ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations
                         AmerisourceBergen Corporation
                         Summary Financial Information

                                                    Three Months Ended December 31,
(dollars in thousands)                                  2008                 2007             Change

Total revenue                                     $     17,338,377       $  17,279,383               - %


Pharmaceutical Distribution gross profit          $        489,848       $     482,631               1 %
Gain on antitrust litigation settlements                         -               1,585             N/M


Total gross profit                                $        489,848       $     484,216               1 %


Pharmaceutical Distribution operating income      $        198,913       $     191,235               4 %
Facility consolidations, employee severance
and other                                                   (1,029 )              (177 )           N/M
Gain on antitrust litigation settlements                         -               1,585             N/M


Total operating income                            $        197,884       $     192,643               3 %


Percentages of total revenue:

Pharmaceutical Distribution
Gross profit                                                  2.83 %              2.79 %
Operating expenses                                            1.68 %              1.69 %
Operating income                                              1.15 %              1.11 %

AmerisourceBergen Corporation
Gross profit                                                  2.83 %              2.80 %
Operating expenses                                            1.68 %              1.69 %
Operating income                                              1.14 %              1.11 %

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Operating Results
Total revenue, including bulk deliveries, was $17.3 billion in the quarters ended December 31, 2008 and 2007. Total revenue growth was 0.3% from the prior year quarter as ABSG's total revenue growth of 5% was substantially offset by a 0.5% decline in ABDC's total revenue. During the quarter ended December 31, 2008, 69% of total revenue was from sales to institutional customers and 31% was from sales to retail customers; this compared to a customer mix in the prior year quarter of 64% institutional and 36% retail. In comparison with the prior year quarter results, sales to institutional customers increased 8% primarily due to the strong growth of our largest customer. Sales to retail customers decreased 13% primarily due to the July 1, 2008 loss of certain business (approximately $3.0 billion on an annualized basis) with a national retail drug chain customer. Excluding the loss of this business, total revenue in the quarter ended December 31, 2008 would have increased by 4.8% from the prior year quarter.
Bulk deliveries of $457.3 million in the quarter ended December 31, 2008 decreased from $1.1 billion in the prior year quarter primarily due to the prior fiscal year transition of a significant amount of business previously conducted on a bulk delivery basis with our largest customer to an operating revenue basis. 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.
ABDC's total revenue decreased by 0.5% from the prior year quarter primarily due to the loss of certain business with a large retail drug chain customer, as mentioned above, offset, in part, by an increase in sales to certain of its large institutional customers.
ABSG's total revenue of $3.8 billion in the quarter ended December 31, 2008 increased 5% from the prior year quarter primarily due to the good growth broadly across its distribution and services businesses, offset, in part, by declining anemia drug sales (see paragraph below). Additionally, the prior year quarter benefited from one month of sales to a large oncology drug customer, which was acquired by a competitor in October 2007. The majority of ABSG's revenue is generated from the distribution of pharmaceuticals to physicians who specialize in a variety of disease states, especially oncology. ABSG also distributes vaccines, plasma, and other blood products. ABSG's business may be adversely impacted in the future by changes in medical guidelines and the Medicare reimbursement rates for certain pharmaceuticals, including oncology drugs administered by physicians and anemia drugs. Since ABSG provides a number of services to or through physicians, any changes to this service channel could result in slower or reduced growth in revenues.
Revenue related to the distribution of anemia-related products, which represented approximately 5.5% of total revenue in the quarter ended December 31, 2008, decreased approximately 11% from the prior year quarter. The decline in sales of anemia-related products has been most pronounced in the use of these products for cancer treatment. Sales of oncology anemia-related products represented approximately 2% of total revenue in the quarter ended December 31, 2008 and decreased approximately 27% from the prior year quarter. Several developments have contributed to the decline in sales of anemia drugs, including expanded warning and other product safety labeling requirements, more restrictive federal policies governing Medicare reimbursement for the use of these drugs to treat oncology patients with kidney failure and dialysis, and changes in regulatory and clinical medical guidelines for recommended dosage and use. As a result, we expect oncology-related anemia drug sales to continue to decline further in fiscal 2009 from our fiscal 2008 total. In addition, the U.S. Food and Drug Administration ("FDA") is continuing to review clinical study data concerning the possible risks associated with erythropoiesis stimulating agents. Also, on July 30, 2008, the Centers for Medicare & Medicaid Services ("CMS") announced it is considering a review of national Medicare coverage policy for these drugs for patients who have cancer or pre-dialysis chronic kidney disease. The FDA or CMS may take additional action regarding the use, safety labeling and/or Medicare coverage of these drugs in the future. Further changes in medical guidelines for anemia drugs may impact the availability and extent of reimbursement for these drugs from third party payors, including federal and state governments and private insurance plans. Our future revenue growth rate and/or profitability may continue to be impacted by any future reductions in reimbursement for anemia drugs or changes that limit the dosage and or use of anemia drugs.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
We continue to expect that our total revenue growth in fiscal 2009 will be between 1% and 3%. This expected range reflects market growth between 1% and 2% as estimated by industry data firm IMS Healthcare, Inc. ("IMS"), the expected strong growth of certain of our large institutional customers, primarily within ABDC, offset in part by the loss of certain business with a national retail chain customer to a competitor, effective July 1, 2008. Sales to this chain customer approximated $3.0 billion on an annualized basis. Our expected growth largely reflects U.S. pharmaceutical industry conditions, including increases in prescription drug utilization, the introduction of new products, and higher pharmaceutical prices, offset, in part, by the increased use of lower-priced generics. Our growth has also been impacted by industry competition and changes in customer mix. Industry sales in the United States, as estimated by IMS, are expected to grow between 1% and 2% in 2009 and between 3% and 6% per year during the five-year period ending 2012. IMS also indicated that certain sectors of the market, such as biotechnology and other specialty and generic pharmaceuticals would grow faster than the overall market. Our future revenue growth will continue to be affected by various factors such as: competition within the industry, customer consolidation, changes in pharmaceutical manufacturer pricing and distribution policies and practices, increased downward pressure on reimbursement rates, changes in Federal government rules and regulations, industry growth trends, such as the likely increase in the number of generic drugs that will be available over the next few years as a result of the expiration of certain drug patents held by brand manufacturers, and general economic conditions.
Gross profit of $489.8 million in the quarter ended December 31, 2008 increased 1% from the prior year quarter. As a percentage of total revenue, gross profit in the quarter ended December 31, 2008 was 2.83%, an increase of 3 basis points from the prior year quarter. These increases were primarily due the strong growth and increased profitability of our generic programs; increased contributions from our fee-for-service agreements, including $10.2 million of fees relating to prior period sales due to the execution of new agreements in the current quarter; strong manufacturer price increases; and good growth from certain of ABSG's service businesses; all of which were partially offset by ABSG's $12.7 million loss on its influenza vaccine program, which included a $15.5 million write-down of excess influenza vaccine inventory. Prior year's gross profit also benefited from a gain of $10.0 million relating to a favorable litigation settlement with a major competitor. Additionally, in the prior year quarter, we recognized a gain of $1.6 million from antitrust litigation settlements with pharmaceutical manufacturers. This gain, which was excluded from the determination of Pharmaceutical Distribution segment's gross profit, was recorded as reduction to cost of goods sold.
Our cost of goods sold for interim periods includes a last-in, first-out ("LIFO") provision that is based on our estimated annual LIFO provision. We recorded a LIFO charge of $5.0 million and $3.1 million in the quarters ended December 31, 2008 and 2007, respectively. The annual LIFO provision is affected by changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences. Operating expenses of $292.0 million, which include the below facility consolidations, employee severance and other charges of $1.0 million, in the quarter ended December 31, 2008 increased $0.4 million from the prior year quarter. As a percentage of total revenue, operating expenses declined to 1.68% from 1.69% in the prior year quarter, which was primarily due to reduced ABDC warehouse operating costs from continuing productivity improvements and due to our streamlined organizational structure within ABDC and ABSG, as a result of our cE2 initiative described below.
The following table illustrates the charges incurred relating to facility consolidations, employee severance and other, (which are excluded from operating expenses of the Pharmaceutical Distribution segment), for the quarters ended December 31, 2008 and 2007 (in thousands):

                                                                   Quarter ended
                                                                    December 31,
                                                                  2008        2007
   Facility consolidations and employee severance                $ 1,029     $ (758 )
   Costs related to business divestitures                              -        935


   Total facility consolidations, employee severance and other   $ 1,029     $  177

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
In fiscal 2008, we 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, we have reduced various operating costs and terminated certain positions. We have incurred the majority of our employee severance costs related to cE2 through December 31, 2008. During the quarter ended December 31, 2008, we terminated 122 employees and incurred $1.0 million of employee severance costs. During the prior year quarter, we reversed $0.9 million of employee severance charges previously estimated and recorded. Costs related to business divestitures in the prior year quarter related to the sale of PMSI.
We paid a total of $3.6 million and $0.4 million for employee severance, lease cancellation and other costs during the quarters ended December 31, 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 $197.9 million in the quarter ended December 31, 2008 increased 3% from the prior year quarter. As a percentage of total revenue, operating income in the quarter ended December 31, 2008 increased 3 basis points from the prior year quarter. These increases were due to the improvement in our gross profit as operating expenses were relatively flat in comparison to the prior year quarter. The costs of facility consolidations, employee severance and other decreased operating income by $1.0 million in the quarter ended December 31, 2008 and lowered 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 $1.4 million to operating income in the prior year quarter and contributed 1 basis point to operating income as a percentage of total revenue. Interest expense, interest income, and their respective weighted-average interest rates in the quarters ended December 31, 2008 and 2007 were as follows (in thousands):

                                      2008                                2007
                                       Weighted-Average                    Weighted-Average
                          Amount        Interest Rate         Amount        Interest Rate
 Interest expense        $ 16,363                   5.30 %   $ 20,235                   5.73 %
 Interest income           (2,180 )                 2.27 %     (3,821 )                 4.45 %

 Interest expense, net   $ 14,183                            $ 16,414

Interest expense decreased from the prior year quarter due to a decrease of $82.8 million in average borrowings and a decrease in the weighted-average variable interest rate to 3.73% from 5.63% in the prior year quarter. Interest income decreased from the prior year quarter primarily due to a decline in the weighted-average interest rate. Our net interest expense in future periods may vary significantly depending upon changes in net borrowings, interest rates and strategic decisions made by us to deploy our invested cash and short-term investments.
Income tax expense reflects an effective income tax rate of 38.6%, versus 38.2% in the prior year quarter. We expect that our effective tax rate in fiscal 2009 will approximate our prior fiscal year tax rate of 38.4%.
Income from continuing operations of $112.5 million in the quarter ended December 31, 2008 increased 4% from the prior year quarter due to the increase in operating income and the decrease in interest expense. Diluted earnings per share from continuing operations of $0.73 in the quarter ended December 31, 2008 increased 12% from $0.65 per share in the prior year quarter. The difference between diluted earnings per share growth and the increase in income from continuing operations was primarily due to the 7% reduction in weighted average common shares outstanding resulting 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.
(Loss) income from discontinued operations, net of income taxes, for the quarters ended December 31, 2008 and 2007 related to the PMSI business, which was sold in October 2008. Accordingly, PMSI's results of operations have been classified as discontinued for the current and prior periods presented.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Liquidity and Capital Resources
The following table illustrates the Company's debt structure at December 31,
2008, including availability under revolving credit facilities and the
receivables securitization facility (in thousands):

                                                     Outstanding        Additional
                                                       Balance         Availability

 Fixed-Rate Debt:
 $400,000, 5 5/8% senior notes due 2012              $    398,841     $            -
 $500,000, 5 7/8% senior notes due 2015                   498,166                  -
 Other                                                      1,677                  -


 Total fixed-rate debt                                    898,684                  -


 Variable-Rate Debt:
 Blanco revolving credit facility due 2009                 55,000                  -
 Multi-currency revolving credit facility due 2011        232,385            450,505
 Receivables securitization facility due 2009                   -            975,000
 Other                                                        580                920


 Total variable-rate debt                                 287,965          1,426,425


 Total debt, including current portion               $  1,186,649     $    1,426,425

The Company's aggregate availability under its revolving credit facilities and its receivables securitization facility provides sufficient sources of capital to fund the Company's working capital requirements.
The Company has a $695 million five-year multi-currency senior unsecured revolving credit facility (the "Multi-Currency Revolving Credit Facility") with a syndicate of lenders. (This amount reflects the reduction of $55 million in availability under the facility as a result of the bankruptcy of Lehman Commercial Paper, Inc. in September 2008.) Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based on the Company's debt rating and ranges from 19 basis points to 60 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (40 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee at December 31, 2008). Additionally, interest on borrowings denominated in Canadian dollars may accrue at the greater of the Canadian prime rate or the CDOR rate. The Company pays quarterly facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on the Company's debt rating, ranging from 6 basis points to 15 basis points of the total commitment (10 basis points at December 31, 2008). The Company may choose to repay or reduce its commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of excluded subsidiaries and asset sales.
The Company has a $975 million receivables securitization facility ("Receivables Securitization Facility"), of which $181.2 million expires in June 2009 and $793.8 million expires in November 2009. The Company has available to it an accordion feature whereby the commitment may be increased, subject to lender approval, for seasonal needs during the December and March quarters. Effective January 2, 2009, the Company increased its availability by $152 million under the accordion feature. Interest rates are based on prevailing market rates for short-term commercial paper plus a program fee, and vary based on the Company's debt ratings. The program fee and the commitment fee, on average, were 53 basis points and 20 basis points, respectively, at December 31, 2008. At December 31, 2008, there were no borrowings outstanding under the Receivables Securitization Facility.
The Blanco revolving credit facility (the "Blanco Credit Facility") is not classified in the current portion of long-term debt on the accompanying consolidated balance sheet at December 31, 2008 because the Company has the ability and intent to refinance it on a long-term basis. Borrowings under the Blanco Credit Facility are guaranteed by the Company. Interest on borrowings under the Blanco Credit Facility accrues at specific rates based on the Company's debt rating (55 basis points over LIBOR at December 31, 2008). Additionally, the Company pays quarterly facility fees on the full amount of the facility to maintain the availability under the Blanco Credit Facility at specific rates based on the Company's debt rating (10 basis points at December 31, 2008).

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The Company's operating results have generated cash flow, which, together with availability under its debt agreements and credit terms from suppliers, has provided sufficient capital resources to finance working capital and cash operating requirements, and to fund capital expenditures, acquisitions, repayment of debt, the payment of interest on outstanding debt, dividends, and repurchases of shares of the Company's common stock.
Recent deterioration in general economic conditions could adversely affect the amount of prescriptions that are filled and the amount of pharmaceutical products purchased by consumers and, therefore, reduce purchases by our customers. In addition, volatility in financial markets may also negatively impact our customers' ability to obtain credit to finance their businesses on acceptable terms. Reduced purchases by our customers or changes in the ability of our customers to remit payments to us as required could adversely affect our revenue growth, our profitablity, and our cash flow from operations. . . .