Overview

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto contained herein.

The Company is a pharmaceutical services company providing drug distribution and related healthcare services and solutions to its pharmacy, physician, and manufacturer customers, which currently 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 are 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. 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 fiscal 2008, 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 in fiscal 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 table on page 28).

Acquisition

On October 1, 2007, the Company acquired Bellco Health 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 expanded 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 in fiscal 2008.

Divestiture

During fiscal 2008, the Company committed to a plan to divest its workers' compensation business, PMSI. In accordance with the Financial Accounting Standards Board's ("FASB's") Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," 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 the current and prior fiscal years presented. Previously, PMSI was included in the Company's Other reportable segment.

In October 2008, the Company completed the sale of PMSI for approximately $34 million, net of a working capital adjustment, including a $19 million subordinated note payable due from PMSI on the fifth anniversary of the closing date (the "maturity date"), of which $4 million may be payable in October 2010, if PMSI achieves certain revenue targets with respect to its largest customer. Interest, which accrues at an annual rate of 7%, will 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 subordinated note payable due from PMSI on the maturity date of the note. The Company recorded a non-cash charge of $225.8 million in fiscal 2008 to reduce the carrying value of PMSI. This charge, which is included in the loss from discontinued operations for the fiscal year ended September 30, 2008, was comprised of a $199.1 million write-off of PMSI's goodwill and a $26.7 million charge to record the Company's loss on the sale of PMSI. The tax benefit recorded in connection with the above charge was minimal as the loss on the sale of PMSI will be treated as a capital loss for income tax purposes, and the Company does not have significant 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. The operating results of PMSI, which was sold in October 2008, have been reclassified to discontinued operations.

Pharmaceutical Distribution

During fiscal 2008, the Pharmaceutical Distribution reportable segment was comprised of four operating segments, which included the operations of AmerisourceBergen Drug Corporation ("ABDC"), the AmerisourceBergen Specialty Group ("ABSG"), Bellco Health ("Bellco"), and the AmerisourceBergen Packaging Group ("ABPG"). We recently completed our integration of Bellco's separate operations within ABDC and ABSG and as of September 30, 2008, the Pharmaceutical Distribution reportable segment was comprised of three operating segments, which included ABDC, ABSG and 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.

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, long-term care and other alternate site pharmacies 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, including dialysis clinics. 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. As previously noted, the dialysis-related business of Bellco has been integrated within ABSG as of September 30, 2008.

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 contracted packaging services for pharmaceutical manufacturers. Brecon is a United Kingdom-based provider of contract packaging and clinical trials 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.

                         AmerisourceBergen Corporation

                          Summary Segment Information



                                                                                        2008        2007
                                                   Total Revenue                        vs.         vs.
                                          Fiscal year ended September 30,               2007        2006
                                       2008            2007              2006          Change      Change
                                               (dollars in thousands)
Pharmaceutical Distribution        $ 70,189,733    $ 65,340,623      $ 60,437,757           7 %         8 %
Other (a)                                    -        1,045,663         1,211,548         N/M         (14 )
Intersegment eliminations                    -         (714,214 )        (836,884 )       N/M         (15 )

Total                              $ 70,189,733    $ 65,672,072      $ 60,812,421           7 %         8 %

                                                                                           2008         2007
                                                     Operating Income                      vs.          vs.
                                             Fiscal year ended September 30,               2007         2006
                                          2008              2007            2006          Change       Change
                                                  (dollars in thousands)
Pharmaceutical Distribution            $   836,747        $ 729,978       $ 640,938           15 %         14 %
Other (a)                                       -            24,994          31,187          N/M          (20 )
Facility consolidations, employee
severance and other                        (12,377 )         (2,072 )       (20,123 )        497          (90 )
Gain on antitrust litigation
settlements                                  3,491           35,837          40,882          (90 )        (12 )

Total                                  $   827,861        $ 788,737       $ 692,884            5 %         14 %

Percentages of total revenue:

Pharmaceutical Distribution
Gross profit                                  2.91 %           2.87 %          2.85 %
Operating expenses                            1.72 %           1.75 %          1.79 %
Operating income                              1.19 %           1.12 %          1.06 %

Other (a)
Gross profit                                   N/M            29.37 %         29.47 %
Operating expenses                             N/M            26.98 %         26.90 %
Operating income                               N/M             2.39 %          2.57 %

AmerisourceBergen Corporation
Gross profit                                  2.92 %           3.38 %          3.49 %
Operating expenses                            1.74 %           2.18 %          2.35 %
Operating income                              1.18 %           1.20 %          1.14 %

(a) Other represents Long-Term Care's operating results for the ten-month period ended July 31, 2007 and for the fiscal year ended September 30, 2006.

Year ended September 30, 2008 compared with Year ended September 30, 2007

Consolidated Results

Operating revenue of $67.5 billion in fiscal 2008, which excludes bulk deliveries, increased 10% from the prior fiscal year. 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 3% of the operating revenue growth for the fiscal year ended September 30, 2008, resulted from a new contract that we signed with our largest customer.

The Company reports as revenue bulk deliveries to customer warehouses, whereby the Company acts as an intermediary in the ordering and delivery of pharmaceutical products. Bulk delivery transactions are arranged by the Company at the express direction of the customer, and involve either shipments from the supplier directly to customers' warehouse sites (i.e., drop shipment) or shipments from the supplier to the Company for immediate shipment to the customers' warehouse sites (i.e., cross-dock shipment). Bulk deliveries of $2.7 billion in fiscal 2008 decreased 39% from the prior fiscal year. This decline was due to the customer transition discussed above. The Company is a principal to these transactions because it is the primary obligor and has the ultimate responsibility for fulfillment and acceptability of the products purchased, and bears full risk of delivery and loss for products, whether the products are drop-shipped or shipped cross-dock. The Company also bears full credit risk associated with the creditworthiness of any bulk delivery customer. As a result, and in accordance with the Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," the Company records bulk deliveries to customer warehouses as gross revenues. 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 $70.2 billion in fiscal 2008 increased 7% from the prior fiscal year. This increase was driven by the Pharmaceutical Distribution segment, which received a 3% contribution from the Bellco acquisition.

Gross profit of $2.0 billion in fiscal 2008 decreased 8% from the prior fiscal year. This decline was related to the Other segment, as prior year's consolidated results included $307.1 million of gross profit from the operating results of Long-Term Care through the July 31 spin-off date. The Other segment gross profit decrease was offset, in part, by the 9% increase in the Pharmaceutical Distribution Segment's gross profit for the fiscal year ended September 30, 2008, primarily due to revenue growth, including the acquisition of Bellco. In fiscal 2008 and 2007, we recognized gains of $3.5 million and $35.8 million, respectively, from antitrust litigation settlements with pharmaceutical manufacturers. These gains, which are net of attorney fees and estimated payments due to other parties, were recorded as reductions to cost of goods sold and contributed 0.2% and 1.6% of gross profit in fiscal 2008 and 2007, respectively. The Company is unable to estimate future gains, if any, it will recognize as a result of antitrust settlements (see Note 14 to the consolidated financial statements). As a percentage of total revenue, gross profit in fiscal 2008 decreased 46 basis points from the prior fiscal year, which included the operating results of Long-Term Care.

Distribution, selling and administrative expenses, depreciation and amortization ("DSAD&A") of $1.2 billion in fiscal 2008 decreased 16% from the prior fiscal year. This decline was related to the Other segment, as prior year's consolidated results included $282.1 million of DSAD&A from the operating results of Long-Term Care and was 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 fiscal years ended September 30, 2008 and 2007 (in thousands):

                                                                  2008       2007
  Facility consolidations and employee severance                $  9,741   $ (5,863 )
  Information technology transition costs                             -       1,679
  Costs relating to business divestitures                          2,636      9,335
  Gain on sale of assets                                              -      (3,079 )

  Total facility consolidations, employee severance and other   $ 12,377   $  2,072

In fiscal 2008, the Company announced a more streamlined organizational structure and introduced an initiative ("cE2") designed to drive increased customer efficiency and cost effectiveness. In connection with these efforts, the Company reduced various operating costs and terminated certain positions. The Company expects to incur the majority of employee severance costs related to the above efforts through December 31, 2008. In fiscal 2008, the Company terminated approximately 130 employees and incurred $10.0 million of employee severance costs, relating to the aforementioned efforts.

In fiscal 2007, the Company completed its integration plan to consolidate its distribution network and eliminate duplicative administrative functions. The plan included building six new facilities, closing 31 facilities, and outsourcing a significant amount of its information technology activities. In fiscal 2008, the Company reversed $1.0 million of employee severance charges previously estimated and recorded related to this integration plan.

In fiscal 2006, the Company incurred a charge of $13.9 million for an increase in a compensation accrual due to an adverse decision in an employment-related dispute with a former Bergen Brunswig chief executive officer whose employment was terminated in 1999. In October 2007, the Company received a favorable ruling from a California appellate court reversing certain portions of the prior adverse decision. As a result, the Company reduced its liability in fiscal 2007 to the Bergen Brunswig chief executive officer by $10.4 million (see Bergen Brunswig Matter under Note 13 of the consolidated financial statements). The fiscal 2007 compensation expense reduction was recorded as a component of facility consolidations and employee severance.

Costs related to business divestitures in fiscal 2008 and 2007 related to PMSI and the Long-Term Care spin-off, respectively.

In fiscal 2007, the Company recognized a $3.1 million gain relating to the sale of certain retail pharmacy assets of its former Long-Term Care business.

The Company paid a total of $6.8 million and $20.7 million for employee severance, lease cancellation and other costs in fiscal 2008 and 2007, respectively. Remaining unpaid amounts of $21.4 million for employee severance, lease cancellation and other costs are included in accrued expenses and other in the accompanying consolidated balance sheet at September 30, 2008. Most employees receive their severance benefits over a period of time, generally not in excess of 12 months, while others may receive a lump-sum payment.

Operating income of $827.9 million in fiscal 2008 increased 5% from the prior fiscal year due to the 15% or $106.8 million increase in the Pharmaceutical Distribution segment's operating income, which was offset, in part, by a decrease of $32.3 million in gains from antitrust litigation settlements, and an increase of $10.3 million in facility consolidation, employee severance and other costs. Additionally, the prior fiscal year benefited from a $25.0 million contribution from Long-Term Care, prior to its July 2007 spin-off. As a percentage of total revenue, operating income in fiscal 2008 decreased 2 basis points from the prior fiscal year despite

Pharmaceutical Distribution's operating income as a percentage of total revenue increasing by 7 basis points. The costs of facility consolidations, employee severance and other, less the gain on antitrust litigation settlements, decreased operating income by $8.9 million in fiscal 2008 and reduced operating income as a percentage of total revenue by 1 basis point. The gain on antitrust litigation settlements, less the costs of facility consolidations, employee severance and other, contributed $33.8 million to operating income in fiscal 2007 and increased operating income as a percentage of total revenue by 5 basis points. Long-Term Care's operating income in fiscal 2007 increased operating income as a percentage of total revenue by 4 basis points.

Other loss of $2.0 million and $3.0 million in fiscal 2008 and 2007, respectively, primarily related to other-than-temporary impairment losses incurred with respect to equity investments.

Interest expense, interest income, and their respective weighted average interest rates in fiscal 2008 and 2007 were as follows (in thousands):

                                       2008                             2007
                                        Weighted Average                 Weighted Average
                           Amount        Interest Rate      Amount        Interest Rate
  Interest expense        $  75,099          5.48%         $  75,661          5.65%
  Interest income           (10,603 )        3.33%           (43,417 )        4.26%

  Interest expense, net   $  64,496                        $  32,244

Interest expense was relatively consistent when compared to the prior fiscal year as an increase of $85.2 million in average borrowings was offset by the decline in the weighted average interest rate. Interest income decreased substantially from the prior fiscal year primarily due to a decline of average invested cash and short-term investments from $976.2 million during the prior fiscal year to $309.5 million during fiscal 2008.

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

Income tax expense reflects an effective income tax rate of 38.4%, versus 37.0% in the prior fiscal year. The increase in the effective tax rate from the prior fiscal year was primarily due to the company having benefited less in the current year from tax-free investment income. We expect our effective tax rate going forward will approximate the fiscal 2008 tax rate.

We adopted 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 fiscal 2008.

Income from continuing operations of $469.1 million in fiscal 2008 decreased 1% from $474.8 million in the prior fiscal year. The 5% increase in 2008 operating income was offset by the increase in net interest expense and the increase in the effective income tax rate. Diluted earnings per share from continuing operations of $2.89 increased 14% from $2.53 per share in the prior fiscal year. 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. The costs of facility consolidations, employee severance and other, less the gain on antitrust litigation settlements decreased income from continuing operations by $5.5 million and decreased diluted earnings per share by $0.03 in fiscal 2008. The gain on antitrust litigation settlements less the costs of facility consolidations, employee severance and other

contributed $17.0 million to income from continuing operations and $0.09 to diluted earnings per share in fiscal 2007. Additionally, the inclusion of Long-Term Care's operating results in fiscal 2007 increased diluted earnings per share from continuing operations by $0.08.

The loss from discontinued operations of $218.5 million, net of income taxes, relates to the PMSI business, which was sold in October 2008. The loss from discontinued operations in fiscal 2008 includes a $224.8 million charge, net of income taxes, recorded to reduce the carrying value of PMSI. Loss from discontinued operations of $5.6 million, net of income taxes, in fiscal 2007 included a $24.6 million charge, net of income taxes, incurred by the Company related to an adverse court ruling with respect to a contingent purchase price adjustment in connection with the 2003 acquisition of Bridge Medical, Inc. ("Bridge"), as previously discussed in Legal Proceedings under Item 3. Substantially all of the assets of the Bridge business were sold in July 2005. The aforementioned charge in fiscal 2007 was substantially offset by income from discontinued operations relating to the PMSI business.

Segment Information

Pharmaceutical Distribution

Pharmaceutical Distribution total revenue of $70.2 billion in fiscal 2008 increased 7% from the prior fiscal year primarily due to the 5% revenue growth of ABDC and the acquisition of Bellco, which contributed 3% of the total revenue increase. During fiscal 2008, 68% of total revenue was from sales to institutional customers and 32% was from sales to retail customers; this compared to a customer mix in the prior fiscal year of 64% institutional and 36% retail. In comparison with the prior fiscal year results, sales to institutional customers increased 15% primarily due to the acquisition of Bellco (the revenue of which is heavily weighted towards institutional customers) and the strong growth of certain large customers. Sales to retail customers decreased 5% primarily due to our decision not to renew a contract, effective January 2007, with a large retail customer and the July 1, 2008 loss of certain business totaling approximately $3.0 billion of annual revenue from a large retail drug chain customer.

ABDC's total revenue (excluding Bellco) increased by 5% in fiscal 2008 in comparison to the prior fiscal year. This revenue growth was primarily due to the increase in sales to certain of our large institutional customers, offset, in part, by the decline in retail customer revenue, as discussed above.

. . .