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

The discussion and analysis presented below is concerned with material changes in financial condition and results of operations for the Company's condensed consolidated balance sheets as of September 30, 2008 and June 30, 2008, and for the condensed consolidated statements of earnings for the three month periods ended September 30, 2008 and 2007. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2008 Form 10-K.

Portions of this Form 10-Q (including information incorporated by reference) include "forward-looking statements." The words "believe," "expect," "anticipate," "project," and similar expressions, among others, generally identify "forward-looking statements," which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in Exhibit 99.1 to this Form 10-Q and in the 2008 Form 10-K (under "Item 1A: Risk Factors") and are incorporated in this Form 10-Q by reference. Except to the extent required by applicable law, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

Cardinal Health is a leading provider of products and services that help improve the safety and productivity of healthcare. The Company is one of the largest distributors of pharmaceuticals and medical supplies. Customers include hospitals and clinics, some of the largest drug store chains in the United States, and many other healthcare providers and retail outlets. The Company believes that its depth and breadth of products is unique in the industry and gives it a competitive advantage.

Continued demand for the Company's products and services during the three months ended September 30, 2008 led to revenue of $24.3 billion, up 11% from the same period in the prior year. Operating earnings were approximately $426 million, a decline of 13% from the same period in the prior year. Operating earnings were favorably impacted by increased gross margin ($22 million) offset by increases in SG&A expenses ($52 million) and increases in restructuring charges ($35 million). Net earnings for the three months ended September 30, 2008 were $249 million and net diluted earnings per Common Share were $0.69.

Cash used in operating activities totaled $353 million during the three months ended September 30, 2008 primarily due to changes in the Company's working capital. Cash used in investing activities was $95 million primarily due to capital spending ($89 million). Cash used in financing activities was $172 million primarily due to the Company's repayment of long-term obligations ($153 million). Also during the three months ended September 30, 2008, the Company paid $50 million in dividends or $0.14 per share.

Planned Spin-Off of Clinical and Medical Products Businesses

On September 29, 2008, the Company announced that it plans to spin off most of its clinical and medical products businesses from its remaining businesses through a pro rata distribution to the Company's shareholders (the "Planned Spin-Off"). The Company will retain the surgical and exam gloves, drapes and apparel and fluid management businesses that are currently part of the Clinical and Medical Products segment. Completion of the Planned Spin-Off is subject to final approval by the Company's Board of Directors, confirmation of the tax-free nature of the Planned Spin-Off and the effectiveness of a Form 10 registration statement that will be filed with the SEC. While it is currently anticipated that the Planned Spin-Off will be completed by the middle of calendar 2009, there can be no assurance as to the timing or terms of the Planned Spin-Off should it be completed. See "Part II, Item 1A-Risk Factors" for certain risk factors relating to the Planned Spin-Off.

In connection with the Planned Spin-Off, the Company has announced that R. Kerry Clark will continue to lead the Company through the Planned Spin-Off and then retire as the Company's Chairman and Chief Executive Officer. Following Mr. Clark's retirement, George S. Barrett, Vice Chairman of Cardinal Health and Chief Executive Officer of Healthcare Supply Chain Services, is expected to become the Company's Chairman and Chief Executive Officer. Jeffrey W. Henderson will remain the Company's Chief Financial Officer. David L. Schlotterbeck, Vice Chairman of Cardinal Health and Chief Executive Officer of Clinical and Medical Products, is expected to become Chairman and Chief Executive Officer of the spin-off company.