NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ACCOUNTING INVESTIGATIONS AND RESTATEMENT

As previously reported, in October 2003, the Securities and Exchange Commission (the "SEC") initiated an informal inquiry regarding Cardinal Health, Inc. (the "Company"). The SEC's request sought historical financial and related information including but not limited to the accounting treatment of certain recoveries from vitamin manufacturers. The SEC's 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. In connection with the SEC's informal inquiry, the Audit Committee of the Board of Directors of the Company commenced its own internal review in April 2004, assisted by independent counsel. On May 6, 2004, the Company was notified that the SEC had converted the informal inquiry into a formal investigation. On June 21, 2004, as part of the SEC's formal investigation, the Company received an additional 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." In addition, the Company learned that the U.S. Attorney for the Southern District of New York had also commenced an inquiry with respect to the Company that the Company understands relates to the revenue classification issue. 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 continues to respond to the SEC's investigation and the Audit Committee's internal review and provide all information required.

During September and October 2004, the Audit Committee reached certain conclusions with respect to findings to date from its internal review. These conclusions regarding certain items that impact revenue and earnings relate 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 Automation and Information Services segment; and (4) certain balance sheet reserve and accrual adjustments that have been identified in the internal review. The Audit Committee's internal review with respect to the financial statement impact of the matters reviewed to date is substantially complete. In connection with these conclusions, the Audit Committee has determined that the 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. As the Company continues to respond to the SEC's investigation and the Audit Committee's internal review, there can be no assurance that additional restatements will not be required or that the historical financial statements included in this Form 10-K will not change or require amendment. In addition, the Audit Committee may identify new issues, or make additional findings if it receives additional information, that may impact the Company's financial statements and the scope of the restatements described in this Form 10-K.

The conclusions of the Audit Committee's internal review to date are as follows:

REVENUE IMPACT: 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

As presented historically since 1998, the Pharmaceutical Distribution and Provider Services segment's revenue was classified into two categories ("Operating Revenue" and "Bulk Deliveries to Customer Warehouses and Other"). "Bulk Deliveries to Customer Warehouses and Other" has historically included revenue arising from sales where the Company ordered pharmaceutical product in bulk on behalf of a specific warehousing customer and either the manufacturer ships the product directly to the customer's warehouse or the product is shipped to the customer's warehouse by the Company shortly after it is received by the Company and is not put into the Company's inventory (in either case, "Bulk Revenue"). For all Bulk Revenue, the product was shipped to the customer in the same bulk form in which it was received by the Company from the manufacturers. The Company previously since November 2001 followed an internal policy for distinguishing between Operating Revenue and Bulk Revenue based on how long the product was in the Company's possession prior to being shipped to customers. If the product was in the possession of the Company for more than 24 hours prior to being shipped to customers, then, regardless of other characteristics of the transaction or the reason for the product being held more than 24 hours, the sale of that product was deemed to be Operating Revenue. The Company's internal policy also provided that customer orders for bulk shipments filled from inventory within the Company's warehouse were deemed to be Operating Revenue if the order for the product had been placed with the manufacturer prior to the Company receiving the bulk order from its customer. Based on results of the internal review conducted by the Audit Committee, the Company concluded that certain bulk shipments ordered by customers were intentionally held beyond 24 hours so that, pursuant to the internal policy, such shipments were classified as Operating Revenue in four quarters within fiscal 2003 and 2002. The impact of this practice was not previously quantified and disclosed as part of the Company's reported Operating Revenue. The improper classification between Bulk Revenue and Operating Revenue had no impact on the Company's previously reported total revenue or operating or net earnings for these periods. See Note 2 for further discussion of these matters.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNDISCLOSED EARNINGS IMPACT: 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

Historically, the Company recognized cash discounts as a reduction of cost of products sold primarily upon payment of vendor invoices. Cash discounts are discounts the Company receives from some vendors for timely payment of invoices. The Company had a practice of accelerating payment of vendor invoices at the end of certain reporting periods in order to accelerate the recognition of cash discounts, which had the effect of improving operating results for those reporting periods. Although the effect of these accelerated payments were properly included in the Company's reported earnings, the impact of this acceleration practice was not separately quantified and disclosed in the periods in which the Company benefited from this practice. The net increase (decrease) in net earnings as a result of this practice for fiscal 2004, 2003 and 2002 is as follows:

                      Fiscal        Fiscal         Fiscal
(in millions)          2004          2003           2002
                      ------        ------         ------
First Quarter         $ (0.2)       $   -         $  (3.3)
Second Quarter           3.0          2.0               -
Third Quarter           (0.3)         5.5               -
Fourth Quarter          (1.2)         1.3               -
                      ------        -----         -------
Total                 $  1.3        $ 8.8         $  (3.3)
                      ======        =====         =======

During the fourth quarter fiscal 2004, the Company changed its accounting method for recognizing cash discounts from recognition primarily upon payment of vendor invoices to recording cash discounts as a component of inventory cost and recognizing such discounts as a reduction to cost of products sold upon sale by the Company of the purchased inventory. The Company believes the change in accounting method provides a more objectively determinable method of recognizing cash discounts and a better matching of inventory cost to revenues. This change will be retroactively effective to the beginning of fiscal 2004. As a result, the Company restated its previously reported fiscal 2004 quarterly results to reflect this change. See Note 16 for further discussion of this change in accounting.

REVENUE AND EARNINGS IMPACT: Timing of Revenue Recognition Within the Company's Automation and Information Services Segment

Within its Automation and Information Services segment, the Company's revenue recognition policy for equipment systems installed at a customer's site is to recognize revenue once the Company's installation obligations are complete and the equipment is functioning according to the material specifications of the user's manual and the customer has accepted the equipment as evidenced by signing an equipment confirmation document. The Company learned of concerns during the Audit Committee's internal review that some equipment confirmation documents were being executed prior to the time when installations were complete and revenue could be recognized. In order to assess the implications of any premature execution of equipment confirmations and corresponding revenue recognition, the Audit Committee review included: (a) document and process reviews including a sample of equipment confirmation forms; (b) certifications for selected employees involved in the installation process; (c) interviews of selected employees across regions within the U.S. and at various levels of the Company; (d) interviews of certain former employees of the Company; and (e) interviews of selected customers across all regions within the U.S.

This inquiry indicated some equipment confirmations, particularly in some sales regions, had been prematurely executed by customers at the request of certain Company employees, including certain situations where inducements to the customer (such as deferral of payments) were offered to obtain premature execution. As a result, there was a material weakness in internal controls because the Company did not have internal controls in place to assure that equipment installations were in fact completed before the equipment confirmations were executed. The Company concluded the impact of such actions was as follows:

- Equipment confirmations in the last several weeks of a quarter were the most likely to be executed early by the customer due to requests from certain Company employees.

- No evidence was discovered of fictitious sales being recorded by the Company.

- Revenue was recognized early primarily by one quarter. In most cases, installations were completed in the following quarter.

- Impact on the Company's financial results was not deemed material for any individual quarter or annually.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- Net impact of this premature revenue recognition was assessed as of June 30, 2004 based upon interviews of customers as of June 30, 2004 representing a substantial percentage of the segment's end of quarter reported revenues resulting in approximately 10.8% of revenue in the last 10 days of the quarter being recognized prematurely (based upon an extrapolation). The Company recorded an $8.3 million reduction of revenue and a $5.3 million reduction of operating earnings during the fourth quarter fiscal 2004 to adjust for premature revenue recognition that was determined to have occurred within that quarter. These revenues and operating earnings will be recognized in the first quarter fiscal 2005.

The Company does not maintain accounting records that allow it to determine the precise impact of this matter on prior quarters. However, during the investigation there was sufficient data accumulated independent of the accounting systems to estimate the impact using a variety of methods. These methods were utilized solely to test the materiality of prior periods and are not necessarily indicative of what the actual results would have been. If the results of the June 30, 2004 interviews were applied to prior years (i.e., utilizing the 10.8% exception rate) as was utilized in the fourth quarter fiscal 2004 adjustment, the net increase (decrease) on revenue and operating earnings for fiscal 2002 and each previously reported quarter of fiscal 2003 and 2004, and the related percentage of the Automation and Information Services segment's reported amounts, would have been as follows:

                                              Operating
                    Revenue     % Change       Earnings      % Change
                    -------     --------      ---------      --------
FISCAL 2002         $  (8.3)       (1.5%)     $    (5.3)       (2.5%)

FISCAL 2003
  First Quarter     $   2.6         1.9%      $     1.7         3.6%
  Second Quarter        0.2         0.1%            0.1         0.1%
  Third Quarter        (0.3)       (0.2%)          (0.2)       (0.3%)
  Fourth Quarter       (3.8)       (1.9%)          (2.4)       (2.8%)
                    -------                   ---------
  Total Year        $  (1.3)       (0.2%)     $    (0.8)       (0.3%)
                    =======                   =========

FISCAL 2004
  First Quarter     $   3.7         2.6%      $     2.4         4.5%
  Second Quarter        0.1         0.0%              -         0.0%
  Third Quarter        (1.9)       (1.1%)          (1.2)       (1.7%)
                    -------                   ---------
  Year-To-Date      $   1.9         0.4%      $     1.2         0.6%
                    =======                   =========

Using different estimation methods than the methodology used to derive the table above, the percentage change in operating earnings for the periods noted above would range from less than 1% to a high of 6.6%. There were two quarters in which the estimated impact was over 5% (first quarter fiscal 2003 negative impact of 6.6% and third quarter of fiscal 2004 negative impact of 5.5%). The Company believes the impact of the adjustments resulting from the estimation methods are not material to previously reported results as such estimated adjustments do not distort trends in revenue and operating earnings growth that were previously reported and would not alter the Company's previous disclosures related to the Automation and Information Services segment.

The Company has recently reiterated the revenue recognition policy for equipment systems installed at a customer's site for its Automation and Information Services segment, and instructed all employees to strictly adhere to this policy.

The Company is in the process of implementing the following corrective actions in response to these initial conclusions:

- Adoption of new customer contracts and equipment confirmation forms that clarify when the installation is complete and the confirmation is to be executed.

- Revision of policies and procedures for equipment installation and revenue recognition processes.

- Enhanced level of internal training for those Company employees involved in equipment installation and revenue recognition processes.

- Reemphasizing availability of the Company's ethics and compliance hotline for reporting questions about appropriateness of the Company's business and accounting practices, including channels of communication to the Company's Audit Committee.

- Enhanced random audits of the Company's equipment confirmation process. Such random audits will be performed by the Company's internal audit department and such procedures will be reviewed and periodically tested by its independent auditors.

- Within the next year, it is expected that system enhancements will be implemented that will allow for the automated audit of installation of equipment at the customer's location.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESTATED EARNINGS: Certain Balance Sheet Reserve and Accrual Adjustments

The Audit Committee's internal review included a review to determine if period-end adjustments to balance sheet reserve accounts and other accruals recorded in fiscal 2000 through fiscal 2004 were properly recorded in accordance with generally accepted accounting principles ("GAAP"). Based upon the Audit Committee's internal review, the Company determined there were various situations where (a) amount of reserve, (b) timing of reserve recognition, or
(c) timing of reserve adjustments could not be substantiated or was in error. As a result, the financial statements for certain prior fiscal quarters and years have been restated by the Company.

The types of balance sheet reserves and accrual adjustments that were restated consist of the following:

1. Errors arising from misapplication of GAAP. These errors primarily include (a) reductions in reserve accounts made in periods subsequent to the period in which the excess had been identified by the Company, (b) a last-in, first-out ("LIFO") inventory adjustment, and (c) a change in accounting policy for dividends to recognition when declared versus when paid.

2. Errors made in previous periods which were identified and appropriately corrected in a subsequent period when discovered. These items were not reported as prior period corrections at the time of their discovery because they were deemed immaterial. At this time, however, the Company has restated its prior financial statements to correct for such items identified during the internal review.

3. As a result of discussions with the SEC staff, the Company decided to reverse its previous recognition of estimated recoveries from vitamin manufacturers for amounts overcharged in prior years and to recognize the income from such recoveries as a special item in the period cash was received from the manufacturers. The Company recognized $10.0 million of operating earnings ($6.5 million net of taxes) in the second quarter of fiscal 2001 and $12.0 million of operating earnings ($7.9 million net of taxes) in the first quarter of fiscal 2002 based on its estimate of amounts that would subsequently be received. The actual cash payments received from manufacturers did not exceed the amounts previously recorded until the fourth quarter of fiscal 2002. 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.

The following table summarizes the restatement impact on previously reported net earnings as defined above for fiscal 2004, 2003 and 2002:

                           Misapplication                 Vitamin          Total
  (in millions)               of GAAP       Errors      Litigation      Restatement
  -------------               -------       ------      ----------      -----------
Fiscal 2004:
 First Quarter                 $ (0.3)      $ (4.5)       $    -          $  (4.8)
 Second Quarter                  (0.4)        (4.5)            -             (4.9)
 Third Quarter                      -         (5.7)            -             (5.7)
                               ------       ------        ------          -------
 Total Year-to-Date            $ (0.7)      $(14.7)       $    -          $ (15.4)
                               ======       ======        ======          =======

Fiscal 2003:
 First Quarter                 $ (3.1)      $ (3.8)       $    -          $  (6.9)
 Second Quarter                  (1.1)         3.7             -              2.6
 Third Quarter                   (9.1)        (5.4)            -            (14.5)
 Fourth Quarter                  (2.3)        (9.6)            -            (11.9)
                               ------       ------        ------          -------
 Total Year                    $(15.6)      $(15.1)       $    -          $ (30.7)
                               ======       ======        ======          =======

Fiscal 2002:
 First Quarter                 $  2.8       $ (5.9)       $ (7.9)         $ (11.0)
 Second Quarter                  (0.6)        (2.1)            -             (2.7)
 Third Quarter                    2.1          4.4             -              6.5
 Fourth Quarter                   0.8          7.5          13.4             21.7
                               ------       ------        ------          -------
 Total Year                    $  5.1       $  3.9        $  5.5          $  14.5
                               ======       ======        ======          =======

                                              Fiscal 2003                        Fiscal 2002
                                       -------------------------          ------------------------
                                          As               As                As              As
                                       Reported         Restated          Reported        Restated
                                       --------         --------          --------        --------
Earnings from continuing
operations per Common Share:
  Basic                                 $ 3.17           $ 3.10            $ 2.50          $ 2.53
  Diluted                               $ 3.12           $ 3.05            $ 2.45          $ 2.48

The Company reduced its June 30, 2001 retained earnings balance of $4,146.0 million by $33.6 million due to the restatement adjustments. This restatement amount consists of a $3.6 million decrease for misapplication of GAAP, a $23.5 million decrease for errors and a $6.5 million decrease for vitamin litigation.

See Note 19 for the restatement impact on previously reported quarterly earnings per Common Share amounts for fiscal 2004 and 2003.

The SEC investigation, the U.S. Attorney inquiry and the Audit Committee internal review remain ongoing. While the Company is continuing in its efforts to respond to the SEC's investigation and the Audit Committee's internal review and provide all information required, the Company cannot predict the outcome of the SEC investigation or the U.S. Attorney inquiry. 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 as well as the imposition of fines and other penalties, remedies and sanctions.

2. RECLASSIFICATIONS

As presented historically since 1998, the Pharmaceutical Distribution and Provider Services segment's revenue was classified into two categories ("Operating Revenue" and "Bulk Deliveries to Customer Warehouses and Other"). "Bulk Deliveries to Customer Warehouses and Other" has historically included revenue arising from sales where the Company ordered pharmaceutical product in bulk on behalf of a specific warehousing customer and either the manufacturer ships the product directly to the customer's warehouse or the product is shipped to the customer's warehouse by the Company shortly after it is received by the Company and is not put into the Company's inventory (in either case, "Bulk Revenue"). For all Bulk Revenue, the product was shipped to the customer in the same bulk form in which it was received by the Company from the manufacturers. The Company since November 2001 previously followed an internal policy for distinguishing between Operating Revenue and Bulk Revenue based on how long the product was in the Company's possession prior to being shipped to customers. If the product was in the possession of the Company for more than 24 hours prior to being shipped to

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

customers, then, regardless of other characteristics of the transaction or the reason for the product being held more than 24 hours, the sale of that product was deemed to be Operating Revenue. The Company's internal policy also provided that customer orders for bulk shipments filled from inventory within the Company's warehouse were deemed to be Operating Revenue if the order for the product had been placed with the manufacturer prior to the Company receiving the bulk order from its customer. Based on results of the internal review conducted by the Audit Committee, the Company concluded that certain bulk shipments ordered by customers were intentionally held beyond 24 hours so that, pursuant to the internal policy, such shipments were classified as Operating Revenue in four quarters within fiscal 2003 and 2002. The impact of this practice was not previously quantified and disclosed as part of the Company's reported Operating Revenue. The improper classification between Bulk Revenue and Operating Revenue had no impact on the Company's previously reported total revenue or operating or net earnings for these periods.

The following table shows the amount of Bulk Revenue that was estimated to be improperly classified as Operating Revenue in the manner described above and the impact from adjusting each of Bulk Revenue and Operating Revenue for the periods in which these improper classifications occurred:

                                Bulk Revenue                           Operating Revenue
                                ------------                           -----------------
                         Fiscal Year Ended June 30,                Fiscal Year Ended June 30,
                        ----------------------------             -----------------------------
(in millions)             2003                 2002                 2003                 2002
-------------           -------              -------             --------             --------
First Quarter           $     -              $     -             $      -             $      -
Second Quarter            673.0                 82.0               (673.0)               (82.0)
Third Quarter             140.0                    -               (140.0)                   -
Fourth Quarter                -                332.0                    -               (332.0)
                        -------              -------             --------             --------
Total Year              $ 813.0              $ 414.0             $ (813.0)            $ (414.0)
                        =======              =======             ========             ========

During fiscal 2004, the Company decided to aggregate revenue classes within this Form 10-K. "Operating Revenue" and "Bulk Deliveries to Customer Warehouses and Other" have been 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. These reclassifications have no effect on previously reported total revenue, related cost of products sold, operating earnings, net earnings or earnings per share. Beginning with this Form 10-K, information concerning the portion of the Company's revenue that arises from Bulk Revenue will be discussed in the Company's "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Certain other insignificant reclassifications have been made to conform prior period amounts to the current presentation.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company is a leading provider of products and services supporting the health care industry, and helping health care providers and manufacturers improve the efficiency and quality of health care. As of June 30, 2004, the Company conducted its business within the following four business segments:
Pharmaceutical Distribution and Provider Services; Medical Products and Services; Pharmaceutical Technologies and Services; and Automation and Information Services. See Note 18 for information related to the Company's business segments.

BASIS OF PRESENTATION. The consolidated financial statements of the Company include the accounts of all majority-owned subsidiaries. In addition, all significant intercompany accounts and transactions have been eliminated upon consolidation.

During fiscal 2004, 2003 and 2002, the Company completed several acquisitions, which were accounted for under the purchase method of accounting. The consolidated financial statements include the results of operations from each of these business combinations as of the date of acquisition. Additional disclosure related to the Company's acquisitions is provided in Note 4.

The preparation of financial statements in conformity with GAAP in the United States requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, inventory valuation, allowance for doubtful accounts, goodwill and intangible asset impairment, vendor reserves and restructuring charge reserves. Actual amounts may differ from these estimated amounts.

CASH EQUIVALENTS. The Company considers all liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying value of these cash equivalents approximates fair value. Cash payments for interest were $112.7 million, $115.3 million and $116.5 million and cash payments for income taxes were $566.3 million, $256.8 million and $246.0 million for fiscal 2004, 2003 and 2002, respectively. See Note 4 for additional information regarding non-cash investing activities.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECEIVABLES. Trade receivables are primarily comprised of amounts owed to the Company through its pharmaceutical and other health care service activities and are presented net of an allowance for doubtful accounts of $119.1 million and $121.3 million at June 30, 2004 and 2003, respectively. An account is considered past due on the first day after its due date. In accordance with contract terms, the Company generally has the ability to charge a customer service fees or higher prices if an account is considered past due. The Company continuously monitors past due accounts and establishes appropriate reserves to cover potential losses. The Company will write off any amounts deemed uncollectible against an established bad debt reserve.

The Company provides financing to various customers. Such financing arrangements range from one year to ten years, at interest rates that generally fluctuate with the prime rate. Interest income on these accounts is recognized by the Company as it is earned. The financings may be collateralized, guaranteed by third parties or unsecured. Finance notes and accrued interest receivables were $35.4 million and $30.8 million at June 30, 2004 and 2003, respectively (current portions were $17.2 million and $14.9 million, respectively), and are included in other assets. These amounts are reported net of an allowance for doubtful accounts of $4.1 million and $4.5 million at June 30, 2004 and 2003, respectively.

The Company has formed special purpose entities with the sole purpose of buying receivables or sales type leases from various legal entities of the Company and selling those receivables or sales type leases to certain multi-seller conduits administered by banks or other third-party investors. See Note 10 for additional disclosure regarding off-balance sheet financing.

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, 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 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. See Note 6 for additional information.

INVENTORIES. A majority of inventories (approximately 66% in 2004 and 68% in 2003) are stated at the lower of cost, using the LIFO method, or market 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 been higher than the LIFO method reported at June 30, 2004 and 2003 by $57.8 million and $61.4 million, respectively.

GOODWILL AND OTHER INTANGIBLES. The Company accounts for purchased goodwill and other intangible assets 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 no longer amortized, but instead are tested for impairment at least annually. Intangible assets with finite lives, primarily customer relationships and patents and trademarks, continue to be amortized over their useful lives. The Company performed its annual impairment test in fiscal 2004 which did not result in the recognition of any impairment charges. See Note 17 for additional disclosure regarding goodwill and other intangible assets.

PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation expense for financial reporting purposes is primarily computed using the straight-line method over the estimated useful lives of the assets, including capital lease assets which are depreciated over the terms of their respective leases. The Company uses the following range of useful lives for its property and equipment categories: buildings and improvements - 1 to 50 years; machinery and equipment - 3 to 20 years; furniture and fixtures - 7 years. Depreciation expense was $278.0 million, $249.0 million and $231.2 million for fiscal 2004, 2003 and 2002, respectively. The Company expenses repairs and maintenance expenditures as incurred. The Company capitalizes interest on long-term fixed asset projects using a rate of 5.0%, which approximates the Company's weighted average interest rate on long-term debt. The amount of capitalized interest was immaterial for all fiscal years presented.

OTHER ACCRUED LIABILITIES. Other accrued liabilities represent various obligations of the Company including certain accrued operating expenses and taxes payable. For the fiscal years ended June 30, 2004 and 2003, the largest component of other accrued liabilities was deferred tax liabilities of approximately $530.2 million and $566.1 million, respectively. Other significant components of other accrued liabilities were current taxes payable and employee compensation and related benefit accruals. For fiscal 2004 and 2003, current taxes payable were $286.4 million and $224.7 million, respectively, while employee compensation and related benefit accruals were $310.8 million and $373.6 million, respectively.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

REVENUE RECOGNITION

Pharmaceutical Distribution and Provider Services

This segment records distribution revenue when title transfers to its customers and the business has no further obligation to provide services related to such merchandise. This revenue is recorded net of sales returns and allowances (see "Sales Returns and Allowances" below for further information).

This segment also records Bulk Revenue, defined as transactions having any one or more of the following characteristics: (a) deliveries to customer warehouses whereby the Company acts as an intermediary in the ordering and delivery of pharmaceutical products, (b) delivery of products to the customer in the same form as the products are received from the manufacturer, (c) warehouse to customer warehouse or process center deliveries, or (d) deliveries to customers in large or high volume full case quantities. See Notes 1 and 2 for a further discussion of Bulk Revenue.

This segment also owns certain consignment inventory and recognizes revenue when that inventory is sold to a third party by the segment's customer.

This segment earns franchise and origination fees from its apothecary-style pharmacy franchisees. Franchise fees represent monthly fees based upon franchisees' sales and are recognized as revenue when they are earned. Origination fees from signing new franchise agreements are recognized as revenue when the new franchise store is opened.

Pharmacy management and other service revenue is recognized as the services are rendered according to the contracts established. A fee is charged under such contracts through a capitated fee, a dispensing fee, a monthly management fee or an actual costs-incurred arrangement. Under certain contracts, fees for services are guaranteed by the Company not to exceed stipulated amounts or have other risk-sharing provisions. Revenue is adjusted to reflect the estimated effects of such contractual guarantees and risk-sharing provisions.

Medical Products and Services

This segment records distribution and self-manufactured medical product revenue when title transfers to its customers and the business has no further obligation to provide services related to such merchandise. This revenue is recorded net of sales returns and allowances (see "Sales Returns and Allowances" below for further information).

Pharmaceutical Technologies and Services

Manufacturing and packaging revenue is recognized either upon shipment or delivery of the product, in accordance with the terms of the contract which specify when transfer of title occurs. Radiopharmaceutical revenue is recognized upon delivery of the product to the customer. Other revenue from services provided, such as development or sales and marketing services, is recognized upon the completion of such services.

Drug delivery system revenue is recognized upon shipment of products to the customer. Non-product revenue includes annual exclusivity fees, option fees to extend exclusivity agreements and milestone payments for attaining certain regulatory approvals. This segment receives exclusivity payments from certain manufacturers in return for its commitment not to enter into agreements to manufacture competing products. The revenue related to these agreements is recognized over the term of the exclusivity or the term of the option agreement unless a particular milestone is designated, in which case revenue is recognized when all obligations of performance have been completed.

Analytical science revenue from fixed contracts is recorded as projects are completed and billed. Projects are primarily for a short-term duration. Certain contracts contain provisions for price redetermination for cost overruns. Such amounts are included in service revenue when realization is assured and the amounts are reasonably determined.

Automation and Information Services

Revenue is recognized from sales-type leases of point-of-use systems once the Company's installation obligations are complete and the equipment is functioning according to material specifications of the user's manual and the customer has accepted the equipment, as evidenced by signing an equipment confirmation document. At this point, the lease becomes noncancellable (see Note 16 for additional information). Interest income on sales-type leases is recognized in revenue using the interest method. Sales of point-of-use systems are recognized upon installation at the customer site. Revenue for systems installed under operating lease arrangements is recognized over the lease term as such amounts become receivable according to the provisions of the lease.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALARIS Medical Systems, Inc. ("ALARIS")

The Company's recently acquired subsidiary, ALARIS, recognizes revenue, net of an allowance for estimated returns and credits, upon delivery and/or installation (depending on the product) and once transfer of title and risk of loss have occurred. ALARIS frequently enters into revenue arrangements with multiple deliverables, which, depending on the nature of the contract terms, are subject to the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" or Statement of Position 97-2, "Software Revenue Recognition."

SALES RETURNS AND ALLOWANCES. Pharmaceutical distribution revenue is recorded net of sales returns and allowances. The Pharmaceutical Distribution business recognizes sales returns as a reduction of revenue and cost of sales for the sales price and cost, respectively, when products are returned. The Pharmaceutical Distribution business' 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. Product returns are generally consistent throughout the year, and typically are not specific to any particular product or customer. Amounts recorded in revenue and cost of sales under this accounting policy closely approximate what would have been recorded under SFAS No. 48, "Revenue Recognition When Right of Return Exists." Applying the provisions of SFAS No. 48 would not materially change the Company's financial position and results of operations. Sales returns and allowances for the Pharmaceutical Distribution business were approximately $1.3 billion, $1.2 billion, and $1.0 billion in fiscal 2004, 2003 and 2002, respectively.

Distributed and self-manufactured medical product revenue is recorded net of sales returns and allowances. The Medical Products and Services segment has established a reserve against returned goods in accordance with SFAS No. 48. This reserve amount was immaterial for all periods presented. This segment'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. Product returns are generally consistent throughout the year, and typically are not specific to any particular product or customer. Sales returns and allowances for the Medical Products and Services segment were approximately $56.9 million, $55.6 million and $53.1 million in fiscal 2004, 2003 and 2002, respectively.

CASH DISCOUNTS. Cash discounts are recorded as a component of inventory cost and recognized as a reduction of cost of products sold when related inventory is sold. See Note 16 for further information regarding cash discounts and the change in accounting method adopted in 2004.

ACCOUNTING FOR VENDOR RESERVES. In the ordinary course of business, vendors may challenge deductions or billings taken against payments otherwise due them from the Company. These contested transactions are researched and resolved based upon Company policy and findings of the research performed. At any given time, there are outstanding items in various stages of research and resolution. In determining an appropriate vendor reserve, the Company assesses historical information and current outstanding claims. The ultimate outcome of certain claims may be different than the Company's original estimate and may require adjustment.

SHIPPING AND HANDLING. Shipping and handling costs are included in selling, general and administrative expenses in the consolidated statements of earnings. Shipping and handling costs include all delivery expenses as well as all costs to prepare the product for shipment to the end customer. Shipping and handling costs totaled $250.3 million, $213.8 million and $211.9 million for fiscal 2004, 2003 and 2002, respectively. Shipping and handling revenue received was immaterial for all periods presented.

TRANSLATION OF FOREIGN CURRENCIES. Financial statements of the Company's subsidiaries outside the U.S. generally are measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of these foreign subsidiaries into U.S. dollars are accumulated in a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in the consolidated statements of earnings and were immaterial for the fiscal years ended June 30, 2004, 2003 and 2002.

INTEREST RATE AND CURRENCY RISK MANAGEMENT. The Company accounts for derivative instruments in accordance with SFAS No. 133, as amended, "Accounting for Derivatives and Hedging Activity." Under this standard, all derivative instruments are recorded at fair value on the balance sheet and all changes in fair value are recorded to net earnings or shareholders' equity through other comprehensive income.

The Company uses forward currency exchange contracts, currency options and interest rate swaps to manage its exposures to the variability of cash flows primarily related to the foreign exchange rate changes of future foreign currency transaction costs and to the interest rate changes on borrowing costs. These contracts are designated as cash flow hedges.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company also uses interest rate swaps to hedge changes in the value of fixed rate debt due to variations in interest rates. Both the derivative instruments and underlying debt are adjusted to market value through "interest expense and other" at the end of each period. The Company uses foreign currency forward contracts to protect the value of existing foreign currency assets and liabilities. The remeasurement adjustments for any foreign currency denominated assets or liabilities are included in "interest expense and other." The remeasurement adjustment is offset by the foreign currency forward contract settlements which are also classified in "interest expense and other." Both interest rate swaps and foreign currency forward contracts are designated as fair value hedges.

The Company generally does not use derivative instruments for trading or speculative purposes. During fiscal 2003, the Company entered into one speculative interest rate swap transaction resulting in a gain of approximately $6.7 million.

The Company's derivative contracts are adjusted to current market values each period and qualify for hedge accounting under SFAS No.133. Periodic gains and losses of contracts designated as cash flow hedges are deferred in other comprehensive income until the underlying transactions are recognized. Upon recognition, such gains and losses are recorded in net earnings as an adjustment to the carrying amounts of underlying transactions in the period in which these transactions are recognized. For those contracts designated as fair value hedges, resulting gains or losses are recognized in net earnings offsetting the exposures of underlying transactions. Carrying values of all contracts are included in other assets or liabilities.

The Company's policy requires contracts used as hedges must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Hedging effectiveness is assessed periodically. Any contract not designated as a hedge, or so designated but ineffective, is adjusted to market value and recognized in net earnings immediately. If a fair value or cash flow hedge ceases to qualify for hedge accounting or is terminated, the contract would continue to be carried on the balance sheet at fair value until settled and future adjustments to the contract's fair value would be recognized in earnings immediately. If a forecasted transaction were no longer probable to occur, amounts previously deferred in other comprehensive income would be recognized immediately in earnings. Additional disclosure related to the Company's hedging contracts is provided in Note 7.

RESEARCH AND DEVELOPMENT COSTS. Costs incurred in connection with development of new products and manufacturing methods are charged to expense as incurred. Research and development expenses were $56.5 million, $56.9 million and $65.1 million in fiscal 2004, 2003 and 2002, respectively.

INCOME TAXES. In accordance with provisions of SFAS No. 109, "Accounting for Income Taxes," the Company accounts for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's assets and liabilities. No provision is made for U.S. income taxes on undistributed earnings of foreign subsidiaries because those earnings are considered permanently reinvested in the operations of those subsidiaries.

EARNINGS PER COMMON SHARE. Basic earnings per Common Share ("Basic") is computed by dividing net earnings (the numerator) by the weighted average number of Common Shares outstanding during each period (the denominator). Diluted earnings per Common Share is similar to the computation for Basic, except that the denominator is increased by the dilutive effect of stock options, computed using the treasury stock method.

DIVIDENDS. Excluding dividends paid by all entities with which the Company has merged, the Company paid cash dividends per Common Share of $0.12, $0.10 and $0.10 for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.

RECENT FINANCIAL ACCOUNTING STANDARDS. In December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." The revision relates to employers' disclosures about pension plans and other postretirement benefit plans. The revision does not alter the measurement or recognition provisions of the original SFAS No. 132. The revision requires additional disclosures regarding assets, obligations, cash flows and net periodic benefit costs of

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

pension plans and other defined benefit postretirement plans. Excluding certain disclosure requirements, the revised SFAS No. 132 is effective for financial statements with fiscal years ended after December 15, 2003 (see Note 9 for the Company's disclosures).

In December 2003, the FASB issued a revision to Interpretation No. 46, "Consolidation of Variable Interest Entities." This revised Interpretation defines when a business enterprise must consolidate a variable interest entity. The revised Interpretation provisions are effective for variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. The revised Interpretation provisions apply to all other types of variable interest entities for financial statement periods ending after March 15, 2004. As of June 30, 2004, the Company did not hold a significant variable interest in a variable interest entity in which the Company is not the primary beneficiary. See Note 6 for discussion of the Company's accounts receivable and financing entity which is included in the consolidated financial statements as the Company is the primary beneficiary of the variable interest entity. Adoption of the subsequent provisions of the Interpretation did not have a material impact on the Company's financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the financial accounting and reporting requirements as originally established in SFAS No. 133 for derivative instruments and hedging activities. SFAS No. 149 provides greater clarification of the characteristics of a derivative instrument so that contracts with similar characteristics will be accounted for consistently. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, as well as for hedging relationships designated after June 30, 2003, excluding certain implementation issues that have been effective prior to this date under SFAS No. 133. The adoption of SFAS No. 149 did not have a material effect on the Company's financial position or results of operations.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ACCOUNTING FOR STOCK-BASED COMPENSATION. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123. The transition guidance and annual disclosure provisions (shown below) are effective for fiscal years ending after December 15, 2002. The adoption of this statement did not have a material effect on the Company's financial position or results of operations.

At June 30, 2004, the Company maintained several stock incentive plans for the benefit of certain employees, which are more fully described in Note 14. The Company accounts for these plans in accordance with Accounting Principles Bulletin ("APB") 25, and related interpretations. Except for costs related to restricted shares and restricted share units, no compensation expense has been recognized in net earnings, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. The following tables illustrate the effect on net earnings and earnings per share if the Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."

                                                                               Fiscal Year Ended June 30,
                                                              --------------------------------------------------------
                                                                 2004                    2003                   2002
                                                              --------------------------------------------------------
(in millions, except per Common Share amounts)                                         Restated               Restated
Net Earnings, as reported                                     $ 1,474.5               $ 1,375.1              $ 1,070.7
Restricted share amortization included in net
  earnings, net of related tax effects                              2.0                     1.8                    2.7
Total stock-based employee compensation expense
  determined under fair value method for all awards,
  net of related tax effects (1)                                 (104.3)                  (91.6)                 (79.1)
                                                              ---------               ---------              ---------
Pro Forma net earnings                                        $ 1,372.2               $ 1,285.3              $   994.3
                                                              =========               =========              =========

                                                                               Fiscal Year Ended June 30,
                                                              --------------------------------------------------------
                                                                 2004                    2003                   2002
                                                              --------------------------------------------------------
                                                                                       Restated               Restated
Basic earnings per Common Share:
  As reported                                                 $    3.39               $    3.08              $    2.37
  Pro Forma basic earnings per Common Share                   $    3.16               $    2.88              $    2.21

Diluted earnings per Common Share
  As reported                                                 $    3.35               $    3.03              $    2.33
  Pro Forma diluted earnings per Common Share (2)             $    3.14               $    2.85              $    2.17

(1) The total stock-based employee compensation expense was adjusted to include employee stock purchase plan expense of $8.4 million, $6.8 million and $6.9 million for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.

(2) The Company uses the treasury stock method when calculating diluted earnings per Common Share as presented in the table above. Under the treasury stock method, diluted shares outstanding is adjusted for the weighted-average unrecognized compensation component should the Company adopt SFAS 123.

The information in the table above has been revised with respect to an option award previously granted to the Company's Chairman and Chief Executive Officer in November 1999. For more information, see Note 14.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. BUSINESS COMBINATIONS, SPECIAL ITEMS & MERGER-RELATED COSTS

POLICY

The Company's special items primarily consist of costs relating 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 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 SAB 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 not meeting the criteria for accrual at the commitment date have been expensed as the integration plan has been implemented.

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 formalized and adopted by management. Certain other integration costs not meeting the criteria for accrual at the commitment date are expensed as the integration plan is implemented.

At the beginning of the third quarter of 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 an exit cost 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 Company records settlements of significant lawsuits that are infrequent, non-recurring or unusual in nature as special items. Also, the Company records, from time to time, material charges that are one-time, unusual or infrequent in nature as special items.

BUSINESS COMBINATIONS

FISCAL 2004. On June 28, 2004, the Company acquired approximately 98.7% of the outstanding common stock of ALARIS, a San Diego, California-based company which is a leading 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 acquisition extends the Company's portfolio of market leading products and services to health care providers, and increases its presence in strategic markets outside the United States. With complementary operations, product lines, distribution networks and geographic presence, the acquisition will enable the Company to broaden integrated product and service offerings, better serve customers globally and deliver a comprehensive suite of medication safety solutions.

This acquisition was accounted for under the purchase method of accounting. The cash transaction was valued at approximately $2.1 billion, including the assumption of approximately $358 million of debt. Under the agreement, the Company agreed to make a cash tender offer to acquire all of the outstanding shares of ALARIS common stock at a price of $22.35 per share. ALARIS employees with outstanding stock options either elected to receive a cash payment or convert their options into an option to purchase the Company's Common Shares. In July 2004, certain ALARIS employees elected to convert their options for the right to purchase a total of approximately 0.6 million Common Shares of the Company.

The preliminary allocation of the ALARIS purchase price resulted in an allocation to goodwill of approximately $1.5 billion and an allocation to identifiable intangible assets of $413.2 million. The Company valued intangible assets related to trademarks, trade names, patents and customer relationships. The detail by category is as follows:

                                                         Amount       Average
                Category                             (in millions)  Life (Years)
                --------                             -------------  ------------
Trademarks and trade names                              $ 153.8      Indefinite
Patents                                                   108.2          10
Customer relationships                                    151.2           8
                                                        -------
         Total intangible assets acquired               $ 413.2
                                                        =======

Given the size and timing of the acquisition, the allocation of the purchase price is not yet finalized and is subject to adjustment. The Company worked with a third-party valuation expert to determine the fair value of in-process research and development ("IPR&D") and the fair value of identifiable intangible assets. As required by SFAS 141 "Business Combinations,"

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

amounts assigned to tangible and intangible assets to be used in research and development projects that have no alternate future use were charged to expense at the acquisition date. The Company recorded a charge of $12.7 million, within special items in the Company's consolidated statement of earnings, for an estimate of acquired IPR&D.

Supplemental pro forma results of operations are not disclosed as the impact to the Company from the ALARIS acquisition was not material. The consolidated financial statements include the results of operations as of June 28, 2004.

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(R) family of needle-free valves and systems infringes upon ICU patents. ICU seeks monetary damages plus permanent injunctive relief preventing ALARIS from selling SmartSite(R) 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 The Intercare Group, plc ("Intercare"), a leading European pharmaceutical products and services company. This acquisition increased the Company's scale of proprietary sterile manufacturing and broadened its participation in the fast-growing European generic (including manufacturing capabilities) and injectible product market. The cash transaction was valued at approximately $570 million, including the assumption of approximately $150 million in Intercare debt.

In addition, during fiscal 2004, the Company also completed other acquisitions that individually were not material and were accounted for under the purchase method of accounting. The aggregate purchase price of these individually immaterial acquisitions, which was paid in cash, was approximately $168 million. Assumed liabilities of acquired businesses, including those of ALARIS and Intercare, were approximately $1.1 billion. The consolidated financial statements include the results of operations from each of these business combinations as of the date of acquisition. Had the transactions, including ALARIS and Intercare, occurred on July 1, 2001, results of operations would not have differed materially from reported results.

FISCAL 2003. On January 1, 2003, the Company completed the acquisition of Syncor International Corporation, a Woodland Hills, California-based company (which has been given the legal designation of Cardinal Health 414, Inc., and is referred to in these "Notes to Consolidated Financial Statements" as "Syncor"), which is a leading provider of nuclear pharmacy services. This acquisition was accounted for under the purchase method of accounting. The Company issued approximately 12.5 million Common Shares, valued at approximately $780 million, to Syncor stockholders and Syncor's outstanding stock options were converted into options to purchase approximately 3.0 million Common Shares. The Company also assumed approximately $120 million in debt. In connection with this acquisition, certain operations of Syncor have been or will be sold (see Note 21) and other operations have been integrated with the Company's existing Nuclear Pharmacy Services business, a component of the Pharmaceutical Technologies and Services segment.

In addition, during fiscal 2003, the Company also completed other acquisitions that individually were not material and were accounted for under the purchase method of accounting. The aggregate purchase price of these individually immaterial acquisitions, which was paid in cash, was approximately $14.4 million. Assumed liabilities of the acquired businesses, including those of Syncor, were approximately $340.1 million. The consolidated financial statements include the results of operations from each of these business combinations as of the date of acquisition. Had the transactions, including Syncor, occurred on July 1, 2001, results of operations would not have differed materially from reported results.

FISCAL 2002. During fiscal 2002, the Company completed several acquisitions that individually were not material and were accounted for under the purchase method of accounting. These business combinations primarily focused on expanding the service offerings within the Pharmaceutical Technologies and Services segment to include contract pharmaceutical development and integrated medical education. The aggregate purchase price, which was paid primarily in cash, was approximately $418.0 million. The Company issued approximately 0.3 million Common Shares to stockholders and outstanding stock options were converted into options to purchase a total of approximately 1.0 million Common Shares. Assumed liabilities of the acquired businesses were approximately $93.5 million, including debt of $11.1 million. The consolidated financial statements include the results of operations from each of these business combinations subsequent to the date of acquisition. Had these transactions occurred on July 1, 2001, results of operations would not have differed materially from reported results.

                                                                  Fiscal Year Ended June 30,
                                                           ---------------------------------------
(in millions, except per Common Share amounts)               2004          2003             2002
----------------------------------------------             ---------------------------------------
                                                                                          Restated
   Merger-related costs                                    $  44.7       $   74.4          $ 131.9
   Restructuring costs                                        37.1           67.0             18.5
   Litigation settlements, net                               (62.3)        (101.5)           (33.8)
   Other special items                                        37.9              -                -
                                                           -------       --------          -------

Total special items                                           57.4           39.9            116.6
Tax effect of special items (1)                              (21.8)          (6.7)           (42.9)
                                                           -------       --------          -------
Net earnings effect of special items                          35.6           33.2             73.7
                                                           =======       ========          =======
Net decrease on Diluted EPS                                $  0.08       $   0.07          $  0.16
                                                           =======       ========          =======

(1) The Company applies varying tax rates to its special items depending upon the tax jurisdiction where the item was incurred. The overall effective tax rate varies each period depending upon the unique nature of the Company's special items and the tax jurisdiction where the item was incurred.

Merger-Related Costs

Costs of integrating operations of various merged companies are recorded as merger-related costs when incurred. The merger-related costs incurred during fiscal 2004 were primarily a result of the Syncor acquisition. Merger-related costs incurred during fiscal 2003 and 2002 were primarily a result of the Bindley Western Industries, Inc. (which has been given the legal designation of Cardinal Health 100, Inc., and is referred to in these "Notes to Consolidated Financial Statements" as "Bindley") acquisition. During the fiscal years noted above, the Company also incurred merger-related costs for numerous smaller acquisitions. The following table and paragraphs provide additional detail regarding the types of merger-related costs incurred by the Company.

                                                                 Fiscal Year Ended June 30,
                                                            -------------------------------------
(in millions)                                                2004            2003            2002
-------------                                               -------------------------------------
Merger-related costs:
   Employee-related costs                                   $11.9          $18.7           $ 23.7
   Pharmaceutical distribution center consolidation           0.1           22.7             52.4
   Asset impairments & other exit costs                       0.9            5.4              9.0
   In-Process research & development                         12.7              -                -
   Integration costs and other                               19.1           27.6             46.8
                                                            -----          -----           ------
Total merger-related costs                                  $44.7          $74.4           $131.9
                                                            =====          =====           ======

EMPLOYEE-RELATED COSTS. During fiscal 2004, 2003 and 2002, the Company incurred employee-related costs associated with certain merger and acquisition transactions of $11.9 million, $18.7 million and $23.7 million, respectively. These costs primarily consist of severance, stay bonuses, non-compete agreements and other forms of compensatory payouts made to employees as a direct result of the mergers or acquisitions. In addition to these types of costs, during fiscal 2003, the Company incurred a charge of $8.8 million related to an approved plan to curtail defined benefit pension plans within the Pharmaceutical Technologies and Services segment. This curtailment resulted from the plan to conform the employee benefit plans of R.P. Scherer Corporation (which was acquired in August 1998, has been given the legal designation of Cardinal Health 409, Inc. and is referred to in these "Notes to Consolidated Financial Statements" as "Scherer") to the Company's benefit plan structure at the time of the Scherer merger.

PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. During fiscal 2004, 2003 and 2002, the Company incurred charges of $0.1 million, $22.7 million and $52.4 million, respectively, primarily associated with the Company's plans to close and consolidate a total of 16 Bindley distribution centers, Bindley's corporate office and one of the Company's data centers as a result of the Bindley acquisition. These charges include, but are not limited to, the following: (1) employee-related costs, primarily from the termination of approximately 1,250 employees due to the closures and consolidations noted above; (2) exit costs to consolidate and close the various facilities mentioned above, including asset impairment charges, inventory move costs and contract/lease termination costs; and (3) duplicate salary costs incurred during the shutdown periods.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ASSET IMPAIRMENTS & OTHER EXIT COSTS. During fiscal 2004, 2003 and 2002, the Company incurred asset impairment and other exit costs of $0.9 million, $5.4 million and $9.0 million, respectively. The asset impairment and other exit costs incurred during fiscal 2004 related primarily to plans to consolidate operations as a result of the Syncor acquisition. The asset impairment and other exit costs incurred during fiscal 2003 and 2002 related primarily to plans to close and consolidate facilities as a result of the Bergen Brunswig Medical Corporation acquisition as well as asset impairments, lease terminations and other exit costs incurred internationally as a result of the Scherer acquisition.

IN-PROCESS RESEARCH & DEVELOPMENT. During the fourth quarter of fiscal 2004, the Company recorded a charge of $12.7 million related to the writeoff of in-process research and development costs associated with the ALARIS acquisition.

OTHER INTEGRATION COSTS. During fiscal 2004, 2003 and 2002, the Company incurred integration costs and other of $19.1 million, $27.6 million and $46.8 million, respectively. The costs included in this category generally relate to expenses incurred to integrate merged or acquired companies' operations and systems into the Company's pre-existing operations and systems. These costs include, but are not limited to, the integration of information systems, employee benefits and compensation, accounting/finance, tax, treasury, internal audit, risk management, compliance, administrative services, sales and marketing and others.

                                                                 Fiscal Year Ended June 30,
                                                            -------------------------------------
(in millions)                                               2004            2003            2002
-------------                                               ------------------------------------
Restructuring costs:
   Pharmaceutical Distribution and Provider Services            -          $ 1.4           $  0.3
   Medical Products and Services                              8.7           23.6             14.9
   Pharmaceutical Technologies and Services                  23.3           40.7              2.8
   Automation and Information Services                        4.2              -                -
   Other                                                      0.9            1.3              0.5
                                                            -----          -----           ------
Total restructuring costs                                   $37.1          $67.0           $ 18.5
                                                            =====          =====           ======

PHARMACEUTICAL DISTRIBUTION AND PROVIDER SERVICES. During the fiscal years noted above, the Company has initiated very few restructuring projects that impacted the Pharmaceutical Distribution and Provider Services segment. Costs incurred during fiscal 2003 and 2002 primarily comprised employee-related costs incurred to reduce headcount for certain businesses within the segment and to realign the management structure of those businesses. These restructuring projects resulted in approximately 30 employees being terminated, the majority of which occurred during fiscal 2003. The restructuring projects that impacted the Pharmaceutical Distribution and Provider Services segment were substantially completed by the end of fiscal 2003.

MEDICAL PRODUCTS AND SERVICES. During fiscal 2004, 2003 and 2002, the Company incurred costs of $8.7 million, $23.6 million and $14.9 million, respectively, to restructure operations both domestically and internationally. These restructuring plans focused on various aspects of the segment's operations, specifically to close and consolidate certain manufacturing operations, rationalize headcount both domestically and internationally, and align certain distribution and manufacturing operations in the most strategic and cost efficient structure. In connection with the implementation of these restructuring plans, the Company incurred costs which included, but are not limited to, the following: (1) employee-related costs, the majority of which represents severance accrued upon either communication of terms to employees or management's commitment to the restructuring plan, depending upon the project; and (2) exit costs, including asset impairment charges, costs incurred to relocate physical assets and project management costs. The earliest of these restructuring plans was initiated during fiscal 2002, with others being implemented throughout fiscal 2003 and 2004. Some of these restructuring plans were completed during fiscal 2003 and 2004, while other plans will be completed throughout fiscal 2005. Overall, these restructuring plans will result in termination of approximately 2,200 employees, of which approximately 1,900 had been terminated as of June 30, 2004.

PHARMACEUTICAL TECHNOLOGIES AND SERVICES. During fiscal 2004, 2003 and 2002, the Company incurred costs of $23.3 million, $40.7 million and $2.8 million, respectively, to restructure operations both domestically and internationally. These restructuring plans focused on various aspects of the segment's operations, specifically to close and consolidate certain manufacturing and other

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

business facilities, exit non-strategic businesses, integrate and align operations in the most strategic and cost efficient manner and rationalize headcount both domestically and internationally as a result of integration plans and market changes. In connection with the implementation of these restructuring plans, the Company incurred costs which included, but are not limited to, the following: (1) employee-related costs, the majority of which represents severance accrued upon communication of terms to employees; (2) asset impairment charges, including the writedown of physical assets as well as goodwill writeoffs from the exit of non-strategic and non-integrated businesses; and (3) other exit costs, including lease/contract termination costs, costs to dismantle and move machinery, equipment and other physical assets and costs to transfer certain technologies to other existing facilities. The earliest of these restructuring plans was initiated during fiscal 2001, with others being implemented throughout fiscal 2003 and 2004. Some of the restructuring plans were completed during fiscal 2003 and 2004, while other plans will be completed throughout fiscal 2005. Overall, these restructuring plans will result in the termination of approximately 1,000 employees, of which approximately 900 had been terminated as of June 30, 2004.

AUTOMATION AND INFORMATION SERVICES. During fiscal 2004, the Company incurred restructuring costs of $4.2 million related to plans to exit or dispose of certain non-strategic businesses as well as close a manufacturing facility within this segment. In connection with the implementation of these restructuring plans, the Company incurred employee-related costs, primarily severance accrued upon communication of terms to employees, asset impairment charges and facility exit costs. The Company expects these restructuring plans to be completed during fiscal 2005. Overall, these restructuring plans will result in the termination of approximately 35 employees, of which approximately 10 had been terminated as of June 30, 2004.

OTHER. During fiscal 2004, 2003 and 2002, the Company incurred costs of $0.9 million, $1.3 million and $0.5 million related to restructuring plans that impacted more than just one segment. These costs related primarily to a plan to restructure the Company's delivery of information technology infrastructure services. These plans were initiated during fiscal 2003 and are expected to be completed during fiscal 2005. Overall, these restructuring plans resulted in the termination of approximately 20 employees, all of which had been terminated as of June 30, 2004.

                                                                    Fiscal Year Ended June 30,
                                                              --------------------------------------
(in millions)                                                  2004           2003             2002
-------------                                                 --------------------------------------
                                                                                             Restated
Litigation settlements, net:
   Vitamin litigation                                         ($ 6.5)       ($102.9)          ($35.3)
   Pharmaceutical manufacturer antitrust litigation            (55.9)             -                -
   Other litigation                                              0.1            1.4              1.5
                                                              ------        -------           ------
Total litigation settlements, net                             ($62.3)       ($101.5)          ($33.8)
                                                              ======        =======           ======

VITAMIN LITIGATION. During fiscal 2004, 2003 and 2002, the Company recorded income of $6.5 million, $102.9 million and $35.3 million, respectively, resulting from the recovery of antitrust claims against certain vitamin manufacturers for amounts overcharged in prior years. The total recovery of antitrust claims against certain vitamin manufacturers through June 30, 2004 was $144.7 million (net of attorney fees, payments due to other interested parties and expenses withheld). See Note 1 for additional information regarding the periods in which these recoveries were recorded. The Company has settled all but one known claim, and the total amount of any future recovery is not likely to be a material amount.

PHARMACEUTICAL MANUFACTURER ANTITRUST LITIGATION. During fiscal 2004, the Company recorded income of $55.9 million resulting from settlement of antitrust claims alleging certain prescription drug manufacturers took improper actions to delay or prevent generic drug competition.

OTHER LITIGATION. During fiscal 2004, 2003 and 2002, the Company recorded settlement charges of $0.1 million, $1.4 million and $1.5 million, respectively, related to certain immaterial litigation matters, all of which have been fully resolved.

Other Special Items

FISCAL 2004. During fiscal 2004, the Company incurred other special items totaling $37.9 million. This total comprises two items. First, the Company executed a special contribution to The Cardinal Health Foundation during the fourth quarter which totaled approximately $31.7 million. The special contribution was executed as a direct result of a large pharmaceutical manufacturer antitrust litigation settlement received during the fourth quarter. The Cardinal Health Foundation is the

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

primary vehicle used by the Company to provide charitable support to the community and various organizations. Prior contributions to the Cardinal Health Foundation were immaterial. Second, the Company incurred costs of $6.2 million during the fourth quarter related to the SEC investigation and the Audit Committee's internal review. These costs primarily represent legal fees and document preservation and production costs incurred in responding to requests related to the SEC's investigation and the Audit Committee's internal review. Prior costs incurred related to these matters were immaterial. For further information regarding the SEC's investigation and the Audit Committee's internal review, see Note 1.

                                                      Fiscal Year Ended June 30,
                                              ---------------------------------------
($ in millions)                                 2004             2003          2002
                                              ---------------------------------------
Balance at beginning of year                  $   45.7         $   64.7      $   34.7
Additions (1)                                    119.8            142.8         151.9
Payments                                        (125.6)          (161.8)       (121.9)
                                              --------         --------      --------
Balance at end of year                        $   39.9         $   45.7      $   64.7
                                              ========         ========      ========

(1) Amounts represent items that have been expensed as incurred or accrued in accordance with GAAP. These amounts do not include gross litigation settlement income recorded during fiscal 2004, 2003 and 2002 of $62.4 million, $102.9 million and $35.3 million, respectively, which were recorded as special items.

Purchase Accounting Accruals

In connection with restructuring and integration plans related to Intercare, the Company accrued, as part of its acquisition adjustments, a liability of $10.4 million related to employee termination and relocation costs and $11.0 million related to closing of certain facilities. During fiscal 2004, the Company paid $1.5 million of employee-related costs. No payments were made associated with the facility closures during fiscal 2004.

In connection with restructuring and integration plans related to Syncor, the Company accrued, as part of its acquisition adjustments, a liability of $15.1 million related to employee termination and relocation costs and $10.4 million related to closing of duplicate facilities. As of June 30, 2004, the Company had paid $12.0 million of employee related costs, $1.0 million associated with the facility closure and $1.5 million of other restructuring costs.

Other

Certain merger, acquisition and restructuring costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recorded amounts exceed costs, such changes in estimates will be recorded in special items when incurred.

The Company estimates it will incur additional costs in future periods associated with various mergers, acquisitions and restructuring activities totaling approximately $70 million (approximately $45 million net of tax). The Company believes it will incur these costs to properly integrate and rationalize operations, a portion of which represents facility rationalizations and implementing efficiencies regarding information systems, customer systems, marketing programs and administrative functions, among other things. Such amounts will be expensed as special items when incurred. This estimate does not include costs associated with the integration of ALARIS or the Company-wide restructuring project announced in September 2004 as the Company is still in the process of determining the costs associated with these projects.

                                                                 June 30,       June 30,
                                                                   2004           2003
                                                                 --------       ---------
Future minimum lease payments receivable                        $   844.0      $    840.5
Unguaranteed residual values                                         21.6            18.6
Unearned income                                                    (101.8)         (112.2)
Allowance for uncollectible minimum lease payments
   receivable                                                       (15.7)          (17.8)
                                                                ---------      ----------
Net investment in sales-type leases                                 748.1           729.1
       Less: current portion                                        202.1           171.8
                                                                ---------      ----------
Net investment in sales-type leases, less current portion       $   546.0      $    557.3
                                                                =========      ==========

Future minimum lease payments to be received pursuant to sales-type leases during the next five fiscal years and thereafter are:

(in millions)                 2005     2006    2007     2008    2009   Thereafter    Total
-------------                 ------------------------------------------------------------
Minimum lease  payments      $228.7   $215.7  $182.4   $138.5  $71.8     $  6.9     $ 844.0

During fiscal 2004 and 2003, the Company entered into four separate agreements (two in fiscal 2004 and two in fiscal 2003) to transfer ownership of certain lease receivables along with a security interest in the related leased equipment to the leasing subsidiary of a bank. The net book value of the leases sold was $314.2 million and $356.0 million for fiscal 2004 and 2003, respectively (see Note 10 for additional information).

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. NOTES PAYABLE & LONG-TERM OBLIGATIONS

NOTES PAYABLE, BANKS. The Company has entered into an unsecured, uncommitted line-of-credit arrangement that allows for borrowings up to $7.3 million at June 30, 2004, at an interest rate of 55 basis points over three month Euro Libor. At June 30, 2004, $5.6 million was outstanding under this arrangement, at an effective interest rate of 2.13%. Total available but unused lines of credit at June 30, 2004 were $1.7 million. At June 30, 2003, there were no notes payable outstanding.

LONG-TERM OBLIGATIONS. Long-term obligations consist of the following (in millions):

                                                                 June 30,       June 30,
                                                                   2004           2003
                                                                 --------       ---------
4.00% Notes due 2015                                            $   432.9      $    475.7
4.45% Notes due 2005                                                305.5           317.8
6.00% Notes due 2006                                                151.6           158.0
6.25% Notes due 2008                                                150.0           150.0
6.50% Notes due 2004                                                    -           100.0
6.75% Notes due 2011                                                497.0           495.4
6.75% Notes due 2004                                                    -           100.0
7.25% Senior subordinated notes due 2011                            195.3               -
7.30% Notes due 2006                                                130.3           135.2
7.80% Debentures due 2016                                            75.7            75.7
7.00% Debentures due 2026                                           192.0           192.0
Bank term loan due 2009                                             162.6               -
Commercial paper                                                    634.2               -
Preferred debt securities                                           650.0           400.0
Short-term borrowings, reclassified                                  15.0            21.0
Other obligations; interest averaging 4.65% in 2004 and
    5.29% in 2003, due in varying installments
    through 2015                                                     97.6            79.8
                                                                ---------      ----------
Total                                                             3,689.7         2,700.6
Less: current portion                                               855.0           228.7
                                                                ---------      ----------

Long-term obligations, less current portion                     $ 2,834.7      $  2,471.9
                                                                =========      ==========

The 4.00%, 4.45%, 6.00%, 6.25% and 6.50% Notes and the 6.75% Notes due 2011 represent unsecured obligations of the Company, and the 6.75% Notes due 2004 represent unsecured obligations of Scherer, which are guaranteed by the Company. The 7.30% Notes and the 7.80% and 7.00% Debentures represent unsecured obligations of Allegiance Corporation, which are guaranteed by the Company. These obligations are not subject to a sinking fund and are not redeemable prior to maturity, except for the 7.00% Debentures which included put options that expired on September 15, 2003, without any put options being exercised. Interest is paid pursuant to the terms of the notes. These notes are structurally subordinated to the liabilities of the Company's subsidiaries, including trade payables of $6.4 billion and $650.0 million of preferred debt securities.

As part of the Company's acquisition of ALARIS, the Company assumed $195.3 million of Senior subordinated notes due 2011, which includes a premium of $20.3 million based on the fair value of the debt. The Senior subordinated notes bear interest at an annual rate of 7.25%, which is payable semi-annually in arrears on July 1 and January 1 of each year, commencing January 1, 2004, and mature on July 1, 2011. The Senior subordinated notes are redeemable at the option of the Company, in whole or in part, at any time on or after July 1, 2007 at an initial redemption price of 103.625%, plus accrued and unpaid interest, if any, to the date of redemption, with the redemption price declining annually thereafter. In addition, subject to certain limitations, the Company may redeem up to 35% of the Senior subordinated notes on or before July 1, 2006 with the net cash proceeds of one or more equity offerings, at a price of 107.25%, plus accrued and unpaid interest, if any, to the date of redemption. In the event of a change of control, as defined in the indenture governing the Senior subordinated notes, holders may require the Company to purchase their Senior subordinated notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. The Senior subordinated notes are subject to certain restrictive and reporting covenants. As of June 30, 2004, the Company was in compliance with all such covenants. Subsequent to June 30, 2004, the Company paid off $183.6 million of the Senior subordinated notes and amended the bond indenture to remove the restrictive covenants. The remaining $11.7 million

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

balance 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. The term loan bears interest at an annual rate equal to current LIBOR or a fluctuating base rate, plus a margin of 2.25% as of June 30, 2004. The Company can elect to use either a one-, two-, three-, or six-month LIBOR rate. ALARIS has made elections resulting in a weighted average interest rate at June 30, 2004 of 3.36% per annum (1.11% plus the margin of 2.25%). Subsequent to June 30, 2004, the Company paid off the term loan and terminated the credit facility.

The Company has a commercial paper program, providing for the issuance of up to $1.5 billion in aggregate maturity value of commercial paper. The Company had $634.2 million outstanding under this program at June 30, 2004 with a market interest rate based upon LIBOR. The Company also had an extendible commercial notes program providing for the issuance of up to $150.0 million of extendible commercial notes. The Company did not have any borrowings outstanding under this extendible commercial notes program at June 30, 2004. The Company also maintains other short-term credit facilities that allow for borrowings up to $176.4 million. At June 30, 2004 and 2003, $62.8 million and $21.0 million, respectively, were outstanding under these uncommitted facilities. The June 30, 2004 balance includes $15 million in short-term borrowings reclassified. The effective interest rate as of June 30, 2004 and 2003 was 1.68% and 2.28%, respectively. The balance also includes $47.8 million which is classified in other obligations. The remaining $49.8 million balance of other obligations consists primarily of additional notes, loans and capital leases.

The Company also has two unsecured $750 million bank revolving credit facilities, which provide for up to an aggregate of $1.5 billion in borrowings. One of these facilities expires on March 24, 2008 and the other expires on March 23, 2009. At expiration, these revolving credit facilities can be extended upon mutual consent of the Company and the lending institutions. These revolving credit facilities exist largely to support issuances of commercial paper as well as other short-term borrowings and remained unused at June 30, 2004, except for $37.3 million of standby letters of credit issued on behalf of the Company. At June 30, 2004, $500.0 million of commercial paper and $15.0 million of other short-term borrowings were reclassified as long-term. At June 30, 2003, $21.0 million of other short-term borrowings were reclassified as long-term. These reclassifications reflect the Company's intent and ability, through the existence of the unused revolving credit facilities, to refinance these borrowings. The remaining $134.2 million of commercial paper outstanding at June 30, 2004 was classified as short-term.

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, 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. At June 30, 2004 and 2003, the Accounts Receivable and Financing Entity owned approximately $506.9 million and $463.6 million, respectively, of receivables that are included in the Company's consolidated balance sheet. The effective interest rate as of June 30, 2004 and 2003 was 2.36% and 2.81%, respectively. Other than for loans made to the Company or for breaches of certain representations, warranties or covenants, the Accounts Receivable and Financing Entity does not have any recourse against the general credit of the Company.

At June 30, 2003, the Company had an asset securitization facility available which allows the Company to sell receivables generated from its radiopharmaceutical operations to a wholly-owned subsidiary, which in turn sells the receivables to a multi-seller conduit administered by a third party bank. This securitization program allowed the Company to borrow up to $65.0 million. This securitization facility was terminated in fiscal year 2004.

During fiscal 2003, the Company issued $500 million of 4.00% Notes due 2015. The proceeds of the debt issuance were used for general corporate purposes, including working capital, capital expenditures, acquisitions, investments and repurchases of our debt and equity securities. After such issuance, the Company has the capacity to issue approximately $500 million of additional equity or debt securities pursuant to effective shelf registration statements filed with the SEC.

(in millions)                            2005     2006     2007    2008    2009    Thereafter    Total
--------------------------------------------------------------------------------------------------------
Maturities of long-term obligations     $855.0   $680.7   $136.5   $4.5   $804.3   $ 1,208.7    $3,689.7

7. FINANCIAL INSTRUMENTS

INTEREST RATE RISK MANAGEMENT. The Company is exposed to the impact of interest rate changes. The Company's objective is to manage the impact of interest rate changes on earnings and cash flows and on the market value of its borrowings. The Company maintains fixed rate debt as a percentage of its net debt within a certain range.

The Company utilizes a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, the Company enters into interest rate swaps to further manage its exposure to interest rate variations related to its borrowings and to lower its overall borrowing costs.

At June 30, 2004, the Company held two pay-fixed interest rate swaps acquired through the ALARIS acquisition. These pay-fixed interest rate swaps were utilized by ALARIS to hedge a bank term loan. The swaps were unwound subsequent to June 30, 2004 upon the Company's election to pay down the bank term loan (see Note 6). These swaps did not have a material impact upon the Company's financial statements. At June 30, 2003, the Company held pay-fixed interest rate swaps to hedge the variability of cash flows related to changes in interest rates on borrowing costs of variable-rate debt. These contracts were classified as cash flow hedges and matured through January 2004. The Company adjusted the pay-fixed interest rate swaps to current market values through other comprehensive income, as the contracts were effective in offsetting the interest rate exposure of the forecasted interest rate payments hedged. The Company did not recognize any material gains/(losses) related to contracts that were not effective or forecasted transactions that did not occur during fiscal 2003.

The Company also held pay-floating interest rate swaps to hedge the change in fair value of the fixed-rate debt related to fluctuations in interest rates. These contracts are classified as fair value hedges and mature through June 2015. The gain/(loss) recorded on the pay-floating interest rate swaps is directly offset by the change in fair value of the underlying debt. Both the derivative instrument and the underlying debt are adjusted to market value at the end of each period with any resulting gain/(loss) recorded in interest expense and other.

The following table represents the notional amount hedged, fair value of the interest rate swaps outstanding at June 30, 2004 and 2003 included in other assets/liabilities and the amount of net gain/(loss) for pay-floating interest rate swaps recognized through interest expense and other during fiscal 2004 and 2003.

(in millions)                              2004       2003     Classification of net gain/loss
---------------------------------        --------   --------   -------------------------------
Pay-fixed interest rate swaps:
     Notional amount                     $  171.0   $  125.0
     Assets                                   0.8          -
     Liabilities                                -        3.5
Pay-floating interest rate swaps:
     Notional amount                     $1,327.8   $1,077.8
     Assets                                  10.6       33.2
     Liabilities                             67.1       24.4
     Gain/(loss)                             34.8       27.1   Interest expense and other

At June 30, 2003, the Company had net deferred losses on pay-fixed interest rate swaps of $3.5 million, recorded in other comprehensive income. During fiscal 2004 and 2003, the Company recognized losses of $4.5 million and $11.9 million, respectively, within interest expense and other related to these interest rate swaps.

The counterparties to these contracts are major financial institutions and the Company does not have significant exposure to any one counterparty. Management believes the risk of loss is remote and in any event would not be material.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CURRENCY RISK MANAGEMENT. The Company conducts business in several major international currencies and is subject to risks associated with changing foreign exchange rates. The Company's objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on its business operations. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the value of existing foreign currency assets and liabilities, commitments and anticipated foreign currency revenue and expenses. The gains and losses on these contracts offset changes in the value of the underlying transactions as they occur.

At June 30, 2004 and 2003, the Company held forward contracts expiring through June 2005 to hedge probable, but not firmly committed, revenue and expenses. These hedging contracts are classified as cash flow hedges and, accordingly, are adjusted to current market values through other comprehensive income until the underlying transactions are recognized. Upon recognition, such gains and losses are recorded in operations as an adjustment to the recorded amounts of the underlying transactions in the period in which these transactions are recognized. The principal currencies hedged are the European euro, British pound, Mexican peso, and the Thai bhat.

At June 30, 2004 and 2003, the Company also held forward contracts expiring in December 2013 and September 2003, respectively, to hedge the value of foreign currency assets and liabilities. These forward contracts are classified as fair value hedges and are adjusted to current market values through interest expense and other, directly offsetting the adjustment of the foreign currency asset or liability.

The following table represents the notional amount hedged, the value of the forward contracts outstanding at June 30, 2004 and 2003 included in other assets or liabilities and the amount of net gain/(loss) related to fair value forward contracts recognized through interest expense and other during fiscal 2004 and 2003.

(in millions)                              2004       2003     Classification of net gain/loss
---------------------------------        --------   --------   -------------------------------
Forward contracts - cash flow hedge:
     Notional amount                     $  276.9   $  240.5
     Assets                                   1.4        4.7
     Liabilities                              4.9       14.2
Forward contracts - fair value hedge:
     Notional amount                     $  489.0   $  114.0
     Assets                                     -        0.3
     Liabilities                             19.5        1.1
     Gain/(loss)                            (12.7)      (8.1)  Interest expense and other

At June 30, 2004 and 2003, the Company had net deferred losses related to forward contract cash flow hedges of $3.5 million and $9.5 million, respectively, recorded in other comprehensive income. During fiscal 2004 and 2003, the Company recognized losses of $14.9 million and $12.2 million, respectively, within net earnings related to these forward contracts.

The income/loss recorded on the forward contract fair value hedge is offset by the remeasurement adjustment on the foreign currency denominated asset or liability. The settlement of the derivative instrument and the remeasurement adjustment on the foreign currency denominated asset or liability are both recorded in interest expense and other at the end of each period. The Company did not recognize any material gains/(losses) related to contracts that were not effective or forecasted transactions that did not occur during fiscal 2004 and 2003.

In connection with the Company's acquisition of ALARIS, the Company acquired certain options hedging European euro, Australian dollar, Canadian dollar, and British pound. These options were entered into by ALARIS to reduce the risk of earnings and cash flow volatility related to certain forecasted transactions. As of June 30, 2004, exercise of these options would not result in a material impact to the Company.

The counterparties to these contracts are major financial institutions and the Company does not have significant exposure to any one counterparty. Management believes the risk of loss is remote and in any event would not be material.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash and equivalents, trade receivables, accounts payable, notes payable-banks, other short-term borrowings and other accrued liabilities at June 30, 2004 and 2003, approximate their fair value because of the short-term maturities of these items.

Cash balances are invested in accordance with the Company's investment policy. These investments are exposed to market risk from interest rate fluctuations and credit risk from the underlying issuers, although this is mitigated through diversification.

The estimated fair value of the Company's long-term obligations was $3,787.1 million and $2,926.1 million as compared to the carrying amounts of $3,689.7 million and $2,700.6 million at June 30, 2004 and 2003, respectively. The fair value of the Company's long-term obligations is estimated based on either the quoted market prices for the same or similar issues and the current interest rates offered for debt of the same remaining maturities or estimated discounted cash flows.

The following is a summary of the fair value gain/(loss) of the Company's derivative instruments, based upon the estimated amount that the Company would receive (or pay) to terminate the contracts as of June 30. The fair values are based on quoted market prices for the same or similar instruments.

(in millions)                                 2004                     2003
----------------------------------   ----------------------   ----------------------
                                     Notional   Fair Value    Notional   Fair Value
                                      Amount    Gain/(Loss)    Amount    Gain/(Loss)
                                     --------   -----------   --------   -----------
Foreign currency forward contracts   $  765.9   $    (23.0)   $  354.5   $    (10.3)
Interest rate swaps                  $1,498.8   $    (55.7)   $1,202.8   $      5.3

                              Fiscal Year Ended June 30,
                            ------------------------------
                              2004       2003       2002
                            --------   --------   --------
                                       Restated   Restated
U.S. Based Operations       $1,845.1   $1,733.8   $1,486.8
Non-U.S. Based Operations      393.3      346.9      238.1
                            --------   --------   --------
                            $2,238.4   $2,080.7   $1,724.9
                            ========   ========   ========

The provision for income taxes from continuing operations before cumulative effect of changes in accounting consists of the following (in millions):

                         Fiscal Year Ended June 30,
                      --------------------------------
                        2004        2003        2002
                      --------    --------    --------
                                  Restated    Restated
Current:
  Federal             $  547.3    $  426.5    $  296.2
  State                   39.1        29.5        23.8
  Foreign                 22.2        28.3        24.4
                      --------    --------    --------
    Total                608.6       484.3       344.4

Deferred:
  Federal                 99.8       191.0       208.5
  State                    7.1        27.1        29.8
  Foreign                 (1.8)       (2.9)        1.4
                      --------    --------    --------
    Total                105.1       215.2       239.7
                      --------    --------    --------
    Total provision   $  713.7    $  699.5    $  584.1
                      ========    ========    ========

                              Fiscal Year Ended June 30,
                              --------------------------
                                2004     2003     2002
                               ------   ------   ------
Provision at federal
   statutory rate              35.0%    35.0%    35.0%
State income taxes, net of
   federal benefit              2.0      1.7      2.6
Foreign tax rates              (4.0)    (3.2)    (3.2)
Nondeductible expenses          0.3      0.5      0.2
Other                          (1.4)    (0.4)    (0.8)
                               ----     ----     ----
   Effective income tax rate   31.9%    33.6%    33.8%
                               ====     ====     ====

The Company's effective tax rate reflects tax benefits derived from significant operations outside the United States, which are generally taxed at rates lower than the U.S. statutory rate of 35%. During fiscal 2004, the Company's results of operations benefited from a lower effective tax rate due to increased profits from production in lower tax international countries such as the Dominican Republic and Thailand. In addition, the Company has subsidiaries operating in Puerto Rico under a tax incentive agreement expiring in 2019.

No provision for income taxes has been made on approximately $1.2 billion of undistributed earnings of foreign subsidiaries because those earnings are considered permanently reinvested in the operations of those subsidiaries. It is not practicable to estimate the amount of tax that might be payable on the eventual remittance of such earnings.

Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities, and operating loss and tax credit carryforwards for tax purposes. The components of the deferred income tax assets and liabilities are as follows (in millions):

                                                         June 30,      June 30,
                                                           2004          2003
                                                        ----------    ----------
Deferred income tax assets:
   Receivable basis difference                          $     32.5    $     55.6
   Accrued liabilities                                       146.8          86.3
   Net operating loss carryforwards                           21.6          35.3
                                                        ----------    ----------
     Total deferred income tax assets                        200.9         177.2
   Valuation allowance for deferred income tax assets        (15.8)        (20.7)
                                                        ----------    ----------
     Net deferred income tax assets                     $    185.1    $    156.5
                                                        ----------    ----------
Deferred income tax liabilities:
   Inventory basis differences                              (498.8)       (521.1)
   Property-related                                         (339.2)       (359.4)
   Revenues on lease contracts                              (231.2)       (207.8)
   Other                                                    (153.3)       (112.2)
                                                        ----------    ----------
     Total deferred income tax liabilities                (1,222.5)     (1,200.5)
                                                        ----------    ----------
       Net deferred income tax liabilities              $ (1,037.4)   $ (1,044.0)
                                                        ==========    ==========

                                                June 30,    June 30,
                                                 2004        2003
                                               ---------   ---------
Other current assets and current liabilities   $  (175.8)  $  (204.3)
Deferred income taxes and other liabilities       (861.6)     (839.7)
                                               ---------   ---------
  Net deferred income tax liabilities          $(1,037.4)  $(1,044.0)
                                               =========   =========

The Company had state net operating loss carryforwards of $866.6 million at June 30, 2004. A valuation allowance of $9.9 million at June 30, 2004 has been provided for the state net operating loss, as utilization of such carryforwards within the applicable statutory periods is uncertain. The state net operating loss carryforwards expire through 2024. Expiring state net operating loss carryforwards and the required valuation allowances have been adjusted annually. The Company also has federal capital loss carryovers of $15.6 million at June 30, 2004 for which a 100% valuation allowance has been established since usage of these carryovers is uncertain at this time. After application of the valuation allowances described above, the Company anticipates no limitations will apply with respect to utilization of any of the other net deferred income tax assets described above.

Under a tax-sharing agreement with Baxter International Inc., Allegiance Corporation will pay for increases and be reimbursed for decreases to the net deferred tax assets transferred on the date of the Baxter-Allegiance Spin-Off (as hereinafter defined in Note 11). Such increases or decreases may result from audit adjustments to Baxter's prior period tax returns.

9. EMPLOYEE RETIREMENT BENEFIT PLANS

The Company sponsors various retirement and pension plans, including defined benefit, other postretirement benefit and defined contribution plans. Substantially all of the Company's domestic non-union employees are eligible to be enrolled in Company-sponsored contributory profit sharing and retirement savings plans, which include features under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), and provide for Company matching and profit sharing contributions. The Company's contributions to the plans are determined by the Board of Directors subject to certain minimum requirements as specified in the plans.

The total expense for employee retirement benefit plans (excluding defined benefit and other postretirement benefit plans, see below) was $54.5 million, $64.2 million and $59.0 million for the fiscal years ended June 30, 2004, 2003 and 2002, respectively.

DEFINED BENEFIT AND OTHER POSTRETIREMENT BENEFIT PLANS. The Company has several defined benefit plans covering substantially all Scherer salaried and hourly employees. The Company also assumed defined benefit plans through the Intercare and ALARIS acquisitions. The Company's domestic defined benefit plans provide defined benefits based on years of service and level of compensation. Foreign subsidiaries provide for pension benefits in accordance with local customs or law. The Company funds its pension plans at amounts required by applicable regulations.

The Company also has a postretirement medical plan and a postretirement life insurance plan that covers all eligible Scherer participants.

The Company uses a measurement date of March 31 for substantially all its pension and postretirement benefit plans.

                                          Pension Benefits    Other Postretirement Benefits
                                          ----------------    -----------------------------
                                           2004      2003            2004      2003
                                          ------    ------          ------    ------
Projected benefit obligation at
beginning of year                         $161.0    $128.8          $  5.6    $ 10.6
         Service cost                        1.6       4.6               -       0.6
         Interest cost                       9.2       8.4             0.2       0.7
         Plan participant contributions      0.3       1.2               -         -
         Actuarial (gain)/loss               0.4      14.1            (0.6)      4.7
         Benefits paid                      (5.9)     (4.5)           (0.1)     (0.1)
         Special termination benefits          -         -               -       1.2
         Translation                        15.2      14.6               -         -
         Curtailments                       (7.3)     (4.8)              -     (12.1)
         Settlements                           -      (1.4)              -         -
         Plan amendments                     0.1         -               -         -
         Business combinations              21.0         -               -         -
                                          ------    ------          ------    ------
Projected benefit obligation at end
of year                                   $195.6    $161.0          $  5.1    $  5.6
                                          ======    ======          ======    ======

The following table provides a reconciliation of the change in fair value of plan assets (in millions):

                                            Pension Benefits    Other Postretirement Benefits
                                            ----------------    -----------------------------
                                             2004      2003             2004      2003
                                            ------    ------           ------    ------
Fair value of plan assets at beginning of
year                                        $ 74.0    $ 68.4           $    -    $    -
        Actual return on plan assets           8.5      (2.9)               -         -
        Employer contributions                16.4       5.4                -         -
        Plan participant contributions         0.3       1.2              0.1       0.1
        Benefits paid                         (5.5)     (3.9)            (0.1)     (0.1)
        Settlements                              -      (1.4)               -         -
        Translation                            5.7       7.2                -         -
        Business combinations                 20.1         -                -         -
                                            ------    ------           ------    ------
Fair value of plan assets at end of year    $119.5    $ 74.0           $    -    $    -
                                            ======    ======           ======    ======

                                         Pension Benefits  Other Postretirement Benefits
                                         ----------------  -----------------------------
                                          2004       2003          2004      2003
                                         ------    ------         ------    ------
Funded status                            $(76.1)   $(87.0)        $ (5.1)   $ (5.6)
Unrecognized net actuarial (gain)/loss     48.5      49.8           (2.5)     (2.0)
Unrecognized net transition asset          (0.2)     (0.3)             -         -
Unrecognized prior service cost             0.1       0.1              -         -
Other                                       1.5       0.5              -       0.1
                                         ------    ------         ------    ------
Net amount recognized                    $(26.2)   $(36.9)        $ (7.6)   $ (7.5)
                                         ======    ======         ======    ======

Consolidated Balance Sheets:
Other comprehensive income               $ 30.6    $ 31.5         $    -    $    -
Prepaid benefit cost                        4.0         -              -         -
Accrued benefit liability                 (60.8)    (68.4)          (7.6)     (7.5)
                                         ------    ------         ------    ------
Net amount recognized                    $(26.2)   $(36.9)        $ (7.6)   $ (7.5)
                                         ======    ======         ======    ======

The projected benefit obligation and fair value of plan assets for pension plans and other postretirement plans with projected benefit obligations in excess of plan assets are as follows (in millions):

                               Pension Benefits   Other Postretirement Benefits
                               ----------------   -----------------------------
                                2004      2003           2004     2003
                               ------   -------         ------   ------
Projected benefit obligation   $178.5    $161.0         $  5.1   $  5.6
Fair value of plan assets      $101.8    $ 74.0         $    -   $    -

The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets are as follows (in millions):

                                Pension Benefits
                                ----------------
                                  2004     2003
                                 ------   ------
Accumulated benefit obligation   $174.6   $151.2
Fair value of plan assets        $101.8   $ 74.0

                                                Pension Benefits         Other Postretirement Benefits
                                           --------------------------    -----------------------------
                                            2004      2003      2002      2004        2003       2002
                                           ------    ------    ------    ------      ------     ------
Components of net periodic benefit cost:
         Service cost                      $  1.6    $  4.6    $  4.1    $    -      $  0.6     $  0.6
         Interest cost                        9.2       8.4       7.2       0.3         0.7        0.7
         Expected return on plan assets      (5.6)     (5.4)     (4.8)        -           -          -
         Net amortization and other (1)       2.8       1.2       0.7      (0.1)          -        0.1
                                           ------    ------    ------    ------      ------     ------
Net amount recognized                      $  8.0    $  8.8    $  7.2    $  0.2      $  1.3     $  1.4
                                           ======    ======    ======    ======      ======     ======

(1) Amount primarily represents the amortization of unrecognized actuarial losses, as well as the amortization of the transition obligation and prior service costs.

                                               Pension Benefits      Other Postretirement Benefits
                                               ----------------      -----------------------------
                                               2004        2003              2004   2003
                                               ----        ----              ----   ----
Discount rate                                  5.60%       6.00%             6.00%  6.25%
Rate of increase in compensation levels        3.50%       3.80%              N/A    N/A

The weighted average assumptions used in determining net periodic pension cost are as follows:

                                                  Pension Benefits       Other Postretirement Benefits
                                               ----------------------    -----------------------------
                                               2004     2003     2002     2004       2003        2002
                                               ----     ----     ----     ----       ----        ----
Discount rate                                  5.50%    6.00%    6.30%    6.25%      7.25%       7.25%
Rate of increase in compensation levels        3.50%    3.80%    4.00%     N/A        N/A         N/A
Expected long-term rate of return on
  plan assets (1)                              6.30%    6.90%    7.20%     N/A        N/A         N/A

(1) To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This rate is gross of any investment or administrative expenses.

Health Care Cost Trend Rates

The health care cost trend rates assumed for next year for other postretirement benefits at December 31 are 11.2% and 11.6% for Pre-Medicare and Post-Medicare, respectively. The health care cost trend rates are assumed to decline to 5.6% for Pre-Medicare and Post-Medicare by 2014. A one percentage point change in the assumed health care cost trend rates would not have a material impact on total service cost, total interest cost or the accumulated postretirement benefit obligation.

                       2004      2003
                      Actual    Actual    Target
                      ------    ------    ------
Asset Category
  Equity Securities       46%       50%       52%
  Debt Securities         29%       30%       28%
  Real Estate              0%        0%        6%
  Other                   25%       20%       14%
                      ------    ------    ------
Total                    100%      100%      100%

The investment policy reflects the long-term nature of the plans' funding obligations. The assets are invested to provide the opportunity for both income and growth of principal. This objective is pursued as a long-term goal designed to provide required benefits for participants without undue risk. It is expected that this objective can be achieved through a well-diversified asset portfolio. All equity investments are made within the guidelines of quality, marketability and diversification mandated by the Employee Retirement Income Security Act ("ERISA") and other relevant statutes. Investment managers are directed to maintain equity portfolios at a risk level approximately equivalent to that of the specific benchmark established for that portfolio. Assets invested in fixed income securities and pooled fixed income portfolios are managed actively to pursue opportunities presented by changes in interest rates, credit ratings or maturity premiums.

Contributions

The total estimated contributions for the 2005 measurement year are $5.4 million.

                                Pension     Other
Fiscal Year Ended June 30,     Benefits   Benefits
----------------------------   --------   --------
2005                           $    5.1   $    0.5
2006                           $    6.3   $    0.5
2007                           $    5.3   $    0.5
2008                           $    5.5   $    0.5
2009                           $    5.8   $    0.5
2010 - 2014                    $   35.0   $    2.2

10. OFF-BALANCE SHEET ARRANGEMENTS

The Company periodically enters into certain off-balance sheet arrangements, primarily receivable sales and operating leases, in order to maximize diversification of funding and return on assets. The receivable sales, as described below, also provide for the transfer of credit risk to third parties.

Lease Receivable-Related Arrangements

During fiscal 2004 and 2003, the Company entered into four separate agreements (two in fiscal 2004 and two in fiscal 2003) to transfer ownership of certain equipment lease receivables, plus security interests in the related equipment, to the leasing subsidiary of a bank in the amounts of $164.2 million and $150.0 million in fiscal 2004 and $156.0 million and $200.0 million in fiscal 2003. These transactions resulted in immaterial gains or losses classified by the Company as revenue within its results of operations. In order to qualify for sale treatment under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," the Company formed wholly-owned, special purpose, bankruptcy-remote subsidiaries (the "Pyxis SPEs") of Pyxis Corporation (which has been given the legal designation of Cardinal Health 301, Inc. and is referred to in this Form 10-K as "Pyxis"), and each of the Pyxis SPEs formed wholly-owned, qualified special purpose subsidiaries (the "QSPEs") to effectuate the removal of the lease receivables from the Company's consolidated financial statements. In accordance with SFAS

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

No. 140, the Company consolidates the Pyxis SPEs and does not consolidate the QSPEs. Both the Pyxis SPEs and QSPEs are separate legal entities that maintain separate financial statements from the Company and Pyxis. The assets of the Pyxis SPEs and QSPEs are available first and foremost to satisfy the claims of their respective creditors.

The Company formed Pyxis Funding LLC ("Pyxis Funding") for the sole purpose of acquiring a pool of leases and the related leased equipment from Pyxis and ultimately selling the lease receivables to a multi-seller conduit administered by a third-party bank. Pyxis Funding is a wholly-owned, special purpose, bankruptcy-remote subsidiary of Pyxis. Pyxis Funding II LLC ("Pyxis Funding II") was formed for the sole purpose of acquiring lease receivables from Pyxis Funding and issuing notes secured by its assets to a multi-seller conduit administered by a third-party bank. Pyxis Funding II is a wholly-owned, qualified special purpose subsidiary of Pyxis Funding. The transaction qualifies for sale treatment under SFAS No. 140. Accordingly, the related receivables are not included in the Company's consolidated financial statements. As required by U.S. GAAP, the Company consolidates Pyxis Funding and does not consolidate Pyxis Funding II. Both Pyxis Funding and Pyxis Funding II are separate legal entities that maintain separate financial statements from the Company and Pyxis. The assets of Pyxis Funding and Pyxis Funding II are available first and foremost to satisfy the claims of their creditors. The notes held by investors had a principal balance of $16.0 million on June 30, 2004, and the investors are provided with credit protection in the form of 20% ($4.0 million) over-collateralization. As of June 30, 2003, the notes had a principal balance of $51.5 million, and $12.9 million of credit protection was provided.

Other Receivable-Related Arrangements

Cardinal Health Funding ("CHF") and Medicine Shoppe Capital Corporation ("MSCC") were organized for the sole purpose of buying receivables and selling those receivables to multi-seller conduits administered by third party banks or other third party investors. MSCC and CHF were designed to be special purpose, bankruptcy-remote entities. Although consolidated in accordance with GAAP, MSCC and CHF are separate legal entities from the Company, Medicine Shoppe International, Inc. and the Company's Financial Shared Services business. The sale of receivables by MSCC and CHF qualify for sales treatment under SFAS No. 140 and accordingly are not included in the Company's consolidated financial statements.

At June 30, 2004, the Company had a committed receivables sales facility program available through CHF with capacity to sell $500.0 million in receivables. Recourse is provided under the CHF program by the requirement that CHF retain a percentage subordinated interest in the sold receivables. At June 30, 2004, the Company had no outstanding receivables or subordinated interests related to this facility. During fiscal 2004, the Company terminated and liquidated MSCC resulting in an immaterial loss.

At June 30, 2003, the Company had $280.0 million in committed receivables sales facility programs available through CHF and MSCC. There were no receivables outstanding or subordinated interests related to CHF at June 30, 2003. The total amount of receivables outstanding under the MSCC program was $5.4 million. Recourse was provided under the MSCC program by the requirement that MSCC retain a 20% subordinated interest in the sold receivables. Subordinated interests were $1.3 million at June 30, 2003.

(in millions)                                         2004     2003     2002
--------------------------------------------------   ------   ------   ------
Proceeds received on transfer of receivables         $321.4   $375.8   $295.4
Cash collected in servicing of related receivables      3.9      2.2      1.2
Proceeds received on subordinated interests             8.9     18.3     58.4
                                                     ------   ------   ------
Cash inflow to the Company                            334.2    396.3    355.0
Cash collection remitted to the bank                  226.0    131.0    257.2
Cash collection remitted to QSPE                        8.9     17.7        -
                                                     ------   ------   ------
Net benefit to the Company's Cash Flow               $ 99.3   $247.6   $ 97.8
                                                     ======   ======   ======

Pyxis, MSCC and CHF are required to repurchase any receivables sold only if it is determined that the representations and warranties with regard to the related receivables were not accurate on the date sold.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Operating Leases

The Company has entered into operating lease agreements with several third party banks for the construction of various new facilities and equipment. The initial terms of the lease agreements have varied maturity dates ranging from February 2005 through June 2013, with optional renewal periods, generally five years. In the event of termination, the Company is required (at its election) to either purchase the facility or vacate the property and make reimbursement for a portion of any unrecovered property cost. The maximum portion of unrecovered property costs that the Company could be required to reimburse does not exceed the amount expended to acquire and/or construct the facilities. As of June 30, 2004, the amount expended to acquire and/or construct the facilities was $525.6 million. The agreements provide for maximum funding of $575.0 million, which is currently greater than the estimated cost to complete the construction projects. The required lease payments equal the interest expense for the period on the amounts drawn. Lease payments under the agreements are based primarily upon LIBOR and are subject to interest rate fluctuations. As of June 30, 2004, the weighted average interest rate on the agreements approximated 1.79%. The Company's estimated minimum annual lease payments under the agreements at June 30, 2004 were approximately $9.4 million.

(in millions)              2005     2006     2007     2008     2009    Thereafter    Total
------------------------------------------------------------------------------------------
Minimum rental payments   $109.1   $ 79.1   $ 58.6   $ 44.8   $ 34.6   $    109.1   $435.3

Rental expense relating to operating leases (including those referenced in Note 10) was approximately $120.6 million, $102.8 million and $77.6 million in fiscal 2004, 2003 and 2002, respectively. Sublease rental income was not material for any period presented herein.

Latex Litigation

On September 30, 1996, Baxter International Inc. ("Baxter") and its subsidiaries transferred to Allegiance Corporation and its subsidiaries ("Allegiance"), which were acquired by the Company in February 1999, 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 (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off, Allegiance Corporation, which merged with a subsidiary of the Company on February 3, 1999, agreed to indemnify Baxter, and to defend and indemnify Baxter Healthcare Corporation ("BHC"), 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. The Company is not a party to any of the lawsuits and has not agreed to pay any settlements to the plaintiffs.

As of June 30, 2004, there were 36 lawsuits pending against BHC and/or Allegiance involving allegations of sensitization to natural rubber latex products, and some of these cases were proceeding to trial. The total dollar amount of potential damages cannot be reasonably quantified. Some plaintiffs plead damages in extreme excess of what they reasonably can expect to recover, some plead a modest amount and some do not include a request for any specific dollar amount. Not including cases that ask for no specific damages, the damage requests per action have ranged from $10,000 to $240 million. All of these cases name multiple defendants, in addition to Baxter/Allegiance. The average number of defendants per case exceeds 25. Based on the significant differences in the range of damages sought and, based on the multiple number of defendants in these lawsuits, Allegiance cannot reasonably quantify the total amount of possible/probable damages. Therefore, Allegiance and the Company do not believe that these numbers should be considered as an indication of either reasonably possible or probable liability.

Since the inception of this litigation, Baxter/Allegiance have been named as a defendant in 834 cases. During the fiscal year ended June 30, 2002, Allegiance began settling some of these lawsuits with greater frequency. As of June 30, 2004, Allegiance had resolved more than 90% of these cases. About 20% of the lawsuits that have been resolved were concluded without any liability to Baxter/Allegiance. No individual claim has been settled for a material amount and all the settled claims through June 30, 2004 amounted to, in the aggregate, approximately $28 million. Due to the number of claims filed and the ongoing defense costs that will be incurred, Allegiance believes it is probable that it will incur substantial legal fees related to the resolution of the cases still pending. Although the Company continues to believe that it cannot reasonably estimate the potential cost to settle these lawsuits, the Company believes that the impact of such lawsuits upon Allegiance will be immaterial to the Company's financial position, liquidity or results of operations, and could be in the range of $0 to $20 million, net of insurance proceeds (with the range reflecting the Company's reasonable estimation of potential insurance coverage, and defense and indemnity costs). The Company believes a substantial

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

portion of any liability will be covered by insurance policies Allegiance has with financially viable insurance companies, subject to self-insurance retentions, exclusions, conditions, coverage gaps, policy limits and insurer solvency. The Company and Allegiance continue to believe that insurance recovery is probable.

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. 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 (a) renegotiate or terminate the Company's proposed acquisition of Syncor, and (b) 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 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. Discovery is proceeding in this action. 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.

On July 9, 2004, a complaint was filed by a purported shareholder against the members of the Company's Board of Directors, and the Company as a nominal defendant in the Court of Common Pleas, Franklin County, Ohio, as a purported derivative action. The complaint alleges 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 complaint seeks money damages and equitable relief against the defendant directors, and an award of attorney's fees. None of the defendants has responded to the complaint yet, nor has the Company.

On August 27, 2004, a complaint was filed by a purported shareholder against members of the Company's Board of Directors, current and former officers and/or employees of the Company and the Company as a nominal defendant in the Court of Common Pleas, Franklin County, Ohio, as a purported derivative action. The complaint alleges that the individual defendants breached various fiduciary duties owed to the Company. The complaint seeks money damages and equitable relief against the individual defendants, and an award of attorney's fees. None of the defendants has responded to the complaint yet, nor has the Company.

On September 22, 2004, a complaint was filed by a purported shareholder against the members of the Company's Board of Directors, and the Company as a nominal defendant in the Court of Common Pleas, Franklin County, Ohio, as a purported derivative action. The complaint alleges 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 complaint seeks money damages and equitable relief against the defendant directors, and an award of attorney's fees. None of the defendants has responded to the complaint 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. 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. 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. None of the defendants has yet responded to any of the complaints in the Cardinal Health federal securities actions.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Since July 2, 2004, fourteen purported class action complaints 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 (collectively referred to as the "Cardinal Health ERISA actions"). To date, all of these actions have been filed in the United States District Court for the Southern District of Ohio. The Cardinal Health ERISA actions purport to be brought on behalf of participants in the Cardinal Health Profit Sharing, Retirement and Savings Plan (the "Plan"), and also on behalf of the Plan itself. The complaints allege that the defendants breached certain fiduciary duties owed under ERISA, generally asserting that the defendants failed to make full disclosure of the risks to plan participants of investing in the Company's stock, to the detriment of the plan's participants and beneficiaries, and that Company stock should not have been made available as an investment alternative for plan participants. The misstatements alleged in the Cardinal Health ERISA actions significantly overlap with the misstatements alleged in the complaints 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. None of the defendants has yet responded to any of the complaints in the Cardinal Health ERISA actions.

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. 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. 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, lead plaintiff filed a Motion for Clarification of the Court's July 6, 2004 dismissal order.

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 in the merger by Syncor stockholders 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 into one action (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 is 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.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. 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.

A purported class action complaint 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 Employees' Savings and Stock Ownership Plan (the "Syncor ESSOP"). A related purported class action complaint was filed on September 11, 2003, against the Company, Syncor and certain individual defendants. Another related purported class action complaint was filed on January 14, 2004, against the Company, Syncor and certain individual defendants. 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. 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 and 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. 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. Although this action is in its early stages and it is impossible to accurately predict the outcome of the proceedings or their impact on the Company, the Company believes that it 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.

Other Matters

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. The Company intends to vigorously defend itself against this other litigation and does not currently believe that the outcome of this other litigation now pending will have a material adverse effect on the Company's consolidated financial statements.

See also the discussion of the SEC investigation and U.S. Attorney inquiry in Note 1.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. SHAREHOLDERS' EQUITY

At June 30, 2004 and 2003, the Company's authorized capital shares consisted of (a) 750 million common shares, without par value ("Class A common shares"); (b) 5 million Class B common shares, without par value; and (c) 0.5 million non-voting preferred shares, without par value. The Class A common shares and Class B common shares are collectively referred to as "Common Shares." Holders of Class A and Class B common shares are entitled to share equally in any dividends declared by the Company's Board of Directors and to participate equally in all distributions of assets upon liquidation. Generally, the holders of Class A common shares are entitled to one vote per share and the holders of Class B common shares are entitled to one-fifth of one vote per share on proposals presented to shareholders for vote. Under certain circumstances, the holders of Class B common shares are entitled to vote as a separate class. Only Class A common shares were outstanding as of June 30, 2004 and 2003.

On February 27, 2004, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant to this authorization, the Company repurchased approximately 6.9 million Common Shares under an accelerated share repurchase program having an aggregate cost of approximately $460.3 million. The initial price paid per share was $66.80. The approximately 6.9 million shares repurchased under the program were subject to a future contingent purchase price adjustment which was settled during the fourth quarter of fiscal 2004. The purchase price adjustment was based upon the volume weighted average price during the actual repurchase period and was subject to certain provisions which establish a cap and a floor for the average share price in the Company's agreement with its broker-dealer who executed the repurchase transactions.

The accelerated share repurchase program was completed on May 11, 2004. The final volume weighted average price was $70.07. As a result, the Company settled the forward contract for $22.5 million in cash, which cost was included in the amount associated with Common Shares in treasury. The Company used the remaining $17.2 million of the initial authorization to repurchase additional shares of approximately 0.2 million having an average price paid per share of $70.73. The repurchased shares were placed into treasury to be used for general corporate purposes.

On August 1, 2003, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $1.0 billion. Pursuant to this authorization, the Company repurchased approximately 17.0 million Common Shares having an aggregate cost of approximately $1.0 billion during the three months ended September 30, 2003. The average price paid per share was $58.65. This repurchase was completed during the first quarter of fiscal 2004, and the repurchased shares were placed into treasury to be used for general corporate purposes.

In January 2003, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant to this authorization, the Company repurchased approximately 8.6 million Common Shares having an aggregate cost of approximately $500 million. This repurchase was completed in February 2003, and the repurchased shares were placed into treasury shares to be used for general corporate purposes.

In August 2002, the Company's Board of Directors authorized the repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant to this authorization, the Company repurchased approximately 7.8 million Common Shares having an aggregate cost of approximately $500 million. This repurchase was completed in January 2003, and the repurchased shares were placed into treasury shares to be used for general corporate purposes.

13. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

The Company invests cash in deposits with major banks throughout the world and in high quality short-term liquid instruments. Such investments are made only in instruments issued or enhanced by high quality institutions. These investments mature within three months and the Company has not incurred any related losses.

The Company's trade receivables, finance notes and accrued interest receivables, and lease receivables are exposed to a concentration of credit risk with customers in the retail and health care sectors. Credit risk can be affected by changes in reimbursement and other economic pressures impacting the hospital and acute care sectors of the health care industry. However, such credit risk is limited due to supporting collateral and the diversity of the customer base, including its wide geographic dispersion. The Company performs ongoing credit evaluations of its customers' financial conditions and maintains reserves for credit losses. Such losses historically have been within the Company's expectations.

                               Percent of Revenues
                             ------------------------
                             2004    2003      2002
                             ----  --------  --------
                                   Adjusted  Adjusted
CVS                          18%      18%       19%

At June 30, 2004 and 2003, CVS Corporation ("CVS") accounted for 18% of the Company's gross trade receivable balance.

Certain of the Company's businesses have entered into agreements with group purchasing organizations ("GPOs"), which organizations act as purchasing agents that negotiate vendor contracts on behalf of their members. In fiscal 2004, 2003 and 2002, approximately 17%, 17% and 18%, respectively, of revenue was derived from GPO members through the contractual arrangements established with Novation, LLC and Premier Purchasing Partners, L.P.-- the Company's two largest GPO relationships in terms of revenue. However, the Company's trade receivable balances are with individual members of the GPO and therefore no significant concentration of credit risk exists with these types of arrangements.

14. STOCK OPTIONS AND RESTRICTED SHARES

The Company maintains several stock incentive plans (the "Plans") for the benefit of certain officers, directors and employees. Options granted generally vest over three years and are exercisable for periods up to ten years from the date of grant at a price which equals fair market value at the date of grant.

The information in the following tables in this Note 14 has been revised to reflect the maximum number of shares that could be granted under the Company's Amended and Restated Equity Incentive Plan, as amended (the "Equity Incentive Plan"), with respect to an option award that the Board of Directors and its Human Resources and Compensation Committee (the "Compensation Committee") granted to the Company's Chairman and Chief Executive Officer in November 1999 for 1,425,000 shares (giving effect to stock splits occurring after the date of grant). The maximum number of shares that could be granted pursuant to the terms of the Equity Incentive Plan was 562,500 shares. The Compensation Committee is currently exploring alternatives to substitute the remaining portion of the stock option granted to this individual in November 1999 in excess of the 562,500 shares with equivalent value.

EQUITY COMPENSATION PLAN INFORMATION

Certain plans are subject to shareholder approval while other plans have been authorized solely by the Board of Directors (the "Board"). The following is a description of the Company's plans that have not been approved by shareholders:

Broadly-based Equity Incentive Plan, as amended

The Company's Broadly-based Equity Incentive Plan, as amended (the "Broadly-based Equity Incentive Plan"), was adopted by the Board effective November 15, 1999 and further amended pursuant to resolutions of the Board adopted on August 8, 2001. The plan provides for grants in the form of nonqualified stock options, restricted shares and restricted share units to employees of the Company. The aggregate number of Common Shares authorized for issuance pursuant to the plan is 36 million with generally no more than 10% of the authorized amount issuable in the form of restricted shares and restricted share units having a restriction period of less than three years. The plan is not intended to qualify under Section 401(a) of the Code and is not subject to any of the provisions of ERISA.

Outside Directors Equity Incentive Plan

The Company's Outside Directors Equity Incentive Plan was adopted by the Board effective May 10, 2000. The plan reserves and makes available for distribution an aggregate of 1.5 million Common Shares for grants in the form of nonqualified stock options and restricted shares to members of the Board who are not employees of the Company. The plan is not intended to qualify under Section 401(a) of the Code and is not subject to any of the provisions of ERISA.

Deferred Compensation Plan, as amended

The Company's Deferred Compensation Plan, as amended (the "Deferred Compensation Plan"), was adopted by the Board effective April 7, 1994 and has been subsequently amended several times since then, most recently on May 25, 2004. The plan permits certain management

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

employees of the Company to defer salary, bonus and long-term incentive plan payments into one of several investment alternatives, including a stock equivalent account. In addition, the Company may, in its discretion, make additional matching or fixed contributions to the deferred balances of participating management employees. Deferrals into the stock equivalent account are valued as if each deferral were invested in the Company's Common Shares as of the deferral date. Deferred balances are paid upon retirement, termination from employment, death or disability. The maximum aggregate number of Common Shares that can be credited to stock equivalent accounts pursuant to the plan is 2.25 million. Deferred balances are paid in cash, or in Common Shares in kind, with any fractional shares paid in cash. The plan contains a dividend reinvestment feature for the stock equivalent account with dividends generally being reinvested in investment options other than the stock equivalent account for reporting persons under Section 16 of the Exchange Act. The plan is not intended to qualify under Section 401(a) of the Code and is exempt from many of the provisions of ERISA as a "top hat" plan for a select group of management or highly compensated employees.

Directors Deferred Compensation Plan, as amended and restated

The Company's Directors Deferred Compensation Plan, as amended and restated (the "Directors Deferred Compensation Plan"), was adopted by the Board effective August 11, 1999 and was recently amended and restated on May 1, 2004. The plan permits directors of the Company to defer board fees into one of several investment alternatives, including a stock equivalent account. Deferrals into the stock equivalent account are valued as if each deferral were invested in the Company's Common Shares as of the deferral date. Deferred balances are paid upon retirement or other termination from board service, death or disability. The maximum aggregate number of Common Shares that can be credited to stock equivalent accounts pursuant to the plan is 90,000. Deferred balances are paid in cash, or in Common Shares in kind, with any fractional shares paid in cash. The plan contains a dividend reinvestment feature for the stock equivalent account with dividends generally being reinvested in investment options other than the stock equivalent account. The plan is not intended to qualify under Section 401(a) of the Code and is not subject to any of the provisions of ERISA.

Global Employee Stock Purchase Plan

The Company's Global Employee Stock Purchase Plan was adopted by the Board effective August 11, 1999. The plan permits the Company's international employees to purchase Common Shares through payroll deductions. The total number of Common Shares made available for purchase under the plan is 4.5 million. International employees who have been employed by the Company for at least 30 days are eligible to contribute from 1% to 15% of eligible compensation. The purchase price is determined by the lower of 85% of the closing market price on the first day of the offering period or 85% of the closing market price on the last day of the offering period. During any given calendar year, there are two offering periods: January 1-June 30; and July 1-December 31. The plan is not intended to qualify under Section 401(a) of the Code and is not subject to any of the provisions of ERISA.

                                          Outstanding
                             ------------------------------------
                               Number of Common       Weighted
                             Shares to be Issued       Average       Common Shares
                               Upon Exercise of    Exercise Price    Available for
                             Outstanding Options     per Common     Future Issuance
                                (in millions)           Share        (in millions)
                             -------------------   --------------   ---------------
Plans approved by
     shareholders (1)                11.8 (2)       $   52.31 (2)          22.6 (3)
Plans not approved by
     shareholders                    25.2 (4)       $   62.01 (4)          14.0 (5)
Plans acquired through
     acquisition (6)                  5.8 (6)       $   33.63                 -
                              ------------------    -------------    --------------
Balance at June 30, 2004             42.8           $   55.52              36.6
                              ==================    =============    ==============

(1) Under the Company's Equity Incentive Plan, which was approved by the Company's shareholders in November 1995, the total number of Common Shares available for grant of awards under the plan is an amount equal to the sum of
(a) 1.5% of the total outstanding Common Shares as of the last day of the Company's immediately preceding fiscal year, plus (b) the number of Common Shares available for grant under the plan as of November 23, 1998, plus (c) any Common Shares related to awards that expire or are unexercised, forfeited, terminated, cancelled, settled in such a manner that all or some of the Common Shares covered by an award are not issued to a participant, or returned to the Company in payment of the exercise price or tax withholding obligations in connection with outstanding awards, plus (d) any unused portion of the Common Shares available under clause (a) above for the previous two fiscal years as a result of not being used in such previous two fiscal years.

(2) In addition to stock options outstanding under the Company's Equity Incentive Plan, also includes 430,302 restricted share units outstanding under the Equity Incentive Plan that are payable solely in Common Shares. Restricted share units do not have an exercise price, and therefore were not included for purposes of computing the weighted-average exercise price.

(3) Includes approximately 4.2 million Common Shares available for issuance under the Company's Employee Stock Purchase Plan.

(4) In addition to stock options outstanding under the Company's Broadly-based Equity Incentive Plan and Outside Director Equity Incentive Plan, also includes 10,000 restricted share units outstanding under the Company's Broadly-based Equity Incentive Plan that are payable solely in Common Shares. Also includes 22,564 and 4,076 Common Share units, respectively, outstanding under the Company's Directors Deferred Compensation Plan and Deferred Compensation Plan that are payable solely in Common Shares. These awards do not have an exercise price, and therefore were not included for purposes of computing the weighted-average exercise price.

(5) Includes approximately 4.3 million Common Shares available for issuance under the Company's Global Employee Stock Purchase Plan.

(6) Includes options to purchase approximately 3.4 million Common Shares in the aggregate that were assumed by the Company in connection with acquisitions that were approved by the Company's shareholders. The remaining options to purchase approximately 2.4 million Common Shares in the aggregate were assumed by the Company in connection with acquisitions that were not approved by the Company's shareholders.

                                          Weighted Average
                             Options       Exercise Price
                           Outstanding    per Common Share
                           -----------    ----------------
Balance at June 30, 2001          32.4    $          34.92
Granted                            8.7               68.02
Exercised                         (4.5)              23.40
Canceled                          (1.4)              51.75
Other                              1.0               47.32
                           -----------    ----------------
Balance at June 30, 2002          36.2    $          43.95
Granted                            9.5               67.49
Exercised                         (6.2)              27.04
Canceled                          (2.5)              63.29
Other                              3.0               49.23
                           -----------    ----------------
Balance at June 30, 2003          40.0    $          51.35
Granted                           11.8               61.48
Exercised                         (5.9)              29.78
Canceled                          (4.2)              65.30
Other                              0.6               34.24
                           -----------    ----------------
Balance at June 30, 2004          42.3    $          55.52
                           ===========    ================

Additional information concerning stock options outstanding as of June 30, 2004 is presented below:

                                       Outstanding                                Exercisable
                    -------------------------------------------------   ------------------------------
                                        Weighted          Weighted                         Weighted
     Range of                            average          average                           average
 exercise prices                        remaining      exercise price                   exercise price
    per Common         Options      contractual life     per Common        Options        per Common
      Share         (in millions)       in years            Share       (in millions)       Share
-----------------   -------------   ----------------   --------------   -------------   --------------
$ 0.92 - $ 29.96              4.2                2.9   $        18.76             4.2   $        18.76
$29.99 - $ 59.19              8.2                5.3   $        38.62             7.9   $        38.12
$59.60 - $ 64.11             11.8                9.3   $        61.47             0.1   $        63.00
$64.40 - $ 67.90             11.5                7.7   $        67.24             4.0   $        66.08
$67.98 - $132.23              6.6                7.3   $        69.07             0.8   $        75.16
----------------    -------------   ----------------   --------------   -------------   --------------
$ 0.92 - $132.23             42.3                7.1   $        55.52            17.0   $        41.71
----------------    -------------   ----------------   --------------   -------------   --------------

The Company accounts for the Plans in accordance with APB Opinion No. 25, under which no compensation cost has been recognized. See Note 3 for table illustrating the effect on net income and earnings per share if the Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based Compensation."

The weighted average fair value of options granted during fiscal 2004, 2003 and 2002 are $22.78, $21.96 and $25.95, respectively.

                                      As of June 30,
                             --------------------------------
                               2004         2003        2002
                             -------      -------     -------
Risk-free interest rate        3.17%        2.32%       3.84%
Expected life                5 years      4 years     5 years
Expected volatility              37%          38%         36%
Dividend yield                 0.19%        0.18%       0.15%

The market values of restricted shares and restricted share units awarded by the Company are recorded in the "Other" component of shareholders' equity in the accompanying consolidated balance sheets. The restricted shares are amortized to expense over the period in which participants perform services, generally one to seven years. The restricted share units are generally amortized over a five-year vesting period. As of June 30, 2004, approximately 0.3 million shares and share units remained restricted and subject to forfeiture.

The Company has employee stock purchase plans under which the sale of 12.0 million of the Company's Common Shares has been authorized. All employees who have been employed by the Company for at least 30 days are eligible to contribute from 1% to 15% of eligible compensation. The purchase price is determined by the lower of 85% of the closing market price on the first day of the offering period or 85% of the closing market price on the last day of the offering period. During any given calendar year, there are two offering periods:
January 1-June 30; and July 1-December 31. At June 30, 2004, subscriptions of 0.4 million shares were outstanding. Through June 30, 2004, 3.0 million shares had been issued to employees under the plans.

(in millions)                      2004     2003     2002
-------------------------------   ------   ------   ------
Weighted-average shares-basic      434.4    446.0    450.1
Effect of dilutive securities:
     Employee stock options          5.6      7.3      9.5
                                  ------   ------   ------
Weighted-average shares-diluted    440.0    453.3    459.6
                                  ======   ======   ======

The potentially dilutive employee stock options that were antidilutive for fiscal 2004, 2003 and 2002 were 18.4 million, 22.5 million and 0.9 million, respectively.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. CHANGE IN ACCOUNTING

Effective fiscal 2004, the Company changed its method of recognizing cash discounts from recognizing cash discounts as a reduction of cost of products sold primarily upon payment of vendor invoices to recording cash discounts as a component of inventory cost and recognizing such discounts as a reduction to cost of products sold upon the sale of inventory. The Company believes the change in accounting method provides a more objectively determinable method of recognizing cash discounts and a better matching of inventory cost to revenue.

The Company recorded a $38.5 million (net of tax of $22.5 million) cumulative effect of change in accounting in the consolidated statements of earnings. The cumulative effect reduced net diluted earnings per Common Share by $0.09. The impact of this change for the fiscal year ended June 30, 2004 was an increase in earnings from continuing operations before cumulative effect of change in accounting by approximately $13.2 million. This resulted in an increase in diluted earnings per Common Share from continuing operations of $0.03 for fiscal 2004. The pro forma effect of this accounting change on prior periods is as follows:

(in millions, except per Common Share amounts)    2003           2002
------------------------------------------------------------------------
 Earnings from continuing operations before
cumulative effect of changes in accounting:
                                As restated     $ 1,381.2      $ 1,140.8
                                  Pro forma     $ 1,368.4      $ 1,142.9

                              Net earnings:
                                As restated     $ 1,375.1      $ 1,070.7
                                  Pro forma     $ 1,362.3      $ 1,072.8

       Basic earnings per Common Share from
                     continuing operations:
                                As restated     $    3.10      $    2.53
                                  Pro forma     $    3.07      $    2.54

     Diluted earnings per Common Share from
                     continuing operations:
                                As restated     $    3.05      $    2.48
                                  Pro forma     $    3.02      $    2.49

       Net basic earnings per Common Share:
                                As restated     $    3.08      $    2.37
                                  Pro forma     $    3.05      $    2.38

     Net diluted earnings per Common Share:
                                As restated     $    3.03      $    2.33
                                  Pro forma     $    3.01      $    2.33

In fiscal 2002, the method of recognizing revenue for pharmacy automation equipment was changed from recognizing revenue when the units were delivered to the customer to recognizing revenue when the units are installed at the customer site. Management believes that the change in accounting method provides for a more objectively determinable method of revenue recognition. In addition, the Company implemented other changes to better service its customers and leverage operational efficiencies. The Company recorded a cumulative effect of change in accounting of $70.1 million (net of tax of $44.6 million) in the consolidated statement of earnings during fiscal 2002. The after tax dilutive impact of the cumulative effect is $0.15 per diluted share. The effect of the change for the fiscal year ended June 30, 2002 was to reduce net earnings before the cumulative effect by approximately $18.6 million. This change reduced diluted earnings per share by $0.04 for the fiscal year ended June 30, 2002. The pro-forma effect of this accounting change on prior periods has not been presented as the required information is not available.

                                              Pharmaceutical
                                               Distribution      Medical      Pharmaceutical   Automation and
                                               and Provider      Products      Technologies     Information
(in millions)                                    Services      and Services    and Services       Services       ALARIS     Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001                      $         86.9   $      671.7   $        358.3   $         41.7          -   $1,158.6
-----------------------------------------------------------------------------------------------------------------------------------
 Goodwill acquired, net of purchase
   price adjustments, foreign currency
   translation adjustments and other                     3.6            3.7            350.4              9.0          -      366.7
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002                      $         90.5   $      675.4   $        708.7   $         50.7          -   $1,525.3
-----------------------------------------------------------------------------------------------------------------------------------
 Goodwill acquired, net of purchase
   price adjustments, foreign currency
   translation adjustments and other                     5.6           19.3            723.6                -          -      748.5
 Goodwill write-off                                        -              -             (9.1)               -          -       (9.1)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2003                      $         96.1   $      694.7   $      1,423.2   $         50.7          -   $2,264.7
-----------------------------------------------------------------------------------------------------------------------------------
 Goodwill acquired, net of purchase
   price adjustments, foreign currency
   translation adjustments and other (1)(2)             83.3           14.1            428.0                -    1,536.8    2,062.2
-----------------------------------------------------------------------------------------------------------------------------------
 Goodwill related to the divestiture/
    closure of businesses                                  -              -             (7.6)               -          -       (7.6)
-----------------------------------------------------------------------------------------------------------------------------------
 Transfer (3)                                           31.6          (31.6)               -                -          -          -
-----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004                      $        211.0   $      677.2   $      1,843.6   $         50.7   $1,536.8   $4,319.3
===================================================================================================================================

(1) During the fourth quarter fiscal 2004, the Company acquired approximately 98.7% of the outstanding common stock of ALARIS and ALARIS merged with a subsidiary of the Company to complete the transaction on July 7, 2004. See Note 4 for additional information regarding this acquisition. As of June 30, 2004, the acquisition of ALARIS resulted in a preliminary goodwill allocation of $1,536.8 million. During the second quarter fiscal 2004, the Company completed the acquisition of Intercare. As of June 30, 2004, the Company finalized the Intercare purchase price allocation, resulting in a goodwill allocation of $430.9 million. During the six months ended December 31, 2003, the Company also finalized the Syncor purchase price allocation resulting in a goodwill reduction of $6.9 million. The remaining amounts represent goodwill acquired from other immaterial acquisitions, purchase price adjustments from prior period acquisitions and foreign currency translation adjustments.

(2) For segment reporting purposes, as of June 30, 2004, a goodwill allocation of $66.4 million was included within the Pharmaceutical Distribution and Provider Services segment related to Intercare's specialty pharmaceutical distribution business. All other goodwill allocations for Intercare are included within the Pharmaceutical Technologies and Services segment.

(3) During the first quarter fiscal 2004, the Company transferred its Consulting and Services business, previously reported within the Medical Products and Services segment, to its Clinical Services and Consulting business within the Pharmaceutical Distribution and Provider Services segment to better align business operations. This transfer resulted in approximately $31.6 million of goodwill being reclassed between the two segments.

The purchase price allocation for ALARIS and other immaterial acquisitions are not yet finalized and are subject to adjustment. Due to the short period of time between the ALARIS acquisition date and fiscal year end, the Company had not determined ALARIS's reporting segment treatment as of June 30, 2004. See Note 18 for information regarding the recently announced new segment which will include ALARIS.

                                Gross      Accumulated       Net
      (in millions)           Intangible   Amortization   Intangible
--------------------------------------------------------------------
June 30, 2002
    Trademarks and patents    $     30.0   $       20.4   $      9.6
    Non-compete agreements          20.4           19.1          1.3
    Other                           16.8            8.9          7.9
--------------------------------------------------------------------
      Total                   $     67.2   $       48.4   $     18.8
--------------------------------------------------------------------
June 30, 2003
    Trademarks and patents    $     48.1   $       20.8   $     27.3
    Non-compete agreements          27.3           21.9          5.4
    Customer relationships          12.5            1.2         11.3
    Other                           37.1           13.5         23.6
--------------------------------------------------------------------
      Total                   $    125.0   $       57.4   $     67.6
--------------------------------------------------------------------
June 30, 2004
    Trademarks and patents    $    345.9   $       23.4   $    322.5
    Non-compete agreements          32.0           24.8          7.2
    Customer relationships         231.4            6.8        224.6
    Other                           82.4           17.2         65.2
--------------------------------------------------------------------
      Total                   $    691.7   $       72.2   $    619.5
====================================================================

Additions of intangible assets for fiscal 2003 primarily relate to the Syncor acquisition (see Note 4).

Additions of intangible assets for fiscal 2004 primarily relate to the ALARIS and Intercare acquisitions (see Note 4).

Amortization expense for the years ended June 30, 2004, 2003 and 2002 was $13.9 million, $6.7 million and $3.0 million, respectively. Amortization expense is estimated to be (in millions):

                              -------------------------------------------------------------
                                 2005          2006           2007        2008       2009
                              -------------------------------------------------------------
Amortization expense          $  47.5      $   47.2         $ 46.3      $ 43.5     $ 41.6

18. SEGMENT INFORMATION

The Company's operations are principally managed on a products and services basis and are comprised of four reportable business segments:
Pharmaceutical Distribution and Provider Services, Medical Products and Services, Pharmaceutical Technologies and Services and Automation and Information Services. During the first quarter fiscal 2004, the Company transferred its Consulting and Services business, previously included within the Medical Products and Services segment, to its Clinical Services and Consulting business within the Pharmaceutical Distribution and Provider Services segment. Also during the first quarter fiscal 2004, the Company transferred its clinical information business, previously included within the Automation and Information Services segment, to its Clinical Services and Consulting business within the Pharmaceutical Distribution and Provider Services segment. These transfers were done to better align business operations. Prior period financial results have not been restated as each of these businesses is not significant within the respective segments, and, therefore, the transfers did not have a material impact on each segment's growth rates.

During fiscal 2003, the Company reclassified Central Pharmacy Services, Inc. and Cord Logistics, Inc. from the Pharmaceutical Distribution and Provider Services segment to the Pharmaceutical Technologies and Services segment and therefore restated these segments' financial results. All prior period financial results presented in this Form 10-K have been restated to reflect this reclassification. In addition, with the completion of the Syncor acquisition on January 1, 2003, Syncor was included within the Pharmaceutical Technologies and Services segment.

In December 2003, the Company acquired Intercare, which operates specialty pharmaceutical distribution and pharmaceutical manufacturing operations in Europe (see Notes 4 and 17 for further discussion of the Intercare acquisition). For the fiscal year ended June 30, 2004, the results of operations of Intercare's specialty pharmaceutical distribution business, which is similar to the Company's

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

pharmaceutical distribution business, were included within the Pharmaceutical Distribution and Provider Services segment (see Note 3 in the table below for further information). All other results of operations for Intercare were included within the Pharmaceutical Technologies and Services segment. For segment reporting purposes, Intercare's results of operations will continue to be reported in this manner. This classification was not reported during the second quarter fiscal 2004 immediately following the acquisition as the Company was still assessing the appropriate segment reporting treatment. Intercare's results of operations for the second quarter of fiscal 2004 were not material to the Company or the Company's individual segments.

The Company acquired approximately 98.7% of the outstanding common stock of ALARIS and ALARIS merged with a subsidiary of the Company to complete the transaction on July 7, 2004. The results of ALARIS' operations for the period following the completion of the transaction have been included within the Corporate segment for the year ended June 30, 2004. Due to the short period of time between the acquisition date and year end, the impact of the results is not material. See Notes 4 and 17 for additional information regarding the ALARIS acquisition.

On August 30, 2004, the Company announced the creation of a new segment, Clinical Technologies and Services, which will replace the Company's Automation and Information Services segment and will include ALARIS, the Company's existing businesses formerly within the Automation and Information Services segment and the Company's existing Clinical Services and Consulting business, which was formerly reported under the Pharmaceutical Distribution and Provider Services segment. The Company will begin reporting results for this new segment beginning with the first quarter fiscal 2005. In addition, effective first quarter fiscal 2005, the Company will transfer its Specialty Pharmaceutical Distribution business, previously included within the Pharmaceutical Distribution and Provider Services segment, to the Medical Products and Services segment. All prior periods will be restated to reflect these transfers beginning in fiscal 2005.

The Pharmaceutical Distribution and Provider Services segment involves the distribution of a broad line of pharmaceuticals, health care, and other specialty pharmaceutical products and other items typically sold by hospitals, retail drug stores and other health care providers. In addition, this segment provides services to the health care industry through integrated pharmacy management, temporary pharmacy staffing, as well as franchising of apothecary-style retail pharmacies.

The Medical Products and Services segment involves the manufacture of medical, surgical and laboratory products and the distribution of these products as well as products not manufactured internally to hospitals, physician offices, surgery centers and other health care providers.

The Pharmaceutical Technologies and Services segment provides services to the health care industry through the design and manufacture of proprietary drug delivery systems including softgel capsules, controlled release forms, Zydis(R) fast dissolving wafers and advanced sterile delivery technologies. This segment also provides sterile injectible pharmaceutical products for pharmacies in the United Kingdom. It also provides comprehensive packaging, radiopharmaceutical manufacturing, pharmaceutical development and analytical science expertise, as well as medical education, marketing and contract sales services.

The Automation and Information Services segment provides services, to hospitals and other health care providers, focusing on meeting customer needs through unique and proprietary automation and information products and services. In addition, this segment markets point-of-use supply systems for use in the life sciences market.

The Company evaluates the performance of the segments based on operating earnings after the corporate allocation of administrative expenses. Information about interest income and expense and income taxes is not provided on a segment level. In addition, special charges are not allocated to the segments. The accounting policies of the segments are the same as described in the summary of significant accounting policies.

                                                                               Revenue (1)
                                                                   ------------------------------------
(in millions)                                                         2004         2003         2002
                                                                   ------------------------------------
                                                                                 Restated     Restated
Revenue:
   Pharmaceutical Distribution and Provider Services (1) (2) (3)   $ 54,231.0   $ 47,260.1   $ 42,998.0
   Medical Products and Services                                      7,357.6      6,614.7      6,256.7
   Pharmaceutical Technologies and Services (1) (4)                   2,804.1      2,250.0      1,417.5
   Automation and Information Services (6)                              680.8        666.7        560.2
   Corporate (5)                                                        (20.0)       (60.0)       (87.8)
                                                                   ------------------------------------
Total revenue                                                      $ 65,053.5   $ 56,731.5   $ 51,144.6
                                                                   ====================================

                                                                            Operating Earnings
                                                                   ------------------------------------
(in millions)                                                         2004         2003         2002
                                                                   ------------------------------------
                                                                                 Restated     Restated
   Pharmaceutical Distribution and Provider Services (3)           $  1,173.4   $  1,188.1   $  1,081.0
   Medical Products and Services                                        666.0        591.8        545.2
   Pharmaceutical Technologies and Services (6)                         465.4        368.3        265.0
   Automation and Information Services (6)                              270.2        266.0        209.2
   Corporate (6)                                                       (237.7)      (218.2)      (243.0)
                                                                   ------------------------------------
Total operating earnings                                           $  2,337.3   $  2,196.0   $  1,857.4
                                                                   ====================================

The following tables include depreciation and amortization expense and capital expenditures for the fiscal years ended June 30, 2004, 2003 and 2002 for each segment as well as reconciling items necessary to total the amounts reported in the consolidated financial statements:

                                                                   Depreciation and Amortization Expense
                                                                   ------------------------------------
(in millions)                                                         2004         2003         2002
                                                                   ------------------------------------
   Pharmaceutical Distribution and Provider Services               $     56.2   $     62.3   $     61.2
   Medical Products and Services                                         88.2         87.7         87.7
   Pharmaceutical Technologies and Services                             106.6         82.7         65.2
   Automation and Information Services                                   16.3         16.9         14.3
   Corporate                                                             31.9         16.2         15.1
                                                                   ------------------------------------
Total depreciation and amortization expense                        $    299.2   $    265.8   $    243.5
                                                                   ====================================

                                                                           Capital Expenditures
                                                                   ------------------------------------
(in millions)                                                         2004         2003         2002
                                                                   ------------------------------------
   Pharmaceutical Distribution and Provider Services               $     64.0   $     67.3   $     60.4
   Medical Products and Services                                        100.7         85.4         88.0
   Pharmaceutical Technologies and Services                             192.9        182.9        104.4
   Automation and Information Services                                   25.1         10.9         15.1
   Corporate                                                             27.5         76.7         17.5
                                                                   ------------------------------------
Total capital expenditures                                         $    410.2   $    423.2   $    285.4
                                                                   ====================================

                                                               Assets
                                                       -----------------------
(in millions)                                             2004         2003
                                                       -----------------------
                                                                     Restated
   Pharmaceutical Distribution and Provider Services   $  9,011.1   $  8,729.6
   Medical Products and Services                          3,431.9      3,350.2
   Pharmaceutical Technologies and Services               4,389.3      3,094.7
   Automation and Information Services                    1,192.3      1,203.2
   Corporate (7)                                          3,344.5      2,087.4
                                                       -----------------------
Total assets                                           $ 21,369.1   $ 18,465.1
                                                       =======================

(1) Revenue previously classified as "Bulk Deliveries to Customer Warehouses and Other" has been reclassified within this Form 10-K, in all periods presented, as a result of the Company's decision to aggregate revenue classes. For additional information concerning the reclassification, see Note 2.

(2) The Pharmaceutical Distribution and Provider Services segment's revenue is derived from three main product categories. These product categories and their respective contributions to revenue are as follows:

Product Category                               2004        2003         2002
------------------------------------------------------------------------------
                                                         Adjusted     Adjusted
Pharmaceuticals and Health Care Products         95%        95%          95%
Specialty Pharmaceutical Products                 3%         3%           3%
Other Products & Services                         2%         2%           2%
                                               -------------------------------
Total                                           100%       100%         100%
                                               ===============================

(3) Operating results for Intercare, acquired in December 2003, include a specialty pharmaceutical distribution business that is similar to the Company's pharmaceutical distribution business. For segment reporting purposes, this specialty pharmaceutical distribution business was included in the Pharmaceutical Distribution and Provider Services segment for the fiscal year ended June 30, 2004. This classification was not reported during the second quarter of fiscal 2004 immediately following the acquisition as the Company was still assessing the appropriate segment reporting treatment. Intercare's results of operations for the second quarter of fiscal 2004 were not material to the Company or the Company's individual segments.

(4) The Pharmaceutical Technologies and Services segment's revenue is derived from three main product categories. These product categories and their respective contributions to revenue are as follows:

Product Category                               2004        2003         2002
------------------------------------------------------------------------------
                                                         Adjusted     Adjusted
Manufactured Products and
  Radiopharmaceuticals                           66%        63%          68%
Packaged Products                                14%        18%          27%
Other Products & Services                        20%        19%           5%
                                               -------------------------------
Total                                           100%       100%         100%
                                               ===============================

(5) Corporate revenue primarily consists of foreign currency translation adjustments and the elimination of intersegment revenue.

(6) Corporate operating earnings consist of special items of $57.4 million, $39.9 million and $116.6 million for the fiscal years ended June 30, 2004, 2003 and 2002, respectively (see Note 4 for discussion of special items). Corporate costs are allocated to the business segments generally based on certain factors such as revenue, operating earnings and employee base. In addition, the Company attempts to maintain a relatively consistent year over year rate of Corporate allocated costs per segment's net revenue. These Corporate cost allocations may change from period to period depending upon an individual segment's use of Corporate services. The Company does not allocate any Corporate costs for human resources, finance and technology. Corporate operating earnings include unallocated Corporate administrative expenses, costs not attributable to the operations of the segments and certain other Corporate directed costs, as follows:

- Investment spending - the Company has encouraged its business units to identify investment projects which will provide future returns.

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These projects typically require incremental strategic investments in the form of additional capital or operating expenses. As approval decisions for such projects are dependent upon Corporate management, the expenses for such projects are retained at the Corporate segment. Investment spending for fiscal years, 2004, 2003 and 2002 was $48.3 million, $58.0 million and $30.6 million, respectively.

- Interest income adjustment - At the direction of Corporate management, the Automation and Information Services segment sold portions of its leased asset portfolio and transferred the proceeds to Corporate. As the capital proceeds associated with these sales have not been redeployed within the business segment, but utilized for other general corporate purposes, the segment was allocated a benefit by Corporate for the interest income that would have been earned associated with these sold leases. In fiscal 2004, the segment received a $21 million allocation from Corporate.

- Foreign exchange adjustments - The Company assesses the financial performance of its Pharmaceutical Technologies and Services business by applying constant foreign exchange rates to translate foreign business units operating results into U.S. dollars. For fiscal 2004, 2003 and 2002, $11.2 million, $17.5 million and $17.4 million of expenses were allocated to Corporate representing the difference between "constant rates" and "actual" exchange rates.

- At the beginning fiscal 2003, the Company began expanding the use of its shared service center, which previously supported the Medical Products and Services segment, to benefit and support company-wide initiatives and other business segments. Accordingly, the cost of the shared service center, which was previously reported within the Medical Products and Services segment, has been classified within Corporate operating earnings for fiscal 2004 and 2003. The cost of these services was approximately $18.4 million and $19.0 million, respectively, for fiscal 2004 and fiscal 2003.

(7) Includes ALARIS assets of approximately $2.4 billion of which approximately $1.5 billion relates to the preliminary goodwill allocation and $413.2 million relates to intangible assets. The remaining assets primarily include Corporate cash and cash equivalents, Corporate net property and equipment and unallocated deferred taxes.

The following table presents revenue and long-lived assets by geographic area (in millions):

                              Revenue                           Long-Lived Assets
                ------------------------------------   ------------------------------------
                 For The Fiscal Year Ended June 30,               As of June 30,
                ------------------------------------   ------------------------------------
                   2004         2003         2002         2004         2003         2002
                ---------------------------------------------------------------------------
                              Restated     Restated
United States   $ 63,627.3   $ 55,673.1   $ 50,193.9   $  1,932.1   $  1,693.5   $  1,416.6
International      1,426.2      1,058.4        950.7        431.9        396.0        477.8
                ------------------------------------   ------------------------------------
Total           $ 65,053.5   $ 56,731.5   $ 51,144.6   $  2,364.0   $  2,089.5   $  1,894.4
                ====================================   ====================================

Long-lived assets include property and equipment, net of accumulated depreciation.

                                                            First Quarter                             Second Quarter
                                                ----------------------------------------  ----------------------------------------
                                                              Change in                                 Change in
                                                 Reported   Accounting (2)  Restated (2)   Reported   Accounting (2)  Restated (2)
                                                ----------------------------------------  ----------------------------------------
FISCAL 2004
Revenue (1)                                     $ 15,388.7  $     15,388.7  $   15,388.2  $ 16,350.4  $     16,350.4  $   16,350.8

Gross margin                                       1,083.2         1,080.0       1,072.8     1,170.7         1,167.2       1,161.0

Selling, general and administrative expenses         547.6           547.6         547.6       586.9           586.9         588.0

Earnings from continuing operations before
cumulative effect of change in accounting            330.4           328.2         323.5       380.9           378.5         373.6
Loss from discontinued operations                     (1.8)           (1.8)         (1.8)       (5.1)           (5.1)         (5.1)
Cumulative effect of change in accounting                -           (38.5)        (38.5)          -               -             -
                                                ----------------------------------------  ----------------------------------------
Net earnings                                    $    328.6  $        287.9  $      283.2  $    375.8  $        373.4  $      368.5

Earnings from continuing operations before
cumulative effect of change in accounting
per Common Share:

Basic                                           $     0.75  $         0.75  $       0.73  $     0.88  $         0.87  $       0.86
Diluted                                         $     0.74  $         0.73  $       0.72  $     0.87  $         0.86  $       0.85

                                                            Third Quarter                 Fourth Quarter
                                                ----------------------------------------  --------------
                                                              Change in
                                                 Reported   Accounting (2)  Restated (2)     Reported
                                                ----------------------------------------    ----------
FISCAL 2004
Revenue (1)                                     $ 16,392.3  $     16,392.3  $   16,391.8    $ 16,922.7

Gross margin                                       1,280.8         1,291.0       1,283.4       1,224.0

Selling, general and administrative expenses         608.0           608.0         608.9         602.1

Earnings from continuing operations before
cumulative effect of change in accounting            428.9           435.8         430.1         397.4
Loss from discontinued operations                     (0.8)           (0.8)         (0.8)         (3.9)
Cumulative effect of change in accounting                -               -             -             -
                                                ----------------------------------------    ----------
Net earnings                                    $    428.1  $        435.0  $      429.3    $    393.5

Earnings from continuing operations before
cumulative effect of change in accounting
per Common Share:

Basic                                           $     0.99  $         1.01  $       1.00    $     0.92
Diluted                                         $     0.98  $         0.99  $       0.99    $     0.91

                                         First Quarter           Second Quarter          Third Quarter           Fourth Quarter
                                     ----------------------  ----------------------  ----------------------  ----------------------
                                      Reported    Restated    Reported    Restated    Reported    Restated    Reported    Restated
                                     ----------------------  ----------------------  ----------------------  ----------------------
FISCAL 2003
Revenue (1)                          $ 13,086.1  $ 13,085.0  $ 14,091.0  $ 14,096.6  $ 14,371.3  $ 14,366.1  $ 15,188.6  $ 15,183.8

Gross margin                            1,006.9     1,005.8     1,079.5     1,085.5     1,194.1     1,175.4     1,229.5     1,215.5

Selling, general and administrative
expenses                                  520.7       530.0       526.2       528.3       576.1       579.0       605.2       609.0

Earnings from continuing operations       288.3       281.4       367.5       370.1       384.9       370.5       371.2       359.2
Loss from discontinued operations             -           -           -           -        (1.8)       (1.8)       (4.3)       (4.3)
                                     ----------  ----------  ----------  ----------  ----------  ----------  ----------  ----------
Net earnings                         $    288.3  $    281.4  $    367.5  $    370.1  $    383.1  $    368.7  $    366.9  $    354.9

Earnings from continuing operations
per Common Share:
Basic                                $     0.65  $     0.63  $     0.83  $     0.84  $     0.86  $     0.83  $     0.83  $     0.80
Diluted                              $     0.64  $     0.62  $     0.82  $     0.82  $     0.85  $     0.82  $     0.82  $     0.79

(1) Revenue previously classified as "Bulk Deliveries to Customer Warehouses and Other" has been reclassified within this Form 10-K, in all periods presented, as a result of the Company's decision to aggregate revenue classes. These reclassifications have no effect on previously reported total revenue, gross margins, earnings from continuing operations, net earnings or earnings per Common Share amounts. For additional information concerning the reclassification, see Note 2.

(2) During fiscal 2004, the Company changed its method of recognizing cash discounts for payments made to vendors (See Note 16). Fiscal 2004 quarterly financial information has been restated from previously issued quarterly financial statements to reflect this change in accounting. The "change in accounting" column reflects the reported numbers restated for the change in accounting. The "restated" column includes all restatements including the change in accounting.

As discussed in Note 4, merger-related costs and other special items were recognized in various quarters in fiscal 2004 and 2003. The following table summarizes the impact of such costs on net earnings and diluted earnings per Common Share in the quarters in which they were recorded (in millions, except per Common Share amounts):

                                             First   Second    Third   Fourth
                                            Quarter  Quarter  Quarter  Quarter
                                            -------  -------  -------  -------
Fiscal 2004
     Net earnings                           $  (8.7) $   3.3  $  (4.9) $ (25.3)
     Diluted net earnings per Common Share  $ (0.02) $  0.01  $ (0.01) $ (0.06)
                                            -------  -------  -------  -------
Fiscal 2003
     Net earnings                           $ (15.6) $  22.1  $  (6.4) $ (33.3)
     Diluted net earnings per Common Share  $ (0.03) $  0.05  $ (0.01) $ (0.07)
                                            -------  -------  -------  -------

20. GUARANTEES

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation enhances a guarantor's disclosure requirements in its interim and annual financial statements regarding obligations under certain guarantees. The Company adopted the enhanced disclosure requirements in the second quarter of fiscal 2003. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.

The Company has contingent commitments related to certain operating lease agreements (see Note 10). These operating leases consist of certain real estate and equipment used in the operations of the Company. In the event of termination of these operating leases, which range in length from one to ten years, the Company guarantees reimbursement for a portion of any unrecovered

CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

property cost. At June 30, 2004, the maximum amount the Company could be required to reimburse was $396.9 million. Based upon current information, the Company believes that the proceeds from the sale of properties under these operating lease agreements would exceed this contingent obligation. In accordance with FASB Interpretation No. 45, the Company has recorded $4.3 million related to these guarantees.

In the ordinary course of business, the Company, from time to time, agrees to indemnify certain other parties under agreements with the Company, including under acquisition agreements, customer agreements, and intellectual property licensing agreements. Such indemnification obligations vary in scope and, when defined, in duration. In many cases, a maximum obligation is not explicitly stated and, therefore, the overall maximum amount of the liability under such indemnification obligations cannot be reasonably estimated. Where appropriate, such indemnification obligations are recorded as a liability. Historically, the Company has not, individually or in the aggregate, made payments under these indemnification obligations in any material amounts. In certain circumstances, the Company believes that its existing insurance arrangements, subject to the general deduction and exclusion provisions, would cover portions of the liability that may arise from these indemnification obligations. In addition, the Company believes that the likelihood of material liability being triggered under these indemnification obligations is not significant.

In the ordinary course of business, the Company, from time to time, enters into agreements that obligate the Company to make fixed payments upon the occurrence of certain events. Such obligations primarily relate to obligations arising under acquisition transactions, where the Company has agreed to make payments based upon the achievement of certain financial performance measures by the acquired business. Generally, the obligation is capped at an explicit amount. The Company's aggregate exposure for these obligations, assuming the achievement of all financial performance measures, is not material. Any potential payment for these obligations would be treated as an adjustment to the purchase price of the related entity and would have no impact on the Company's results of operations.

21. DISCONTINUED OPERATIONS

In connection with the acquisition of Syncor, the Company acquired certain operations of Syncor that were or will be discontinued. Prior to the acquisition, Syncor announced the discontinuation of certain operations including the medical imaging business and certain overseas operations. The Company is continuing with these plans and has added additional international and non-core domestic businesses to the discontinued operations of Syncor. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the net assets and results of operations of these businesses are presented as discontinued operations. The Company is currently overseeing the planned sale of the discontinued operations and is actively marketing these businesses. The Company expects to sell substantially all of the remaining discontinued operations by the end of the second quarter of fiscal 2005. The net assets for the discontinued operations are included within the Pharmaceutical Technologies and Services segment.

The results of discontinued operations for the fiscal years ended June 30, 2004 and 2003 are summarized as follows:

                                    Fiscal Year
                                   Ended June 30,
(in millions)                       2004    2003
-------------------------------------------------
Revenue                            $ 77.1  $ 92.5
                                   ==============

Loss before income taxes           $(19.1) $ (8.6)
Income tax benefit                    7.4     2.5
                                   --------------
Loss from discontinued operations  $(11.7) $ (6.1)
                                   ==============

Interest expense allocated to discontinued operations was $0.2 million and $0.5 million for the fiscal years ended June 30, 2004 and 2003, respectively. Interest expense was allocated to the discontinued operations based upon a ratio of the net assets of discontinued operations versus the overall net assets of Syncor.

                                  Fiscal Year
                                  Ended June 30,
(in millions)                   2004           2003
---------------------------------------------------
Current Assets               $    21.2     $   49.9
Property and Equipment            22.0         63.2
Other Assets                      17.2         57.0
                             ---------     --------
  Total Assets               $    60.4     $  170.1
                             =========     ========

Current Liabilities          $    30.9     $   35.6
Long Term Debt and Other          24.2         28.7
                             ---------     --------
  Total Liabilities          $    55.1     $   64.3
                             =========     ========

Cash flows generated from the discontinued operations are immaterial to the Company and, therefore, are not disclosed separately.

22. SUBSEQUENT EVENTS

Subsequent to June 30, 2004, the Company borrowed $1.25 billion in the aggregate on its two $750 million bank revolving credit facilities. The proceeds of this borrowing were utilized to repay a significant portion of the Company's commercial paper, none of which remained outstanding as of the filing date of this Form 10-K, and for general corporate purposes, including the establishment of pharmaceutical inventory at the Pharmaceutical Distribution business' National Logistics Center in Groveport, Ohio. See Note 6 for further discussion regarding the nature and terms of the Company's bank revolving credit facilities.

Also, subsequent to June 30, 2004, the Company received a commitment letter for a $500 million committed borrowing facility to be used for general corporate purposes. This facility is in the process of being negotiated.

Additionally, subsequent to June 30, 2004, the Company sold in the aggregate $800 million of receivables under its committed receivables sales facility program. The capacity under the committed receivables sales facility program was increased from $500 million to $800 million in September 2004. See Note 10 for further information regarding this facility.