Overview

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein and in conjunction with the financial statements and notes thereto included in AmerisourceBergen Corporation's (the "Company's") Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

The Company is a pharmaceutical services company providing drug distribution and related healthcare services and solutions to its pharmacy, physician, and manufacturer customers, which are based primarily in the United States and Canada. The Company is organized based upon the products and services it provides to its customers. Substantially all of the Company's operations are located in the United States and Canada. The Company also has a pharmaceutical packaging operation in the United Kingdom.

On July 31, 2007, the Company completed the spin-off of its former institutional pharmacy business, PharMerica Long-Term Care ("Long-Term Care"). In connection with the spin-off, the Company continues to distribute pharmaceuticals to and generate cash flows from the disposed institutional pharmacy business. The historical operating results of Long-Term Care were not reported as a discontinued operation of the Company because of the significance of the continuing cash flows resulting from the pharmaceutical distribution agreement entered into between the disposed component and the Company. Accordingly, for periods prior to August 1, 2007, the Company's operating results include Long-Term Care.

Historically, the Company has evaluated and reported gross profit, operating expense, and operating income margins as a percentage of operating revenue because the gross profit and operating expenses relating to bulk deliveries were negligible, as a majority of this revenue represented direct shipments from manufacturers to customers' warehouses. In the March 2008 quarter, the Company began to transition a significant amount of business previously conducted on a bulk delivery basis to an operating revenue basis as a result of a new contract that the Company signed with its largest customer. As a result, the Company's revenue from bulk deliveries in the future will be insignificant to its total revenue and, therefore, beginning with the quarter ended March 31, 2008, the Company began to report gross profit, operating expense, and operating income margins as a percentage of total revenue (refer to Summary Segment Information tables on pages 27 and 28).

Acquisition

On October 1, 2007, the Company acquired Bellco Health ("Bellco"), for a purchase price of $162.2 million, net of $20.7 million of cash acquired. Bellco is a pharmaceutical distributor in the Metro New York City area, where it primarily services independent retail community pharmacies. The acquisition of Bellco expands the Company's presence in this large community pharmacy market. Nationally, Bellco markets and sells generic pharmaceuticals to individual retail pharmacies, and provides pharmaceutical products and services to dialysis clinics. Bellco's revenues were $2.1 billion for its fiscal year ended June 30, 2007.

Planned Divestiture

As of June 30, 2008, the Company committed to a plan to divest its workers' compensation business, PMSI. In accordance with SFAS No. 144, the Company classified PMSI's assets and liabilities as held for sale in the consolidated balance sheets and classified PMSI's operating results and cash flows as discontinued in the consolidated financial statements for all current and prior fiscal periods presented. Previously, PMSI was included in the Company's Other reportable segment.

On July 23, 2008, the Company signed an agreement to sell PMSI for approximately $40 million, which is subject to closing adjustments, and includes a cash payment of $25 million upon closing plus a $15 million subordinated note payable due from PMSI on the fifth anniversary of the closing date (the "maturity date").

Interest, which accrues at an annual rate of 7%, shall be payable in cash on a quarterly basis if PMSI achieves a defined minimum fixed charge coverage ratio or will be compounded semi-annually and paid at maturity. Additionally, if PMSI's annual net revenue exceeds certain thresholds through December 2011, the Company may be entitled to additional payments of up to $10 million under the form of a subordinated note payable due from PMSI on the maturity date. The Company expects to complete the transaction by the end of September 2008. The Company recorded a non-cash charge of $222.5 million as of June 30, 2008 to reduce the carrying value of PMSI. The $222.5 million charge, which is included in the loss from discontinued operations for the quarter and nine months ended June 30, 2008, was comprised of a $199.1 million write-off of PMSI's goodwill and a $23.4 million charge to record the Company's estimated loss on the sale of PMSI. No tax benefit was recorded in connection with the above charge as the loss on disposal will be treated as a capital loss for income tax purposes, and the Company does not have any capital gains to offset the capital loss.

Reportable Segments

The Company's operations are comprised of two reportable segments:
Pharmaceutical Distribution and Other. The Other reportable segment includes the operating results of Long-Term Care, through the July 31, 2007 spin-off date, and excludes PMSI, which has been reclassified to discontinued operations.

Pharmaceutical Distribution

The Pharmaceutical Distribution reportable segment is currently comprised of four operating segments, which include the operations of the AmerisourceBergen Drug Corporation ("ABDC"), the AmerisourceBergen Specialty Group ("ABSG"), Bellco Health ("Bellco"), and the AmerisourceBergen Packaging Group ("ABPG"). Servicing both healthcare providers and pharmaceutical manufacturers in the pharmaceutical supply channel, the Pharmaceutical Distribution segment's operations provide drug distribution and related services designed to reduce healthcare costs and improve patient outcomes. The Company is currently in the process of integrating Bellco's separate operations within ABDC and ABSG.

ABDC distributes a comprehensive offering of brand name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, alternate site facilities, and other customers. ABDC also provides pharmacy management, staffing and other consulting services, scalable automated pharmacy dispensing equipment, medication and supply dispensing cabinets, and supply management software to a variety of retail and institutional healthcare providers.

ABSG, through a number of individual operating businesses, provides pharmaceutical distribution and other services primarily to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers. ABSG also distributes vaccines, other injectables, plasma, and other blood products. In addition, through its specialty services businesses, ABSG provides a number of commercialization services, third party logistics, group purchasing, and other services for biotech and other pharmaceutical manufacturers, as well as reimbursement consulting, data analytics, practice management, and physician education.

ABPG consists of American Health Packaging, Anderson Packaging ("Anderson") and Brecon Pharmaceuticals Limited ("Brecon"). American Health Packaging delivers unit dose, punch card, unit-of-use, and other packaging solutions to institutional and retail healthcare providers. American Health Packaging's largest customer is ABDC, and, as a result, its operations are closely aligned with the operations of ABDC. Anderson is a leading provider of contract packaging services for pharmaceutical manufacturers. Brecon is a United Kingdom-based provider of contract packaging and clinical trial materials services for pharmaceutical manufacturers.

Other

Prior to its divestiture, Long-Term Care was a leading national dispenser of pharmaceutical products and services to patients in long-term care and alternate site settings, including skilled nursing facilities, assisted living facilities and residential living communities. Long-Term Care's institutional pharmacy business involved the purchase of prescription and nonprescription pharmaceuticals, principally from our Pharmaceutical Distribution segment, and the dispensing of those products to residents in long-term care and alternate site facilities.

Results of Operations

                         AmerisourceBergen Corporation

                          Summary Segment Information



                                                                Total Revenue
                                                         Three Months Ended June 30,
(dollars in thousands)                               2008               2007           Change
Pharmaceutical Distribution                      $ 17,996,666       $ 16,248,832           11 %
Other                                                      -             306,670
Intersegment eliminations                                  -            (211,526 )

Total                                            $ 17,996,666       $ 16,343,976           10 %


                                                               Operating Income
                                                         Three Months Ended June 30,
(dollars in thousands)                               2008               2007           Change
Pharmaceutical Distribution                      $    205,390       $    168,312           22 %
Other                                                      -               6,122
Facility consolidations, employee severance
and other                                              (7,865 )           (3,496 )        125 %
Gain on antitrust litigation settlements                   -              31,919

Total                                            $    197,525       $    202,857           (3 )%

Percentages of total revenue:

Pharmaceutical Distribution
Gross profit                                             2.77 %             2.76 %
Operating expenses                                       1.63 %             1.73 %
Operating income                                         1.14 %             1.04 %
Other
Gross profit                                              n/a              29.38 %
Operating expenses                                        n/a              27.38 %
Operating income                                          n/a               2.00 %
AmerisourceBergen Corporation
Gross profit                                             2.77 %             3.49 %
Operating expenses                                       1.67 %             2.25 %
Operating income                                         1.10 %             1.24 %

                         AmerisourceBergen Corporation

                          Summary Segment Information



                                                                Total Revenue
                                                          Nine Months Ended June 30,
(dollars in thousands)                               2008               2007           Change
Pharmaceutical Distribution                      $ 53,031,887       $ 49,083,637            8 %
Other                                                      -             941,385
Intersegment eliminations                                  -            (645,429 )

Total                                            $ 53,031,887       $ 49,379,593            7 %


                                                               Operating Income
                                                          Nine Months Ended June 30,
(dollars in thousands)                               2008               2007           Change
Pharmaceutical Distribution                      $    633,010       $    564,631           12 %
Other                                                      -              21,224
Facility consolidations, employee severance
and other                                              (9,426 )           (9,654 )         (2 )%
Gain on antitrust litigation settlements                1,585             35,562          (96 )%

Total                                            $    625,169       $    611,763            2 %

Percentages of total revenue:

Pharmaceutical Distribution
Gross profit                                             2.86 %             2.86 %
Operating expenses                                       1.67 %             1.71 %
Operating income                                         1.19 %             1.15 %
Other
Gross profit                                              n/a              29.36 %
Operating expenses                                        n/a              27.10 %
Operating income                                          n/a               2.25 %
AmerisourceBergen Corporation
Gross profit                                             2.87 %             3.48 %
Operating expenses                                       1.69 %             2.24 %
Operating income                                         1.18 %             1.24 %

Consolidated Results

Operating revenue of $17.5 billion in the quarter ended June 30, 2008, which excludes bulk deliveries, increased 15% from the prior year quarter. This increase was due to growth in our Pharmaceutical Distribution segment, particularly within our ABDC operating segment, and the Bellco acquisition. Additionally, in the March 2008 quarter, we began to transition a significant amount of business previously conducted on a bulk delivery basis to an operating revenue basis. This business transition, which contributed approximately 5% of the operating revenue growth for the June 2008 quarter, resulted from a new contract that we signed with our largest customer. Operating revenue of $50.9 billion in the nine months ended June 30, 2008 increased 10% from the prior year period primarily due to an increase in revenue within our ABDC operating segment and the Bellco acquisition.

Bulk deliveries of $489.2 million and $2.2 billion in the quarter and nine months ended June 30, 2008 decreased 54% and 34%, respectively, from the prior year periods. These declines were due to the customer transition discussed above. Due to the insignificant service fees generated from bulk deliveries, fluctuations in

volume have no significant impact on operating margins. However, revenue from bulk deliveries has a positive impact on our cash flows due to favorable timing between the customer payments to us and payments by us to our suppliers.

Total revenue of $18.0 billion and $53.0 billion in the quarter and nine months ended June 30, 2008 increased 10% and 7%, respectively, from the prior year periods. These increases were driven by revenue growth in the Pharmaceutical Distribution segment of 11% and 8% in the quarter and nine months ended June 30, 2008, respectively, including a 3% contribution from the Bellco acquisition, in both periods.

Gross profit of $498.0 million and $1.5 billion in the quarter and nine months ended June 30, 2008 decreased 13% and 12%, respectively, from the prior year periods. These declines were related to decreases in gross profit in the Other segment, as prior year's consolidated results included Long-Term Care. As previously mentioned, for periods prior to August 1, 2007, our operating results included Long-Term Care. The Other segment gross profit decreases were offset, in part, by the Pharmaceutical Distribution segment's gross profit for the quarter and nine months ended June 30, 2008, which increased by 11% and 8% primarily due to revenue growth, including the acquisition of Bellco. During the quarter ended June 30, 2007, we recognized a gain of $31.9 million from antitrust litigation settlements with pharmaceutical manufacturers, which represented 5.6% of gross profit. During the nine months ended June 30, 2008 and 2007, we recognized gains of $1.6 million and $35.6 million, respectively, from antitrust litigation settlements with pharmaceutical manufacturers, which represented 0.1% and 2.1% of gross profit, respectively. As a percentage of total revenue, gross profit in the quarter and nine months ended June 30, 2008 decreased 72 basis points and 61 basis points, respectively, from the prior year periods, which included the operating results of Long-Term Care.

Distribution, selling and administrative expenses, depreciation and amortization ("DSAD&A") of $292.7 million and $885.0 million in the quarter and nine months ended June 30, 2008 decreased 20% and 19% from the prior year periods, respectively. These declines were related to decreases in the DSAD&A in the Other segment, as prior year's consolidated results included Long-Term Care and were partially offset by operating expenses of our recent acquisitions, primarily those of Bellco.

The following table illustrates the charges incurred relating to facility consolidations, employee severance and other for the quarter and nine months ended June 30, 2008 and 2007 (in thousands):

                                                      Quarter ended           Nine months ended
                                                        June 30,                  June 30,
                                                    2008        2007          2008          2007
Facility consolidations and employee severance     $ 7,798     $ 2,059     $    7,286     $  4,695
Information technology transition costs                 -          519             -         1,481
Costs relating to business divestitures                 67         782          2,140        6,442
Loss (gain) on sale of assets                           -          136             -        (2,964 )

Total facility consolidations, employee
severance and other                                $ 7,865     $ 3,496     $    9,426     $  9,654

During the quarter ended June 30, 2008, the Company announced a more streamlined organizational structure and introduced a program ("cE2") designed to drive increased customer efficiency and cost effectiveness. In connection with these efforts, the Company has reduced various operating costs and terminated certain positions. The Company currently expects to incur the majority of employee severance costs related to the above efforts through December 31, 2008. During the quarter ended June 30, 2008, the Company terminated 58

employees and incurred $7.6 million of employee severance costs. During the nine months ended June 30, 2008, the Company reversed $1.0 million of employee severance charges previously estimated and recorded relating to its prior integration plan.

Costs related to business divestitures in the quarter and nine months ended June 30, 2008 related to the sale of PMSI and during the quarter and nine months ended June 30, 2007 related to the Long-Term Care spin-off.

During the nine months ended June 30, 2007, the Company recognized a $3.0 million gain relating to the sale of certain retail pharmacy assets of its former Long-Term Care business.

The Company paid a total of $4.3 million and $12.6 million for employee severance, lease cancellation and other costs during the nine months ended June 30, 2008 and 2007, respectively. Most employees receive their severance benefits over a period, generally not in excess of 12 months, while others may receive a lump-sum payment.

Operating income of $197.5 million in the quarter ended June 30, 2008 decreased 3% from the prior year quarter, which benefited from a $31.9 million gain on antitrust litigation settlements and a $6.1 million contribution from Long-Term Care, and was substantially offset by the strong 22% increase in Pharmaceutical Distribution segment's operating income in the current year period. Operating income of $625.2 million in the nine months ended June 30, 2008 increased 2% compared to the prior year period due to the 12% increase in the Pharmaceutical Distribution segment's operating income, which was offset, in part, by the $35.6 million gain on antitrust litigation settlements and a $21.2 million contribution from Long-Term Care, both of which benefited the prior year period.

As a percentage of total revenue, operating income in the quarter and nine months ended June 30, 2008 decreased 14 basis points and 6 basis points, respectively, from the prior year periods. The costs of facility consolidations, employee severance and other, and the gain on antitrust litigation settlements had the following net effects on operating income as a percentage of total revenue:

• Quarter ended June 30, 2008 - decreased operating income as a percentage of total revenue by 4 basis points.

• Quarter ended June 30, 2007 - increased operating income as a percentage of total revenue by 17 basis points.

• Nine months ended June 30, 2008 - decreased operating income as a percentage of total revenue by 1 basis point.

• Nine months ended June 30, 2007 - increased operating income as a percentage of total revenue by 5 basis points.

Interest expense, interest income, and their respective weighted average interest rates in the quarters ended June 30, 2008 and 2007 were as follows (in thousands):

                                      2008                               2007
                                       Weighted Average                   Weighted Average
                           Amount       Interest Rate        Amount        Interest Rate
  Interest expense        $ 18,067                 5.33 %   $  19,184                 5.63 %
  Interest income           (2,101 )               2.76 %     (12,871 )               4.17 %

  Interest expense, net   $ 15,966                          $   6,313

Interest expense decreased 6% from the prior year quarter due to a decline in the weighted average interest rate, offset in part by an increase of $51.1 million in average borrowings. Interest income decreased substantially from the prior year quarter primarily due to a decline of $908.4 million in average invested cash and short-term investments.

Interest expense, interest income, and their respective weighted average interest rates in the nine months ended June 30, 2008 and 2007 were as follows (in thousands):

                                      2008                               2007
                                       Weighted Average                   Weighted Average
                           Amount       Interest Rate        Amount        Interest Rate
  Interest expense        $ 58,648                 5.56 %   $  58,660                 5.65 %
  Interest income           (7,567 )               3.66 %     (34,336 )               4.28 %

  Interest expense, net   $ 51,081                          $  24,324

Interest expense was relatively consistent when compared to the prior year nine-month period as an increase of $111.1 million in average borrowings was offset by the decline in the weighted average interest rate. Interest income decreased substantially from the prior year nine-month period primarily due to a decline of $764.0 million in average invested cash and short-term investments.

The decreases in invested cash and short-term investments from the prior year periods were primarily due to our use of cash for share repurchases, acquisitions and capital expenditures, all of which, in the aggregate, exceeded our cash provided by operating activities since the prior year periods. Our net interest expense in future periods may vary significantly depending upon our borrowings, interest rates and strategic decisions made by us to deploy our invested cash.

We adopted Financial Accounting Standards Board's ("FASB's") Financial Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes," effective October 1, 2007. The cumulative effect of adoption of this interpretation resulted in a $9.3 million reduction in retained earnings. The adoption of the provisions of FIN No. 48 did not have a significant impact on our effective tax rate in the quarter and nine months ended June 30, 2008.

Income tax expense for the quarter ended June 30, 2008 reflects an effective income tax rate of 37.6%, versus 34.8% in the prior year quarter. Income tax expense for the nine months ended June 30, 2008 reflects an effective income tax rate of 38.3%, versus 37.4% in the prior year period. The increases in the effective tax rates from the prior year periods were primarily due to the Company having benefited less in the current year periods from tax-free investment income. We currently expect to have an effective income tax rate slightly higher than 38% in fiscal 2008 in comparison to our effective tax rate of 37.0% in fiscal 2007.

Income from continuing operations of $112.8 million for the quarter ended June 30, 2008 decreased 10% from $125.9 million in the prior year quarter primarily due to the increase in net interest expense, and the prior year quarter having benefited significantly from a gain on antitrust litigation settlements and the inclusion of Long-Term Care's results. Diluted earnings per share from continuing operations of $0.70 in the quarter ended June 30, 2008 increased 4% from $0.67 per share in the prior year quarter. The difference between diluted earnings per share growth and the decline in income from continuing operations was due to the 14% reduction in weighted average common shares outstanding from purchases of our common stock in connection with our stock repurchase program (see Liquidity and Capital Resources), net of the impact of stock option exercises. Facility consolidations, employee severance and other decreased income from continuing operations by $4.9 million and

decreased diluted earnings per share by $0.03 for the quarter ended June 30, 2008. The gain on litigation settlements less facility consolidations, employee . . .