payments due to other interested
parties and expenses withheld). The Company has settled all known claims with
all but one of the defendants, and the total amount of future recovery is not
likely to be a material amount. The additional $24.2 million recorded during the
nine months ended March 31, 2004, resulted from the settlement of antitrust
claims alleging that certain prescription drug manufacturers took improper
actions to delay or prevent generic drug competition.

ASSET IMPAIRMENTS & OTHER. During the three and nine months ended March 31,
2004, the Company incurred asset impairments and other charges of $1.4 million
and $13.8 million, respectively, as compared to $0.4 million and $18.3 million,
respectively, during the comparable periods in fiscal 2003. During the three and
nine months ended March 31, 2004, the Company recorded asset impairment charges
of $1.3 million and $12.2 million, respectively, as compared to $10.1 million
during the nine months ended March 31, 2003, resulting from the Company's
decision to exit certain North American commodity operations in its
Pharmaceutical Technologies and Services segment. Additionally, costs of $0.1
million and $1.6 million, respectively, were incurred during the three and nine
months ended March 31, 2004, as compared to $0.4 million during the comparable
periods in fiscal 2003, related to a plan to restructure the Company's delivery
of information technology infrastructure services. The remaining $7.8 million
during the nine months ended March 31, 2003, related to a one-time writeoff of
design, tooling and development costs.

Page 11

SPECIAL ITEMS ACCRUAL ROLLFORWARD
The following table summarizes the activity related to the liabilities
associated with the Company's special items during the nine months ended March
31, 2004.

For the Nine
Months Ended
(in millions) March 31, 2004
----------------------

Balance at June 30, 2003 $45.7
Additions(1) 48.7
Payments (57.1)
----------------------

Balance at March 31, 2004 $37.3
======================

(1) Amount represents special items that have been either expensed as
incurred or accrued according to generally accepted accounting principles.
This amount does not include litigation settlement income of $30.7 million
recorded as a special item during the nine months ended March 31, 2004.

PURCHASE ACCOUNTING ACCRUALS
In connection with certain restructuring and integration plans related to
the Intercare acquisition, the Company accrued, as part of its acquisition
adjustments, a liability of $10.4 million related to employee termination and
relocation costs and $11.0 million related to closing of certain facilities.
During the nine months ended March 31, 2004, the Company paid $1.0 million of
employee-related costs. No payments were made associated with the facility
closures during the nine months ended March 31, 2004.

Also, in connection with the restructuring and integration plans related to
Syncor, the Company accrued, as part of its acquisition adjustments, a liability
of $15.1 million related to employee termination and relocation costs and $10.4
million related to closing of duplicate facilities. During the nine months ended
March 31, 2004, the Company paid $11.6 million of employee-related costs and
$0.5 million associated with the facility closures.

SUMMARY
Certain merger, acquisition and restructuring costs are based upon
estimates. Actual amounts paid may ultimately differ from these estimates. If
additional costs are incurred or recorded amounts exceed costs, such changes in
estimates will be recorded in special items when incurred.

The Company estimates it will incur additional costs in future periods
associated with various mergers, acquisitions and restructuring activities
totaling approximately $85 million (approximately $55 million net of tax). This
estimate is subject to adjustment pending resolution of Syncor
acquisition-related litigation contingencies. The Company believes it will incur
these costs to properly integrate and rationalize operations, a portion of which
represents facility rationalizations and implementing efficiencies regarding
information systems, customer systems, marketing programs and administrative
functions, among other things. Such amounts will be expensed as special items
when incurred.

Page 12

5. SEGMENT INFORMATION

The Company's operations are principally managed on a products and services
basis and are comprised of four reportable business segments: Pharmaceutical
Distribution and Provider Services, Medical Products and Services,
Pharmaceutical Technologies and Services and Automation and Information
Services. During the first quarter of fiscal 2004, the Company transferred its
Consulting and Services business, previously included within the Medical
Products and Services segment, to its Clinical Services and Consulting business
within the Pharmaceutical Distribution and Provider Services segment. Also
during the first quarter of fiscal 2004, the Company transferred its clinical
information business, previously included within the Automation and Information
Services segment, to its Clinical Services and Consulting business within the
Pharmaceutical Distribution and Provider Services segment. These transfers were
done to better align business operations. Prior period financial results have
not been restated as each of these businesses is not significant within the
respective segments, and therefore, the transfers did not have a material impact
on each segment's growth rates. The Company has not made any material changes in
the segments reported or the measurement basis of segment profit or loss from
the information provided in the 2003 Form 10-K.

In December 2003, the Company acquired Intercare, which operates specialty
pharmaceutical distribution and pharmaceutical manufacturing operations in
Europe (see Note 10 for further discussion of the Intercare acquisition). For
the three months ended March 31, 2004, the results of operations of Intercare's
specialty pharmaceutical distribution business, which is similar to the
Company's pharmaceutical distribution business, were included within the
Pharmaceutical Distribution and Provider Services segment (see Note 1 in the
table below for further information). All other results of operations for
Intercare were included within the Pharmaceutical Technologies and Services
segment. For segment reporting purposes, Intercare's results of operations will
continue to be reported in this manner. This classification was not reported
during the second quarter of fiscal 2004 immediately following the acquisition
as the Company was still assessing the appropriate segment reporting treatment.
Intercare's results of operations for the second quarter of fiscal 2004 were not
material to the Company or the Company's individual segments.

The Pharmaceutical Distribution and Provider Services segment involves the
distribution of a broad line of pharmaceuticals, health care and other specialty
pharmaceutical products and other items typically sold by hospitals, retail drug
stores and other health care providers. In addition, this segment provides
services to the health care industry through integrated pharmacy management and
temporary pharmacy staffing, as well as franchising of apothecary-style retail
pharmacies.

The Medical Products and Services segment involves the manufacture of
medical, surgical and laboratory products and the distribution of these
products, as well as products not manufactured internally to hospitals,
physician offices, surgery centers and other health care providers.

The Pharmaceutical Technologies and Services segment provides services to
the health care industry through the development and manufacture of proprietary
drug delivery systems including softgel capsules, controlled release forms,
Zydis(R) fast dissolving wafers and advanced sterile delivery technologies. It
also provides comprehensive packaging, radiopharmaceutical manufacturing and
distribution, contract manufacturing, pharmaceutical development and analytical
science expertise, as well as medical education, marketing and contract sales
services.

The Automation and Information Services segment provides services to
hospitals and other health care providers, focusing on meeting customer needs
through unique and proprietary automation and information products and services.
In addition, this segment markets point-of-use supply systems in the non-health
care market.

The Company evaluates the performance of the segments based on operating
earnings after the corporate allocation of administrative expenses. Information
about interest income and expense and income taxes is not provided on a segment
level. In addition, special charges are not allocated to the segments. The
accounting policies of the segments are the same as described in the summary of
significant accounting policies.

Page 13

The following tables include revenue and operating earnings for the three
and nine months ended March 31, 2004 and 2003, for each segment and reconciling
items necessary to agree to amounts reported in the condensed consolidated
financial statements:

NET REVENUE For the Three Months Ended For the Nine Months Ended
(in millions) March 31, March 31,
2004 2003 2004 2003
------------------------------ -----------------------------

Operating revenue:
Pharmaceutical Distribution and Provider
Services (1) $ 11,909.2 $ 10,446.0 $ 34,147.6 $ 30,269.7
Medical Products and Services 1,875.9 1,644.8 5,448.4 4,879.1
Pharmaceutical Technologies and Services (1) 677.6 596.2 1,942.9 1,399.5
Automation and Information Services 172.3 166.2 502.4 464.6
Corporate (2) 3.9 (15.9) (20.5) (52.7)
------------------------------ -----------------------------
Total operating revenue $ 14,638.9 $ 12,837.3 $ 42,020.8 $ 36,960.2
============================== =============================

Bulk deliveries to customer warehouses and other:
Pharmaceutical Distribution and Provider Services $ 1,720.6 $ 1,482.4 $ 5,988.6 $ 4,450.1
Pharmaceutical Technologies and Services 32.8 51.6 122.0 138.1
------------------------------ -----------------------------
Total bulk deliveries to customer warehouses and
other $ 1,753.4 $ 1,534.0 $ 6,110.6 $ 4,588.2
============================== =============================

OPERATING EARNINGS For the Three Months Ended For the Nine Months Ended
(in millions) March 31, March 31,
2004 2003 2004 2003
------------------------------ ------------------------------

Operating earnings:
Pharmaceutical Distribution and Provider
Services (1) $ 343.9 $ 342.8 $ 880.9 $ 899.6
Medical Products and Services 182.4 163.7 492.8 446.0
Pharmaceutical Technologies and Services (1) 115.1 94.4 335.0 252.1
Automation and Information Services 69.5 64.3 202.1 179.8
Corporate (3) (46.4) (57.0) (136.6) (110.9)
------------------------------ ------------------------------
Total operating earnings $ 664.5 $ 608.2 $ 1,774.2 $ 1,666.6
============================== ==============================

(1) Operating results for Intercare, acquired in December 2003, include a
specialty pharmaceutical distribution business that is similar to the
Company's pharmaceutical distribution business. For segment reporting
purposes, this specialty pharmaceutical distribution business was
included in the Pharmaceutical Distribution and Provider Services
segment for the three months ended March 31, 2004 (revenues of $87
million and operating earnings of $2.6 million for the third quarter of
fiscal 2004). This classification was not reported during the second
quarter of fiscal 2004 immediately following the acquisition as the
Company was still assessing the appropriate segment reporting treatment.
Intercare's results of operations for the second quarter of fiscal 2004
were not material to the Company or the Company's individual segments.

(2) Corporate operating revenue consists primarily of foreign currency
translation adjustments and the elimination of intersegment revenues.

(3) Corporate operating earnings include special items of $8.3 million and
$9.8 million in the three-month periods ended March 31, 2004 and 2003,
respectively, and $18.0 million and ($9.1) million for the nine-month
periods ended March 31, 2004 and 2003, respectively. See Note 4 for
further discussion of the Company's special items. Corporate operating
earnings also include unallocated corporate administrative expenses and
investment spending.

Page 14

6. LEGAL PROCEEDINGS

Latex Litigation

On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S. health
care distribution business, surgical and respiratory therapy business and health
care cost-management business, as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off,
Allegiance, which merged with a subsidiary of the Company on February 3, 1999,
agreed to indemnify Baxter, and to defend and indemnify Baxter Healthcare
Corporation ("BHC"), as contemplated by the agreements between Baxter and
Allegiance, for all expenses and potential liabilities associated with claims
arising from the Allegiance Business, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves. The
Company is not a party to any of the lawsuits and has not agreed to pay any
settlements to the plaintiffs.

As of March 31, 2004, there were 72 lawsuits pending against BHC and/or
Allegiance involving allegations of sensitization to natural rubber latex
products, and some of these cases were proceeding to trial. The total dollar
amount of potential damages cannot be reasonably quantified. Some plaintiffs
plead damages in extreme excess of what they reasonably can expect to recover,
some plead a modest amount and some do not include a request for any specific
dollar amount. Not including cases that ask for no specific damages, the damage
requests per action have ranged from $10,000 to $240 million. All of these cases
name multiple defendants, in addition to Baxter/Allegiance. The average number
of defendants per case exceeds 25. Based on the significant differences in the
range of damages sought and, based on the multiple number of defendants in these
lawsuits, Allegiance cannot reasonably quantify the total amount of
possible/probable damages. Therefore, Allegiance and the Company do not believe
that these numbers should be considered as an indication of either reasonably
possible or probable liability.

Since the inception of this litigation, Baxter/Allegiance have been
named as a defendant in 834 cases. During the fiscal year ended June 30, 2002,
Allegiance began settling some of these lawsuits with greater frequency. As of
March 31, 2004, Allegiance had resolved more than 90% of these cases. About 20%
of the lawsuits that have been resolved were concluded without any liability to
Baxter/Allegiance. No individual claim has been settled for a material amount,
nor do all the settled claims, in the aggregate, comprise a material amount. Due
to the number of claims filed and the ongoing defense costs that will be
incurred, Allegiance believes it is probable that it will incur substantial
legal fees related to the resolution of the cases still pending. Although the
Company continues to believe that it cannot reasonably estimate the potential
cost to settle these lawsuits, the Company believes that the impact of such
lawsuits upon Allegiance will be immaterial to the Company's financial position,
liquidity or results of operations, and could be in the range of $0 to $20
million, net of insurance proceeds (with the range reflecting the Company's
reasonable estimation of potential insurance coverage, and defense and indemnity
costs). The Company believes a substantial portion of any liability will be
covered by insurance policies Allegiance has with financially viable insurance
companies, subject to self-insurance retentions, exclusions, conditions,
coverage gaps, policy limits and insurer solvency. The Company and Allegiance
continue to believe that insurance recovery is probable.

Shareholder Litigation against Cardinal Health

On November 8, 2002, a complaint was filed by a purported shareholder
against the Company and its directors in the Court of Common Pleas, Delaware
County, Ohio, as a purported derivative action. On or about March 21, 2003,
after the Company filed a Motion to Dismiss the complaint, an amended complaint
was filed alleging breach of fiduciary duties and corporate waste in connection
with the alleged failure by the Board of Directors of the Company to (a)
renegotiate or terminate the Company's proposed acquisition of Syncor and (b)
determine the propriety of indemnifying Monty Fu, the former Chairman of Syncor.
The Company filed a Motion to Dismiss the amended complaint and the plaintiffs
subsequently filed a second amended complaint that added three new individual
defendants and included new allegations that the Company improperly recognized
revenue in December 2000 and September 2001 related to settlements with certain
vitamins manufacturers. The Company filed a Motion to Dismiss the second amended
complaint and, on November 20, 2003, the Court denied the motion. The Company
believes the allegations made in the second amended complaint are without merit
and intends to vigorously defend this action. The Company currently does not
believe that the impact of this lawsuit will have a material adverse effect, if
any, on the Company's financial position, liquidity or results of operations.
The Company currently believes that there will be some insurance coverage
available under the Company's directors' and officers' liability insurance
policies in effect at the time this action was filed. Such policies are with
financially viable insurance companies, and are subject to self-insurance
retentions, exclusions, conditions, coverage gaps, policy limits and insurer
solvency.

Page 15

Shareholder Litigation against Syncor

Eleven purported class action lawsuits have been filed against Syncor
and certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "federal securities actions").
All of these actions were filed in the United States District Court for the
Central District of California. The federal securities actions purport to be
brought on behalf of all purchasers of Syncor shares during various periods,
beginning as early as March 30, 2000, and ending as late as November 5, 2002.
The actions allege, among other things, that the defendants violated Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and Section
20(a) of the Exchange Act, by issuing a series of press releases and public
filings disclosing significant sales growth in Syncor's international business,
but omitting mention of certain allegedly improper payments to Syncor's foreign
customers, thereby artificially inflating the price of Syncor shares. A lead
plaintiff has been appointed by the court in the federal securities actions and
a consolidated amended complaint was filed May 19, 2003, naming Syncor and 12
individuals, all former Syncor officers, directors and/or employees, as
defendants. Syncor filed a Motion to Dismiss the consolidated amended complaint
on August 1, 2003 and, on December 12, 2003, the Court granted the motion to
dismiss without prejudice. A second amended consolidated class action complaint
was filed on January 28, 2004, naming Syncor and 14 individuals, all former
Syncor officers, directors and/or employees, as defendants. Syncor filed a
Motion to Dismiss the second amended consolidated class action complaint on
March 4, 2004.

On November 14, 2002, two additional actions were filed by individual
stockholders of Syncor in the Court of Chancery of the State of Delaware (the
"Delaware actions") against seven of Syncor's nine directors (the "director
defendants"). The complaints in each of the Delaware actions were identical and
alleged that the director defendants breached certain fiduciary duties to Syncor
by failing to maintain adequate controls, practices and procedures to ensure
that Syncor's employees and representatives did not engage in improper and
unlawful conduct. Both complaints asserted a single derivative claim, for and on
behalf of Syncor, seeking to recover all of the costs and expenses that Syncor
incurred as a result of the allegedly improper payments (including the costs of
the federal securities actions described above), and a single purported class
action claim seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses sustained if consideration received in the
merger by Syncor stockholders was reduced. On November 22, 2002, the plaintiff
in one of the two Delaware actions filed an amended complaint adding as
defendants the Company, its subsidiary Mudhen Merger Corporation and the
remaining two Syncor directors, who are hereafter included in the term "director
defendants." These cases have been consolidated under the caption "In re: Syncor
International Corp. Shareholders Litigation" (the "consolidated Delaware
action"). On August 14, 2003, the Company filed a Motion to Dismiss the
operative complaint in the consolidated Delaware action. At the end of September
2003, plaintiffs in the consolidated Delaware action moved the court to file a
second amended complaint. Monty Fu is the only named defendant in the proposed
second amended complaint.

On November 18, 2002, two additional actions were filed by individual
stockholders of Syncor in the Superior Court of California for the County of Los
Angeles (the "California actions") against the director defendants. The
complaints in the California actions allege that the director defendants
breached certain fiduciary duties to Syncor by failing to maintain adequate
controls, practices and procedures to ensure that Syncor's employees and
representatives did not engage in improper and unlawful conduct. Both complaints
asserted a single derivative claim, for and on behalf of Syncor, seeking to
recover costs and expenses that Syncor incurred as a result of the allegedly
improper payments. An amended complaint was filed on December 6, 2002 in one of
the cases, purporting to allege direct claims on behalf of a class of
shareholders. The defendants' motion for a stay of the California actions
pending the resolution of the Delaware actions (discussed above) was granted on
April 30, 2003.

A proposed class action complaint was filed on April 8, 2003, against
the Company, Syncor and certain officers and employees of the Company by a
purported participant in the Syncor Employees' Savings and Stock Ownership Plan
(the "Syncor ESSOP"). A related proposed class action complaint was filed on
September 11, 2003, against the Company, Syncor and certain individual
defendants. Another related proposed class action complaint, captioned "Thompson
v. Syncor International Corp., et al," was filed on January 14, 2004, against
the Company, Syncor and certain individual defendants. A consolidated complaint
was filed on February 24, 2004 against Syncor and certain former Syncor
officers, directors and/or employees alleging that the defendants breached
certain fiduciary duties owed under the Employee Retirement Income Security Act
("ERISA"). On April 26, 2004, the defendants filed Motions to Dismiss the
consolidated complaint. In addition, the United States Department of Labor is
conducting an investigation of the Syncor ESSOP with respect to its compliance
with ERISA requirements. The Company has responded to a subpoena received from
the Department of Labor and continues to cooperate in the investigation.

Each of the actions described under the heading "Shareholder Litigation
against Syncor" is in its early stages, and it is impossible to predict the
outcome of these proceedings or their impact on Syncor or the Company.

Page 16

However, the Company currently does not believe that the impact of these actions
will have a material adverse effect on the Company's financial position,
liquidity or results of operations. The Company and Syncor believe the
allegations made in the complaints described above are without merit and intend
to vigorously defend such actions. The Company and Syncor have been informed
that the individual director and officer defendants deny liability for the
claims asserted in these actions and believe they have meritorious defenses and
intend to vigorously defend such actions. The Company and Syncor currently
believe that a portion of any liability will be covered by insurance policies
that the Company and Syncor have with financially viable insurance companies,
subject to self-insurance retentions, exclusions, conditions, coverage gaps,
policy limits and insurer solvency.

DuPont Litigation

On September 11, 2003, E.I. Du Pont De Nemours and Company ("DuPont")
filed a lawsuit against the Company and others in the United States District
Court for the Middle District of Tennessee. The complaint alleges various causes
of action against the Company relating to the production and sale of surgical
drapes and gowns by the Company's Medical Products and Services segment.
DuPont's claims generally fall into the categories of breach of contract, false
advertising and patent infringement. The complaint does not request a specific
amount of damages. The Company believes that the claims made in the complaint
are without merit and it intends to vigorously defend this action. Although this
action is in its early stages and it is impossible to accurately predict the
outcome of the proceedings or their impact on the Company, the Company believes
that it is owed a defense and indemnity from its codefendants with respect to
DuPont's claim for patent infringement. The Company currently does not believe
that the impact of this lawsuit, if any, will have a material adverse effect on
the Company's financial position, liquidity or results of operations.

Securities and Exchange Commission Investigation

On October 9, 2003, the Company announced that it had received a request
for information from the Securities and Exchange Commission (the "SEC") in
connection with an informal inquiry regarding the Company. The SEC's request
sought historical financial and related information, including but not limited
to information pertaining to the accounting treatment of $22 million recovered
from vitamin manufacturers who were found to have overcharged the Company. In
connection with the SEC's informal inquiry, the Company's audit committee
commenced its own review in April 2004, assisted by independent counsel, which
review is ongoing. In early May 2004, the Company was notified that the SEC has
converted the informal inquiry into a formal investigation. The Company intends
to continue to respond to the SEC's ongoing investigation and provide all
information required by the SEC.

Other Matters

For information relating to antitrust claims against certain vitamins
manufacturers, and antitrust claims against certain pharmaceutical
manufacturers, see the Litigation Settlements discussion in Note 4.

The Company also becomes involved from time-to-time in other litigation
incidental to its business, including, without limitation, inclusion of certain
of its subsidiaries as a potentially responsible party for environmental
clean-up costs. Although the ultimate resolution of the litigation referenced
herein cannot be forecast with certainty, the Company intends to vigorously
defend itself and does not currently believe that the outcome of any pending
litigation will have a material adverse effect on the Company's financial
position, liquidity or results of operations.

Page 17

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the nine months ended
March 31, 2004, were as follows:

Pharmaceutical Medical Automation and
Distribution Products Pharmaceutical Information
and Provider and Technologies and Services
(in millions) Services Services Services Total
- -----------------------------------------------------------------------------------------------------------------------

Balance at June 30, 2003 $96.1 $694.7 $1,423.2 $50.7 $2,264.7
Goodwill acquired - net of purchase price
adjustments, foreign currency
translation adjustments and other (1)(2) 87.1 38.1 424.1 - 549.3
Goodwill related to the divestiture of
businesses - - (4.3) - (4.3)
Transfer (3) 31.6 (31.6) - - -
- -----------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2004 $214.8 $701.2 $1,843.0 $50.7 $2,809.7
=======================================================================================================================

(1) During the second quarter of fiscal 2004, the Company completed
the acquisition of Intercare. See Note 10 for additional
information regarding this acquisition. As of March 31, 2004,
the acquisition of Intercare resulted in a preliminary goodwill
allocation of $419.0 million. During the six months ended
December 31, 2003, the Company also finalized the Syncor
purchase price allocation resulting in a goodwill reduction of
$6.9 million. The remaining amounts represent goodwill acquired
from other immaterial acquisitions, purchase price adjustments
from prior period acquisitions and foreign currency translation
adjustments.

(2) For segment reporting purposes, as of March 31, 2004, a
preliminary goodwill allocation of $70.0 million was included
within the Pharmaceutical Distribution and Provider Services
segment related to Intercare's specialty pharmaceutical
distribution business. All other preliminary goodwill
allocations for Intercare are included within the Pharmaceutical
Technologies and Services segment.

(3) During the first quarter of fiscal 2004, the Company transferred
its Consulting and Services business, previously reported within
the Medical Products and Services segment, to its Clinical
Services and Consulting business within the Pharmaceutical
Distribution and Provider Services segment to better align
business operations. This transfer resulted in approximately
$31.6 million of goodwill being reclassed between the segments.

The purchase price allocations for Intercare and other immaterial
acquisitions are not yet finalized and are subject to adjustment as the Company
assesses the value of acquired intangible assets and certain other matters.
Since valuations relating to acquired intangible assets have not been finalized;
goodwill and intangibles allocations may change as valuations are completed.

All intangible assets for the periods presented are subject to
amortization. Intangible assets are being amortized using the straight-line
method over periods that range from five to forty years. The detail of other
intangible assets by class as of June 30, 2003, and March 31, 2004, was as
follows:

Gross Accumulated Net
(in millions) Intangible Amortization Intangible
- ------------------------------------------------ ------------------- ---------------------- --------------------

June 30, 2003
Trademarks and patents $48.1 $20.8 $27.3
Non-compete agreements 27.3 21.9 5.4
Other 49.6 14.7 34.9
- ------------------------------------------------ ------------------- ---------------------- --------------------
Total $125.0 $57.4 $67.6
- ------------------------------------------------ ------------------- ---------------------- --------------------
March 31, 2004
Trademarks and patents $62.1 $22.7 $39.4
Non-compete agreements 31.7 24.6 7.1
Other 166.1 19.8 146.3
- ------------------------------------------------ ------------------- ---------------------- --------------------
Total $259.9 $67.1 $192.8
- ------------------------------------------------ ------------------- ---------------------- --------------------

Page 18

See discussion above for information regarding intangible assets
acquired from the Intercare and other immaterial transactions. The increase in
intangible assets during the nine months ended March 31, 2004, is primarily a
result of the Company's acquisitions during this time period.

Amortization expense for the three months ended March 31, 2004 and 2003,
was $4.3 million and $2.4 million, respectively, and for the nine months ended
March 31, 2004 and 2003, was $9.0 million and $4.1 million, respectively.

Amortization expense for each of the next five fiscal years is estimated
to be:

------------------------------------------------------------------------------------------------
(in millions) 2004 2005 2006 2007 2008
------------------------------------------------------------------------------------------------

Amortization expense $15.9 $16.6 $16.3 $15.4 $11.7

8. GUARANTEES

The Company has contingent commitments related to certain operating lease
agreements. These operating leases consist of certain real estate and equipment
used in the operations of the Company. In the event of termination of these
operating leases, which range in length from two to ten years, the Company
guarantees reimbursement for a portion of any unrecovered property cost. At
March 31, 2004, the maximum amount the Company could be required to reimburse
was $394.0 million. Based upon current information, the Company believes that
the proceeds from the sale of properties under these operating lease agreements
would exceed its payment obligation. In accordance with FASB Interpretation No.
45, the Company has a liability of $4.4 million recorded as of March 31, 2004,
related to these agreements.

In the ordinary course of business, the Company, from time to time, agrees
to indemnify certain other parties under agreements with the Company, including
under acquisition agreements, customer agreements and intellectual property
licensing agreements. Such indemnification obligations vary in scope and, when
defined, in duration. Generally, a maximum obligation is not explicitly stated
and, therefore, the overall maximum amount of the liability under such
indemnification obligations, if any, cannot be reasonably estimated.
Historically, the Company has not, individually or in the aggregate, made
payments under these indemnification obligations in any material amounts. In
certain circumstances, the Company believes that its existing insurance
arrangements, subject to the general deduction and exclusion provisions, would
cover portions of the liability that may arise from these indemnification
obligations. In addition, the Company believes that the likelihood of material
liability being triggered under these indemnification obligations is not
significant.

In the ordinary course of business, the Company, from time to time, enters
into agreements that obligate the Company to make fixed payments upon the
occurrence of certain events. Such obligations primarily relate to obligations
arising under acquisition transactions, where the Company has agreed to make
payments based upon the achievement of certain financial performance measures by
the acquired company. Generally, the obligation is capped at a specific amount.
The Company's aggregate exposure for these obligations, assuming the achievement
of all financial performance measures, is not material. Any potential payment
for these obligations would be treated as an adjustment to the purchase price of
the related entity and would have no impact on the Company's results of
operations.

9. DISCONTINUED OPERATIONS

In connection with the acquisition of Syncor, the Company acquired certain
operations of Syncor that were or will be discontinued. Prior to the
acquisition, Syncor announced the discontinuation of certain operations
including the medical imaging business and certain overseas operations. The
Company is continuing with these plans and has added additional international
and non-core domestic businesses to the discontinued operations of Syncor. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the net assets and results of operations of these businesses
are presented as discontinued operations. The Company is currently overseeing
the planned sale of the discontinued operations and is actively marketing these
businesses. The Company expects to sell substantially all of the remaining
discontinued operations by the end of fiscal 2004. The net assets for the
discontinued operations are included within the Pharmaceutical Technologies and
Services segment.

Page 19

The results of discontinued operations for the three and nine months ended
March 31, 2004 and 2003, are summarized as follows:

Three Nine
Months Ended Months Ended
March 31, March 31,
(in millions) 2004 2003 2004 2003
--------------------------- ----------------------------

Revenue $20.3 $51.6 $71.2 $51.6
=========================== ============================

Loss before income taxes $(1.4) $(2.9) $(12.5) $(2.9)
Income tax benefit 0.6 1.1 4.8 1.1
--------------------------- ----------------------------
Loss from discontinued operations $(0.8) $(1.8) $(7.7) $(1.8)
=========================== ============================

Interest expense allocated to discontinued operations for the three and
nine months ended March 31, 2004, was $0.1 million and $0.2 million,
respectively, as compared to $0.3 million for the three and nine months ended
March 31, 2003. Interest expense was allocated to the discontinued operations
based upon a ratio of the net assets of discontinued operations versus the
overall net assets of Syncor.

At March 31, 2004, and June 30, 2003, the major components of assets and
liabilities of the discontinued operations were as follows:

March 31, June 30,
(in millions) 2004 2003
----------------- ----------------

Current assets $ 39.0 $ 49.9
Property and equipment, net 44.1 63.2
Other assets 55.9 57.0
----------------- ----------------
Total assets $ 139.0 $ 170.1
================= ================

Current liabilities $ 43.5 $ 35.6
Long-term debt and other 17.4 28.7
----------------- ----------------
Total liabilities $ 60.9 $ 64.3
================= ================

Cash flows generated from the discontinued operations are immaterial to the
Company and, therefore, are not disclosed separately.

10. ACQUISITIONS

Intercare Group, plc

During December 2003, the Company completed the purchase of Intercare, a
leading European pharmaceutical products and services company. The acquisition
expands the Company's global reach by increasing its scale of proprietary
sterile manufacturing and broadening its participation in the fast-growing
European generic (including manufacturing capabilities) and injectible product
market.

The cash transaction was valued at approximately $570 million, including
the repayment of approximately $150 million in Intercare debt. Excluding the
operating results of its specialty pharmaceutical distribution business (as
discussed in Note 5), the results of Intercare's operations for the period
following the completion of the transaction have been reported within the
Company's Pharmaceutical Technologies and Services segment for the three and
nine months ended March 31, 2004.

See Note 7 for discussion of Intercare's preliminary purchase price
allocation.

Other Acquisitions

During the three and nine months ended March 31, 2004, the Company
completed other acquisitions that individually were not material and were
accounted for under the purchase method of accounting. The aggregate

Page 20

purchase price of these individually immaterial acquisitions, which was paid in
cash, was approximately $165 million. Assumed liabilities of the acquired
businesses were approximately $16 million, including debt of approximately $3
million. The consolidated financial statements include the results of operations
from each of these business combinations as of the date of acquisition.

Supplemental pro forma results of operations are not provided as the
impact to the Company of the acquisitions mentioned above during the three and
nine months ended March 31, 2004, individually and in the aggregate, were not
material.

11. OFF-BALANCE SHEET ARRANGEMENTS

During the nine months ended March 31, 2004 and 2003, the Company
entered into two separate agreements to transfer ownership of certain equipment
lease receivables, plus security interests in the related equipment, to the
leasing subsidiary of a bank in the amounts of $164.2 million and $200.0
million, respectively. An immaterial gain was recognized from each of these
transactions, which was classified as operating revenue within the Company's
results of operations. In order to qualify for sale treatment under SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the Company formed two wholly-owned, special
purpose, bankruptcy-remote entities (the "SPEs") of Pyxis Corporation (a
wholly-owned subsidiary of the Company now known as Cardinal Health 301, Inc.
and referred to in this Form 10-Q as "Pyxis"), and the SPEs formed two
wholly-owned, qualified special purpose entities (the "QSPEs") to effectuate the
removal of the lease receivables from the Company's consolidated financial
statements. In accordance with SFAS No. 140, the Company consolidates the SPEs
and does not consolidate the QSPEs. Both the SPEs and QSPEs are separate legal
entities that maintain separate financial statements from the Company and Pyxis.
The assets of the SPEs and QSPEs are available first and foremost to satisfy the
claims of their respective creditors.

12. EMPLOYEE RETIREMENT BENEFIT PLANS

Components of the Company's net periodic benefit costs for the three and
nine months ended March 31, 2004 and 2003, were as follows:

Three Months Nine Months
Ended March 31, Ended March 31,
(in millions) 2004 2003 2004 2003
--------------------------- ----------------------------

Components of net periodic benefit cost:
Service cost $0.4 1.2 $1.2 $3.5
Interest cost 2.2 2.1 6.6 6.3
Expected return on plan assets (1.3) (1.4) (4.0) (4.1)
Net amortization and other (1) 0.6 0.3 1.8 0.9
--------------------------- ----------------------------
Net amount recognized $1.9 $2.2 $5.6 $6.6
=========================== ============================

(1) Amount primarily represents the amortization of unrecognized actuarial
losses, as well as the amortization of the transition obligation and prior
service costs.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion and analysis presented below are concerned with material
changes in financial condition and results of operations for the Company's
condensed consolidated balance sheets as of March 31, 2004, and June 30, 2003,
and the condensed consolidated statements of earnings for the three and
nine-month periods ended March 31, 2004 and 2003.

This discussion and analysis should be read together with management's
discussion and analysis included in the 2003 Form 10-K.

Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe," "expect," "anticipate,"
"project," and similar expressions, among others, identify "forward-looking
statements," which speak only as of the date the statement was made. Such
forward-looking statements are subject to risks, uncertainties and other
factors, which could cause actual results to materially differ from those made,
projected or implied. The most significant of such risks, uncertainties and
other factors are described in Exhibit 99.01 to this Form 10-Q and beginning on
page 8 of the 2003 Form 10-K and are incorporated herein by reference. The
Company disclaims any obligation to update any forward-looking statement.

OVERVIEW

The following summarizes the Company's results of operations for the
three and nine-month periods ended March 31, 2004.

Three Months Ended Nine Months Ended
(in millions, except per Common Share March 31, March 31,
------------------------------------ -------------------------------------
amounts) Growth (1) 2004 2003 Growth (1) 2004 2003
- --------------------------------------------------------------------------------- -------------------------------------

Operating revenue 14% $14,638.9 $12,837.3 14% $42,020.8 $36,960.2
Operating earnings 9% $664.5 $608.2 6% $1,774.2 $1,666.6
Earnings from continuing operations 11% $428.9 $384.9 10% $1,140.2 $1,040.7
Net earnings 12% $428.1 $383.1 9% $1,132.5 $1,038.9
Diluted earnings per Common Share 15% $0.97 $0.84 12% $2.56 $2.29
- --------------------------------------------------------------------------------- -------------------------------------

(1) Growth is calculated as the change (increase or decrease) for
the three and nine months ended March 31, 2004, compared to the
three and nine months ended March 31, 2003.

The results of operations during the three and nine months ended March
31, 2004, reflect the breadth of products and services the Company offers and
the increasing demand for the Company's diverse portfolio of products and
services, which led to revenue growth in every segment of the Company. The
Company continues to experience strong demand for integrated solutions from
health care providers. These integrated solutions include products and services
from multiple lines of businesses within the Company. These unique arrangements
currently represent more than $6 billion of annual sales.

The Company has four operating business segments: Pharmaceutical
Distribution and Provider Services, Medical Products and Services,
Pharmaceutical Technologies and Services and Automation and Information
Services. The Company generated strong operating earnings within its Medical
Products and Services, Pharmaceutical Technologies and Services and Automation
and Information Services segments. These three segments now comprise more than
one-half of the Company's operating earnings. The operating earnings growth in
those three segments was offset partially by the relatively flat earnings within
the Pharmaceutical Distribution and Provider Services segment, as discussed
below.

The Company's Pharmaceutical Distribution and Provider Services segment
is in transition in its business model from a "buy and hold" inventory
investment model to a "just-in-time" fee-for-service model with regard to the
pharmaceutical distribution services it provides for manufacturers.
Historically, one way the Company obtained value from manufacturers was by
buying inventories from them, holding those inventories and generating margins
on the subsequent sale of those inventories after pharmaceutical prices
increased. The Company is currently working

Page 22

with its pharmaceutical manufacturing vendors to transition towards a
"just-in-time" fee-for-service business model where the Company will be
compensated for the services it provides the manufacturer. To assist in this
transition, the Company has performed an analysis of its pharmaceutical
manufacturing vendors' "next-best alternative" to utilizing the Company's
services. This analysis is being used to help develop the Company's total fee
requirement for each manufacturer.

During this business model transition, the Company's vendor margins have
been negatively impacted, resulting in lower operating earnings growth rates
when compared to the same periods a year ago. However, the Company believes that
the most severe impact of this transition on its vendor margins occurred in the
second quarter of fiscal 2004. During the three months ended March 31, 2004,
operating earnings were stable when compared to the same period a year ago.

This transition to a new business model also has affected the Company's
operating revenues. While the overall demand for the Company's products has not
changed, the business model guiding how the Company fills certain orders has
changed. The previous "buy and hold" model resulted in the Company holding large
quantities of inventories and filling certain "bulk" orders through the
Company's inventory on-hand. These types of sales were classified as "Bulk from
Stock" and were reported within operating revenue. With the transition to this
new business model, the Company will hold less inventory, and therefore will not
fill these orders from its own stock with the same frequency, but rather will
act more as a pass-through entity and record the revenue within its "Bulk
Deliveries to Customer Warehouses" line within the income statement. The impact
of this change is reflected in the Company's investment in days of inventory
on-hand at quarter-end (i.e., investment declined seven days from a year ago
March 31 and three days sequentially from December 31, 2003).

The Company and certain product manufacturers are in discussions regarding
the risks of counterfeit products in the supply chain and the manufacturers'
concerns regarding the impact of secondary market distribution on
counterfeiting. The Company continues to work with its suppliers to help
minimize the risks associated with counterfeit products in the supply chain.

The Medicare Prescription Drug, Improvement, and Modernization Act (the
"Medicare Act") was passed by Congress and enacted by President Bush on December
8, 2003. The Medicare Act is the largest expansion of the Medicare program since
its inception and provides participants with voluntary prescription drug
benefits effective in 2006 with an interim drug discount card. The Medicare Act
also includes provisions relating to medication management programs, generic
substitution and provider reimbursement. Based upon current information, the
Company believes the Medicare Act may create additional volume demand and
provide incentives for additional utilization of generic drugs.

As a leading provider of products and services supporting the health care
industry, including the distribution of pharmaceuticals and other health care
products, the Company is monitoring issues regarding importation of
pharmaceuticals and other health care products. The Company is sensitive to the
issue of pharmaceutical prices and the pricing disparity between domestic and
international markets. However, the Company believes that for importation to be
successful, additional controls and protections would need to be implemented to
ensure patients and consumers receive safe and effective pharmaceutical
products. The Company will continue to work proactively with all participants
and regulators in the pharmaceutical supply chain to help ensure any solution is
safe and efficient.

During the nine months ended March 31, 2004, the Company completed several
acquisitions, including Intercare. The Company's trend with regard to
acquisitions has been to expand its role as a provider of services to the health
care industry. This trend has resulted in expansion into service areas which (a)
complement the Company's existing operations, and (b) provide opportunities for
the Company to develop synergies with, and thus strengthen, the acquired
business. As the health care industry continues to change, the Company regularly
evaluates possible candidates for merger or acquisition and intends to continue
to seek opportunities to expand its role as a provider of services to the health
care industry through all its reporting segments. There can be no assurance that
it will be able to successfully pursue any such opportunity or consummate any
such transaction, if pursued. If additional transactions are entered into or
consummated, the Company would incur additional merger- and acquisition-related
costs, and may need to enter into funding arrangements for such mergers or
acquisitions. There can be no assurance that the integration efforts associated
with any such transaction would be successful.

Page 23

GENERAL

The following discussions provide details regarding the results of
operations of the Company's four operating business segments. See Note 5 in
"Notes to Condensed Consolidated Financial Statements" for a description of
these segments.

RESULTS OF OPERATIONS

Operating Revenue Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------------- ---------------------------------------
Percent of Total Percent of Total
Operating Revenues Operating Revenues
-------------------------- ---------------------------------------
Growth (1) 2004 2003 Growth (1) 2004 2003
- ------------------------------------------------------------- -------------------------------------------------------------------

Pharmaceutical Distribution and Provider
Services 14% 81% 81% 13% 81% 82%
Medical Products and Services 14% 13% 13% 12% 13% 13%
Pharmaceutical Technologies and Services 14% 5% 5% 39% 5% 4%
Automation and Information Services 4% 1% 1% 8% 1% 1%

Total Company 14% 100% 100% 14% 100% 100%
- ----------------------------------------------------------------------------------------------------------------------------------

(1) Growth is calculated as the change (increase or decrease) in the
operating revenue for the three and nine months ended March 31,
2004, compared to the three and nine months ended March 31,
2003.

TOTAL COMPANY. Total operating revenue for the three and nine months
ended March 31, 2004, increased 14% compared to the same periods of the prior
year. These increases resulted from a higher sales volume across each of the
Company's segments; revenue growth from existing customers; the addition of new
customers, some of which resulted from new corporate agreements with health care
providers that integrate the Company's diverse offerings; the addition of new
products; and pharmaceutical price increases.

PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES. This segment's
operating revenue growth of 14% and 13%, respectively, during the three and nine
months ended March 31, 2004, resulted from strong sales to customers within this
segment's core pharmaceutical distribution business. "Direct Store Door" sales
(sales in which the Company breaks down bulk pharmaceuticals to customize orders
for delivery direct to the health care providers) within the pharmaceutical
distribution business showed particular strength, increasing 24% during the
three and nine months ended March 31, 2004. The increase in "Direct Store Door"
sales was primarily due to increased sales to new and existing customers, in
particular alternate site and health system customers, and pharmaceutical price
increases. This segment's growth was dampened by the impact of declining "Bulk
from Stock" sales as described in the "Overview" section. To fully gauge
downstream customer demand within pharmaceutical distribution, three types of
sales should be aggregated. These sales types are "Direct Store Door" and "Bulk
from Stock" (reported in total as operating revenues) and "Bulk Deliveries to
Customer Warehouses." Revenue growth from these total sales activities was 14%
and 16% during the three and nine months ended March 31, 2004, as compared to
the comparable periods a year ago. In addition, the three months ended March 31,
2004, included an extra business day when compared to the same period a year
ago, which accounted for approximately 2% of this segment's revenue growth for
the three months ended March 31, 2004.

MEDICAL PRODUCTS AND SERVICES. This segment's operating revenue growth
of 14% and 12%, respectively, during the three and nine months ended March 31,
2004, resulted primarily from increased sales momentum from new and existing
contracts within the distribution business, as well as increased sales from new
self-manufactured products. New contracts drove an increase in sales of both
distributed and self-manufactured products, with sales from the distribution
business showing particular strength during the three and nine months ended
March 31, 2004. Sales of new self-manufactured products, particularly
enhancements within surgeon glove products, contributed to this segment's
revenue growth. This segment's revenue growth has been well above industry
averages during the current fiscal year. Also, this segment's international
business contributed solid revenue growth during the three months ended March
31, 2004. This segment also benefited from the extra business day during the
three months ended March 31, 2004, when compared to the same period a year ago,
accounting for approximately 2% of this segment's revenue growth for the three
months ended March 31, 2004.

Page 24

PHARMACEUTICAL TECHNOLOGIES AND SERVICES. This segment's operating
revenue growth of 14% and 39%, respectively, during the three and nine months
ended March 31, 2004, resulted from sales momentum within the pharmaceutical
development, packaging services and nuclear pharmacy businesses. This segment's
revenue growth for the three months ended March 31, 2004, benefited from the
inclusion of Intercare, an acquisition that was completed during December 2003.
Intercare's results of operations are not included in the prior period amounts.
Also, this segment's revenue growth for the nine months ended March 31, 2004,
benefited from the inclusion of Syncor, an acquisition that was completed on
January 1, 2003. Syncor's results of operations are not included in the amounts
for the first half of fiscal 2003 (prior to the acquisition). This segment's
revenue growth was partially dampened by a delay in the startup of commercial
manufacturing of key sterile products from signed contracts, which has now begun
during the fourth quarter of fiscal 2004.

AUTOMATION AND INFORMATION SERVICES. This segment's operating revenue
growth of 4% and 8%, respectively, during the three and nine months ended March
31, 2004, primarily reflected sales growth within the medication product lines
(such as Pyxis MedStation(R)). A portion of this segment's revenue growth was
due to the addition of new customers and products. This segment was impacted by
a softening of demand at the hospital level. The Company believes that this
softening is attributable to capital spending pressures being experienced by
hospitals. The Company believes that this trend may continue in the short-term;
however, the Company remains confident in the long-term prospects for this
segment as patient safety concerns combine with innovative new products to drive
future demand.

Bulk Deliveries to Customer Warehouses and Other
The Pharmaceutical Distribution and Provider Services segment reports
bulk deliveries made to customers' warehouses as revenue. These sales involve
the Company acting as an intermediary in the ordering and subsequent delivery of
pharmaceutical products. Fluctuations in bulk deliveries result largely from
circumstances that the Company cannot control, including consolidation within
customers' industries, decisions by customers to either begin or discontinue
warehousing activities and changes in policies by manufacturers related to
selling directly to customers. Due to the lack of margin generated through bulk
deliveries, fluctuations in their amount have no significant impact on the
Company's net earnings.

The Pharmaceutical Technologies and Services segment records
out-of-pocket reimbursements received through its sales and marketing services
business as revenue. These out-of-pocket expenses, which generally include
travel expenses and other incidental costs, are incurred to fulfill the services
required by various contracts. These contracts provide for the customer to
reimburse the Company for these expenses. Due to the Company not generating any
margin from these reimbursements, fluctuations in their amount have no impact on
the Company's net earnings.

Page 25