SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For The Fiscal Year Ended June 30, 2005

or

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

Commission File Number: 1-11373

TABLE OF CONTENTS

ITEM				PAGE
		Important Information Regarding Forward-Looking Statements			3
		PART I
1.		Business			3
2.		Properties			20
3.		Legal Proceedings			20
4.		Submission of Matters to a Vote of Security Holders			28
		PART II
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			30
6.		Selected Financial Data			31
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
7a.		Quantitative and Qualitative Disclosures About Market Risk			51
8.		Financial Statements and Supplementary Data			52
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			112
9a.		Controls and Procedures			112
9b.		Other Information			116
		PART III
10.		Directors and Executive Officers of the Registrant			116
11.		Executive Compensation			116
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			116
13.		Certain Relationships and Related Transactions			118
14.		Principal Accounting Fees and Services			118
		PART IV
15.		Exhibits and Financial Statement Schedules			119
		Signatures			125
EX-4.07
EX-10.13
EX-10.16
EX-10.19
EX-10.21
EX-10.23
EX-10.27
EX-10.36
EX-10.52
EX-21.01
EX-23.01
EX-31.01
EX-31.02
EX-32.01
EX-32.02
EX-99.01
EX-99.02
EX-99.03

Important Information Regarding Forward-Looking Statements

     Portions of this Annual Report on Form 10-K (including information incorporated by reference) include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. This includes, in particular, Part II, Item 7 of this Form 10-K. 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. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in this Form 10-K (including in the section titled “Risk Factors That May Affect Future Results” within “Item 1: Business”) and in Exhibit 99.01 to this Form 10-K. Except to the limited 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.

     During September and October 2004, the Audit Committee reached certain conclusions with respect to findings from its internal review. These conclusions regarding certain items that impact revenue and earnings related to four primary areas of focus: (1) classification of sales to customer warehouses between “Operating Revenue” and “Bulk Deliveries to Customer Warehouses and Other” within the Company’s Pharmaceutical Distribution and Provider Services segment; (2) disclosure of the Company’s practice, in certain reporting periods, of accelerating its receipt and recognition of cash discounts earned from suppliers for prompt payment; (3) timing of revenue recognition within the Company’s former Automation and Information Services segment; and (4) certain balance sheet reserve and accrual adjustments that had been identified in the internal review. These conclusions were detailed in Notes 1 and 2 of “Notes to Consolidated Financial Statements” included in the 2004 Form 10-K.

     In connection with the Audit Committee’s conclusions with respect to findings from its internal review, the Company made certain reclassification and restatement adjustments to its fiscal 2004 and prior historical consolidated financial statements, which were reflected in the 2004 Form 10-K. Revenue previously disclosed separately as “Bulk Deliveries to Customer Warehouses and Others” was aggregated with “Operating Revenue” resulting in combined “Revenue” being reported in the financial statements. In addition, the Company changed its accounting method for recognizing income from cash discounts. The Company also reduced its fourth quarter fiscal 2004 results of operations for premature revenue recognition within its former Automation and Information Services segment after assessing the impact this segment’s sales practice had on the Company’s results of operations for the three year period ended June 30, 2004. Lastly, the Company restated its consolidated financial statements for fiscal 2000, 2001, 2002 and 2003 and the first three quarters of fiscal 2004 as a result of various misapplications of generally accepted accounting principles (“GAAP”) and errors relating primarily to balance sheet reserve and accrual adjustments recorded in prior periods. As a result, the Company supplemented its historical disclosures within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2004 Form 10-K to reflect these reclassification and restatement adjustments on previously reported Company and business segment operating earnings performance. All prior period disclosures presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2004 Form 10-K were adjusted to reflect these changes. More information with respect to the prior conclusions of the Audit Committee’s internal review and the impact of the reclassification and restatement adjustments on the reporting periods discussed in this Form 10-K is set forth in Notes 1 and 2 of “Notes to Consolidated Financial Statements.”

     Following the conclusions reached by the Audit Committee in September and October 2004, the Audit Committee began the task of assigning responsibility for the financial statement matters described above which were reflected in the 2004 Form 10-K and in January 2005 took disciplinary actions with respect to the Company’s employees who it determined bore responsibility for these matters, other than with respect to the accounting treatment of certain recoveries from vitamin manufacturers for which there is a separate Board committee internal review (discussed below). The disciplinary actions ranged from terminations or resignations of employment to required repayments of some or all of fiscal 2003 bonuses from certain employees to letters of reprimand. These disciplinary actions affected senior financial and managerial personnel, as well as other personnel, at the corporate level and in the four business segments. None of the Company’s current corporate executive officers (who are identified under the heading “Executive Officers of the Company” following Item 4 of this Form 10-K) were the subject of disciplinary action by the Audit Committee. In connection with the determinations made by the Audit Committee, the Company’s former controller resigned effective February 15, 2005. The Audit Committee has completed its determinations of responsibility for the financial statement matters described above which were reflected in the 2004 Form 10-K, although responsibility for matters relating to the Company’s accounting treatment of certain recoveries from vitamin manufacturers has been addressed by a separate committee of the Board. The Audit Committee internal review is substantially complete.

     In connection with the SEC’s formal investigation, a committee of the Board of Directors, with the assistance of independent counsel, separately initiated an internal review to assign responsibility for matters relating to the Company’s accounting treatment of certain recoveries from vitamin manufacturers. In the 2004 Form 10-K, as part of the Audit Committee’s internal review, the Company reversed its previous recognition of estimated recoveries from vitamin manufacturers for amounts overcharged in prior years and recognized the income from such recoveries as a special item in the period in which cash was received from the manufacturers. The SEC staff had previously advised the Company that, in its view, the Company did not have an appropriate basis for recognizing the income in advance of receiving the cash. In August 2005, the separate Board committee reached certain conclusions with respect to findings from its internal review and determined that no additional disciplinary actions were required beyond the disciplinary actions already taken by the Audit Committee, as described above. The separate Board committee internal review is substantially complete.

     Settlement discussions have recently commenced with the SEC regarding resolution of its investigation with respect to the Company. While these discussions are ongoing, there can be no assurance that the Company’s efforts to resolve the investigation with respect to the Company will be successful, and the Company cannot predict the timing or outcome of these matters or the terms of any such resolution. As a result of the initiation of these discussions, the Company recorded a reserve of $25 million for its fiscal year ended June 30, 2005 in respect of the SEC investigation. Unless and until the SEC investigation is resolved, there can be no assurance that the amount reserved by the Company for this investigation will be sufficient and that a

larger amount will not be required. Therefore, this reserve will be reviewed on a quarterly basis and adjusted to the extent that the Company determines it is necessary.

     The SEC investigation, the U.S. Attorney inquiry, the Audit Committee internal review and the separate Board committee internal review remain ongoing, although the Audit Committee internal review and the separate Board committee internal review are substantially complete. While the Company is continuing in its efforts to respond to these inquiries and provide all information required, the Company cannot predict the outcome of the SEC investigation, the U.S. Attorney inquiry, the Audit Committee internal review or the separate Board committee internal review. The outcome of the SEC investigation, the U.S. Attorney inquiry and any related legal and administrative proceedings could include the institution of administrative, civil injunctive or criminal proceedings involving the Company and/or current or former Company employees, officers and/or directors, as well as the imposition of fines and other penalties, remedies and sanctions.

     In addition, there can be no assurance that additional restatements will not be required, that the historical consolidated financial statements included in the 2004 Form 10-K, the Forms 10-Q for the quarterly periods during fiscal 2005, or this Form 10-K will not change or require amendment, or that additional disciplinary actions will not be required in such circumstances. As the SEC’s investigation, the U.S. Attorney’s inquiry and the Audit Committee’s internal review continue, the Audit Committee may identify new issues, or make additional findings if it receives additional information, that may have an impact on the Company’s consolidated financial statements and the scope of the restatements described in the 2004 Form 10-K, the Forms 10-Q for the quarterly periods during fiscal 2005, and this Form 10-K.

     In connection with the Audit Committee’s internal review, since the end of fiscal 2004, the Company has adopted and is in the process of implementing various measures in connection with the Company’s ongoing efforts to improve its internal control processes and corporate governance. These measures include the following:

	•		appointing a new Chief Financial Officer with substantial public company business management, governance and financial experience;
	•		creating an Office of Chief Ethics and Compliance Officer (“CECO”) and appointing a CECO to help ensure that the Company is following best practices with respect to regulatory and compliance matters;
	•		appointing a new Chief Accounting Officer and Controller, who is primarily responsible for keeping the Company apprised of contemporary accounting issues;
	•		appointing a new Treasurer;
	•		enhancing the Company’s internal audit function by increasing the number of internal audit staff and recruiting additional seasoned audit professionals;
	•		adopting additional governance processes relating to operation of the Company’s Disclosure Committee and increasing the membership on the Committee;
	•		developing written procedures for, among other items, reviewing unusual financial statement adjustments and allocating costs to the Company’s segments;
	•		adopting process improvements concerning the Company’s financial statement close process;
	•		adopting policy, procedure and oversight improvements concerning the timing of revenue recognition within the Company’s Pyxis products business (as more fully discussed in Note 1 in “Notes to Consolidated Financial Statements”);
	•		developing systems enhancements to enable automated verifications of installed Pyxis automatic dispensing equipment at customer locations;
	•		adopting process improvements for establishing and adjusting reserves;
	•		adopting improved accounting and reporting controls for complex vendor and customer relationships;
	•		developing additional training programs for the Company’s finance and accounting personnel;
	•		developing enhanced educational programs for personnel at all levels in ethics, corporate compliance, disclosure, procedures for anonymous reporting of concerns and mechanisms for enforcing Company policies; and
	•		implementing an enhanced certification process from the Company’s finance, accounting and operations personnel in connection with the financial statement close process, which enhancements are, in part, intended to ensure operating decisions are based on appropriate business considerations.

     The control enhancements discussed above are intended to improve the Company’s control procedures and address the issues resulting in the material weaknesses identified by the Company’s independent auditor in fiscal 2004. See Item 9a of this Form 10-K for a more detailed discussion of the Company’s controls and procedures.

Business Segments

     The Company’s operations are organized into four reporting segments. They are Pharmaceutical Distribution and Provider Services, Medical Products and Services, Pharmaceutical Technologies and Services and Clinical Technologies and Services.

   Pharmaceutical Distribution and Provider Services

     Through its Pharmaceutical Distribution and Provider Services segment, the Company distributes a broad line of pharmaceutical and other health care products. The Company’s Pharmaceutical Distribution business is one of the country’s leading wholesale distributors of pharmaceutical and related health care products to independent and chain drug stores, hospitals, alternate care centers and the pharmacy departments of supermarkets and mass merchandisers located throughout the United States. Through the acquisition of The Intercare Group, plc (which has been given the legal designation of Cardinal Health U.K. 432 Limited and is referred to in this Form 10-K as “Intercare”) in fiscal 2004, this segment also operates a distribution network within the United Kingdom offering a specialized range of branded and generic pharmaceutical products. As a full-service wholesale distributor, the Pharmaceutical Distribution business complements its distribution activities by offering a broad range of support services to assist its customers and suppliers in maintaining and improving the efficiency and quality of their services. These support services include: online procurement, fulfillment and information provided through cardinalhealth.com; computerized order entry and order confirmation systems; generic sourcing programs; product movement and management reports; consultation on store operations and merchandising; and customer training. The Company’s proprietary software systems feature customized databases specially designed to help its distribution customers order more efficiently, contain costs and monitor their purchases.

     Through this segment, the Company also provides certain services to pharmaceutical manufacturers in connection with new distribution service agreements entered into during fiscal 2005. In addition to the base distribution services, these services generally include inventory management services, data/reporting services, new product launch support and deduction management services.

     Through this segment, the Company also operates a pharmaceutical repackaging and distribution program for independent and chain drug store customers as well as mail order customers. In addition, through this segment the Company also is a franchisor of apothecary-style retail pharmacies through its Medicine Shoppe International, Inc. (“Medicine Shoppe”) and Medicap Pharmacies Incorporated (“Medicap”) franchise systems.

     During the fourth quarter of fiscal 2005, the Company made a business decision to exit its branded pharmaceutical trading operations within this segment. These operations represented less than 1% of the Company’s fiscal 2005 Pharmaceutical Distribution revenue.

   Medical Products and Services

     Through its Medical Products and Services segment, the Company provides medical products and cost-saving services to hospitals and other health care providers. The Company offers a broad range of medical and laboratory products, representing approximately 2,000 suppliers in addition to its own line of surgical and respiratory therapy products to hospitals and other health care providers. The Company also manufactures sterile and non-sterile procedure kits, single-use surgical drapes, gowns and apparel, exam and surgical gloves, fluid suction and collection systems, respiratory therapy products, surgical instruments, special procedure products and other products. This segment also assists its customers in reducing costs while helping to improve the quality of patient care in a variety of ways, including online procurement, fulfillment and information provided through cardinalhealth.com, supply-chain management and instrument repair. Through this segment, the Company also distributes oncology, therapeutic plasma and other specialty pharmaceutical and biotechnology products to hospitals, clinics and other managed-care facilities.

   Pharmaceutical Technologies and Services

     Through its Pharmaceutical Technologies and Services segment, the Company provides a broad range of technologies and services through facilities located in North America, Latin America, Europe and Asia Pacific to the pharmaceutical, life sciences and consumer health industries. This segment’s Oral Technologies business provides proprietary drug delivery technologies, including softgel capsules, controlled release forms and Zydis ^® fast dissolving wafers, and manufacturing for nearly all traditional oral dosage forms. The Biotechnology and Sterile Life Sciences business provides advanced aseptic blow/fill/seal technology, drug lyophilization and manufacturing for nearly all sterile dose forms, such as vials and prefilled syringes, as well as biologic

development and regulatory consulting services. The Packaging Services business provides pharmaceutical packaging services, folding cartons, inserts and labels, with proprietary expertise in child-resistant and unit dose/compliance package design. The Pharmaceutical Development business provides drug discovery, development and analytical science services. The Healthcare Marketing Services business provides medical education, marketing and contract sales services, along with product logistics management. The Nuclear Pharmacy Services business operates centralized nuclear pharmacies that prepare and deliver radiopharmaceuticals for use in nuclear imaging and other procedures in hospitals and clinics. Through this segment, the Company also manufactures and markets generic injectible pharmaceutical products for sale to hospitals, clinics and pharmacies in the United Kingdom.

   Clinical Technologies and Services

     Through its Clinical Technologies and Services segment, the Company provides products and services to hospitals and other health care providers that focus on patient safety. Through the acquisition of ALARIS Medical Systems, Inc. (which has been given the legal designation of Cardinal Health 303, Inc. and is referred to in this Form 10-K as “Alaris”) in fiscal 2004, this segment designs, develops and markets intravenous medication safety and infusion therapy delivery systems, software applications, needle-free disposables and related patient monitoring equipment. Through its Pyxis products business, this segment develops, manufactures, leases, sells and services point-of-use systems that automate the distribution and management of medications and supplies in hospitals and other health care facilities. In addition, through its Clinical Services and Consulting business, this segment provides services to the health care industry through integrated pharmacy management, temporary pharmacy staffing and the gathering and recording of clinical information for review, analysis and interpretation.

     For information on comparative segment revenue, profits and related financial information, see Note 18 of “Notes to Consolidated Financial Statements.”

Available Information

     This Annual Report on Form 10-K as well as Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available on the Company’s website (www.cardinalhealth.com, under the “Investors—SEC filings” captions) after the Company electronically files such materials with, or furnishes them to, the SEC. Required filings by the Company’s officers and directors and certain third parties with respect to transactions and holdings in Company shares are also made available on the Company’s website, as are proxy statements for the Company’s shareholder meetings. These filings also may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

     Information relating to corporate governance at Cardinal Health, including the Company’s Corporate Governance Guidelines and its Ethics Guide, which applies to all employees, including the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and to all directors, is available on the Company’s website (www.cardinalhealth.com, under the “Investors” caption). Information about the Company’s Board of Directors and Board Committees, including Committee charters, also is available on the Company’s website (www.cardinalhealth.com, under the “Investors” caption). This information also is available in print (free of charge) to any shareholder who requests it from the Company’s Investor Relations department.

     The Company has also completed a number of smaller acquisitions (asset purchases, stock purchases and mergers) during the last five fiscal years, including acquisitions of Rexam Cartons Inc., International Processing Corporation, American Threshold Industries, Inc., SP Pharmaceuticals, L.L.C., Medicap, Snowden Pencer Holdings, Inc. and Geodax Technology, Inc (“Geodax”). The Company has also completed the divestiture of certain operations of the medical imaging business of Syncor International Corporation (which has been given the legal designation of Cardinal Health 414, Inc. and is referred to in this Form 10-K as “Syncor”) since acquiring Syncor in fiscal 2003.

     The Company evaluates possible candidates for merger or acquisition and intends to take advantage of opportunities to expand its operations and services across all reporting segments from time to time as appropriate. These acquisitions may involve the use of cash, stock or other securities as well as the assumption of indebtedness and liabilities. In addition, the Company evaluates from time to time as appropriate its portfolio of businesses to identify any non-core businesses for possible divestiture. For additional information concerning certain of the transactions described above, see Notes 4, 17 and 22 of “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Customers and Suppliers

     The Company’s largest customers, CVS Corporation (“CVS”) and Walgreen Co. (“Walgreens”), accounted for approximately 21% and 10%, respectively, of the Company’s revenue (by dollar volume) for fiscal 2005. All of the Company’s business with CVS and Walgreens is included in its Pharmaceutical Distribution and Provider Services segment. The aggregate of the Company’s five largest customers, including CVS and Walgreens, accounted for approximately 37% of the Company’s revenue (by dollar volume) for fiscal 2005. The Company could be adversely affected if the business of these customers was lost.

     In addition, certain of the Company’s businesses have entered into agreements with group purchasing organizations (“GPOs”) that act as purchasing agents that negotiate vendor contracts on behalf of their members. Approximately 15% of the Company’s revenue for fiscal 2005 was derived from GPO members through the contractual arrangements established with Novation, LLC (“Novation”) and Premier Purchasing Partners, L.P. (“Premier”), the Company’s two largest GPO relationships in terms of member revenue. Generally, compliance by GPO members with GPO vendor selections is voluntary. As such, the Company believes the loss of any of the Company’s agreements with a GPO would not mean the loss of sales to all members of the GPO, although the loss of such an agreement could adversely affect the Company’s operating results. See Note 13 in “Notes to Consolidated Financial Statements” for further information regarding the Company’s concentrations of credit risk and major customers.

     The Company obtains its products from many different suppliers, the largest of which, Pfizer Inc., accounted for approximately 13% (by dollar volume) of the Company’s revenue in fiscal 2005. The Company’s five largest suppliers combined accounted for approximately 42% (by dollar volume) of the Company’s revenue during fiscal 2005. Overall, the Company believes that its relationships with its suppliers are good. New distribution service agreements recently entered into between the Company and certain branded pharmaceutical manufacturers generally range from a one-year term with an automatic renewal feature to a five-year term. Such agreements generally cannot be terminated unless mutually agreed to by the parties, a breach of the agreement occurs that is not cured, or in the event of an involuntary bankruptcy filing. The loss of certain suppliers could adversely affect the Company’s business if alternative sources of supply were unavailable at reasonable rates.

     The Company’s Pharmaceutical Distribution business is in a business model transition with respect to how it is compensated for the logistical, capital and administrative services that it provides to branded pharmaceutical manufacturers. Historically, the compensation received by the Pharmaceutical Distribution business from branded pharmaceutical manufacturers was based on each manufacturer’s unique sales practices (e.g., volume of product available for sale, eligibility to purchase product, cash discounts for prompt payment, rebates, etc.) and pharmaceutical pricing practices (e.g., the timing, frequency and magnitude of product price increases). Specifically, a significant portion of the compensation the Pharmaceutical Distribution business received from manufacturers was derived from the Company’s ability to purchase pharmaceutical inventory in advance of pharmaceutical price increases, hold that inventory as manufacturers increased pharmaceutical prices, and generate a higher operating margin on the subsequent sale of that inventory. This compensation system was dependent to a large degree upon the sales practices of each branded pharmaceutical manufacturer, including established policies concerning the volume of product available for purchase in advance of a price increase, and on predictable pharmaceutical pricing practices.

     Beginning in fiscal 2003, branded pharmaceutical manufacturers began to seek greater control over the amount of pharmaceutical product available in the supply chain, and, as a result, began to change their sales practices by restricting the volume of product available for purchase by pharmaceutical wholesalers. In addition, manufacturers have increasingly sought more services from the Company, including providing data concerning product sales and distribution patterns. The Company believes that the manufacturers sought these changes to provide them with greater visibility over product demand and movement in the market and to increase product safety and integrity by reducing the risks associated with product being available to, and distributed in, the secondary market. These changes have significantly reduced the compensation received by the Company from branded pharmaceutical manufacturers. As a result of these actions by branded pharmaceutical manufacturers, the Company concluded it was no longer being adequately and consistently compensated for the reliable and consistent logistical, capital and administrative services being provided by the Company to these manufacturers.

     In response to the developments discussed above, the Company has established a compensation system that is significantly less dependent on manufacturers’ sales or pricing practices, and is based on the services provided by the Company to meet the unique distribution requirements of each manufacturer’s products. During fiscal 2005, the Company worked with individual branded pharmaceutical manufacturers to define fee-for-service terms that adequately compensate the Company based on the services being provided to such manufacturers. The initial fee-for-service transition is essentially complete, which should help reduce earnings volatility in the segment.

     As part of the transition to fee-for-service terms, certain of the new distribution service agreements entered into with branded pharmaceutical manufacturers continue to have an inflation-based compensation component to them. Arrangements with certain other branded manufacturers still continue to be solely inflation-based. If branded pharmaceutical price inflation is lower than the

Company has anticipated, its operating results could be adversely affected with respect to its current exposure to contingent fee-based compensation in its Pharmaceutical Distribution business. In addition, certain key distribution service agreements will be re-negotiated in the latter half of fiscal 2006 and into fiscal 2007 when their initial terms expire. If the terms of the re-negotiated agreements are unfavorable to the Company, it could adversely affect the Company’s operating results.

     The Company’s manufacturing businesses within the Medical Products and Services and Pharmaceutical Technologies and Services segments use a broad range of raw materials in the products that they produce. These raw materials include for Medical Products and Services, latex, resin and fuel oil and, for Pharmaceutical Technologies and Services, resin, gelatin and active pharmaceutical ingredients, among others. In certain circumstances, the Company’s operating results may be adversely affected by increases in raw materials costs because the Company may not be able to fully recover the increased costs from the customer or offset the increased cost through productivity improvements. In addition, although most of these raw materials are generally available, certain raw materials used by the Company’s manufacturing businesses may be available only from a limited number of suppliers. There also may be cases where a particular raw material may be available from another supplier or several other suppliers, but the Company is constrained to use a particular supplier due to customer requirements, regulatory filings or product approvals. In either case, where there are a limited number of suppliers, the Company may experience shortages in supply, and as a result, the Company’s operating results could be adversely affected.

     The Company’s Pharmaceutical Distribution business utilizes contract carriers to distribute its products. Contracts with these carriers generally contain a fuel surcharge capped at a certain percentage. If fuel costs rise significantly, the Pharmaceutical Distribution business may need to increase the specified fuel surcharge, which is limited to specified annual percentage increases, with certain contract carriers. In the event that the Pharmaceutical Distribution business cannot reach agreement on these changes, it may need to replace the contract carriers at prevailing market rates. The Company’s Medical Products and Services Distribution and Nuclear Pharmacy Services businesses own their distribution fleets, which distribute a majority of their products to customers. These businesses are directly impacted by market changes in the price of fuel. As a result of the Company’s exposure to fuel costs, the Company’s operating results may be adversely affected by increased fuel costs, as the Company may not be able to fully recover the increased costs from its customers.

     The Company’s Medical Products and Services Distribution business purchases medical/surgical products from vendors other than the original manufacturer of such products. Certain manufacturers have adopted policies limiting the ability of such business to purchase products from anyone other than the manufacturer. If this practice becomes more widespread, the ability of the Medical Products and Services Distribution business to purchase products from other distributors, as well as its ability to sell excess inventories to other distributors, may be impaired. This could adversely affect the Company’s operating results.

     While certain of the Company’s operations may show quarterly fluctuations, the Company does not consider its business to be seasonal in nature on a consolidated basis.

Competition

     The markets in which the Company operates generally are highly competitive.

     In the Pharmaceutical Distribution and Provider Services segment, the Company’s pharmaceutical wholesale distribution business competes directly with two other national wholesale distributors (McKesson Corporation and AmerisourceBergen Corporation) and a number of smaller regional wholesale distributors, direct selling manufacturers, self-warehousing chains, specialty distributors and third-party logistics companies on the basis of a value proposition that includes breadth of product lines, service offerings, support services and pricing. The Company’s pharmaceutical wholesale distribution operations have narrow profit margins and, accordingly, the Company’s earnings depend significantly on its ability to distribute a large volume and variety of products efficiently, to provide quality support services, to compete effectively on the pricing of pharmaceutical products, and to maintain satisfactory arrangements with pharmaceutical manufacturers whereby the Company is compensated for its logistical, capital and administrative services. With respect to pharmacy franchising operations, a few smaller franchisors compete with Medicine Shoppe and Medicap in the franchising of pharmacies, with competition being based primarily upon benefits offered to both the pharmacist and the customer, access to third-party programs, the reputation of the franchise and pricing. Medicine Shoppe and Medicap also need to be competitive with a pharmacist’s ongoing options to operate or work for an independent or chain pharmacy.

     The Company’s Medical Products and Services segment competes both domestically and internationally. Competitive factors within medical-surgical supply distribution include price, breadth of product offerings, product availability, order-filling accuracy (both invoicing and product selection) and service offerings. Within its distribution services, this segment competes across several customer classes with many different distributors, including Owens & Minor, Inc., Fisher Scientific International, Inc., and Henry

Schein, Inc., among others. Competitive factors within medical-surgical product manufacturing include brand recognition and product innovation, performance, quality and price. This segment competes against many product manufacturers, some of which are larger and more diversified than Medical Products and Services. The Company believes that its key competitive strengths within this segment include its ability to work with customers to help them provide quality care while enhancing their competitiveness through cost-savings initiatives. This competitive strength is enhanced through the integration of products and services within both the Medical Products and Services segment and across other Company segments.

     In the Pharmaceutical Technologies and Services segment, the Company competes on several fronts both domestically and internationally, including competing with other companies that provide outsourcing services to pharmaceutical manufacturers based in North America, Latin America, Europe and Asia Pacific and competing with those pharmaceutical manufacturers that choose to perform these services themselves. Specifically, in this segment, the Company competes with providers of both new drug delivery technologies and existing delivery technologies as well as oral solid dose manufacturing; with other providers of sterile fill/finish manufacturing and lyophilization services; with providers of contract discovery, development, analytical laboratory and regulatory consulting services and manufacturing and packaging of clinical supplies; with companies that provide packaging components and packaging services; with other providers of medical education, marketing/product launch services, contract sales and product logistics services; and with other nuclear pharmacy companies and distributors engaged in the preparation and delivery of radiopharmaceuticals for use in nuclear imaging procedures in hospitals and clinics, which include numerous operators of radiopharmacies, numerous independent radiopharmacies and manufacturers and universities that have established their own radiopharmacies. The Company competes in this segment based upon a variety of factors, principally including quality, responsiveness, proprietary technologies or capabilities, customer service and price.

     In the Clinical Technologies and Services segment, the Alaris products business competes based upon quality, technological innovation, the value proposition of helping improve patient outcomes while reducing overall costs associated with medication safety, and price. Alaris’ competitors include both domestic and foreign companies, including Baxter International, Inc., Hospira, Inc. and B. Braun Medical, Inc. The Pyxis products business competes based upon quality, relationships with customers, customer service and support capabilities, patents and other intellectual property, its ability to interface with customer information systems, and price. Actual and potential competitors for Pyxis include both existing domestic and foreign companies, as well as emerging companies that supply products for specialized markets and other outside service providers. Such competitors include McKesson Corporation and Omnicell, Inc. With respect to services that enhance performance in hospital pharmacies, the Company competes with both national and regional hospital pharmacy management firms, and self-managed hospitals and hospital systems on the basis of services offered, its established base of existing operations, the effective use of information systems, the development of clinical programs, the quality of the services it provides to its customers and price.

Employees

     As of September 9, 2005, the Company had more than 55,000 employees in the U.S. and abroad, of which 910 are subject to collective bargaining agreements. Overall, the Company considers its employee relations to be good.

Intellectual Property

     The Company relies on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions and technical measures to protect its products, services and intangible assets. These proprietary rights are important to the Company’s ongoing operations.

     The Company has applied in the United States and certain foreign countries for registration of a number of trademarks and service marks, some of which have been registered, and also holds common law rights in various trademarks and service marks. It is possible that in some cases the Company may be unable to obtain the registrations for trademarks and service marks for which it has applied.

     The Company holds patents relating to certain aspects of its automated pharmaceutical dispensing systems, automated medication management systems, medication packaging, medical devices, processes, products, formulations, infusion therapy systems, infusion administration sets, drug delivery systems and sterile manufacturing. The Company has a number of pending patent applications in the United States and certain foreign countries, and intends to pursue additional patents as appropriate. The Company has enforced and will continue to enforce its intellectual property rights in the United States and worldwide.

     The Company does not consider any particular patent, trademark, license, franchise or concession to be material to its overall business.

Regulatory Matters

     Certain of the Company’s subsidiaries may be required to register for permits and/or licenses with, and comply with operating and security standards of, the United States Drug Enforcement Administration (the “DEA”), the Food and Drug Administration (the “FDA”), the United States Nuclear Regulatory Commission (the “NRC”), the Department of Health and Human Services (“DHHS”), and various state boards of pharmacy, state health departments and/or comparable state agencies as well as foreign agencies, and certain accrediting bodies depending upon the type of operations and location of product distribution, manufacturing and sale. These subsidiaries include those that:

	•		distribute and/or manufacture prescription pharmaceuticals (including certain controlled substances) and/or medical devices;
	•		manage or own pharmacy operations;
	•		engage in or operate retail pharmacies or nuclear pharmacies;
	•		purchase pharmaceuticals;
	•		engage in logistics and/or manufacture infusion therapy systems or surgical and respiratory care and intravenous administration set products and devices;
	•		develop, manufacture or package pharmaceutical products and devices;
	•		manufacture and market pharmaceutical products and provide outsourced pharmaceutical manufacturing services using both proprietary and nonproprietary drug delivery formulations and outsourced analytical development services;
	•		develop, create, present or distribute accredited and unaccredited educational or promotional programs or materials; and
	•		provide consulting services that assist healthcare institutions and pharmacies in their operations as well as pharmaceutical manufacturers with regard to regulatory submissions and filings made to healthcare agencies such as the FDA.

     In addition, certain of the Company’s subsidiaries are subject to requirements of the Controlled Substances Act and the Prescription Drug Marketing Act of 1987 and similar state laws, which regulate the marketing, purchase, storage and distribution of prescription drugs and prescription drug samples under prescribed minimum standards. Certain of the Company’s subsidiaries that manufacture medical devices are subject to the Federal Food, Drug and Cosmetic Act, as amended by the Medical Device Amendments of 1976, the Safe Medical Device Act of 1990, as amended in 1992, the Medical Device User Fee and Modernization Act of 2002, and comparable foreign regulations. In addition, certain of the Clinical Technologies and Services segment’s Alaris products are indirectly subject to the Needlestick Safety and Prevention Act.

     Laws regulating the manufacture and distribution of products also exist in most other countries where certain of the Company’s subsidiaries conduct business. In addition, the Medical Products and Services segment’s international manufacturing operations, the Pharmaceutical Technologies and Services segment’s international operations (including Intercare) and the Clinical Technologies and Services segment’s Alaris international operations are subject to local certification requirements, including compliance with domestic and/or foreign good manufacturing practices and quality system regulations established by the FDA and/or those applicable foreign jurisdictions. Intercare self-manufactures and markets sterile injectible products in the United Kingdom in accordance with applicable laws, rules and regulations of the United Kingdom and the European Union. Intercare also manufactures methadone syrup in the United Kingdom pursuant to the United Kingdom’s regulations covering the manufacture of controlled opioid substances.

     The Company’s franchising operations, through Medicine Shoppe and Medicap, are subject to Federal Trade Commission regulations, and rules and regulations adopted by certain states, which require franchisors to make certain disclosures to prospective franchisees prior to the sale of franchises. In addition, certain states have adopted laws which regulate the franchisor-franchisee relationship. The most common provisions of such laws establish restrictions on the ability of franchisors to terminate or to refuse to renew franchise agreements. From time to time, similar legislation has been proposed or is pending in additional states.

     The Company’s Nuclear Pharmacy Services business operates nuclear pharmacies, imaging centers and related businesses such as cyclotron facilities used to produce positron emission tomography (“PET”) products used in medical imaging. This group operates in a regulated industry which requires licenses or permits from the NRC, the radiologic health agency and/or department of health of each state in which it operates and the applicable state board of pharmacy. In addition, the FDA is also involved in the regulation of cyclotron facilities where PET products are produced.

     Certain of the Company’s businesses are subject to federal and state health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations. Certain of the Company’s subsidiaries also maintain contracts with the federal government and are subject to certain regulatory requirements relating to government contractors.

     Services and products provided by certain of the Company’s businesses include access to health care information gathered and assessed for the benefit of health care clients. Greater scrutiny on a federal and state level is being placed on how patient identifiable health care information should be handled and in identifying the appropriate parties and means to do so. Future changes in regulations and/or legislation such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and its accompanying federal regulations, such as those pertaining to privacy and security, may affect how some of these information services or products are provided. In addition, certain of the Company’s operations, depending upon their location, may be subject to additional state or foreign regulations affecting personal data protection and how information services or products are provided. Failure to comply with HIPAA and other such laws may subject the Company and/or its subsidiaries to civil and/or criminal penalties, which could be significant.

     The Company is also subject to various federal, state and local laws, regulations and recommendations, both in the United States and abroad, relating to safe working conditions, laboratory and manufacturing practices and the use, transportation and disposal of hazardous or potentially hazardous substances. The Company’s environmental policies mandate compliance with all applicable regulatory requirements concerning environmental quality and contemplate, among other things, appropriate capital expenditures for environmental protection for each of its subsidiaries. In addition, U.S. and international import and export laws and regulations require that the Company abide by certain standards relating to the importation and exportation of finished goods, raw materials and supplies and the handling of information. The Company is also subject to certain laws and regulations concerning the conduct of its foreign operations, including the U.S. Foreign Corrupt Practices Act and anti-bribery laws and laws pertaining to the accuracy of the Company’s internal books and records.

     There have been increasing efforts by various levels of government including state pharmacy boards and comparable agencies to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or mislabeled drugs into the pharmaceutical distribution system. Certain states, such as Florida and California, have already adopted laws and regulations that are intended to protect the integrity of the pharmaceutical distribution system while other government agencies are currently evaluating their recommendations. These laws and regulations could increase the overall regulatory burden and costs associated with the Company’s Pharmaceutical Distribution business, and may adversely affect the Company’s operating results. The Company continues to work with its suppliers to help minimize the risks associated with counterfeit products in the supply chain.

     The costs associated with complying with the various applicable federal regulations, as well as state and foreign regulations, could be significant and the failure to comply with all such legal requirements could have an adverse affect on the Company’s results of operations and financial condition.

Inventories

     The Company has historically maintained higher levels of inventory in its Pharmaceutical Distribution business in order to satisfy daily delivery requirements and take advantage of price changes as partial compensation for its services, but is not generally required by its customers to maintain particular inventory levels other than as may be required to meet service level requirements. In connection with the business model transition discussed under “Customers and Suppliers” above, the Pharmaceutical Distribution business’ inventory levels are significantly lower than historical levels. This trend, primarily attributable to reduced pharmaceutical investment buying opportunities and lower inventory levels negotiated with pharmaceutical manufacturers, is expected to continue. Certain supply contracts with U.S. Government entities require the Company’s Pharmaceutical Distribution and Medical Products Distribution businesses to maintain sufficient inventory to meet emergency demands. The Company does not believe that the requirements contained in these U.S. Government supply contracts materially impact inventory levels. The Company’s customer return policy requires that the product be physically returned, subject to restocking fees, and only allows customers to return products which can be added back to inventory and resold at full value, or which can be returned to vendors for credit. The Company’s practice is to offer market payment terms to its customers. The Company is not aware of any material differences between its practices and those of other industry participants.

Research and Development

     For information on company-sponsored research and development costs in the last three fiscal years, see Note 3 of “Notes to Consolidated Financial Statements.”

Revenue and Long-Lived Assets by Geographic Area

     For information on revenue and long-lived assets by geographic area, see Note 18 of “Notes to Consolidated Financial Statements.”

Risk Factors That May Affect Future Results

     Although it is not possible to predict all risks that may affect future results, these risks may include, but are not limited to, the following:

Intense competition may erode the Company’s profit margins. The markets in which the Company operates generally are highly competitive. For example, in its Pharmaceutical Distribution business, the Company competes with national wholesale distributors McKesson Corporation and AmerisourceBergen Corporation, and a number of smaller regional wholesale distributors, direct selling manufacturers, self-warehousing chains, specialty distributors and third-party logistics companies. Competitive pressures across business segments have contributed to a decline in the Company’s gross profit margins on revenue from approximately 4% in fiscal 2002 to 3% in fiscal 2005. This trend may continue and the Company’s business could be adversely affected as a result.

The Company’s Pharmaceutical Distribution business is transitioning its business model, which subjects the Company to risks and uncertainties. As discussed more fully under “Customers and Suppliers” within “Item 1: Business,” the Company’s Pharmaceutical Distribution business, which is the Company’s largest business, is in a business model transition with respect to how it is compensated for the logistical, capital and administrative services it provides to branded pharmaceutical manufacturers. During fiscal 2005, the Company worked with individual branded pharmaceutical manufacturers to define fee-for-service terms that adequately compensate the Company based on the services being provided to such manufacturers.

     As part of the transition to fee-for-service terms, certain of the new distribution service agreements entered into with branded pharmaceutical manufacturers continue to have an inflation-based compensation component to them. Arrangements with certain other branded manufacturers still continue to be solely inflation-based. If branded pharmaceutical price inflation is lower than the Company has anticipated, its operating results could be adversely affected with respect to its current exposure to contingent fee-based compensation in its Pharmaceutical Distribution business. In addition, certain key distribution service agreements will be re-negotiated in the latter half of fiscal 2006 and into fiscal 2007 when their initial terms expire. If the terms of the re-negotiated agreements are unfavorable to the Company, it could adversely affect the Company’s operating results.

The ongoing SEC investigation and U.S. Attorney inquiry could adversely affect the Company’s business, financial condition or operating results. As discussed below under “Item 3: Legal Proceedings” and Note 1 of “Notes to Consolidated Financial Statements,” the Company is the subject of a formal SEC investigation and had learned that the U.S. Attorney for the Southern District of New York had also commenced an inquiry with respect to the Company. In April 2004, the Company’s Audit Committee commenced its own internal review, assisted by independent counsel. While the Company is continuing in its efforts to respond to these inquiries and provide all information required, the Company cannot predict the outcome of the SEC investigation or the U.S. Attorney inquiry. There can be no assurance that the scope of the SEC investigation or the U.S. Attorney inquiry will not expand or that other regulatory agencies will not become involved. The outcome of, and costs associated with, the SEC investigation and the U.S. Attorney inquiry could adversely affect the Company’s business, financial condition or operating results, and the investigations could divert the efforts and attention of its management team from the Company’s ordinary business operations. The outcome of the SEC investigation, the U.S. Attorney inquiry and any related legal and administrative proceedings could include the institution of administrative, civil injunctive or criminal proceedings involving the Company and/or current or former Company employees, officers and/or directors, as well as the imposition of fines and other penalties, remedies and sanctions.

Additional restatements may be required, the historical consolidated financial statements may change or require amendment or additional disciplinary actions may be required; the Audit Committee may identify new issues, or make additional findings if it receives additional information, that may have an impact on the Company’s consolidated financial statements and the scope of the restatements described in Forms 10-K and 10-Q. During September and October 2004, the Audit Committee reached certain conclusions with respect to findings to date from its internal review, which were discussed in Notes 1 and 2 of “Notes to Consolidated Financial Statements” included in the 2004 Form 10-K. In connection with these conclusions, the Audit Committee previously determined that the consolidated financial statements of the Company with respect to fiscal 2000, 2001, 2002 and 2003, as well as the first three quarters of fiscal 2004, should be restated to reflect the conclusions from its internal review to date. In January 2005, the Audit Committee took disciplinary actions with respect to the Company’s employees who it determined bore responsibility for these matters, other than with respect to the accounting treatment of certain recoveries from vitamin manufacturers for which there is a separate Board committee internal review. There can be no assurance that additional restatements will not be required, that the historical consolidated financial statements included in the 2004 Form 10-K, the Forms 10-Q for the quarterly periods during fiscal 2005, or this Form 10-K will not change or require amendment, or that additional disciplinary actions will not be required in such circumstances. In addition, as the SEC investigation, the U.S. Attorney inquiry and

the Audit Committee internal review continue, the Audit Committee may identify new issues, or make additional findings if it receives additional information, that may have an impact on the Company’s consolidated financial statements and the scope of the restatements described in the 2004 Form 10-K, the Forms 10-Q for the quarterly periods, and this Form 10-K.

The Company’s internal controls may not be sufficient to ensure timely and reliable financial information. As reported under Item 9a of this Form 10-K, the Company’s management completed its assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2005 and based on that assessment, concluded that the Company maintained effective internal control over financial reporting as of June 30, 2005. The Company’s auditor, Ernst & Young LLP, has issued an attestation report on management’s assessment that expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting. Still, however, the Company’s growth continues to place stress on its internal controls, and there can be no assurance that the Company’s control procedures will continue to be adequate. The effectiveness of the Company’s controls and procedures may be limited by a variety of risks, including, among other things, faulty human judgment, simple errors, omissions and mistakes, collusion of two or more people or inappropriate management override of procedures. If the Company fails to have effective internal controls and procedures for financial reporting in place, it could be unable to provide timely and reliable financial information.

Changes in the United States health care environment may adversely affect the Company’s business, financial condition or operating results. In recent years, the health care industry has undergone significant changes driven by various efforts to reduce costs. These efforts include, but are not limited to, potential national health care reform, trends toward managed care, cuts in Medicare, consolidation of competitors, suppliers and customers and the development of large, sophisticated purchasing groups, including the efforts in several states to establish pharmaceutical purchasing programs on behalf of their residents. This industry is expected to continue to undergo significant changes for the foreseeable future, which could have an adverse effect on the Company’s business, financial condition or operating results. Other factors related to the health care industry that could adversely affect the Company’s business, financial condition or operating results include, but are not limited to:

	•		changes in governmental support of, and reimbursement for, health care services, including any legislation affecting the payment of fees for distribution services;
	•		changes in the method by which health care services are delivered;
	•		changes in the prices for health care services;
	•		other legislation or regulations governing health care services or mandated benefits; and
	•		changes in pharmaceutical and medical-surgical manufacturers’ pricing, selling, inventory, distribution or supply policies or procedures.

     The Company’s Medical Products and Services Distribution business purchases medical/surgical products from vendors other than the original manufacturer of such products. Certain manufacturers have adopted policies limiting the ability of such business to purchase products from anyone other than the manufacturer. If this practice becomes more widespread, the ability of the Medical Products and Services Distribution business to purchase products from other distributors, as well as its ability to sell excess inventories to other distributors, may be impaired. This could adversely affect the Company’s operating results.

     Healthcare and public policy trends indicate that the number of generic drugs will increase over the next few years as a result of the expiration of certain drug patents. To the extent that market conditions significantly alter the level of availability or pricing of generic drugs different from what the Company was anticipating, this could adversely affect the Company’s net earnings.

     There have been increasing efforts by various levels of government including state pharmacy boards and comparable agencies to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated or mislabeled drugs into the pharmaceutical distribution system. Certain states, such as Florida and California, have already adopted laws and regulations that are intended to protect the integrity of the pharmaceutical distribution system while other government agencies are currently evaluating their recommendations. These laws and regulations could increase the overall regulatory burden and costs associated with the Company’s Pharmaceutical Distribution business, and may adversely affect the Company’s business, financial condition or operating results.

     There have been increasing efforts by various parties to introduce and pass legislation that would directly permit the importation of pharmaceutical products into the United States. If such efforts are successful, the price the Company receives for pharmaceutical products and related services could be adversely affected, thereby negatively impacting the Company’s operating results.

     The Company is subject to extensive and frequently changing local, state and federal laws and regulations relating to healthcare fraud. The federal government continues to increase its scrutiny over practices involving healthcare fraud affecting Medicare, Medicaid and other government healthcare programs. Furthermore, the Company’s relationships with pharmaceutical

manufacturers and healthcare providers subject its business to laws and regulations on fraud and abuse. Many of the regulations applicable to the Company, including those relating to marketing incentives offered by pharmaceutical or medical-surgical suppliers, are vague and could be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require the Company to make changes in its operations. If the Company fails to comply with applicable laws and regulations, it could suffer civil and criminal penalties, including the loss of licenses or its ability to participate in Medicare, Medicaid and other federal and state healthcare programs.

     Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”), the U.S. government recently proposed changes in certain pharmaceutical reimbursement rates. The Company may be adversely affected by changes or changes that may be proposed in the future under the Act. The Company is in the process of developing plans to mitigate any exposures from these changes in reimbursement rates and the way its customers conduct their business under the Act. However, if the Company fails to successfully implement such plans, its business and the results of operations may be adversely affected.

The outcomes of lawsuits brought against the Company may adversely affect the Company’s business, financial condition or operating results. As discussed below under “Item 3: Legal Proceedings,” the Company is subject to numerous lawsuits, including several class action lawsuits against the Company and certain of its former and present officers and directors. Any settlement of or judgment in one or more of these matters could adversely affect the Company’s business, financial condition or operating results. There can be no assurance that all or any portion of the liability arising from these pending lawsuits will be covered by insurance policies that the Company currently maintains.

The Company could be adversely affected by the loss of one or more significant customers or group of customers, or by a change in customer mix. The Company’s largest customers, CVS and Walgreens, accounted for approximately 21% and 10%, respectively, of the Company’s revenue (by dollar volume) for fiscal 2005. The aggregate of the Company’s five largest customers, including CVS and Walgreens, accounted for approximately 37% of the Company’s revenue (by dollar volume) for fiscal 2005. The Company’s business and operating results could be adversely affected if the business of these customers was lost.

     In addition, certain of the Company’s businesses have entered into agreements with GPOs. Approximately 15% of the Company’s revenue for fiscal 2005 was derived from GPO members through the contractual arrangements established with Novation and Premier. Generally, compliance by GPO members with GPO vendor selections is voluntary. Notwithstanding this fact, the loss of such an agreement could adversely affect the Company’s operating results. See the “Customers and Suppliers” discussion within “Item 1: Business” and Note 13 of “Notes to Consolidated Financial Statements” for further information regarding the Company’s significant customers.

     Changes in the Company’s customer mix could also significantly impact its business, financial condition or operating results. Due to the diverse range of health care supply management and health care information technology products and services that the Company offers, such changes may adversely affect certain of the Company’s businesses, while not affecting some of its competitors who offer a narrower range of products and services.

Difficulties, delays or increased costs in implementing the global restructuring program associated with the Company’s One Cardinal Health initiative may adversely affect the anticipated benefit of the restructuring on the Company’s business, financial condition and operating results. As discussed more fully in the “Overview” section within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in fiscal 2005, the Company launched a global restructuring program in connection with its One Cardinal Health initiative. The Company expects the program to be substantially completed by the end of fiscal 2008 and expects it to improve operating earnings and position the Company for future growth. If the restructuring program suffers unforeseen difficulties, is delayed in its completion or results in unforeseen additional costs, the Company may not achieve the operational and financial objectives it has set for the program, and the Company’s business, financial condition or operating results may not fully benefit from the restructuring to the extent that the Company had initially anticipated.

     In addition, certain projects under the One Cardinal Health restructuring involve replacement of legacy systems, consolidation and rationalization of employees and, in some cases, outsourcing. During such transitions, it is possible the Company may suffer, at least on a temporary basis, problems associated with internal control over financial reporting or business interruptions which could arise as a result of such restructuring.

Failure to comply with existing and future regulatory requirements may adversely affect the Company’s business, financial condition or operating results. The health care industry is highly regulated. The Company is subject to various local, state, federal, foreign and transnational laws and regulations, which include the operating and security standards of the DEA, the FDA, various state boards of pharmacy, state health departments, the NRC, DHHS, the European Union member states and other comparable agencies. Certain of the Company’s subsidiaries may be required to register for permits and/or licenses with, and comply with operating and security standards of, the DEA, the FDA, the NRC, DHHS and various state boards of pharmacy, state

health departments and/or comparable state agencies as well as foreign agencies and certain accrediting bodies depending upon the type of operations and location of product distribution, manufacturing and sale. Although the Company believes that it is in compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion concerning the compliance of the Company’s operations with applicable laws and regulations. In addition, there can be no assurance that the Company will be able to maintain or renew existing permits and licenses or obtain without significant delay future permits and licenses needed for the operation of the Company’s businesses. The Clinical Technologies and Services segment’s automated pharmaceutical dispensing systems are not currently required to be registered or submitted for pre-market notifications to the FDA. There can be no assurance, however, that FDA policy in this regard will not change.

     Any noncompliance by the Company with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could have an adverse effect on the Company’s results of operations and financial condition. In addition, if changes were to occur to the laws and regulations applicable to the Company’s businesses, such changes could adversely affect many of the Company’s regulated operations, which include:

	•		distributing prescription pharmaceuticals (including certain controlled substances);
	•		operating pharmacy businesses (including nuclear pharmacies);
	•		manufacturing medical/surgical products (including infusion therapy systems and intravenous administration set products and devices);
	•		manufacturing pharmaceuticals using proprietary drug delivery systems;
	•		development and manufacturing of oral and sterile pharmaceutical products;
	•		packaging pharmaceuticals; and
	•		the sales and marketing of pharmaceuticals.

     Also, the health care regulatory environment may change in a manner that could restrict the Company’s existing operations, limit the expansion of the Company’s businesses, apply regulations to previously unregulated businesses or otherwise affect the Company adversely.

The Company’s operating results could be adversely affected by a delay in, or failure to receive, regulatory approval. The Company’s pharmaceutical and medical device manufacturing businesses are heavily regulated and strict compliance with federal and foreign laws, rules, regulations and practices must be followed. By nature, the manufacturing of such products is a highly controlled process in which great strides are taken to avoid contamination in the products. Due to the regulatory issues and challenges, there is a risk of delay in approval of these products, which could adversely affect the Company’s operating results.

Circumstances associated with the Company’s acquisition strategy and internal growth may adversely affect the Company’s operating results . An important element of the Company’s growth strategy has been the pursuit of acquisitions of other businesses which expand or complement the Company’s existing businesses. Over the past decade, the Company has expanded beyond its core pharmaceutical distribution business into areas such as medical-surgical product manufacturing and distribution, development and manufacturing of drug delivery systems, development and manufacturing of automation and information products, compounding and distribution of nuclear pharmaceutical products, and developing, manufacturing and distributing intravenous pumps and administration sets. Integrating businesses, however, involves a number of special risks, including the following:

	•		the possibility that management may be distracted from regular business concerns by the need to integrate operations;
	•		unforeseen difficulties in integrating operations and systems;
	•		problems assimilating and retaining the Company’s employees or the employees of the acquired company;
	•		accounting issues that could arise in connection with, or as a result of, the acquisition of the acquired company, including unforeseen issues related to internal control over financial reporting at the acquired company;
	•		regulatory or compliance issues that could exist at an acquired company;
	•		challenges in retaining the Company’s customers or the customers of the acquired company following the acquisition; and
	•		potential adverse short-term effects on operating results through increased costs or otherwise.

     In addition, the Company may incur debt to finance future acquisitions and/or may issue securities in connection with future acquisitions which may dilute the holdings of its current and future shareholders. To the extent the Company continues to pursue acquisitions, its ability to complete such transactions may be adversely affected by the government investigations described above under the risk factor entitled “The ongoing SEC investigation and U.S. Attorney inquiry could adversely affect the Company’s business, financial condition or operating results.”

     In addition to the risks associated with acquisition-related growth, the Company’s business has grown in size and complexity

over the past few years as a result of internal growth. This growth and increase in complexity have placed significant demands on management, systems, internal controls and financial and physical resources. To meet such demands, the Company intends to continue to invest in new technology, make other capital expenditures and, where appropriate, hire and/or train employees with expertise to handle these particular demands. If the Company is unable to successfully complete and integrate strategic acquisitions in a timely manner or if the Company fails to efficiently manage operations in a way that accommodates continued internal growth, its business, financial condition or operating results could be adversely affected.

Downgrades of the Company’s credit ratings could adversely affect the Company. The Company’s senior debt credit ratings from S&P, Moody’s and Fitch are BBB, Baa3 and BBB+, respectively, the commercial paper ratings are A-3, P-3 and F-2, respectively, and the ratings outlooks are “negative,” “stable” and “negative,” respectively. Although a ratings downgrade by any of the rating agencies will not trigger an acceleration of any of the Company’s indebtedness, these events may adversely affect its ability to access capital and would result in an increase in the interest rates payable under the Company’s credit facilities and future indebtedness. See also “Liquidity and Capital Resources” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company could be adversely affected if transitions in senior management are not successful . The Company’s operations depend in a large extent on the efforts of its senior management. Several new members of senior management, including the Company’s Chairman and Chief Executive Officer – Pharmaceutical Technologies and Services, Chief Financial Officer, Chief Ethics and Compliance Officer, Chief Accounting Officer and Controller and Treasurer have recently joined the Company. The Company seeks to develop and retain an effective management team through the proper positioning of existing key employees and the addition of new management personnel where necessary. The Company’s operations could be adversely affected if transitions in senior management are not successful or if the Company is unable to sustain an effective management team.

Increased costs for raw materials or raw material shortages may adversely affect the Company’s operating results. As discussed more fully under “Customers and Suppliers” within “Item 1: Business,” the Company’s manufacturing businesses within the Medical Products and Services and Pharmaceutical Technologies and Services segments use a broad range of raw materials in the products that they produce. In certain circumstances, the Company’s operating results may be adversely affected by increases in raw materials costs because the Company may not be able to fully recover the increased costs from the customer or offset the increased cost through productivity improvements. In addition, in the case where there are a limited number of suppliers for a particular raw material or where the Company is constrained to use a particular supplier due to customer requirements, regulatory filings or product approvals, the Company may experience shortages in supply. This, in turn, could adversely affect the Company’s operating results.

Increased fuel costs may adversely affect the Company’s operating results. As discussed under “Customers and Suppliers” within “Item 1: Business,” the Company’s Pharmaceutical Distribution business utilizes contract carriers to distribute its products. Contracts with these carriers generally contain a fuel surcharge capped at a certain percentage. If fuel costs rise significantly, the Pharmaceutical Distribution business may need to increase the specified fuel surcharge, which is limited to specified annual percentage increases, with certain contract carriers. In the event that the Pharmaceutical Distribution business cannot reach agreement on these changes, it may need to replace the contract carriers at prevailing market rates. The Company’s Medical Products and Services Distribution and Nuclear Pharmacy Services businesses own their distribution fleets, which distribute a majority of their products to customers. These businesses are directly impacted by market changes in the price of fuel. As a result of the Company’s exposure to fuel costs, the Company’s operating results may be adversely affected by increased fuel costs, as the Company may not be able to fully recover the increased costs from its customers.

Proprietary technology protections may not be adequate and Company products may infringe on the rights of third parties. The Company relies on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions and technical measures to protect a number of its products, services and intangible assets. There can be no assurance that these protections will provide meaningful protection against competitive products or services or otherwise be commercially valuable or that the Company will be successful in obtaining additional intellectual property or enforcing its intellectual property rights against unauthorized users. There can be no assurance that the Company’s competitors will not independently develop technologies that are substantially equivalent or superior to the Company’s technology.

     From time to time, third parties have asserted infringement claims against the Company and there can be no assurance that third parties will not assert infringement claims against the Company in the future. (See the discussion of the ICU Medical, Inc. litigation against Alaris in the “Overview” section within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”) While the Company believes that the products it currently manufactures using its proprietary technology do not infringe upon proprietary rights of other parties or that meritorious defenses would exist with respect to any assertions to the contrary, there can be no assurance that the Company would not be found to infringe on the proprietary rights of others.

     Additionally, the Company may be subject to litigation or find it necessary to initiate litigation to protect its trade secrets, to enforce its patent, copyright and trademark rights and to determine the scope and validity of the proprietary rights of others. This type of litigation can be costly and time consuming and could generate significant expenses, damage payments or restrictions or prohibitions on the Company’s use of its technology, which could adversely affect the Company’s results of operations. In addition, if the Company is found to be infringing on proprietary rights of others, the Company may be required to develop non-infringing technology, obtain a license or cease making, using and/or selling the infringing products.

Risks generally associated with the Company’s sophisticated information systems may adversely affect the Company’s operating results. The Company relies on sophisticated information systems in its business to obtain, rapidly process, analyze and manage data to:

	•		facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers;
	•		receive, process and ship orders on a timely basis;
	•		manage the accurate billing and collections for thousands of customers; and
	•		process payments to suppliers.

     The Company’s business and results of operations may be adversely affected if these systems are interrupted, damaged by unforeseen events or fail for any extended period of time, including due to the actions of third parties.

The Company could become subject to liability claims that are not adequately covered by insurance, and may have to pay damages and other expenses which may have an adverse affect on the Company’s operating results. The Company’s businesses expose it to risks that are inherent in:

	•		the distribution and dispensing of pharmaceuticals and nuclear pharmaceuticals;
	•		the provision of ancillary services (such as pharmacy management and pharmacy staffing services);
	•		the development and manufacture of drug delivery systems and of pharmaceutical products for the Company or its customers;
	•		the development, presentation and distribution of medical education and marketing programs and materials; and
	•		the manufacture and distribution of medical/surgical products, automated drug dispensing units and infusion therapy systems and intravenous administration set products and devices.

     Insurance policies covering pharmaceutical product liability generally being offered by insurance carriers are becoming more restrictive in terms of self-insured retentions, available policy limits, coverage exclusions and other terms. There can be no assurance that a successful product or professional liability claim would be adequately covered by the Company’s applicable insurance policies or by any applicable contractual indemnity and, as such, this could adversely effect the Company’s operating results.

The loss of third-party licenses used by businesses within the Company’s Clinical Technologies and Services segment may adversely affect the Company’s operating results. The Company licenses the rights to use certain technologies from third-party vendors to incorporate in or complement products and services offered through its Clinical Technologies and Services segment. These licenses are generally nonexclusive, must be renewed periodically by mutual consent and may be terminated if the Company breaches the terms of the license. As a result, the Company may have to discontinue, delay or reduce product shipments until it obtains equivalent technology, which could adversely affect the Company’s business. The Company’s competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with the Company. In addition, if the Company’s vendors choose to discontinue support of the licensed technology in the future, the Company may not be able to modify or adapt certain of its own products.

Tax legislation initiatives could adversely affect the Company’s net earnings. The Company is a large multinational corporation with operations in the United States and international jurisdictions. As such, the Company is subject to the tax laws and regulations of the United States federal, state and local governments and of many international jurisdictions. From time to time, various legislative initiatives may be proposed that could adversely affect the Company’s tax positions. There can be no assurance that the Company’s effective tax rate will not be adversely affected by these initiatives. In addition, United States federal, state and local, as well as international, tax laws and regulations are extremely complex and subject to varying interpretations. Although the Company believes that its historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that the Company’s tax positions will not be challenged by relevant tax authorities or that the Company would be successful in any such challenge.

Item 2: Properties

     Domestically, the Company has 24 principal pharmaceutical distribution facilities and two specialty distribution facilities utilized by its Pharmaceutical Distribution and Provider Services segment. In its Medical Products and Services segment, the Company has 52 medical-surgical distribution facilities, 16 medical-surgical manufacturing facilities and one specialty distribution facility. In its Pharmaceutical Technologies and Services segment, the Company has 198 domestic sites, 171 of which are Nuclear Pharmacy Services laboratory, manufacturing and distribution facilities, and the remainder of which are Packaging Services, Oral Technologies, Pharmaceutical Development and Biotechnology and Sterile Life Sciences facilities and a single Specialty Pharmaceutical Services facility. In its Clinical Technologies and Services segment, the Company has four domestic assembly operation facilities. The Company’s domestic facilities are located in 45 states and Puerto Rico.

     Internationally, the Company owns or leases 11 facilities through its Pharmaceutical Distribution and Provider Services segment, all located in the United Kingdom. The Company owns or leases 13 facilities through its Medical Products and Services segment, located in Australia, Dominican Republic, France, Germany, Malaysia, Malta, Mexico and Thailand. The Company owns or leases 19 operating facilities through its Pharmaceutical Technologies and Services segment, located in Argentina, Australia, Belgium, Brazil, France, Germany, Ireland, Italy, Japan and the United Kingdom. The Company owns or leases four manufacturing and distribution facilities through its Clinical Technologies and Services segment in Australia, Italy, Mexico and the United Kingdom. The Company’s international facilities are located in a total of 29 countries.

     The Company owns 90 of its domestic and international operating facilities, and the remaining 254 facilities are leased. The Company’s principal executive offices are headquartered in a leased four-story building located at 7000 Cardinal Place in Dublin, Ohio.

     The Company considers its operating properties to be in satisfactory condition and adequate to meet its present needs. However, the Company regularly evaluates its operating properties and may make further additions, improvements and consolidations as it continues to seek opportunities to expand its role as a provider of products and services to the health care industry.

     For certain financial information regarding the Company’s facilities, see Notes 10 and 11 of “Notes to Consolidated Financial Statements.”

Item 3: Legal Proceedings

Latex Litigation

     On September 30, 1996, Baxter International Inc. (“Baxter”) and its subsidiaries transferred to Allegiance Corporation and its subsidiaries (“Allegiance”), 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. In connection with this spin-off, Allegiance Corporation, which later merged with a subsidiary of the Company on February 3, 1999, agreed to indemnify Baxter, and to defend and indemnify Baxter Healthcare Corporation, as contemplated by the agreements between Baxter and Allegiance Corporation, 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. Such claims, which name multiple defendants in addition to Baxter/Allegiance, involved allegations of sensitization to natural rubber latex products. The Company is not a party to any of the lawsuits and has not agreed to pay any settlements to the plaintiffs.

     During the first quarter of fiscal 2005, the Company reassessed its ability to estimate the potential remaining costs of these lawsuits. Following this reassessment, during the first quarter of fiscal 2005, the Company recognized a charge of $16.4 million as its reasonable estimate of net future costs to be incurred in defending or settling outstanding claims as well as pursuing insurance recoveries. During the fourth quarter of fiscal 2005, the Company resolved claims relating to substantially all of its remaining insurance coverage for this litigation. Following resolution of these claims, the Company concluded that it was in a position to reasonably estimate the total remaining uninsured costs for this litigation. As such, during the fourth quarter of fiscal 2005, the Company recognized an additional charge of $11.8 million as its reasonable estimate of uninsured costs already incurred in defending or settling outstanding claims. While the Company does not anticipate significant charges in future periods, additional charges may be required if there is a significant increase in the number of new lawsuits filed. Currently, the Company considers this potential event to be remote.

Antitrust Litigation against Pharmaceutical Manufacturers

     During the past six years, numerous class action lawsuits have been filed against certain prescription drug manufacturers alleging that the prescription drug manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drug competition against the manufacturer’s brand name drug. The Company has not been a named plaintiff in any of these class actions, but has been a member of the direct purchasers’ class (i.e., those purchasers who purchase directly from these drug manufacturers). None of the class actions have gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement fund. Currently, there are several such class actions pending in which the Company is a class member. Total recoveries from these actions through June 30, 2005 were $97.7 million, including a $21.2 recovery during the fourth quarter of fiscal 2005. The Company is unable at this time to estimate definitively future recoveries, if any, it will receive as a result of these class actions.

Environmental Claims

Pennsauken Environmental Claim

     In 1985, PCI Services, Inc. (“PCI”) purchased Burgess & Why Folding Carton Company (“Burgess”), located in Pennsauken, New Jersey. The Company acquired PCI in 1996. In 1991, the Pennsauken Solid Waste Management Authority sued various waste transporters and other parties in New Jersey State court alleging contamination of the Pennsauken landfill. One of the waste haulers sued by the Pennsauken Solid Waste Management Authority was Quick Way, Inc. (“Quick Way”), a waste hauling company used by Burgess from 1970 to 1982. Quick Way, in turn, joined several companies that it serviced, including Burgess. There are approximately 600 parties in the litigation. The Company reasonably believes that PCI’s liability, if any, will be less than $100,000, and the impact of this claim upon PCI, if any, will be immaterial to the Company’s financial position, liquidity and results of operations.

Environmental Claims Relating to Allegiance

     On September 30, 1996, Baxter and its subsidiaries transferred to Allegiance the Allegiance Business in connection with the Baxter-Allegiance Spin-Off. As a result of the Baxter-Allegiance Spin-Off, Allegiance agreed to defend and indemnify Baxter from the following environmental claims.

San Gabriel Environmental Claim

     Allegiance, through Baxter and its predecessors-in-interest, owned a facility located in Irwindale, California (the “Irwindale Property”) from approximately 1961 to approximately 1999 where, among other things, plastics were manufactured, a chemical laboratory was operated, and certain research and development activity was carried out. San Gabriel is a Superfund site in the Los Angeles area that concerns ground water contamination of a local drinking water aquifer. The U.S. Environmental Protection Agency (the “U.S. EPA”) is the lead government agency in charge of the San Gabriel Valley Groundwater Basin Superfund Sites, Areas 1-4, Baldwin Park Operable Unit (the “BPOU”). According to the U.S. EPA, the groundwater within the BPOU is contaminated. The Irwindale Property is located approximately one mile away from the BPOU plume. The U.S. EPA named Allegiance as a potentially responsible party (“PRP”) for the groundwater contamination in the BPOU, along with a number of other PRPs. In June 2000, the U.S. EPA issued a unilateral administrative order (“UAO”) against a number of companies, including Allegiance. The UAO requires, among other things, the design and implementation of the Interim Groundwater Remedy selected by the U.S. EPA. This Interim Groundwater Remedy generally requires pumping contaminated groundwater from the aquifer and treating it in accordance with federal and state government standards in order to remove or reduce contaminants of concern and to stop the further migration of contaminants. Allegiance has maintained that the Irwindale Property did not contribute to the alleged ground water contamination. The levels of contaminants detected on the Irwindale Property are below any state or federal standard requiring remediation or monitoring. The U.S. EPA has been engaged in settlement discussions with Allegiance, and has not sued Allegiance in connection with the UAO or the BPOU. During the fourth quarter of fiscal 2004, Allegiance accepted the U.S. EPA’s cash buy-out demand of $550,000 in satisfaction of Allegiance’s share of costs for the Interim Groundwater Remedy. Allegiance also agreed to pay the California Department of Toxic Substances (“DTSC”) $16,050 in settlement of DTSC’s claims related to the Interim Groundwater Remedy. Allegiance has recorded environmental accruals, based upon information available, that it reasonably believes are adequate to satisfy known costs. The Company reasonably believes that the impact of this claim upon Allegiance will be immaterial to the Company’s financial position, liquidity and results of operations.

A-1 Plainwell and A-1 Sunrise Environmental Claims

     The Michigan Department of Environmental Quality brought suit against Baxter as a PRP along with a number of other PRPs in 1994 in the Circuit Court of the State of Michigan for Ingham County alleging contamination of the A-1 disposal site in Plainwell, Michigan (“A-1 Plainwell”). Among the contaminants at the site were solvent wastes generated by Burdick & Jackson (“Burdick”) of Muskegon, Michigan. Baxter became a PRP through its acquisition of Burdick in 1986. Allegiance agreed to defend and indemnify Baxter in this claim as part of the Baxter-Allegiance Spin-Off. The principal relief sought was for the PRPs to clean up the site to applicable standards and to reimburse the government for its oversight and other costs at the site. In a related action, Allegiance, through its association with Baxter and Burdick, was named a PRP to reimburse the State of Michigan for reimbursement costs associated with the construction of a landfill cap and continued operation, maintenance and monitoring of the A-1 Sunrise site in Michigan (“A-1 Sunrise”). Allegiance has paid approximately $95,000 for past remediation costs at the A-1 Plainwell site and approximately $230,000 at the A-1 Sunrise site. Remediation of the A-1 Plainwell site is substantially complete, subject to minimal operation, maintenance and monitoring of the site. Allegiance’s share of future remediation at the A-1 Sunrise site is approximately 1.8%. Allegiance has recorded environmental accruals based upon the information available that it reasonably believes are adequate to satisfy known costs. The Company reasonably believes that the impact of these claims upon Allegiance will be immaterial to the Company’s financial position, liquidity and results of operations.

Thermochem Environmental Claim

     As a result of the Burdick acquisition, Baxter was identified by the U.S. EPA as a PRP for clean-up costs related to the Thermochem waste processing site in Muskegon, Michigan. Allegiance agreed to defend and indemnify Baxter in this claim as part of the Baxter-Allegiance Spin-Off. Based upon the information available, Allegiance reasonably believes the total clean-up cost of this site to be between approximately $17 million and $23 million. A well-funded PRP group, of which Allegiance is a member, has spent approximately $10 million in clean-up costs. Allegiance reasonably believes that current available funding of the PRP group, along with Allegiance’s additional recorded environmental accruals, are adequate to satisfy known costs. The Company reasonably believes that the impact of this claim upon Allegiance will be immaterial to the Company’s financial position, liquidity and results of operations.

Derivative Actions

     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. Doris Staehr v. Robert D. Walter, et al., No. 02-CVG-11-639 . 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 renegotiate or terminate the Company’s proposed acquisition of Syncor, and to 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, among other things, the Company improperly recognized revenue in December 2000 and September 2001 related to settlements with certain vitamin manufacturers. The Company filed a Motion to Dismiss the second amended complaint, and on November 20, 2003, the Court denied the motion. On April 14, 2005, the Court stayed the action for a period of six months. The defendants intend to vigorously defend this action. The Company currently does not believe that the impact of this lawsuit will have a material adverse effect on the Company’s financial position, liquidity or results of operations.

     Since July 1, 2004, three complaints have been filed by purported shareholders against the members of the Company’s Board of Directors, certain of its officers and employees and the Company as a nominal defendant in the Court of Common Pleas, Franklin County, Ohio, as purported derivative actions (collectively referred to as the “Cardinal Health Franklin County derivative actions”). These cases include: Donald Bosley, Derivatively on behalf of Cardinal Health, Inc. v. David Bing, et al., Sam Wietschner v. Robert D. Walter, et al. and Green Meadow Partners, LLP, Derivatively on behalf of Cardinal Health, Inc. v. David Bing, et al . The Cardinal Health Franklin County derivative actions allege that the individual defendants failed to implement adequate internal controls for the Company and thereby violated their fiduciary duty of good faith, GAAP and the Company’s Audit Committee charter. The complaints in the Cardinal Health Franklin County derivative actions seek money damages and equitable relief against the defendant directors and an award of attorney’s fees. On November 22, 2004, the Cardinal Health Franklin County derivative actions were consolidated. Furthermore, by agreement of the parties, the Cardinal Health Franklin County derivative actions have been stayed. None of the defendants has responded to the complaints yet, nor has the Company.

Shareholder/ERISA Litigation against Cardinal Health

     Since July 2, 2004, ten purported class action complaints have been filed by purported purchasers of the Company’s securities against the Company and certain of its officers and directors, asserting claims under the federal securities laws (collectively referred to as the “Cardinal Health federal securities actions”). To date, all of these actions have been filed in the United States District Court for the Southern District of Ohio. These cases include: Gerald Burger v. Cardinal Health, Inc., et al. (04 CV 575), Todd Fener v. Cardinal Health, Inc., et al. (04 CV 579), E. Miles Senn v. Cardinal Health, Inc., et al. (04 CV 597), David Kim v. Cardinal Health, Inc. (04 CV 598), Arace Brothers v. Cardinal Health, Inc., et al. (04 CV 604), John Hessian v. Cardinal Health, Inc., et al. (04 CV 635), Constance Matthews Living Trust v. Cardinal Health, Inc., et al. (04 CV 636), Mariss Partners, LLP v. Cardinal Health, Inc., et al. (04 CV 849), The State of New Jersey v. Cardinal Health, Inc., et al. (04 CV 831) and First New York Securities, LLC v. Cardinal Health, Inc., et al. (04 CV 911). The Cardinal Health federal securities actions purport to be brought on behalf of all purchasers of the Company’s securities during various periods beginning as early as October 24, 2000 and ending as late as July 26, 2004 and 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 false and/or misleading statements concerning the Company’s financial results, prospects and condition. Certain of the complaints also allege violations of Section 11 of the Securities Act of 1933, as amended, claiming material misstatements or omissions in prospectuses issued by the Company in connection with its acquisition of Bindley Western Industries, Inc. (which has been given the legal designation of Cardinal Health 100, Inc. and is referred to in this Form 10-K as “Bindley”) in 2001 and Syncor in 2003. The alleged misstatements relate to the Company’s accounting for recoveries relating to antitrust litigation against vitamin manufacturers, and to classification of revenue in the Company’s Pharmaceutical Distribution business as either operating revenue or revenue from bulk deliveries to customer warehouses, among other matters. The alleged misstatements are claimed to have caused an artificial inflation in the Company’s stock price during the proposed class period. The complaints seek unspecified money damages and equitable relief against the defendants and an award of attorney’s fees. On December 15, 2004, the Cardinal Health federal securities actions were consolidated into one action captioned In re Cardinal Health, Inc. Federal Securities Litigation , and on January 26, 2005, the Court appointed the Pension Fund Group as lead plaintiff in this consolidated action. On April 22, 2005, the lead plaintiff filed a consolidated amended complaint naming the Company, certain current and former officers and employees and the Company’s external auditors as defendants. The complaint seeks unspecified money damages and other unspecified relief against the defendants. On August 22, 2005, the Company and certain defendants filed a Motion to Dismiss the consolidated amended complaint.

     Since July 2, 2004, 15 purported class action complaints (collectively referred to as the “Cardinal Health ERISA actions”) have been filed against the Company and certain officers, directors and employees of the Company by purported participants in the Cardinal Health Profit Sharing, Retirement and Savings Plan (now known as the Cardinal Health 401(k) Savings Plan, or the “401(k) Plan”). To date, all of these actions have been filed in the United States District Court for the Southern District of Ohio. These cases include: David McKeehan and James Syracuse v. Cardinal Health, Inc., et al. (04 CV 643), Timothy Ferguson v. Cardinal Health, Inc., et al. (04 CV 668), James DeCarlo v. Cardinal Health, Inc., et al. (04 CV 684), Margaret Johnson v. Cardinal Health, Inc., et al. (04 CV 722), Harry Anderson v. Cardinal Health, Inc., et al. (04 CV 725), Charles Heitholt v. Cardinal Health, Inc., et al. (04 CV 736), Dan Salinas and Andrew Jones v. Cardinal Health, Inc., et al. (04 CV 745), Daniel Kelley v. Cardinal Health, Inc., et al. (04 CV 746), Vincent Palyan v. Cardinal Health, Inc., et al. (04 CV 778), Saul Cohen v. Cardinal Health, Inc., et al. (04 CV 789), Travis Black v. Cardinal Health, Inc., et al. (04 CV 790), Wendy Erwin v. Cardinal Health, Inc., et al. (04 CV 803), Susan Alston v. Cardinal Health, Inc., et al. (04 CV 815), Jennifer Brister v. Cardinal Health, Inc., et al. (04 CV 828) and Gint Baukus v. Cardinal Health, Inc., et al. (05 C2 101). The Cardinal Health ERISA actions purport to be brought on behalf of participants in the 401(k) Plan and the Syncor Employees’ Savings and Stock Ownership Plan (the “Syncor ESSOP,” and together with the 401(k) Plan, the “Plans”), and also on behalf of the Plans themselves. The complaints allege that the defendants breached certain fiduciary duties owed under the Employee Retirement Income Security Act (“ERISA”), generally asserting that the defendants failed to make full disclosure of the risks to the Plans’ participants of investing in the Company’s stock, to the detriment of the Plans’ participants and beneficiaries, and that Company stock should not have been made available as an investment alternative for the Plans’ participants. The misstatements alleged in the Cardinal Health ERISA actions significantly overlap with the misstatements alleged in the Cardinal Health federal securities actions. The complaints seek unspecified money damages and equitable relief against the defendants and an award of attorney’s fees. On December 15, 2004, the Cardinal Health ERISA actions were consolidated into one action captioned In re Cardinal Health, Inc. ERISA Litigation . On January 14, 2005, the court appointed lead counsel and liaison counsel for the consolidated Cardinal Health ERISA action. On April 29, 2005, the lead plaintiff filed a consolidated amended ERISA complaint naming the Company, certain current and former directors, officers and employees, the Company’s Employee Benefits Policy Committee and Putnam Fiduciary Trust Company as defendants. The complaint seeks unspecified money damages and other unspecified relief against the defendants. On August 22, 2005, the Company and certain defendants filed a Motion to Dismiss the consolidated amended ERISA complaint.

     With respect to the proceedings described under the headings “Derivative Actions” and “Shareholder/ERISA Litigation against Cardinal Health,” the Company currently believes that there will be some insurance coverage available under the Company’s insurance policies in effect at the time the actions were 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.

Shareholder/ERISA 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 “Syncor federal securities actions”). All of these actions were filed in the United States District Court for the Central District of California. These cases include Richard Bowe v. Syncor Int’l Corp., et al., No. CV 02-8560 LGB (RCx) (C.D. Cal.), Alan Kaplan v. Syncor Int’l Corp., et al., No. CV 02-8575 CBM (MANx) (C.D. Cal), Franklin Embon, Jr. v. Syncor Int’l Corp., et al., No. CV 02-8687 DDP (AJWx) (C.D. Cal), Jonathan Alk v. Syncor Int’l Corp., et al., No. CV 02-8841 GHK (RZx) (C.D. Cal), Joyce Oldham v. Syncor Int’l Corp., et al., CV 02-8972 FMC (RCx) (C.D. Cal), West Virginia Laborers Pension Trust Fund v. Syncor Int’l Corp., et al., No. CV 02-9076 NM (RNBx) (C.D. Cal), Brad Lookingbill v. Syncor Int’l Corp., et al., CV 02-9248 RSWL (Ex) (C.D. Cal), Them Luu v. Syncor Int’l Corp., et al., CV 02-9583 RGK (JwJx) (C.D. Cal), David Hall v. Syncor Int’l Corp., et al., CV 02-9621 CAS (CWx) (C.D. Cal), Phyllis Walzer v. Syncor Int’l Corp., et al., CV 02-9640 RMT (AJWx) (C.D. Cal), and Larry Hahn v. Syncor Int’l Corp., et al., CV 03-52 LGB (RCx) (C.D. Cal.) . The Syncor 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 Syncor 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. The consolidated complaint seeks unspecified money damages and other unspecified relief against the 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 July 6, 2004, the Court granted Defendants’ Motion to Dismiss without prejudice as to defendants Syncor, Monty Fu, Robert Funari and Haig Bagerdjian. As to the other individual defendants, the Motion to Dismiss was granted with prejudice. On September 14, 2004, the lead plaintiff filed a Motion for Clarification of the Court’s July 6, 2004 dismissal order. The court clarified its July 6, 2004 dismissal order on November 29, 2004 and the lead plaintiff filed a third amended consolidated complaint on December 29, 2004. Syncor filed a Motion to Dismiss the third amended consolidated complaint on January 31, 2005. On April 15, 2005, the Court granted the Motion to Dismiss with prejudice. The lead plaintiff has appealed this decision.

     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 Syncor 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 by Syncor stockholders in the Company’s merger with Syncor 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. Plaintiffs’ request was granted in February 2004. Monty Fu was the only named defendant in the second amended complaint. On September 15, 2004, the Court granted Monty Fu’s Motion to Dismiss the second amended complaint. The Court dismissed the second amended complaint with prejudice.

     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. These cases include Joseph Famularo v. Monty Fu, et al., Case No. BC285478 (Cal. Sup. Ct., Los Angeles Cty.) , and Mark Stroup v. Robert G. Funari, et al., Case No. BC285480 (Cal. Sup. Ct., Los Angeles Cty.) . 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. On November 29, 2004, the court dismissed the California actions with prejudice.

     A purported class action complaint, captioned Pilkington v. Cardinal Health, et al., 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 ESSOP. A related purported class action complaint, captioned Donna Brown, et al. v. Syncor International Corp, et al., was filed on September 11, 2003 against the Company, Syncor and certain individual defendants. Another related purported 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. Each of these actions was brought in the United States District Court for the Central District of California. 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 ERISA based on the same underlying allegations of improper and unlawful conduct alleged in the federal securities litigation. The consolidated complaint seeks unspecified money damages and other unspecified relief against the defendants. On April 26, 2004, the defendants filed Motions to Dismiss the consolidated complaint. On August 24, 2004, the Court granted in part and denied in part Defendants’ Motions to Dismiss. The Court dismissed, without prejudice, all claims against defendants Ed Burgos and Sheila Coop, all claims alleging co-fiduciary liability against all defendants, and all claims alleging that the individual defendants had conflicts of interest precluding them from properly exercising their fiduciary duties under ERISA. A claim for breach of the duty to prudently manage plan assets was upheld against Syncor, and a claim for breach of the alleged duty to “monitor” the performance of Syncor’s Plan Administrative Committee was upheld against defendants Monty Fu and Robert Funari. 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.

     It is impossible to predict the outcome of the proceedings described under the heading “Shareholder/ERISA Litigation against Syncor” or their impact on the Company. 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 believes the allegations made in the complaints described above are without merit and it intends to vigorously defend such actions. The Company has been informed that the individual director and officer defendants deny liability for the claims asserted in these actions, believe they have meritorious defenses and intend to vigorously defend such actions. The Company currently believes 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. E.I. Du Pont De Nemours and Company v. Cardinal Health, Inc., BBA Materials Technology and BBA Nonwovens Simpsonville, Inc., No. 3-03-0848 . 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. The Company is owed a defense and indemnity from its co-defendants 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. This matter is currently scheduled for trial during the second quarter of fiscal 2006.

SEC Investigation and U.S. Attorney Inquiry

     On October 7, 2003, the Company received a request from the SEC, in connection with an informal inquiry, for historical financial and related information. The SEC’s initial request sought a variety of documentation, including the Company’s accounting records for fiscal 2001 through fiscal 2003, as well as notes, memoranda, presentations, e-mail and other correspondence, budgets, forecasts and estimates.

     On May 6, 2004, the Company was notified that the pending SEC informal inquiry had been converted into a formal investigation. On June 21, 2004, as part of the SEC’s formal investigation, the Company received an SEC subpoena that included a request for the production of documents relating to revenue classification, and the methods used for such classification, in the Company’s Pharmaceutical Distribution business as either “Operating Revenue” or “Bulk Deliveries to Customer Warehouses and

Other.” The Company learned that the U.S. Attorney’s Office for the Southern District of New York had also commenced an inquiry that the Company understands relates to this same subject. On October 12, 2004, in connection with the SEC’s formal investigation, the Company received a subpoena from the SEC requesting the production of documents relating to compensation information for specific current and former employees and officers. The Company was notified in April 2005 that certain current and former employees and directors received subpoenas from the SEC requesting the production of documents. The subject matter of these requests is consistent with the subject matter of the subpoenas the Company had previously received from the SEC.

     In connection with the SEC’s inquiry, the Company’s Audit Committee commenced its own internal review in April 2004, assisted by independent counsel. This internal review was prompted by documents contained in the production to the SEC that raised issues as to certain accounting matters, including but not limited to the establishment and adjustment of certain reserves and their impact on quarterly earnings. The Audit Committee and its independent counsel also have reviewed the revenue classification issue that is the subject of the SEC’s June 21, 2004 subpoena and are reviewing other matters identified in the course of the Audit Committee’s internal review. During September and October 2004, the Audit Committee reached certain conclusions with respect to findings from its internal review. In connection with the Audit Committee’s conclusions, the Company made certain reclassification and restatement adjustments to its fiscal 2004 and prior historical consolidated financial statements. The Audit Committee’s conclusions were discussed, and the reclassification and restatement adjustments were reflected, in the 2004 Form 10-K. More information with respect to the prior conclusions of the Audit Committee’s internal review and the impact of the reclassification and restatement adjustments on the reporting periods discussed in this Form 10-K is set forth in Notes 1 and 2 of “Notes to Consolidated Financial Statements.”

     Following the conclusions reached by the Audit Committee in September and October 2004, the Audit Committee began the task of assigning responsibility for the financial statement matters described above which were reflected in the 2004 Form 10-K and in January 2005 took disciplinary actions with respect to the Company’s employees who it determined bore responsibility for these matters, other than with respect to the accounting treatment of certain recoveries from vitamin manufacturers for which there is a separate Board committee internal review (discussed below). The disciplinary actions ranged from terminations or resignations of employment to required repayments of some or all of fiscal 2003 bonuses from certain employees to letters of reprimand. These disciplinary actions affected senior financial and managerial personnel, as well as other personnel, at the corporate level and in the four business segments. None of the Company’s current corporate executive officers (who are identified under the heading “Executive Officers of the Company” following Item 4 of this Form 10-K) were the subject of disciplinary action by the Audit Committee. In connection with the determinations made by the Audit Committee, the Company’s former controller resigned effective February 15, 2005. The Audit Committee has completed its determinations of responsibility for the financial statement matters described above which were reflected in the 2004 Form 10-K, although responsibility for matters relating to the Company’s accounting treatment of certain recoveries from vitamin manufacturers has been addressed by a separate committee of the Board. The Audit Committee internal review is substantially complete.

     In connection with the SEC’s formal investigation, a committee of the Board of Directors, with the assistance of independent counsel, separately initiated an internal review to assign responsibility for matters relating to the Company’s accounting treatment of certain recoveries from vitamin manufacturers. In the 2004 Form 10-K, as part of the Audit Committee’s internal review, the Company reversed its previous recognition of estimated recoveries from vitamin manufacturers for amounts overcharged in prior years and recognized the income from such recoveries as a special item in the period in which cash was received from the manufacturers. The SEC staff had previously advised the Company that, in its view, the Company did not have an appropriate basis for recognizing the income in advance of receiving the cash. In August 2005, the separate Board committee reached certain conclusions with respect to findings from its internal review and determined that no additional disciplinary actions were required beyond the disciplinary actions already taken by the Audit Committee, as described above. The separate Board committee internal review is substantially complete.

     Settlement discussions have recently commenced with the SEC regarding resolution of its investigation with respect to the Company. While these discussions are ongoing, there can be no assurance that the Company’s efforts to resolve the investigation with respect to the Company will be successful, and the Company cannot predict the timing or outcome of these matters or the terms of any such resolution. As a result of the initiation of these discussions, the Company recorded a reserve of $25 million for its fiscal year ended June 30, 2005 in respect of the SEC investigation. Unless and until the SEC investigation is resolved, there can be no assurance that the amount reserved by the Company for this investigation will be sufficient and that a larger amount will not be required. Therefore, this reserve will be reviewed on a quarterly basis and adjusted to the extent that the Company determines it is necessary.

     The SEC investigation, the U.S. Attorney inquiry, the Audit Committee internal review and the separate Board committee internal review remain ongoing, although the Audit Committee internal review and the separate Board committee internal review are substantially complete. While the Company is continuing in its efforts to respond to these inquiries and provide all information required, the Company cannot predict the outcome of the SEC investigation, the U.S. Attorney inquiry, the Audit Committee internal review or the separate Board committee internal review. The outcome of the SEC investigation, the U.S. Attorney inquiry

and any related legal and administrative proceedings could include the institution of administrative, civil injunctive or criminal proceedings involving the Company and/or current or former Company employees, officers and/or directors, as well as the imposition of fines and other penalties, remedies and sanctions.

     In addition, there can be no assurance that additional restatements will not be required, that the historical consolidated financial statements included in the 2004 Form 10-K, the Forms 10-Q for the quarterly periods during fiscal 2005, or this Form 10-K will not change or require amendment, or that additional disciplinary actions will not be required in such circumstances. As the SEC’s investigation, the U.S. Attorney’s inquiry and the Audit Committee’s internal review continue, the Audit Committee may identify new issues, or make additional findings if it receives additional information, that may have an impact on the Company’s consolidated financial statements and the scope of the restatements described in the 2004 Form 10-K, the Forms 10-Q for the quarterly periods during fiscal 2005, and this Form 10-K.

FTC Investigation

     In December 2004, the Company received a request for documents from the Federal Trade Commission (“FTC”) that asks the Company to voluntarily produce certain documents to the FTC. The document request, which does not allege any wrongdoing, is part of an FTC non-public investigation to determine whether the Company may be engaging in anticompetitive practices with other wholesale drug distributors in order to limit competition for provider customers seeking distribution services. The Company is in the process of responding to the FTC request. Because the investigation is at an early stage, the Company cannot predict its outcome or its effect, if any, on the Company’s business.

New York Attorney General Investigation

     In April 2005, one of the Company’s subsidiaries received a subpoena from the Attorney General’s Office of the State of New York. The Company believes that the New York Attorney General is conducting a broad industry inquiry that appears to focus on, among other things, the secondary market within the wholesale pharmaceutical industry. The Company is one of multiple parties that have received such a subpoena. The Company has been producing documents and providing information to the New York Attorney General’s office in response to the April 2005 subpoena as well as subsequent informal requests. Because the investigation is at an early stage, the Company cannot predict its outcome or its effect on the Company’s business.

Other Matters

     In addition to the legal proceedings disclosed above, 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 as well as litigation in connection with future and prior acquisitions. The Company intends to vigorously defend itself against such other litigation and does not currently believe that the outcome of any such other litigation will have a material adverse effect on the Company’s consolidated financial statements.

     The health care industry is highly regulated and government agencies continue to increase their scrutiny over certain practices affecting government programs and otherwise. From time to time , the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a timely and thorough manner, which responses sometimes require considerable time and effort, and can result in considerable costs being incurred, by the Company. The Company expects to incur additional costs in the future in connection with existing and future requests.

Item 4: Submission of Matters to a Vote of Security Holders

     None during the quarter ended June 30, 2005.

Executive Officers of the Company

     The following is a list of the executive officers of the Company (information provided as of September 9, 2005):

     Unless otherwise indicated, the business experience summaries provided below for the Company’s executive officers describe positions held by the named individuals during the last five years.

      Robert D. Walter Chairman of the Board and Chief Executive Officer of the Company since its formation in 1979, and with the Company’s predecessor business since its formation in 1971. Mr. Walter also serves as a director of the American Express Company, a travel, financial and network services company, and Viacom Inc., a media company. Mr. Walter is the father of Matthew D. Walter, a director of the Company.

      George L. Fotiades President and Chief Operating Officer since February 2004; President and Chief Executive Officer — Life Sciences Products and Services, December 2002 to February 2004; Executive Vice President and President and Chief Operating Officer — Pharmaceutical Technologies and Services, November 2000 to December 2002; Executive Vice President and Group President of R.P. Scherer Corporation, a subsidiary of the Company, August 1998 to October 2000. Mr. Fotiades serves as a director of ProLogis.

      Jeffrey W. Henderson Executive Vice President and Chief Financial Officer since May 2005; Executive Vice President since April 2005; President and General Manager of Eli Lilly Canada, Inc., a subsidiary of Eli Lilly and Company, a pharmaceutical company, July 2003 to April 2005; Vice President and Corporate Controller of Eli Lilly and Company, January 2000 to July 2003.

      Ronald K. Labrum Chairman and Chief Executive Officer — Integrated Provider Solutions and Cardinal Health International since August 2004; President and Chief Executive Officer — Integrated Provider Solutions, February 2004 to August 2004; Executive Vice President and Group President — Medical Products and Services, November 2000 to February 2004; President, Manufacturing and Distribution of Allegiance, a subsidiary of the Company, — October 2000 to November 2000; Corporate Vice President, Regional Companies/Health Systems of Allegiance, January 1997 to October 2000.

      Joseph C. Papa Chairman and Chief Executive Officer — Pharmaceutical Technologies and Services since December 2004; President and Chief Operating Officer of Watson Pharmaceuticals, Inc., November 2001 to November 2004; President and Chief Operating Officer of DuPont Pharmaceuticals Company, February 2001 to November 2001; President of global country operations for North America of Pharmacia Corp., a pharmaceutical company, April 2000 to February 2001.

      Mark W. Parrish Chairman and Chief Executive Officer — Pharmaceutical Distribution and Provider Services since August 2004; Executive Vice President and Group President — Pharmaceutical Distribution, January 2003 to August 2004; President, Medicine Shoppe, a subsidiary of the Company, July 2001 to January 2003; Executive Vice President — Retail Sales and Marketing, June 1999 to July 2001.

      David L. Schlotterbeck Chairman and Chief Executive Officer — Clinical Technologies and Services since August 2004; President of Alaris, a subsidiary of the Company, June 2004 to August 2004; President and Chief Executive Officer and a director of Alaris, November 1999 to June 2004. Mr. Schlotterbeck also serves as a director of STAAR Surgical Company, an ophthalmic implant company.

      Jody R. Davids Executive Vice President and Chief Information Officer since March 2003; Senior Vice President — Information Technology — Pharmaceutical Distribution, January 2000 to March 2003.

      Gary D. Dolch Executive Vice President — Quality and Regulatory Affairs since December 2002; Senior Vice President of Quality and Regulatory Affairs of the American Red Cross, May 2001 to December 2002; Vice President, Quality Assurance for the pharmaceutical operations of BASF, a chemical company, under the Knoll name, April 1995 to May 2001.

      Brendan A. Ford Executive Vice President — Corporate Development, Interim General Counsel and Secretary since April 2005; Executive Vice President — Corporate Development since November 1999.

      Anthony J. Rucci Executive Vice President and President of Strategic Corporate Resources since August 2004; Executive Vice President and Chief Administrative Officer, January 2000 to August 2004.

      Daniel J. Walsh Executive Vice President and Chief Ethics and Compliance Officer since May 2005; Vice President and Chief Compliance Officer of Scientific-Atlanta Inc., a supplier of broadband products and related electronics equipment to the cable television and telephony industries, May 2003 to May 2005; various compliance roles, including Vice President, Audit and Compliance and Corporate Compliance Officer, TI Group PLC/Smiths Group PLC (TI and Smiths merged January 2001), a designer and manufacturer of safety critical systems and products for medical, industrial and aerospace customers, 1993 to May 2003.

      Carole S. Watkins Executive Vice President — Human Resources since August 2000; Senior Vice President — Human Resources — Pharmaceutical Distribution and Provider Services, February 2000 to August 2000.

PART II

Item 6: Selected Financial Data

     In connection with certain conclusions made by the Audit Committee during September and October 2004 as part of its internal review and prior to filing the 2004 Form 10-K, the Company made certain reclassification and restatement adjustments to its fiscal 2004 and prior historical consolidated financial statements, which were reflected in the 2004 Form 10-K. The following selected consolidated financial data reflects the impact of these adjustments.

     The selected consolidated financial data of the Company were prepared giving retroactive effect to the business combination with Bindley on February 14, 2001, which was accounted for as a pooling-of-interests transaction. The consolidated financial data include all purchase transactions as of the date of acquisition that occurred during these periods.

     The selected consolidated financial data below should be read in conjunction with the Company’s consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

CARDINAL HEALTH, INC. AND SUBSIDIARIES

Results of Operations

     The following summarizes the Company’s results of operations for the fiscal years ended June 30, 2005, 2004 and 2003.

     The results of operations during the fiscal years noted in the table above 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 from health care providers for the Company to provide integrated solutions. Integrated solutions include products and services from multiple lines of businesses within the Company, and currently represent approximately $7 billion of annual sales.

     The Company’s operations are organized into four reportable segments, Pharmaceutical Distribution and Provider Services, Medical Products and Services, Pharmaceutical Technologies and Services and Clinical Technologies and Services. See Note 18 of “Notes to Consolidated Financial Statements” for discussion of changes to business segments during fiscal 2005.

     The Company’s Pharmaceutical Distribution business is in a business model transition with respect to how it is compensated for the logistical, capital and administrative services that it provides to branded pharmaceutical manufacturers. Historically, the compensation received by the Pharmaceutical Distribution business from branded pharmaceutical manufacturers was based on each manufacturer’s unique sales practices (e.g., volume of product available for sale, eligibility to purchase product, cash discounts for prompt payment, rebates, etc.) and pharmaceutical pricing practices (e.g., the timing, frequency and magnitude of product price increases). Specifically, a significant portion of the compensation the Pharmaceutical Distribution business received from manufacturers was derived from the Company’s ability to purchase pharmaceutical inventory in advance of pharmaceutical price increases, hold that inventory as manufacturers increased pharmaceutical prices, and generate a higher operating margin on the subsequent sale of that inventory. This compensation system was dependent to a large degree upon the sales practices of each branded pharmaceutical manufacturer, including established policies concerning the volume of product available for purchase in advance of a price increase, and on predictable pharmaceutical pricing practices.

     Beginning in fiscal 2003, branded pharmaceutical manufacturers began to seek greater control over the amount of pharmaceutical product available in the supply chain, and, as a result, began to change their sales practices by restricting the volume of product available for purchase by pharmaceutical wholesalers. In addition, manufacturers have increasingly sought more services from the Company, including providing data concerning product sales and distribution patterns. The Company believes that the manufacturers have sought these changes to provide them with greater visibility over product demand and movement in the market and to increase product safety and integrity by reducing the risks associated with product being available to, and distributed in, the secondary market. These changes have significantly reduced the compensation received by the Company from branded pharmaceutical manufacturers. As a result of these actions by branded pharmaceutical manufacturers, the Company concluded it was no longer being adequately and consistently compensated for the reliable and consistent logistical, capital and administrative services being provided by the Company to these manufacturers.

     In response to the developments discussed above, the Company has established a compensation system that is significantly less dependent on manufacturers’ sales or pricing practices, and is based on the services provided by the Company to meet the unique distribution requirements of each manufacturer’s products. During fiscal 2005, the Company worked with individual branded pharmaceutical manufacturers to define fee-for-service terms that adequately compensate the Company based on the services being provided to such manufacturers. The initial fee-for-service transition is essentially complete, which should help reduce earnings volatility in the segment.

     As part of the transition to fee-for-service terms, certain of the new distribution service agreements entered into with branded pharmaceutical manufacturers continue to have an inflation-based compensation component to them. Arrangements with certain other branded manufacturers still continue to be solely inflation-based. If branded pharmaceutical price inflation is lower than the

Company has anticipated, its operating results could be adversely affected with respect to its current exposure to contingent fee-based compensation in its Pharmaceutical Distribution business. In addition, certain key distribution service agreements will be re-negotiated in the latter half of fiscal 2006 and into fiscal 2007 when their initial terms expire. If the terms of the re-negotiated agreements are unfavorable to the Company, it could adversely affect the Company’s operating results.

     Revenue and operating earnings within the Pyxis products business of the Clinical Technologies and Services segment declined significantly during fiscal 2005. The decline was a result of the following:

	•		a lengthened sales and installation cycle;
	•		the delayed introduction of Pyxis MedStation® 3000, the next generation of Pyxis’ medication management system;
	•		increased competition within the industry; and
	•		the impact from the Audit Committee’s internal review, as more fully described in Note 1 of “Notes to Consolidated Financial Statements,” which created execution issues as the efforts and attention of certain sales and installation teams were diverted from ordinary business operations.

The Company believes that these adverse conditions impacted the Pyxis products business in the short-term, and it remains confident in the long-term prospects for this business due to the expected efficiencies from the formation of the Clinical Technologies and Services segment, the greater efficiency to be realized from new installation processes and continuing customer demand for products and services focusing on patient safety. During the fourth quarter of fiscal 2005, the Pyxis products business established momentum for fiscal 2006 as evidenced by its increased committed contracts primarily for its new product, Pyxis MedStation 3000.

     Operating earnings within the Company’s Pharmaceutical Technologies and Services segment declined during fiscal 2005. The decline was due in part to the continued delays in opening new facilities and existing facilities operating below planned capacity within the Biotechnology and Sterile Life Sciences business, including the Humacao, Puerto Rico facility. The Company decided to close the sterile manufacturing facility in Humacao, Puerto Rico as part of the global restructuring program associated with its One Cardinal Health initiative. These operations had underperformed relative to Company expectations, due in part to continued regulatory issues at the facility. The decision does not affect the Company’s other operations in Puerto Rico or at other locations worldwide. In addition, the operating earnings decline within this segment was also the result of lower demand for medical communication services within the Healthcare Marketing Services business. The adverse conditions experienced by the segment were partially offset by the strength of certain softgel and controlled release products, as well as the year-over-year impact of acquisitions.

Global Restructuring Program

     As previously reported, during fiscal 2005, the Company launched a global restructuring program in connection with its One Cardinal Health initiative with the goal of increasing the value the Company provides its customers through better integration of existing businesses and improved efficiency from a more disciplined approach to procurement and resource allocation. The Company expects the program to be substantially complete by the end of fiscal 2008 and to improve operating earnings and position the Company for future growth. The actual operating earnings improvements for fiscal 2005 were estimated by the Company to have been in excess of the expected improvement of $125 million. The program is expected to improve operating earnings by approximately $190 million for fiscal 2006.

     The Company expects the program to be implemented in two phases. The first phase of the program focuses on business consolidations and process improvements, including rationalizing facilities worldwide, reducing the Company’s global workforce, and rationalizing and discontinuing overlapping and under-performing product lines. See the Form 8-K filed by the Company on December 14, 2004 for a description of the costs the Company expects to incur in connection with the first phase of the program.

     The second phase of the program will focus on longer term integration activities that will enhance service to customers through improved integration across the Company’s segments, and continue to streamline internal operations. See the Form 8-K filed by the Company on August 5, 2005 for a description of the costs the Company expects to incur in connection with the second phase of the program. See Notes 4 and 21 of “Notes to Consolidated Financial Statements” for discussion of the restructuring costs incurred by the Company during fiscal 2005 related to both phases of the global restructuring program.

Government Investigations and Board Committee Internal Reviews

     The Company is currently the subject of a formal investigation by the SEC relating to certain accounting matters and the U.S. Attorney for the Southern District of New York is conducting an inquiry with respect to the Company. The Company’s Audit Committee also is conducting its own internal review, assisted by independent counsel, which internal review is ongoing. In addition, a Board committee, with the assistance of independent counsel, is separately conducting an internal review to assign responsibility for the matters relating to the Company’s accounting treatment of certain recoveries from vitamin manufacturers, which internal review is also ongoing. Settlement discussions have recently commenced with the SEC regarding resolution of its investigation with respect to the Company, and the Company has recorded a reserve of $25 million for fiscal 2005 in respect of the SEC investigation. For further information regarding these matters, see “Part I, Item 3: Legal Proceedings” and Note 1 of “Notes to Consolidated Financial Statements” in this Form 10-K.

Product Safety

     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 the safety of the supply chain for pharmaceuticals and other health care products. The Company will continue to work proactively with all participants and regulators in the pharmaceutical supply chain to help ensure it is safe and efficient. The Company continues to work with its suppliers to help minimize the risks associated with counterfeit products in the supply chain.

Acquisitions

     On June 28, 2004, the Company acquired approximately 98.7% of the outstanding common stock of Alaris, a provider of intravenous medication safety products and services. On July 7, 2004, Alaris merged with a subsidiary of the Company to complete the transaction. The value of the transaction, including the assumption of Alaris’ debt, totaled approximately $2.1 billion. For further information regarding the Alaris acquisition, the valuation of the acquisition’s intangibles, and the impact on segment reporting, see Notes 4, 17 and 18 of “Notes to Consolidated Financial Statements.” Prior to the completion of the ALARIS acquisition, on June 16, 2004, ICU Medical, Inc. filed a patent infringement lawsuit against ALARIS in the United States District Court for the Southern District of California. In the lawsuit, ICU claims that the ALARIS SmartSite® family of needle-free values and systems infringes upon ICU patents. ICU seeks monetary damages plus permanent injunctive relief preventing ALARIS from selling SmartSite® products. On July 30, 2004, the Court denied ICU’s application for a preliminary injunction finding, among other things, that ICU had failed to show a substantial likelihood of success on the merits. The Company intends to vigorously defend this action.

     During December 2003, the Company completed its acquisition of Intercare, an European pharmaceutical products and services company. The cash transaction was valued at approximately $570 million, including the assumption of approximately $150 million in Intercare debt. See Note 18 of “Notes to Consolidated Financial Statements” for further information regarding the impact that this acquisition had on the Company’s segment reporting.

     During fiscal 2005, 2004 and 2003, the Company completed numerous acquisitions, including, Alaris, Intercare and Syncor. 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 areas that complement the Company’s existing operations and provide opportunities for the Company to develop synergies with, and strengthen, the acquired business. As the health care industry continues to change, the Company evaluates possible candidates for merger or acquisition and intends to take advantage of 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 the Company will be able to successfully take advantage of any such opportunity or consummate any such transaction, if pursued. To the extent that the Company continues to pursue acquisitions, its ability to complete such transactions may be adversely affected by the government investigations described under “Part I, Item 3: Legal Proceedings” and Note 1 of “Notes to Consolidated Financial Statements” in this Form 10-K. If additional transactions are pursued 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.

     The following table summarizes the revenue growth rates for the Company and its reportable segments, as well as the percent of Company revenue, excluding Corporate, each segment represents:

      Total Company. Total Company revenue increased 15% during each of fiscal 2005 and 2004. The revenue growth in these fiscal years resulted from the following:

	•		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 arrangements with health care providers that integrate the Company’s diverse offerings;
	•		the addition of new products;
	•		pharmaceutical price increases within its Pharmaceutical Distribution business averaging approximately 4.9% and 6.2%, respectively, during fiscal 2005 and 2004; and
	•		the year-over-year impact of acquisitions.

     These increases during fiscal 2005 were partially offset by slower revenue growth within the Pharmaceutical Technologies and Services segment and a decline in revenue from Pyxis products within the Clinical Technologies and Services segment.

      Pharmaceutical Distribution and Provider Services. The Pharmaceutical Distribution and Provider Services revenue growth of 16% in fiscal 2005 resulted from strong sales to customers within this segment’s core Pharmaceutical Distribution business. The most significant growth was in “Bulk Revenue” (defined below), which increased approximately 34%. See the Bulk Revenue discussion below for further details. In addition, annualized pharmaceutical price increases of approximately 4.9% contributed to the growth in this segment. However, the rate of price increases was lower than the rate experienced over the prior fiscal year.

     As discussed in Note 2 of “Notes to Consolidated Financial Statements” in this Form 10-K, during fiscal 2004, the Company decided to aggregate revenue classes. “Operating Revenue” and “Bulk Deliveries to Customer Warehouses and Other” were combined for all periods presented so that total revenue and total cost of products sold are presented as single amounts in the consolidated statements of earnings. Beginning with the 2004 Form 10-K, information concerning the portion of the Company’s revenue that arises from Bulk Revenue is discussed in the Company’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For more information regarding this reclassification, see Note 2 of “Notes to Consolidated Financial Statements.”

     The Pharmaceutical Distribution and Provider Services segment reports transactions with the following characteristics as “Bulk Revenue”:

	•		deliveries to customer warehouses whereby the Company acts as an intermediary in the ordering and delivery of pharmaceutical products;
	•		delivery of products to the customer in the same bulk form as the products are received from the manufacturer;
	•		warehouse to customer warehouse or process center deliveries; or
	•		deliveries to customers in large or high volume full case quantities.

     Bulk Revenue for fiscal 2005 was $24.1 billion compared to $18.0 billion in fiscal 2004. The increase in Bulk Revenue primarily relates to additional volume from existing and new customers as well as market growth within the mail order business. The increase from existing customers is primarily due to certain customers purchasing from the Company rather than directly from the manufacturer.

     The Company continues to provide disclosure concerning its bulk sales due to the differences in the nature and character of the business activities associated with bulk and non-bulk revenues. Non-bulk activities tend to be more complex as the Company receives inventory in large or full case sizes from the manufacturer, breaks it down into smaller sizes, warehouses the product, picks products specific to a customer’s order and delivers that order to customer locations (such as retail pharmacies or individual hospitals) generally on a just-in-time basis and in small sizes. While certain of the above activities occur with some bulk transactions, bulk typically involves much larger sizes, generally in unopened cases or full pallets, which are shipped either directly from the manufacturer or from the Company to customers’ own warehousing facilities.

     The Company’s classification of sales as bulk or non-bulk also corresponds to its four business operations within Pharmaceutical Distribution. Applying the definition set forth above, all revenue in the brokerage and trading operations is classified as bulk. All revenue in the repackaging operation is classified as non-bulk. Within the core facilities operation, revenue is classified as bulk or non-bulk on a customer-by-customer basis, based solely upon the type of customer involved. Shipments to warehouses and processing centers (primarily retail chain and mail order customers) are classified as bulk revenue. All other core facilities revenue is classified as non-bulk revenue.

     This segment’s revenue growth of 14% in fiscal 2004 resulted primarily from strong sales to existing customers, sales to new customers and pharmaceutical price increases. Sales growth to existing customers within the retail chain and alternate site categories in this segment’s Pharmaceutical Distribution business showed particular strength. This segment also benefited from contract wins during fiscal 2004, pharmaceutical price increases averaging approximately 6.2% during fiscal 2004 and an extra business day. These revenue gains were partially dampened by continued reduction in business with Kmart Holding Corp. (“Kmart”) due to Kmart’s closure of various stores and certain contract losses during fiscal 2004 in this segment’s Pharmaceutical Distribution business.

      Medical Products and Services. The Medical Products and Services revenue growth of 7% in fiscal 2005 resulted primarily from increased volume from existing customers, new contracts signed during fiscal 2004 within the medical-surgical distribution business, strong international growth, especially in Canada and Europe, favorable foreign exchange translation and increased revenue from the Specialty Distribution business. The 6% growth in the medical-surgical distribution business was primarily from increased sales to hospital supply and ambulatory care customers and the 11% growth within the Specialty Distribution business resulted from increased revenue from the business’ largest customer and growth of the existing customer base. This segment’s revenue growth was adversely affected by slower growth in the sale of self-manufactured products, and the loss of certain business from customers within a GPO.

     The Specialty Distribution business’ largest customer has notified the Company that they will begin self distribution on January 1, 2006 which will significantly impact revenue and operating earnings for this business during the second half of fiscal 2006. This customer represented approximately $1.5 billion or 16% of this segment’s fiscal 2005 revenue. The Company plans to partially mitigate this loss through the addition of a large, new customer agreement signed in April 2005 and cost cutting measures.

     This segment’s revenue growth of 14% in fiscal 2004 resulted primarily from increased sales momentum from new and existing contracts within the distribution business as well as from increased sales volume from the segment’s international businesses. New contracts drove increased sales of both distributed and self-manufactured products, with sales from the distribution business particularly strong during fiscal 2004. The international businesses also generated strong revenue growth, increasing nearly 19% from the prior fiscal year. Approximately 14% of the international business revenue growth related to

changes in foreign currency rates. Sales of new self-manufactured products, particularly enhancements within surgeon glove products, also contributed to the overall revenue growth. This segment’s revenue growth was above industry averages during fiscal 2004.

      Pharmaceutical Technologies and Services. The Pharmaceutical Technologies and Services segment’s revenue growth of 6% in fiscal 2005 resulted primarily from strong demand for certain softgel products, the impact of acquisitions, primarily Intercare and the acquisition of Geodax within the Nuclear Pharmacy Services business, and the impact of foreign exchange rates. Revenue growth was offset by certain regulatory issues as noted below. The net impact of acquisitions and divestitures within this segment accounted for approximately 5% of the revenue growth in fiscal 2005. Revenue in fiscal 2005 increased by approximately 2% as a result of the impact of foreign exchange rates. This impact takes into consideration the fiscal 2005 rate fluctuations due to the weakening of the U.S. dollar and the fiscal 2004 constant rate adjustment (see footnote 6 to the table in Note 18 of “Notes to Consolidated Financial Statements” for additional discussion as it relates to fiscal 2004 constant rate adjustment). The segment’s growth was adversely affected by the continued delays in opening new facilities and existing facilities operating below planned capacity within the Company’s Biotechnology and Sterile Life Sciences business, including underperformance at the Humacao, Puerto Rico facility. The segment’s growth was also adversely affected by lower demand for medical communication services within the Healthcare Marketing Services business.

     This segment’s revenue growth of 25% in fiscal 2004 resulted from acquisitions and sales momentum within the Pharmaceutical Development, Nuclear Pharmacy Services and Packaging Services businesses. Approximately 5% of this segment’s revenue growth was due to the inclusion of Intercare, an acquisition completed during December 2003. Intercare’s results of operations are not included in the prior period amounts. Intercare’s operations had considerable sales momentum after the acquisition was completed, particularly in the fourth quarter of fiscal 2004. Also, this segment’s revenue growth 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 fiscal 2003. Acquisitions within this segment accounted for approximately 23% of the revenue growth during fiscal 2004.

     This segment’s fiscal 2004 revenue growth was partially dampened by a delay in startup of commercial manufacturing of key sterile products from signed contracts as certain regulatory inspections and product approvals were delayed in the Biotechnology and Sterile Life Sciences business. Revenue growth was not impacted by foreign exchange fluctuations as the Company applied constant exchange rates to translate its foreign operations’ revenue into U.S. dollars. The impact of actual foreign exchange rate changes for translation purposes is retained within the Corporate segment (see footnote 6 of the table in Note 18 in “Notes to Consolidated Financial Statements”).

      Clinical Technologies and Services. The Clinical Technologies and Services revenue growth of 41% in fiscal 2005 resulted primarily from the impact of the acquisition of Alaris and strong revenue growth within the Clinical Services and Consulting business offset by significant revenue declines within the Pyxis products business. The Alaris acquisition accounted for approximately 41% of this segment’s total revenue growth for fiscal 2005. Alaris’ results of operations are not included in the prior period amounts. The Pyxis products business experienced a revenue decline of approximately 17% in fiscal 2005 due to the following:

	•		a lengthened sales and installation cycle;
	•		the delayed introduction of Pyxis MedStation® 3000, the next generation of Pyxis’ medication management system;
	•		increased competition within the industry; and
	•		the impact from the Audit Committee’s internal review, as more fully described in Note 1 of “Notes to Consolidated Financial Statements,” which created execution issues as the efforts and attention of certain sales and installation teams were diverted from ordinary business operations.

     The Company believes that these adverse conditions impacted the Pyxis products business’ in the short-term, and it remains confident in the long-term prospects for this business due to the expected efficiencies from the formation of the Clinical Technologies and Services segment, the greater efficiency to be realized from new installation processes and continuing customer demand for products and services focusing on patient safety. During the fourth quarter of fiscal 2005, the Pyxis products business established momentum for fiscal 2006 as evidenced by its increased committed contracts primarily for its new product, Pyxis MedStation 3000.

     In fiscal 2004, the Pyxis products business sold portions of its leased asset portfolio at the direction of Corporate. The proceeds were transferred to Corporate, and the Pyxis products business subsequently received a $21.0 million allocation from Corporate related to the estimated interest income that would have been earned had the associated lease portfolios not been sold. This allocation was recorded within revenue, consistent with the recording of interest income received from sales-type leases. Effective the first quarter of fiscal 2005, the Pyxis products business did not receive this Corporate allocation. See footnote 6 to the table in Note 18 of “Notes to Consolidated Financial Statements” for further details.

     The Clinical Technologies and Services segment’s revenue growth of 10% in fiscal 2004 is reflective of the premature revenue recognition adjustment resulting from the Audit Committee’s internal review as more fully described in Note 1 of “Notes to Consolidated Financial Statements.” Operationally, this segment’s revenue growth in fiscal 2004 included sales growth within the medication product lines (such as the Pyxis MedStation ^® system), the addition of new products and 12% growth within the Clinical Services and Consulting business. This segment was adversely affected by a softening of demand at the hospital level for Pyxis products. As discussed above, in order to aid in the comparability of this segment’s operating results, during fiscal 2004, the Company recorded a Corporate allocation adjustment to this segment’s revenue of $21.0 million representing an estimate of interest income this segment would have earned had the Company not completed sales of its lease receivables.

Operating Earnings

     Operating earnings for the Company and its reportable segments are as follows:

     The following table summarizes the operating earnings growth rates for the Company and its reportable segments, as well as the percent of Company operating earnings, excluding Corporate, each segment represents:

 

     Total Company operating earnings decreased 25% and increased 7% during fiscal 2005 and 2004, respectively. The following paragraphs provide a description of the varying dynamics affecting the total Company’s operating earnings for fiscal 2005 and 2004.

      Total Company. Total Company operating earnings decreased 25% during fiscal 2005 as a result of declining operating earnings in each of the Company’s reportable segments. The Company’s gross margins were dampened primarily by the following:

	•		reduced vendor margins within the Pharmaceutical Distribution business driven primarily by changes in branded pharmaceutical manufacturers’ sales and pricing practices (see the “Overview” section for further discussion) and competitive pricing;
	•		increased mix of lower-margin distribution business, competitive pricing and increased raw material and fuel costs within the Medical Products and Services segment;
	•		continued regulatory issues adversely affecting manufacturing efficiencies within the Pharmaceutical Technologies and Services segment; and
	•		a lengthened sales and installation cycle, new product launch delays and increased competition within the Pyxis products business in the Clinical Technologies and Services segment.

     Total Company operating earnings were also adversely affected by the unfavorable impact related to special items of $264.2 million in fiscal 2005. These increased costs related to the Company’s global restructuring program associated with its One Cardinal Health initiative, the SEC investigation and Audit Committee internal review and related matters and the integration of certain acquisitions, which were partially offset by settlements received in antitrust and vitamin litigation (see Note 4 of “Notes to Consolidated Financial Statements” for additional information).

     In addition, the Company recorded $118.0 million for asset impairments during fiscal 2005 compared to gains of $11.5 million in fiscal 2004 (see Note 21 of “Notes to Consolidated Financial Statements” for additional information). Total Company operating earnings for fiscal 2005 were also impacted by the following:

	•		the favorable impact of approximately $31.7 million from changes in the LIFO reserve, primarily due to price deflation within generic pharmaceutical inventories, lower inventory levels and lower price increases related to branded pharmaceutical inventories;
	•		an increase in profit sharing expense of approximately $38.9 million compared to fiscal 2004;
	•		an increase in incentive compensation expense of approximately $36.3 million compared to fiscal 2004;
	•		expenses of approximately $28.2 million within the Medical Products and Services segment related to the estimated remaining liabilities and settlement of insurance proceeds due for outstanding latex litigation;
	•		purchase accounting adjustments related to the Alaris acquisition, which included an inventory valuation adjustment to “fair value,” and the adjusted, higher cost inventory being sold, adversely affecting gross margins by approximately $23.6 million;
	•		product line rationalization and inventory and accounts receivable reserve adjustments within the Pyxis products business of approximately $30.3 million;
	•		an increase in inventory reserves within the Pharmaceutical Distribution and Provider Services segment of approximately $14.7 million related to a generic manufacturer’s bankruptcy and $10.0 million related to slow moving inventory; and
	•		an increase in audit and audit-related fees of approximately $7.5 million compared to fiscal 2004 due to increased costs associated with complying with the Sarbanes-Oxley Act of 2002, expanded audit procedures and a revision in the allocation of audit and audit-related fees to fiscal periods.

     Total Company operating earnings increased 7% during fiscal 2004 primarily as a result of the Company’s revenue growth of 15% during the same time period, which yielded a gross margin increase of 6%. Gross margins grew at a slower rate than revenue primarily as a result of the following:

	•		the continued dampening effect of reduced vendor margins and competitive pricing within the Pharmaceutical Distribution business driven by changes to its business model (see the “Overview” section for further discussion);
	•		an increased mix of lower-margin distribution business within the Medical Products and Services segment;
	•		an increased mix of lower margin business, primarily Nuclear Pharmacy Services business, within the Pharmaceutical Technologies and Services segment; and
	•		competitive product and pricing actions within the Clinical Technologies and Services segment.

     The overall increase in gross margin in fiscal 2004 reflects the increased contributions from the Company’s operating segments outside of the Pharmaceutical Distribution and Provider Services segment, which generate higher gross margins and operating earnings (as a percentage of revenue). These segments accounted for more than one-half of the Company’s operating earnings. Acquisitions completed by the Company accounted for approximately 3% of the operating earnings growth.

     The increases in revenue and gross margin were partially offset by a 4% increase in selling, general and administrative expenses during fiscal 2004 as well as an increase of $17.5 million in the Company’s special items. The overall increase in operating expenses was primarily a result of the additional expenses resulting from acquisitions, higher personnel costs associated with overall business growth and an increase in depreciation and amortization costs. Additionally, the Company continued to invest in research and development and strategic initiatives that will benefit future periods. Investments of approximately $115 million in fiscal 2004 were charged against current operating earnings as incurred. These increases in selling, general and administrative expenses were offset partially by a reduction versus the prior fiscal year in incentive compensation expenses of approximately $64 million due to the performance of the Company’s consolidated operations relative to management’s expectations and established financial performance metrics. Such reduction affected all of the Company’s business segments. The expense increases were also offset by adjustments of certain trade receivable reserves and lower bad debt expenses, with a combined impact of approximately $10 million, due to changes in customer-specific credit exposures and improvements in customer credit, billing and collection processes yielding significant reductions in past due and uncollectible accounts. In addition, operating earnings included $11.5 million of net gains on the sale of certain businesses and assets which were recorded in “impairment charges and other.”

      Pharmaceutical Distribution and Provider Services. The Pharmaceutical Distribution and Provider Services operating earnings decreased 2% during fiscal 2005 primarily as a result of reduced vendor margins resulting from changes in branded pharmaceutical manufacturers’ sales and pricing practices, as discussed above in the “Overview” section, and competitive pricing pressures. As discussed above, branded pharmaceutical manufacturers have changed their sales practices by restricting product available for purchase by pharmaceutical wholesalers. In addition, branded pharmaceutical manufacturers’ product pricing practices have become less predictable, as the frequency of price increases has slowed and the amounts have decreased versus historical levels. For fiscal 2005, annualized pharmaceutical price increases were approximately 4.9% compared to 6.2% in fiscal 2004. During fiscal 2005, the Company worked with individual branded pharmaceutical manufacturers to define fee-for-service terms that adequately compensate the Company based on the services being provided to such manufacturers. The initial fee-for-service transition is essentially complete, which should help reduce earnings volatility in the segment.

     This segment’s operating earnings were also favorably impacted by $31.7 million from changes in the LIFO reserve primarily due to price deflation within generic pharmaceutical inventories, lower inventory levels and lower price increases related to branded pharmaceutical inventories. Operating earnings were also impacted by improved margins from generic products and expense control within the Pharmaceutical Distribution business which resulted in lowering selling, general and administrative expenses as a percentage of sales. In addition, operating earnings during fiscal 2005 were adversely impacted by approximately $14.7 million for inventory reserves related to a generic manufacturer’s bankruptcy, approximately $10.0 million related to slow moving inventory reserves and approximately $7.8 million as a result of inventory rationalization of certain health and beauty care products.

     This segment’s operating earnings decreased 2% during fiscal 2004 primarily due to reduced vendor margins caused by the changing business model within the Pharmaceutical Distribution business (as further described in the “Overview” section) and the impact of competitive pricing. Other adjustments within the Pharmaceutical Distribution business that negatively impacted this segment in fiscal 2004 included an increase in inventory valuation and vendor dispute reserves in the fourth quarter of approximately $11.7 million and an adverse adjustment in the third quarter of approximately $9.2 million for vendor margins. In addition, one of several aspects of the business model transition adversely impacting Pharmaceutical Distribution’s year-over-year operating earnings was the change in estimation of vendor margin with generic, health and beauty products and pharmaceutical manufacturers with an impact of approximately $15.3 million. These declines were partially offset by the following:

	•		segment revenue growth of 14% coupled with expense control;
	•		a change in accounting for cash discounts resulting in additional gross margin of $20.0 million in fiscal 2004 (see additional discussion of the accounting change in Note 16 of “Notes to Consolidated Financial Statements”);
	•		a favorable year-over-year impact of $14.7 million from changes in LIFO reserve;
	•		a favorable year-over-year impact of lower incentive compensation expense;
	•		a favorable year-over-year impact of certain non-recurring expenses recorded in fiscal 2003 relating to operations from the Bindley acquisition; and
	•		a favorable year-over-year impact of $34 million charge recorded in fiscal 2003 relating to the segment’s vendor margins with its generic suppliers.

      Medical Products and Services. The Medical Products and Services segment’s operating earnings decreased 3% during fiscal 2005 primarily as a result of pricing pressures related to self-manufactured products, increased raw material and fuel costs, an increased mix of lower margin distributed products, and competitive pricing on a large GPO contract. Operating earnings were also adversely impacted by a $28.2 million charge for latex litigation as more fully described within Note 11 of “Notes to Consolidated Financial Statements.” Selling, general and administrative expenses grew 10% during fiscal 2005 primarily due to the charge for latex litigation described above and higher personnel costs associated with the overall business growth. These items were partially offset by revenue growth of 7%, manufacturing efficiencies, expense control related to the Company’s global restructuring program and incremental operating earnings from new customers.

     This segment’s operating earnings growth of 11% during fiscal 2004 resulted primarily from revenue growth of 14% during the same time period, led by sales momentum from distribution contracts and gains within international markets. This segment also realized manufacturing productivity improvements resulting in gross margin gains. In addition, operating earnings benefited from lower incentive compensation expense versus prior year. This segment’s operating earnings growth was partially dampened by the increased mix of lower margin distributed products, competitive pricing within the industry and an increase of approximately $9 million in raw material prices.

      Pharmaceutical Technologies and Services. The Pharmaceutical Technologies and Services segment’s operating earnings decreased 28% during fiscal 2005 primarily due to the continued delays in opening new facilities and existing facilities operating below planned capacity within the Company’s Biotechnology and Sterile Life Sciences business, including underperformance at the Humacao, Puerto Rico facility. During the fourth quarter of fiscal 2005, the Company decided to close the sterile manufacturing facility in Humacao, Puerto Rico as part of its global restructuring program. These operations had underperformed relative to Company expectations, due in part to continued regulatory issues at the facility. The decision does not affect the Company’s other operations in Puerto Rico or at other locations worldwide.

     In addition, the operating earnings in this segment’s Healthcare Marketing Services business were adversely affected by lower demand for medical communication services. Operating earnings were also adversely impacted by approximately $8.0 million related to the write down of inventory within the Biotechnology and Sterile Life Sciences business. The operating earnings declines were partially offset by the strength of certain softgel and controlled release products, and the year-over-year impact of acquisitions of approximately 6%. The impact of foreign exchange rates on operating earnings did not significantly affect the fiscal 2005 growth rates above. This takes into consideration the fiscal 2005 rate fluctuations due to the weakening of the U.S. dollar and the fiscal 2004 constant rate adjustment. See footnote 6 to the table in Note 18 of “Notes to Consolidated Financial Statements” for additional discussion as it relates to the fiscal 2004 constant rate adjustment and the change made in fiscal 2005.

     This segment’s operating earnings growth of 26% during fiscal 2004 resulted primarily from revenue growth of 25% during the same time period, with sales momentum in the Pharmaceutical Development, Nuclear Pharmacy Services and Packaging Services businesses showing particular strength. This segment also benefited from acquisitions completed by the Company, specifically Intercare and Syncor. The acquisition of Intercare was completed during the second quarter fiscal 2004 and, therefore, its results of operations are not included in the prior period. Also, Syncor’s results of operations are not included in the first half of fiscal 2003 because the acquisition was completed on January 1, 2003. Acquisitions within this segment accounted for approximately 18% of the operating earnings growth during fiscal 2004.

     This segment’s gross margin as a percentage of revenue was negatively impacted by the increase in services provided by the Nuclear Pharmacy Services business, which has a lower gross margin ratio as compared to the other businesses within this segment. The segment’s operating earnings also benefited year-over-year by reduced incentive compensation expenses. Operating earnings growth was dampened by the delay in startup of commercial manufacturing of certain sterile products as discussed in this segment’s Revenue discussion. In addition, this segment’s fiscal 2004 operating earnings growth was not impacted by foreign exchange fluctuations as the Company applied constant exchange rates to translate its foreign operations’ operating earnings into U.S. dollars. The impact of actual foreign exchange rate changes for translation purposes was retained within the Corporate segment in fiscal 2004. See footnote 6 to the table in Note 18 in “Notes to Consolidated Financial Statements” for additional discussion as it relates to the fiscal 2004 constant rate adjustment and the change made in fiscal 2005.

      Clinical Technologies and Services. The Clinical Technologies and Services segment’s operating earnings decreased 19% during fiscal 2005 primarily from decreased operating earnings within the Pyxis products business that were not completely offset by the acquisition benefit from the Alaris transaction. The Pyxis products business performance was impacted by:

	•		decreased revenue of 17% for fiscal 2005;
	•		lower unit margins due to adverse year-over-year sales mix;
	•		more aggressive price discounting in the market place;.
	•		a product line rationalization and inventory and accounts receivable reserve adjustments of approximately $30.3 million; and
	•		the positive segment allocation adjustments recorded during fiscal 2004 of $21 million for the estimated interest income that the business would have earned from assets sold as part of the leased asset portfolio sales (which proceeds from such sales were returned to Corporate for general corporate requirements).

     The Alaris acquisition improved operating earnings by approximately 26% for fiscal 2005. The results of operations from this acquisition are not included in the prior period amounts. Operating results from Alaris, while incremental to the segment’s results year-over-year, were adversely impacted by the effect of purchase accounting adjustments recorded during the first two quarters of fiscal 2005. These adjustments included an inventory valuation adjustment to “fair value” and the adjusted, higher cost inventory being sold, which adversely affected gross margins by approximately $23.6 million.

     This segment’s operating earnings growth of 6% during fiscal 2004 was impacted by the premature revenue recognition adjustment resulting from the Audit Committee’s internal review as more fully described in Note 1 of “Notes to Consolidated Financial Statements.” This segment’s operating earnings growth during fiscal 2004 resulted, in part, from this segment’s revenue growth of 10% during the same time period in conjunction with operational improvements within the Pyxis products business and expense control within the Clinical Services and Consulting business. In addition, this segment benefited from a reduction in receivable reserves and lower bad debt expenses, with a combined impact of approximately $8.2 million, due to improvements in customer-specific credit matters and general improvements in customer credit, billing and collection procedures, resulting in significant reductions in past due and uncollectible accounts.

     The segment’s fiscal 2004 operating earnings also benefited year-over-year from reduced incentive compensation expenses and a Corporate expense allocation of $1.5 million. As mentioned in this segment’s revenue discussion, the Company recorded, for comparative purposes, a Corporate allocation of $21.0 million to this segment representing estimated interest income this segment would have earned had the Company not initiated the sale of its lease receivables. See this segment’s discussion under “Revenue” for additional information regarding this allocation entry in fiscal 2004.

Impairment Charges and Other

     See Note 21 of “Notes to Consolidated Financial Statements” for additional information regarding “impairment charges and other.”

Special Items

     The following is a summary of the Company’s special items:

     See Note 4 of “Notes to Consolidated Financial Statements” for detail of the Company’s special items during fiscal 2005, 2004 and 2003.

Interest Expense and Other

     “Interest expense and other” increased $23.1 million during fiscal 2005 primarily from increased interest expense of $54.8 million due to increased borrowing levels and rates. The Company manages its exposure to interest rates using various hedging strategies (see Notes 3 and 7 in “Notes to Consolidated Financial Statements”). The $54.8 million increase in interest expense during fiscal 2005 was partially offset by the Company recording the minority interest impact of approximately $19.4 million for certain impairment charges within the Pharmaceutical Technologies and Services segment’s Oral Technologies business. These impairment charges were recorded within “impairment charges and other” on the consolidated statements of earnings during fiscal 2005. See Note 21 of “Notes to Consolidated Financial Statements” for additional information regarding “impairment charges and other.”

     The increase in “interest expense and other” of $4.1 million during fiscal 2004 resulted primarily from the adverse year-over year impact of foreign exchange rates and the impact of a gain recognized in fiscal 2003 related to a speculative interest rate swap transaction, which were partially offset by decreased interest expense.

Provision for Income Taxes

     The provisions for income taxes relative to earnings before income taxes, discontinued operations and cumulative effect of changes in accounting were 35.8% of pretax earnings in fiscal 2005, 31.9% in fiscal 2004 and 33.6% in fiscal 2003. The effective tax rate for fiscal year 2005 includes tax expense related to a planned repatriation of foreign earnings as provided for in the American Jobs Creation Act of 2004 (the “AJCA”) (see the following paragraph). Generally, fluctuations in the effective tax rate are due to changes within state and foreign effective tax rates resulting from the Company’s business mix and changes in the tax impact of special items, which may have unique tax implications depending on the nature of the item and the taxing jurisdiction. The Company’s effective tax rate reflects tax benefits derived from increasing operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35%. The Company has subsidiaries operating in Puerto Rico under a tax incentive agreement expiring in 2019, as well as a tax agreement in place with Thailand that expires in 2013.

     On October 22, 2004, the AJCA was signed into law. A provision of the AJCA creates a temporary incentive for U.S. corporations to repatriate undistributed income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. During the fourth quarter of fiscal 2005, the Company determined that it will repatriate $500 million of accumulated foreign earnings in fiscal 2006 pursuant to the repatriation provisions of the AJCA, and accordingly has recorded a related tax liability of $26.3 million as of June 30, 2005. The $500 million is the maximum repatriation available to the Company under the repatriation provisions of the AJCA. See Note 8 of “Notes to Consolidated Financial Statements” for additional information.

Earnings/(Loss) from Discontinued Operations

     See Note 22 in “Notes to Consolidated Financial Statements” for information on the Company’s discontinued operations.

CRITICAL ACCOUNTING POLICIES AND SENSITIVE ACCOUNTING ESTIMATES

     Critical accounting policies are those accounting policies that can have a significant impact on the presentation of the Company’s financial condition and results of operations, and require use of complex and subjective estimates based upon past experience and management’s judgment. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Below are those policies applied in preparing the Company’s consolidated financial statements that management believes are the most dependent on the application of estimates and assumptions. For additional accounting policies, see Note 3 of “Notes to Consolidated Financial Statements.”

Allowance for doubtful accounts. Trade receivables are amounts owed to the Company through its operating activities and are presented net of an allowance for doubtful accounts. The Company also provides financing to various customers. Such financing arrangements range from one to ten years at interest rates that generally are subject to fluctuation. These financings may be collateralized, guaranteed by third parties or unsecured. Finance notes and accrued interest receivables are recorded net of an allowance for doubtful accounts and are included in other assets. Extending credit terms and calculating the required allowance for doubtful accounts involve the use of judgment by the Company’s management.

     In determining the appropriate allowance for doubtful accounts, which includes general and specific reserves, the Company reviews accounts receivable agings, industry trends, customer financial strength, credit standing, historical write-off trends and payment history to assess the probability of collection. The Company continuously monitors the collectibility of its receivable portfolio by analyzing the aging of its accounts receivable, assessing credit worthiness of its customers and evaluating the impact of changes in economic conditions that may impact credit risks. If the frequency or severity of customer defaults increases due to changes in customers’ financial condition or general economic conditions, the Company’s allowance for uncollectible accounts may require adjustment.

     The allowance for doubtful accounts as a percentage of customer receivables was 2.9% and 3.3% at June 30, 2005 and 2004, respectively. The decrease was a result of adjustments to certain trade receivable reserves due to changes in customer-specific credit exposures, historical write-off trends, and improvements in customer credit, billing and collections processes. A hypothetical 0.1% increase or decrease in the reserve as a percentage of trade receivables to the fiscal 2005 reserve would result in an increase or decrease in bad debt expense of approximately $4.4 million. The Company believes the reserve maintained and expenses recorded in fiscal year 2005 are appropriate and consistent with historical methodologies employed. The total reserve at June 30, 2005 and 2004 exceeds the total Company receivable balance greater than 60 days past due at those same dates. See Schedule II included in this Form 10-K which includes a rollforward of activity for these allowance reserves.

Inventories. A substantial portion of inventories (approximately 67% in 2005 and 66% in 2004) are stated at the lower of cost, using the LIFO method, or market. These inventories are included within the core distribution facilities within the Company’s Pharmaceutical Distribution business and are primarily merchandise inventories. The remaining inventory is primarily stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or market. If the Company had used the FIFO method of inventory valuation, which approximates current replacement cost, inventories would have increased $26.0 million and $57.8 million in fiscal 2005 and 2004, respectively.

     Below is a reconciliation of FIFO inventory to LIFO inventory:

     Inventories recorded on the Company’s consolidated balance sheets are net of reserves for excess and obsolete inventory. The Company reserves for inventory obsolescence using estimates based on historical experiences, sales trends, specific categories of inventory and age of on-hand inventory. If actual conditions are less favorable than the Company’s assumptions, additional inventory reserves may be required, however these would not be expected to have a material adverse impact on the Company’s consolidated financial statements.

Goodwill. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets.” Under SFAS No. 142, purchased goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually or when indicators of impairment exist. Accordingly, the Company does not amortize goodwill and intangible assets with indefinite lives. Intangible assets with finite lives, primarily customer relationships and patents and trademarks, continue to be amortized over their useful lives.

     In conducting the impairment test, the fair value of the Company’s reporting units is compared to its carrying amount including goodwill. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysis is performed to assess impairment.

     The Company’s impairment analysis is based on a review of the price/earnings ratio for publicly traded companies similar in nature, scope and size or a discounted cash flow analysis. The use of alternative estimates, peer groups or changes in the industry could affect the estimated fair value of the assets and potentially result in impairment. Any identified impairment would result in adjustment to the Company’s results of operations. The Company performed its annual impairment tests in fiscal 2005 and 2004, neither of which resulted in the recognition of any impairment charges. See Note 17 of “Notes to Consolidated Financial Statements” for additional information regarding goodwill.

Business Combinations. Assumptions and estimates are used in determining the fair value of assets acquired and liabilities assumed in a business combination. A significant portion of the purchase price in many of the Company’s acquisitions is assigned to intangible assets which require management to use significant judgment in determining fair value. The Company typically utilizes third-party valuation experts (“Valuation Experts”) for this process. In addition, current and future amortization expense for such intangibles is impacted by purchase price allocations as well as the assessment of estimated useful lives of such intangibles, excluding goodwill. The Company believes the assets recorded and the useful lives established are appropriate based upon current facts and circumstances.

     In conjunction with the review of a transaction, the Valuation Experts assess the status of the acquired company’s research and development projects to determine the existence of in-process research and development (“IPR&D”). The Company has not historically recorded significant costs related to IPR&D. However, in conjunction with the acquisition of Alaris, the Company was

required to estimate the fair value of acquired IPR&D which required selecting an appropriate discount rate and estimating future cash flows for each project. Management also assessed the current status of development, nature and timing of efforts to complete such development, uncertainties and other factors when estimating the fair value. Costs were not assigned to IPR&D unless future development was probable. Once the fair value was determined, an asset was established and, as required by GAAP immediately written-off as a special item in the Company’s consolidated statement of earnings. The Company recorded $12.7 million as a special item in fiscal 2004 representing an estimate of Alaris’ IPR&D (see Note 4 of “Notes to Consolidated Financial Statements”).

Special Items. The Company’s special items consist primarily of costs that relate to the integration of previously acquired companies or costs of restructuring operations to improve productivity. Integration costs from acquisitions accounted for under the pooling of interests method have been recorded in accordance with Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring),” and SEC Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges.” Certain costs related to these acquisitions, such as employee and lease terminations and other facility exit costs, were recognized at the date the integration plan was adopted by management. Certain other integration costs that did not meet the criteria for accrual at the commitment date have been expensed as the integration plan has been implemented.

     The costs associated with integrating acquired companies under the purchase method are recorded in accordance with EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” Certain costs to be incurred by the Company, as the acquirer, such as employee and lease terminations and other facility exit costs, are recognized at the date the integration plan is committed to and adopted by management. Certain other integration costs that do not meet the criteria for accrual at the commitment date are expensed as the integration plan is implemented.

     At the beginning of the third quarter fiscal 2003, the Company implemented SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” to account for costs incurred in restructuring activities. Under this standard, a liability for most types of exit costs is recognized as incurred. As discussed above, the Company previously accounted for costs associated with restructuring activities under EITF Issue No. 94-3, which required the Company to recognize a liability for restructuring costs on the date of the commitment to an exit plan.

     The majority of the special items related to acquisitions and restructurings can be classified in one of the following categories: employee-related costs, exit costs (including lease termination costs), asset impairments and other integration costs. Employee costs include severance and termination benefits. Lease termination costs include lease cancellation fees, forfeited deposits and remaining payments due under existing lease agreements less estimated sublease income. Other facility exit costs include costs to move equipment or inventory out of a facility as well as other costs incurred to shut down a facility. Asset impairment costs include the reduction in value of the Company’s assets as a result of the integration or restructuring activities. Other integration costs primarily include charges directly related to the integration plan such as consulting costs related to information systems and employee benefit plans as well as relocation and travel costs directly associated with the integration plan.

     The Company also records settlements of significant lawsuits that are infrequent, non-recurring or unusual in nature as special items. In addition, costs related to legal fees and document preservation and production costs incurred in connection with the SEC investigation and the Audit Committee internal review and related matters are also classified as special items. See Note 4 of “Notes to Consolidated Financial Statements” for additional information.

Vendor Reserves. In determining an appropriate vendor reserve, the Company assesses historical experience and current outstanding claims. The Company researches and resolves contested transactions based on discussions with vendors, Company policy and findings of research performed. At any given time, there are outstanding items in various stages of research and resolution. The ultimate outcome of certain claims may be different than the Company’s original estimate and may require adjustment. However, the Company believes reserves recorded for such disputes are adequate based upon current facts and circumstances.

Income Tax Reserves. The Company has established an estimated liability for federal, state and foreign income tax exposures that arise and meet the criteria for accrual under SFAS No. 5, “Accounting for Contingencies.” This liability addresses a number of issues for which the Company may have to pay additional taxes (and interest) when all examinations by taxing authorities are concluded.

     The Company has developed a methodology for estimating its tax liability related to such matters and has consistently followed such methodology from period to period. The liability amounts for such matters are based on an evaluation of the underlying facts and circumstances, a thorough research of the technical merits of the Company’s arguments, and an assessment of the probability of the Company prevailing in its arguments. In all cases, the Company considers previous findings of the Internal Revenue Service and other taxing authorities. The Company generally consults with external tax advisers in reaching its

conclusions. Amounts accrued for a particular period are not adjusted upward or downward unless a significant change in facts or circumstances has occurred and been formally documented.

Loss Contingencies. The Company accrues for contingencies related to litigation in accordance with SFAS No. 5, which requires the Company to assess contingencies to determine degree of probability and range of possible settlement. An estimated loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the settlement can be reasonably estimated. Assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The amount of ultimate settlement may differ from these estimates.

Self Insurance Accruals. The Company is self-insured for employee medical and dental insurance programs. The Company had recorded liabilities totaling $26.0 million and $23.0 million for estimated costs related to outstanding claims at June 30, 2005 and 2004, respectively. These costs include an estimate for expected settlements on pending claims, administrative fees and an estimate for claims incurred but not reported. These estimates are based on the Company’s assessment of outstanding claims, historical analysis and current payment trends. The Company records an estimate for the claims incurred but not reported using an estimated lag period. This lag period assumption has been consistently applied for the periods presented. If the lag period was hypothetically adjusted by a period equal to a half month, the impact on earnings would be $5.5 million. However, the Company believes the liabilities recorded are adequate based upon current facts and circumstances.

     The Company has certain deductibles or is self-insured for various claims including general liability, product, pharmacist professional, auto and workers’ compensation. The Company had recorded liabilities totaling $66.4 million and $48.0 million for anticipated costs related to general liability and workers’ compensation at June 30, 2005 and 2004, respectively. These costs include an estimate for expected settlements on pending claims, defense costs and an estimate for claims incurred but not reported. These estimates are based on the Company’s assessment of outstanding claims, historical analysis, actuarial information and current payment trends. The amount of ultimate liability in respect to these matters may differ from these estimates.

economic consideration was exchanged between the parties. The Company’s overall investment in inventories declined during fiscal 2004 as compared to fiscal 2003 due primarily to the changing business model of the Pharmaceutical Distribution business (see the “Overview” section earlier within “Management’s Discussion and Analysis of Financial Condition and Results of Operations”). For further discussion of changes in the Company’s earnings from continuing operations, see the “Results of Operations” section. Additionally, the Company’s operating cash flow benefited by approximately $99.3 million during fiscal 2004 due to sales of lease receivables from the Company’s Clinical Technologies and Services segment. See Note 10 in “Notes to Consolidated Financial Statements” for information regarding sales of lease receivables.

      Investing activities. Cash used in investing activities during fiscal 2005, 2004 and 2003 primarily represents the Company’s use of cash to complete acquisitions which expand its role as a provider of services to the health care industry (see “Acquisitions and Divestitures” within “Part I, Item 1: Business” for further information regarding the Company’s acquisitions) and capital spending to develop and enhance the Company’s infrastructure, including facilities, information systems and other machinery and equipment. During fiscal 2005, the majority of the cash used in investing activities related to capital spending and costs associated with the acquisition of Alaris and Geodax. The majority of the cash used in investing activities during fiscal 2004 was related to costs associated with the acquisitions of Alaris, Intercare and Medicap. During fiscal 2005, cash used in investing activities included approximately $99.8 million related to the purchase of investment securities available for sale. See Note 23 of “Notes to Consolidated Financial Statements” for information on the Company’s investments. Cash used in investing activities during fiscal 2005 also includes cash proceeds of approximately $47.4 million which the Company received related to the sale of discontinued operations. See Note 22 of “Notes to Consolidated Financial Statements” for information on the Company’s discontinued operations.

      Financing activities. The Company’s financing activities utilized cash of $1,657.1 million, $815.7 million and $712.3 million during fiscal 2005, 2004 and 2003, respectively. Cash used in financing activities during fiscal 2005 primarily reflects the Company’s decisions to retire its commercial paper and certain debt assumed in the Alaris acquisition and repurchase its Common Shares as authorized by its Board of Directors (see “Share Repurchases” below for additional information). During fiscal 2005, the Company utilized $500.3 million to repurchase its Common Shares. Cash used in financing activities during fiscal 2004 and 2003 primarily reflects the Company’s decision to repurchase its shares as authorized by its Board of Directors. These cash outflows for fiscal 2004 and 2003 were partially offset by net proceeds received from the Company’s debt facilities and proceeds received from shares issued under various employee stock plans.

International Cash

     The Company’s cash balance of approximately $1.4 billion as of June 30, 2005, includes $511.8 million of cash held by its subsidiaries outside of the United States. Although the vast majority of cash held outside the United States is available for repatriation, doing so subjects it to United States federal income tax.

     During the fourth quarter of fiscal 2005, the Company determined that it will repatriate $500 million of accumulated foreign earnings in fiscal 2006 pursuant to the repatriation provisions of the AJCA, and accordingly has recorded a related tax liability of $26.3 million as of June 30, 2005. The $500 million is the maximum repatriation available to the Company under the repatriation provisions of the AJCA. See Note 8 of “Notes to Consolidated Financial Statements” for additional information.

Share Repurchases

     During fiscal 2005, 2004 and 2003, the Company’s Board of Directors approved, and management completed, several share repurchase programs. The Company repurchased approximately $3.2 billion of the Company’s shares, in the aggregate, through these share repurchase programs. During fiscal 2005, the Company repurchased approximately 8.8 million shares having an average price paid per share of $56.76. During fiscal 2004, the Company repurchased approximately 24.2 million shares having an average price paid per share of $62.03. During fiscal 2003, the Company repurchased approximately 19.6 million shares having an average price paid per share of $60.77. The repurchased shares were placed into treasury to be used for general corporate purposes. See “Issuer Purchases of Equity Securities” within “Part I, Item 5: Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further information regarding the Company’s most recent share repurchase program.

Capital Resources

     In addition to cash, the Company’s sources of liquidity include a $1.5 billion commercial paper program backed by $1.5 billion of bank revolving credit facilities, a $150 million extendible commercial note program and a committed receivables sales facility program with capacity to sell $800 million in receivables. As of June 30, 2005, the Company did not have any outstanding borrowings from the commercial paper program. The Company also has other short-term credit facilities of approximately $322.7 million, of which $136.0 million was outstanding as of June 30, 2005. For more information regarding the committed receivables sales facility program, see Note 10 of “Notes to Consolidated Financial Statements.”

     The Company maintains two $750 million bank revolving credit facilities. These facilities are available for general corporate

purposes; however, they are primarily used as backstop liquidity for the Company’s commercial paper program. During the first quarter of fiscal 2005, the Company borrowed $500 million on its revolving credit facilities. The proceeds of this borrowing were utilized to repay a portion of the Company’s commercial paper and for general corporate purposes, including the establishment of pharmaceutical inventory at the Pharmaceutical Distribution business’ National Logistics Center in Groveport, Ohio. During the second quarter of fiscal 2005, the Company borrowed an additional $750 million on the revolving credit facilities, with the proceeds utilized primarily for the establishment of inventory at the National Logistics Center. The Company fully repaid the $1.25 billion in outstanding balances under its bank revolving credit facilities during the second quarter of fiscal 2005 due to stabilization in its short-term liquidity requirements in light of, among other things, the Company having substantially completed the initial establishment of inventory at the National Logistics Center.

     During fiscal 2005, the Company retired $300 million in 4.45% Notes which matured in 2005. Also during fiscal 2005, the Company paid off $183.6 million of the $195.3 million Senior subordinated notes due 2011 assumed as part of the Company’s acquisition of Alaris in fiscal 2004. The Company also amended the bond indenture to remove the restrictive covenants. The remaining balance at June 30, 2005 of $11.6 million is callable at any time on or after July 1, 2007. Also related to the Alaris acquisition, the Company acquired a bank credit facility consisting of a six-year $245 million term loan and a five-year $30 million revolving credit facility. At June 30, 2004, $162.6 million was outstanding under the term loan. During fiscal 2005, the Company paid off the $162.6 million balance under the term loan and terminated the credit facility.

     During fiscal 2004, the Company retired two series of $100 million Notes which matured in 2004.

     During fiscal 2001, the Company entered into an agreement to periodically sell trade receivables to a special purpose accounts receivable and financing entity (the “Accounts Receivable and Financing Entity”), which is exclusively engaged in purchasing trade receivables from, and making loans to, the Company. The Accounts Receivable and Financing Entity, which is consolidated by the Company as it is the primary beneficiary of the variable interest entity, issued $250 million and $400 million in preferred variable debt securities to parties not affiliated with the Company during fiscal 2004 and 2001, respectively. These preferred debt securities are classified as long-term debt in the Company’s consolidated balance sheet. These preferred debt securities must be retired or redeemed by the Accounts Receivable and Financing Entity before the Company, or its creditors, can have access to the Accounts Receivable and Financing Entity’s receivables.

     From time to time, the Company considers and engages in acquisition transactions in order to expand its role as a leading provider of services to the health care industry. The Company evaluates possible candidates for merger or acquisition and intends to take advantage of opportunities to expand its role as a provider of services to the health care industry through all its reporting segments. If additional transactions are entered into or consummated, the Company may need to enter into funding arrangements for such mergers or acquisitions.

     The Company currently believes that, based upon existing cash, operating cash flows, available capital resources (as discussed above) and other available market transactions, it has adequate capital resources at its disposal to fund currently anticipated capital expenditures, business growth and expansion, contractual obligations and current and projected debt service requirements, including those related to business combinations.

Debt Ratings/Covenants

     The Company’s senior debt credit ratings from S&P, Moody’s and Fitch are BBB, Baa3 and BBB+, respectively, the commercial paper ratings are A-3, P-3 and F2, respectively, and the ratings outlooks are “negative,” “stable” and “negative,” respectively. Although a ratings downgrade by any of the rating agencies will not trigger an acceleration of any of the Company’s indebtedness, further reductions in the Company’s credit ratings could negatively impact its ability to access capital as well as its ability to issue additional debt securities at currently available interest rates.

     The Company’s various borrowing facilities and long-term debt, except for the preferred debt securities as discussed below, are free of any financial covenants other than minimum net worth which cannot fall below $4.1 billion at any time. As of June 30, 2005, the Company was in compliance with this covenant.

     The Company’s preferred debt securities contain a minimum adjusted tangible net worth covenant (adjusted tangible net worth cannot fall below $3.0 billion) and certain financial ratio covenants. As of June 30, 2005, the Company was in compliance with these covenants. A breach of any of these covenants would be followed by a grace period during which the Company may discuss remedies with the security holders, or extinguish the securities, without causing an event of default.

Interest Rate and Currency Risk Management

     The Company uses forward currency exchange contracts, currency options and interest rate swaps to manage its exposure to cash flow variability. The Company also uses foreign currency forward contracts and interest rate swaps to protect the value of its

existing foreign currency assets and liabilities and the value of its debt. See Notes 3 and 7 of “Notes to Consolidated Financial Statements” for information regarding the use of financial instruments and derivatives, including foreign currency hedging instruments. As a matter of policy, the Company rarely engages in “speculative” transactions involving derivative financial instruments. During fiscal 2003, the Company entered into one speculative interest rate swap transaction resulting in a gain of approximately $6.7 million. This gain was recorded in interest expense and other in the consolidated statement of earnings.

Contractual Obligations

     As of June 30, 2005, the Company’s contractual obligations, including estimated payments due by period, are as follows:

 

OFF-BALANCE SHEET ARRANGEMENTS

     See Note 10 in “Notes to Consolidated Financial Statements” for a discussion of off-balance sheet arrangements.

OTHER

Recent Financial Accounting Standards. See Note 3 in “Notes to Consolidated Financial Statements” for a discussion of recent financial accounting standards.

Recent Developments. In late August 2005, Hurricane Katrina devastated parts of Louisiana, Mississippi and the Gulf Coast of the United States. The Company sustained limited damage to its facilities in the region and at the time of the filing of this Form 10-K, all major facilities in the region were operational. The damage sustained to the Company’s facilities will not materially impact its financial condition or results of operations. The Company has made monetary and product donations to the hurricane relief efforts which will not have a material impact on its financial condition or results of operations.

     See Note 24 in “Notes to Consolidated Financial Statements” for discussion of additional subsequent events after June 30, 2005.

Item 7a: Quantitative and Qualitative Disclosures about Market Risk

     The Company is exposed to cash flow and earnings fluctuations as a result of certain market risks. These market risks primarily relate to foreign exchange, interest rate, and commodity related changes. The Company maintains a comprehensive hedging program to manage volatility related to these market exposures. It employs operational, economic, and derivative financial instruments in order to mitigate risk. See Notes 3 and 7 of “Notes to Consolidated Financial Statements” for further discussion regarding the Company’s use of derivative instruments.

Foreign Exchange Rate Sensitivity. By nature of the Company’s global operations, it is exposed to cash flow and earnings fluctuations resulting from foreign exchange rate variation. These exposures are transactional and translational in nature. Since the Company manufactures and sells its products throughout the world, its foreign currency risk is diversified. Principal drivers of this diversified foreign exchange exposure include the European euro, Mexican peso, British pound, Canadian dollar, Australian dollar and Thai bhat.

Transactional Exposure

     The Company’s transactional exposure arises from the purchase and sale of goods and services in currencies other than the functional currency of the parent or its subsidiaries. As part of its risk management program, at the end of each fiscal year the Company performs a sensitivity analysis on its forecasted transactional exposure for the upcoming fiscal year. This analysis assumes a hypothetical 10% strengthening or weakening of the U.S dollar. Included in the analysis is the estimated impact of its hedging program, which mitigates the Company’s transactional exposure. At June 30, 2005 and 2004, the Company had hedged approximately 52% of its transactional exposures. The following table summarizes the analysis as it relates to the Company’s transactional exposure:

Interest Rate Sensitivity. The Company is exposed to changes in interest rates primarily as a result of its borrowing and investing activities to maintain liquidity and fund business operations. The nature and amount of the Company’s long-term and short-term debt can be expected to fluctuate as a result of business requirements, market conditions and other factors. The Company’s policy is to manage exposures to interest rates using a mix of fixed and floating rate debt as deemed appropriate by management. The Company utilizes interest rate swap instruments to mitigate its exposure to interest rate movements.

     As part of its risk management program, the Company annually performs a sensitivity analysis on its forecasted exposure to interest rates for the following fiscal year. This analysis assumes a hypothetical 10% change in interest rates. At June 30, 2005 and 2004, the potential increase or decrease in interest expense under this analysis as a result of this hypothetical change was $4.6 million and $6.4 million, respectively.

Commodity Price Sensitivity. The Company purchases certain commodities for use in its manufacturing processes, which include rubber, heating oil, diesel fuel and polystyrene. The Company typically purchases these commodities at market prices, and as a result, is affected by price fluctuations. As part of its risk management program, the Company performs sensitivity analysis on its forecasted commodity exposure for the following fiscal year. At June 30, 2005 and 2004, the Company had not hedged any of these exposures. The table below summarizes the Company’s analysis of these forecasted commodity exposures and a hypothetical 10% fluctuation in commodity prices as of June 30, 2005 and 2004:

     The Company also has exposure to certain energy related commodities, including natural gas and electricity through its normal course of business. These exposures result primarily from operating the Company’s distribution, manufacturing, and corporate facilities. In certain deregulated markets, the Company from time to time enters into long-term purchase contracts to supply these items at a specific price.

Item 8: Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements and Schedule:

Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 2005, 2004 and 2003
Consolidated Balance Sheets at June 30, 2005 and 2004
Consolidated Statements of Shareholders’ Equity for the Fiscal Years Ended June 30, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Schedule II

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the
Board of Directors of Cardinal Health, Inc.:

     We have audited the accompanying consolidated balance sheets of Cardinal Health, Inc. and subsidiaries (the “Company”) as of June 30, 2005 and 2004, and the related consolidated statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2005, in conformity with the U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

     As discussed in Note 16 to the consolidated financial statements, the Company changed its method of recognizing cash discounts effective at the beginning of fiscal year 2004.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 9, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

ERNST & YOUNG LLP
Columbus, Ohio
September 9, 2005

The accompanying notes are an integral part of these consolidated statements.

The accompanying notes are an integral part of these consolidated statements.