UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2011

or

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

Commission File Number: 001-34273

CareFusion Corporation

(Exact name of Registrant as specified in its charter)

Delaware	26-4123274
(State or other jurisdiction of incorporation or organization)	(I.R.S Employer Identification No.)

3750 Torrey View Court

San Diego, CA 92130

Telephone: (858) 617-2000

(Address of principal executive offices, zip code and Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s common stock, as of January 19, 2012 was 224,760,527.

TABLE OF CONTENTS

Important Information Regarding Forward-Looking Statements	3
PART I – FINANCIAL INFORMATION	4
ITEM 1. FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33
ITEM 4. CONTROLS AND PROCEDURES	36
PART II – OTHER INFORMATION	37
ITEM 1. LEGAL PROCEEDINGS	37
ITEM 1A. RISK FACTORS	37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	39
ITEM 6. EXHIBITS	40

2

Important Information Regarding Forward-Looking Statements

Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations and projections regarding our business strategies, market potential, future financial performance, industry and other matters. This includes, in particular, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in Item 1A—Risk Factors of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2011 filed with the Securities and Exchange Commission on August 9, 2011. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

3

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Quarters Ended December 31,				Six Months Ended December 31,
(in millions, except per share amounts)	2011		2010		2011		2010
Revenue	$	915	$	886	$	1,759	$	1,697
Cost of Products Sold		458		441		875		839
Gross Margin		457		445		884		858
Selling, General and Administrative Expenses		267		270		540		542
Research and Development Expenses		40		36		79		76
Restructuring and Acquisition Integration Charges		7		17		14		39
Operating Income		143		122		251		201
Interest Expense and Other, Net		17		20		42		43
Income Before Income Tax		126		102		209		158
Provision for Income Tax		31		29		47		49
Income from Continuing Operations		95		73		162		109
Income from Discontinued Operations, Net of Tax		—		3		—		5
Net Income	$	95	$	76	$	162	$	114
PER SHARE AMOUNTS:
Basic Earnings per Common Share:
Continuing Operations	$	0.42	$	0.32	$	0.72	$	0.49
Discontinued Operations	$	—	$	0.01	$	—	$	0.02
Basic Earnings per Common Share	$	0.42	$	0.34	$	0.72	$	0.51
Diluted Earnings per Common Share:
Continuing Operations	$	0.42	$	0.32	$	0.72	$	0.49
Discontinued Operations	$	—	$	0.01	$	—	$	0.02
Diluted Earnings per Common Share	$	0.42	$	0.34	$	0.72	$	0.51
Weighted-Average Number of Common Shares Outstanding:
Basic		224.7		222.8		224.3		222.4
Diluted		226.6		224.5		226.5		224.2

See accompanying notes to condensed consolidated financial statements

4

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in millions, except per share data)	December 31, 2011			June 30, 2011
ASSETS
Current Assets:
Cash and Cash Equivalents	$	1,347		$	1,371
Trade Receivables, Net		509			540
Current Portion of Net Investment in Sales-Type Leases		390			400
Inventories, Net		444			382
Prepaid Expenses		33			28
Other Current Assets		182			147
Total Current Assets		2,905			2,868
Property and Equipment, Net		448			464
Net Investment in Sales-Type Leases, Less Current Portion		966			957
Goodwill		3,031			2,954
Intangible Assets, Net		921			887
Other Assets		92			91
Total Assets	$	8,363		$	8,221
LIABILITIES AND EQUITY
Current Liabilities:
Current Portion of Long-Term Obligations and Other Short-Term Borrowings	$	251		$	1
Accounts Payable		163			201
Deferred Revenue		96			72
Accrued Compensation and Benefits		111			134
Other Accrued Liabilities		216			211
Total Current Liabilities		837			619
Long-Term Obligations, Less Current Portion		1,151			1,387
Deferred Income Taxes		661			644
Other Liabilities		496			478
Total Liabilities		3,145			3,128
Commitments and Contingencies
Stockholders’ Equity:
Preferred Stock (50.0 Authorized Shares; $.01 Par Value) Issued and Outstanding – None		—			—
Common Stock (1,200.0 Authorized Shares; $.01 Par Value) Issued and Outstanding – 224.7 and 223.6 shares at December 31, 2011 and June 30, 2011, respectively		2			2
Treasury Stock, at cost, 0.2 and 0.1 shares at December 31, 2011 and June 30, 2011, respectively		(5	)		(3	)
Additional Paid-In Capital		4,756			4,740
Retained Earnings		527			365
Accumulated Other Comprehensive Loss		(62	)		(11	)
Total Stockholders’ Equity		5,218			5,093
Total Liabilities and Stockholders’ Equity	$	8,363		$	8,221

See accompanying notes to condensed consolidated financial statements

5

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended December 31,
(in millions)	2011			2010
Cash and Cash Equivalents at July 1, Attributable to Continuing Operations	$	1,371		$	985
Cash and Cash Equivalents at July 1, Attributable to Discontinued Operations	$	—		$	34
Cash Flows from Operating Activities:
Net Income		162			114
Income from Discontinued Operations		—			5
Income from Continuing Operations		162			109
Adjustments to Reconcile Income from Continuing Operations to Net Cash Provided by Operating Activities:
Depreciation and Amortization		100			93
Other Non-Cash Items		44			30
Change in Operating Assets and Liabilities:
Trade Receivables		33			(35	)
Inventories		(53	)		(21	)
Net Investment in Sales-Type Leases		2			(8	)
Accounts Payable		(40	)		(18	)
Other Accrued Liabilities and Operating Items, Net		(58	)		(37	)
Net Cash Provided by Operating Activities – Continuing Operations		190			113
Net Cash Used in Operating Activities – Discontinued Operations		—			(1	)
Net Cash Provided by Operating Activities		190			112
Cash Flows from Investing Activities:
Cash Paid for Acquisition, Net of Cash Received		(131	)		—
Other Investing Activities, Net		(46	)		(66	)
Net Cash Used in Investing Activities – Continuing Operations		(177	)		(66	)
Net Cash Used in Investing Activities – Discontinued Operations		—			—
Net Cash Used in Investing Activities		(177	)		(66	)
Cash Flows from Financing Activities:
Other Financing Activities		(16	)		(14	)
Net Cash Used in Financing Activities – Continuing Operations		(16	)		(14	)
Net Cash Provided by Financing Activities – Discontinued Operations		—			6
Net Cash Used in Financing Activities		(16	)		(8	)
Effect of Exchange Rate Changes on Cash – Continuing Operations		(21	)		23
Effect of Exchange Rate Changes on Cash – Discontinued Operations		—			7
Net Effect of Exchange Rate Changes on Cash		(21	)		30
Net Increase (Decrease) in Cash and Cash Equivalents – Continuing Operations		(24	)		56
Net Increase in Cash and Cash Equivalents – Discontinued Operations		—			12
Net Increase (Decrease) in Cash and Cash Equivalents		(24	)		68
Cash and Cash Equivalents at December 31, Attributable to Continuing Operations	$	1,347		$	1,041
Cash and Cash Equivalents at December 31, Attributable to Discontinued Operations	$	—		$	46

See accompanying notes to condensed consolidated financial statements

6

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

Basis of Presentation. References in these notes to the unaudited condensed consolidated financial statements to “CareFusion Corporation,” “CareFusion,” “we,” “us,” “our,” “the company” and “our company” refer to CareFusion Corporation and its consolidated subsidiaries. References in the notes to the unaudited condensed consolidated financial statements to “Cardinal Health” refer to Cardinal Health, Inc., an Ohio corporation, and its consolidated subsidiaries.

The condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The condensed consolidated balance sheet at June 30, 2011 has been derived from the audited consolidated and combined financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated and combined financial statements for our fiscal year ended June 30, 2011, filed with the SEC on Form 10-K on August 9, 2011 include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

We have evaluated subsequent events for recognition or disclosure through the date these financial statements were issued.

On September 29, 2008, Cardinal Health announced that it intended to separate its clinical and medical products businesses from the remainder of its businesses through a pro-rata distribution of common stock of an entity holding the assets and liabilities associated with the clinical and medical products businesses. CareFusion Corporation was incorporated in Delaware on January 14, 2009 for the purpose of holding such businesses. We completed the spinoff from Cardinal Health on August 31, 2009. In connection with the spinoff, Cardinal Health contributed the majority of the businesses comprising its clinical and medical products segment to us (“the contribution”), and distributed approximately 81% of our outstanding common stock, or approximately 179.8 million shares, to its shareholders (“the distribution”), based on a distribution ratio of 0.5 shares of our common stock for each common share of Cardinal Health held on the record date of August 25, 2009. Cardinal Health retained approximately 19% of our outstanding common stock, or approximately 41.4 million shares, in connection with the spinoff. As of September 15, 2010, Cardinal Health had sold all remaining shares of our common stock retained in connection with the spinoff.

Reorganization of Segment Information. Leading up to the spinoff from Cardinal Health, we organized our businesses into two reportable segments: Critical Care Technologies and Medical Technologies and Services. In July 2011, we made a decision to realign our businesses into two new global operating segments to reduce complexity, provide clearer governance for our investments and make it easier for our customers to do business with us. As a result of this business realignment, we also made a determination to realign our reportable segments with our new operating segments. Commencing with the quarter ended September 30, 2011, we re-segmented our businesses into two new operating and reportable segments: Medical Systems and Procedural Solutions. The Medical Systems segment is organized around our medical equipment businesses. Within the Medical Systems segment, the Company operates its Dispensing Technologies, Infusion Systems and Respiratory Technologies business lines. The Dispensing Technologies business line includes equipment and related services for medication and supply dispensing. The Infusion Systems business line includes infusion pumps and dedicated disposable infusion sets and accessories. The Respiratory Technologies business line includes respiratory ventilators and dedicated disposable ventilator circuits and accessories. The Company also includes its data mining surveillance service business within the Medical Systems segment, which it reports as “Other.” The Procedural Solutions segment is organized around our disposable products businesses. Within the Procedural Solutions segment, the Company operates its Infection Prevention, Medical Specialties and Specialty Disposables business lines. The Infection Prevention business line includes single-use skin antiseptic and other patient-preparation products and non-dedicated disposable infusion administration sets and accessories. The Medical Specialties business line includes

7

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

interventional specialty products used for biopsy, drainage and other procedures, as well as reusable surgical instruments. The Specialty Disposables business line includes non-dedicated disposable ventilator circuits and oxygen masks used in respiratory therapy. The Company also includes its respiratory diagnostics business and its neurological care business within the Procedural Solutions segment, which it reports as “Other.”

For the quarter and six months ended December 31, 2010, certain amounts have been reclassified to conform to the current period presentation. See note 5, note 8 and note 17 to the unaudited condensed consolidated financial statements.

New Accounting Pronouncements (Adopted during Fiscal Year 2012)

ASU 2010-28. In December 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-28 – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). For reporting units with zero or negative carrying amounts, ASU 2010-28 requires that an entity perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that an impairment of goodwill exists, an entity should consider whether any adverse qualitative factors are present. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We adopted the amendment provisions of ASU 2010-28 on July 1, 2011; the adoption of this standard did not have material impact on our financial condition, results of operations or cash flows. See note 8 to the unaudited condensed consolidated financial statements.

ASU 2010-29. In December 2010, the FASB issued ASU 2010-29 – Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”). ASU 2010-29 requires that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplementary pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. We adopted the amendment provisions of ASU 2010-29 for the quarter ended September 30, 2011. As ASU 2010-29 is a disclosure standard, the adoption of this standard did not have any impact on our financial condition, results of operations or cash flows. See note 3 to the unaudited condensed consolidated financial statements.

ASU 2011-04. In May 2011, the FASB issued ASU 2011-04 – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 clarifies the application of existing fair value measurement guidance, amends certain fair value measurement principles, and requires additional disclosures for certain fair value measurements. We prospectively adopted the amendment provisions of ASU 2011-04 on January 1, 2012; the adoption of this standard did not have material impact on our financial condition, results of operations or cash flows.

NOTE 2. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

International Surgical Products Business

During the quarter ended March 31, 2011, we entered into a definitive agreement to sell our International Surgical Products distribution business, resulting in held for sale classification of the underlying assets. Accordingly, the assets of the ISP business were written down to fair value less costs to sell, resulting in a pre-tax impairment charge of $40 million recorded in the quarter ended March 31, 2011. On April 1, 2011, we completed the sale of the ISP business, resulting in a total loss from discontinued operations associated with the ISP business of approximately $47 million, which includes a $5 million loss recorded in the quarter ended June 30, 2011, related to incremental costs to sell and adjustments to the estimated purchase price. At the closing of the sale, we received approximately $124 million in cash. At June 30, 2011, an additional $20 million in receivables were included within current assets in our condensed consolidated balance sheet, for total consideration of approximately $144 million, which is net of purchase price adjustments and was fully collected by September 30, 2011.

8

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

Summarized selected financial information for the ISP business for the quarter and six months ended December 31, 2010 is as follows:

(in millions)	Quarter Ended December 31, 2010		Six Months Ended December 31, 2010
Revenue	$	116	$	213
Operating Income	$	4	$	7
Income from Discontinued Operations	$	3	$	5

NOTE 3. ACQUISITIONS

On August 1, 2011, we completed the acquisition of Rowa Automatisierungssysteme GmbH (“Rowa”), a Germany-based company specializing in robotic medication storage and retrieval systems for retail and hospital pharmacies. The purchase price of the acquisition, which was paid in cash, was approximately $150 million. The valuation of acquired assets and liabilities resulted in the recognition of goodwill of approximately $84 million, of which approximately $11 million is expected to be deductible for tax purposes; identifiable intangible assets of $81 million; deferred tax liabilities of $23 million; and the remaining amount associated with net assets acquired. Various factors contributed to the establishment of goodwill, including market penetration, an expanded global footprint, and the portfolio of future products under development. The unaudited condensed consolidated financial statements include the results of operations from this business combination from the date of acquisition, which is included in our Medical Systems reporting segment. Had the transaction occurred at the beginning of fiscal year 2012, consolidated results of operations would not have differed materially from reported results.

NOTE 4. EARNINGS PER SHARE

For the quarters and six months ended December 31, 2011 and 2010, basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated to give effect to all dilutive securities, using the treasury stock method.

The following table sets forth the reconciliation of basic and diluted earnings per share for the quarters and six months ended December 31, 2011 and 2010:

(shares in millions)	Quarters Ended December 31,				Six Months Ended December  31,
	2011		2010		2011		2010
Denominator for Basic Earnings per Share		224.7		222.8		224.3		222.4
Effect of Dilutive Securities:
Stock Options		0.8		0.6		0.9		0.6
Restricted Stock Awards, Restricted Stock Units and Performance Stock Units		1.1		1.1		1.3		1.2
Denominator for Diluted Earnings per Share		226.6		224.5		226.5		224.2

9

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

The table below provides a summary of the securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the period presented. Antidilutive securities were as follows for the quarters and six months ended December 31, 2011 and 2010:

(securities in millions)	Quarters Ended December 31,				Six Months Ended December 31,
	2011		2010		2011		2010
Number of Securities		11.3		10.0		9.8		11.0
Weighted Average Exercise Price	$	29.52	$	30.72	$	30.37	$	29.84

Basic and diluted earnings per share amounts are computed independently in the unaudited condensed consolidated statements of income, therefore, the sum of per share components may not equal the per share amounts presented.

NOTE 5. RESTRUCTURING AND ACQUISITION INTEGRATION CHARGES

Restructuring liabilities and associated charges are measured at fair value as incurred. Acquisition integration charges are expensed as incurred.

The following is a summary of restructuring and acquisition integration charges for the quarters and six months ended December 31, 2011 and 2010:

	Quarters Ended December 31,				Six Months Ended December  31,
(in millions)	2011		2010		2011		2010
Restructuring Charges	$	7	$	17	$	14	$	37
Acquisition Integration Charges		—		—		—		2
Total Restructuring and Acquisition Integration Charges	$	7	$	17	$	14	$	39

Restructuring Charges

In fiscal year 2011, we initiated a global restructuring program (the “2011 Plan”), which was initially expected to result in a reduction of approximately 700 positions. The 2011 Plan resulted in a reduction of approximately 850 positions in fiscal year 2011. The total expected restructuring costs associated with the 2011 Plan were approximately $50 million and are recorded to the “Restructuring and Acquisition Integration Charges” line within our condensed consolidated statements of income as they were recognized. Substantially all of the costs associated with the 2011 Plan were incurred as of June 30, 2011.

In addition to the restructuring program discussed above, we periodically incur costs to implement smaller restructuring efforts for specific operations. The restructuring plans focus on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount, and aligning operations in the most strategic and cost-efficient structure.

10

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

The following table includes information regarding our current restructuring programs:

			Six Months Ended December 31, 2011
(in millions)	Accrued June 30, 20111		Accrued Costs		Cash Payments			Accrued Dec. 31, 20111		Total Costs Expensed to Date		Total Expected Program Costs
2011 Plan2	$	7	$	2	$	(7	)	$	2	$	51	$	50
Total Other Restructuring Programs3		5		9		(7	)		7
Total Restructuring Programs	$	12	$	11	$	(14	)	$	9

¹  Included within “Other Accrued Liabilities” in the condensed consolidated balance sheets.

²  The costs associated with the 2011 Plan primarily consist of severance and outplacement services and associated payroll costs accrued upon either communication of terms to employees or over the required service period, excluding impairment charges of $3 million.

³  Total costs expensed to date and total program costs are not provided separately for other restructuring programs based on the short duration and smaller size of these programs.

As discussed in note 1 to the unaudited condensed consolidated financial statements, in order to better align our operating and reporting structures with our updated business profile, commencing with the quarter ended September 30, 2011, we re-segmented our businesses into two new segments: Medical Systems and Procedural Solutions.

The following table segregates our restructuring charges into our reportable segments for the quarters and six months ended December 31, 2011 and 2010, net of reclassification adjustments to conform to the current period presentation:

	Quarters Ended December 31,				Six Months Ended December  31,
(in millions)	2011		2010		2011		2010
Medical Systems	$	3	$	10	$	8	$	23
Procedural Solutions		4		7		6		14
Total Restructuring Charges	$	7	$	17	$	14	$	37

Acquisition Integration Charges

Costs of integrating operations of various acquired companies are recorded as acquisition integration charges when incurred. The acquisition integration charges incurred during the six months ended December 31, 2010 were primarily the result of the acquisition of Medegen, LLC (“Medegen”) in May 2010.

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

11

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

NOTE 6. INVENTORIES

Inventories, accounted for at the lower of cost or market on the FIFO method, consisted of the following:

(in millions)	December 31, 2011			June 30, 2011
Finished Goods	$	304		$	256
Work-in-Process		22			26
Raw Materials		164			146
		490			428
Reserve for Excess and Obsolete Inventories		(46	)		(46	)
Inventories, Net	$	444		$	382

NOTE 7. FINANCING RECEIVABLES

Our net investment in sales-type leases are considered financing receivables. As our portfolio of financing receivables primarily arise from the leasing of our dispensing equipment, the methodology for determining our allowance for credit losses is based on the collective population and not stratified by class or portfolio segment. Reserves for bad debts on the entire portfolio are based on historical experience loss rates and the potential impact of anticipated changes in business practices, market dynamics, and economic conditions. We also reserve individual balances based on the evaluation of customers’ specific circumstances. We write off amounts that are deemed uncollectible. Financing receivables are generally considered past due 30 days after the billing date. We do not accrue interest on past due financing receivables.

The change in the allowance for credit losses on financing receivables for the six months ended December 31, 2011, consisted of the following:

(in millions)
Beginning balance of allowance for credit losses – June 30, 2011	$	9
Charge-offs		(1	)
Recoveries		—
Provisions		1
Ending balance of allowance for credit losses – December 31, 2011	$	9

The following table summarizes the credit losses and recorded investment in sales-type leases as of December 31, 2011:

(in millions)
Allowance for credit losses:
Ending Balance at December 31, 2011	$	9
Ending Balance: individually evaluated for impairment	$	2
Ending Balance: collectively evaluated for impairment	$	7
Sales-Type Leases:
Ending Balance at December 31, 2011	$	1,356
Ending Balance: individually evaluated for impairment	$	5
Ending Balance: collectively evaluated for impairment	$	1,351

12

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table summarizes the changes in the carrying amount of goodwill:

(in millions)	Total
Balance at June 30, 2011	$	2,954
Goodwill Acquired, Net of Foreign Currency Translation Adjustments		77
Balance at December 31, 2011	$	3,031

As discussed in note 1 to the unaudited condensed consolidated financial statements, in order to better align our operating and reporting structures with our updated business profile, commencing with the quarter ended September 30, 2011, we re-segmented our businesses into two new segments: Medical Systems and Procedural Solutions.

As of December 31, 2011, goodwill for the businesses comprising the Medical Systems segment and the Procedural Solutions segment was $1,630 million and $1,401 million, respectively. As of June 30, 2011, goodwill for the businesses comprising the Medical Systems segment and the Procedural Solutions segment was $1,553 million and $1,401 million, respectively, net of reclassification adjustments to conform to the current period presentation. The amount set forth above for goodwill acquired reflects the acquisition of Rowa, which we completed on August 1, 2011.

Intangible Assets

Intangible assets with definite lives are amortized over their useful lives which range from three to 20 years. The detail of other intangible assets by class is as follows:

(in millions)	Weighted Average  Life (years)	Gross Intangibles		Accumulated Amortization		Net Intangibles
December 31, 2011
Unamortized Intangibles:
In-Process Research and Development	Indefinite	$	45	$	—	$	45
Trademarks	Indefinite		334		—		334
Total Unamortized Intangibles			379		—		379
Amortized Intangibles:
Trademarks and Patents	11		93		43		50
Developed Technology	10		352		143		209
Customer Relationships	14		522		243		279
Other	10		35		31		4
Total Amortized Intangibles	12		1,002		460		542
Total Intangibles		$	1,381	$	460	$	921
June 30, 2011
Unamortized Intangibles:
In-Process Research and Development	Indefinite	$	45	$	—	$	45
Trademarks	Indefinite		334		—		334
Total Unamortized Intangibles			379		—		379
Amortized Intangibles:
Trademarks and Patents	12		86		39		47
Developed Technology	9		300		125		175
Customer Relationships	14		502		222		280
Other	9		36		30		6
Total Amortized Intangibles	12		924		416		508
Total Intangibles		$	1,303	$	416	$	887

13

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

Amortization expense is as follows:

	Quarters Ended December 31,				Six Months Ended December  31,
(in millions)	2011		2010		2011		2010
Amortization Expense	$	23	$	21	$	45	$	42

Amortization expense for each of the next five fiscal years is estimated to be:

(in millions)	2012		2013		2014		2015		2016
Amortization Expense	$	90	$	69	$	65	$	52	$	51

NOTE 9. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS

The computation of comprehensive income for the quarters and six months ended December 31, 2011 and 2010 is as follows:

	Quarters Ended December 31,						Six Months Ended December  31,
(in millions)	2011			2010			2011			2010
Net Income	$	95		$	76		$	162		$	114
Foreign Currency Translation Adjustments		(18	)		(1	)		(47	)		46
Net Unrealized Gain (Loss) on Derivatives		(5	)		1			(7	)		(1	)
Net Change in Minimum Pension Liability		—			—			—			1
Other		1			1			3			(2	)
Comprehensive Income, Net of Tax	$	73		$	77		$	111		$	158

The components of accumulated other comprehensive loss, net of tax, consisted of the following:

(in millions)	December 31, 2011			June 30, 2011
Foreign Currency Translation Adjustments	$	(56	)	$	(9	)
Net Unrealized Gain (Loss) on Derivative Instruments		(6	)		1
Minimum Pension Liability		(2	)		(2	)
Other		2			(1	)
Accumulated Other Comprehensive Loss	$	(62	)	$	(11	)

14

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

NOTE 10. BORROWINGS

Borrowings consisted of the following:

(in millions)	December 31, 2011		June 30, 2011
Senior Notes due 2012, 4.125% Less Unamortized Discount of $0.4 million at December 31, 2011, Effective Rate 4.37%	$	250	$	249
Senior Notes due 2014, 5.125% Less Unamortized Discount of $2.6 million at December 31, 2011, Effective Rate 5.36%		447		447
Senior Notes due 2019, 6.375% Less Unamortized Discount of $9.4 million at December 31, 2011, Effective Rate 6.60%		691		690
Euro Denominated Debt, Interest Averaging 3.48% at December 31, 2011, Due in Varying Installments through 2020		12		—
Other Obligations; Interest Averaging 7.97% at December 31, 2011 and 7.49% at June 30, 2011, Due in Varying Installments through 2014		2		2
Total Borrowings		1,402		1,388
Less: Current Portion		251		1
Long-Term Portion	$	1,151	$	1,387

Senior Unsecured Notes. In July 2009, we sold $1.4 billion aggregate principal amount of senior unsecured notes and received net proceeds of $1.374 billion. The discount on sale of the senior unsecured notes is amortized to interest expense utilizing the effective interest method.

Euro Denominated Debt. In connection with our acquisition of Rowa on August 1, 2011, we assumed a 9 million euro debt facility comprised of four tranches with annual interest rates ranging from 2.65% to 3.75%. These loans are payable in quarterly or semi-annual installments, with the final payment due September 30, 2020. At December 31, 2011, the aggregate outstanding balance on these loans was $12 million.

Revolving Credit Facilities. In July 2011, we terminated an existing three-year senior unsecured revolving credit facility with an aggregate available principal amount of $480 million and entered into a new five-year senior unsecured revolving credit facility with an aggregate available principal amount of $550 million. During the fiscal year ended June 30, 2011, we also maintained a $240 million 364-day revolving credit facility which expired on August 30, 2010.

The new five-year credit facility matures on July 6, 2016. At our request and subject to certain conditions, the commitments under the facility may be increased by up to $200 million to the extent that existing or new lenders agree to provide such additional commitments. Borrowings under the five-year credit facility bear interest at a rate per annum based upon the British Bankers Association LIBOR Rate or the alternate base rate, in each case plus an applicable margin, which varies based upon CareFusion’s debt ratings. The five-year credit facility also requires us to pay a quarterly commitment fee to the lenders under the credit facility on the amount of the lender’s unused commitments thereunder based upon CareFusion’s debt ratings.

The five-year credit facility contains several customary covenants including, but not limited to, limitations on liens, subsidiary indebtedness, dispositions, and transactions with affiliates. In addition, the credit facility contains financial covenants requiring us to maintain a consolidated leverage ratio of no more than 3.50:1.00 as of the end of any period of four fiscal quarters, and a consolidated interest coverage ratio of at least 3.50:1.00 as of the end of any period of four fiscal quarters. The credit facility is subject to customary events of default, including, but not limited to, non-payment of principal or other amounts when due, breach of covenants, inaccuracy of representations and warranties, cross-default to other material indebtedness, certain ERISA-related events, certain voluntary and involuntary bankruptcy events, and change of control.

At December 31, 2011 and June 30, 2011, there were no amounts outstanding under our revolving credit facilities.

15

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

Other Borrowings. We maintain other borrowings that consist primarily of additional notes, loans and capital leases. These additional notes, loans and capital leases totaled $2 million at December 31, 2011 and June 30, 2011. Obligations related to capital leases are secured by the underlying assets.

Letters of Credit and Bank Guarantees. At December 31, 2011 and June 30, 2011, we had $22 million and $19 million, respectively, of letters of credit and bank guarantees outstanding.

NOTE 11. INCOME TAX

The effective tax rate was 24.7% and 22.5%, for the quarter and six months ended December 31, 2011, respectively, as compared to 28.8% and 30.8%, for the quarter and six months ended December 31, 2010, respectively.

The difference between the effective tax rate for the quarter ended December 31, 2011 and the U.S. federal statutory rate of 35% is primarily attributable to the favorable impact of foreign earnings taxed at less than the U.S. statutory rate. The difference between the effective tax rate for the six months ended December 31, 2011 and the U.S. federal statutory rate of 35% is primarily attributable to the favorable impact of foreign earnings taxed at less than the U.S. statutory rate as well as favorable discrete adjustments related to foreign tax refunds.

The difference between the effective tax rate for the quarter and six months ended December 31, 2010 and the U.S. federal statutory rate of 35% is primarily attributable to the favorable impact of foreign earnings taxed at less than the U.S. statutory rate, offset by unfavorable discrete adjustments for uncertain tax positions.

During the quarter ended September 30, 2008, Cardinal Health received an IRS Revenue Agent’s Report for the fiscal years 2003 through 2005 that included Notices of Proposed Adjustment related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among our subsidiaries. The amount of additional tax proposed by the IRS in these notices totals $462 million, excluding penalties and interest, which may be significant. In addition, during the quarter ended December 31, 2010, we received an IRS Revenue Agent’s Report for fiscal years 2006 and 2007 that included Notices of Proposed Adjustment related to transfer pricing arrangements between foreign and domestic subsidiaries. We and Cardinal Health disagree with the IRS regarding its application of the United States Treasury regulations to the arrangements under review and the valuations underlying such adjustments and intend to vigorously contest them. The tax matters agreement that we entered into with Cardinal Health in connection with the spinoff generally provides that the control of audit proceedings and payment of any additional liability related to our business is our responsibility. During the quarter ended December 31, 2010, we began substantive discussions with the IRS Appeals office related to our 2003 through 2005 fiscal years. We continue to engage in substantive discussion for these periods and it is reasonably possible that we will reach a favorable settlement with the IRS on these years within the next twelve months.

During the quarter ended September 30, 2011, we commenced the tax audit for the fiscal years 2008 and 2009 and the short period July 1, 2009 through August 31, 2009 as part of Cardinal Health’s tax audit of its federal consolidated returns for fiscal years 2008 through 2010. Furthermore, during the quarter ended December 31, 2011, we commenced the tax audit for the short period September 1, 2009 through June 30, 2010.

We believe that we have provided adequate contingent tax reserves for these matters. However, if upon the conclusion of these audits, the ultimate determination of taxes owed is for an amount that is materially different than our current reserves, our overall tax expense and effective tax rate may be materially impacted in the period of adjustment.

NOTE 12. COMMITMENTS AND CONTINGENCIES

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, other pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. We assess contingencies to determine the

16

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in our financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review contingencies to determine the adequacy of our accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

Administrative Subpoenas. In April 2011, we received a federal administrative subpoena from the U.S. Department of Justice (“Department of Justice”) through the U.S. Attorney for the District of Kansas. In addition, in September 2011, we received a federal administrative subpoena from the Office of Inspector General (“OIG”) of the Department of Health and Human Services. Both subpoenas contain a request for documents and other materials that relate primarily to our sales and marketing practices for our ChloraPrep skin preparation product and information regarding our relationships with healthcare professionals. We are cooperating with the Department of Justice and the OIG to respond to these requests. We are unable to determine when these matters will be resolved, whether any additional areas of inquiry will be opened, or any outcome of these matters. We cannot estimate what, if any, impact these matters and any results from these matters could have on our business, financial position, operating results or cash flows.

FDA Consent Decree. We are operating under an amended consent decree with the FDA related to our infusion pump business in the United States. We entered into a consent decree with the FDA in February 2007 related to our Alaris SE pumps, and in February 2009, we and the FDA amended the consent decree to include all infusion pumps manufactured by or for CareFusion 303, Inc., our subsidiary that manufactures and sells infusion pumps in the United States. The amended consent decree does not apply to intravenous administration sets and accessories.

While we remain subject to the amended consent decree, which includes the requirements of the consent decree, we have made substantial progress in our compliance efforts. In accordance with the consent decree, we reconditioned Alaris SE pumps that had been seized by the FDA, remediated Alaris SE pumps in use by customers, and had an independent expert inspect the Alaris SE pump facilities and provide a certification to the FDA as to compliance. As a result of these efforts, in January 2010, we announced that the FDA had given us permission to resume the manufacturing and marketing of our Alaris SE pumps. In accordance with the amended consent decree, and in addition to the requirements of the original consent decree, we also implemented a corrective action plan to bring the Alaris System and all other infusion pumps in use in the United States market into compliance, had our infusion pump facilities inspected by an independent expert, and had our recall procedures and all ongoing recalls involving our infusion pumps inspected by an independent recall expert. In July 2010, the FDA notified us that we can proceed to the audit inspection phase of the amended consent decree, which includes the requirement to retain an independent expert to conduct periodic audits of our infusion pump facilities. The amended consent decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing, recall products and take other actions. We may be required to pay damages of $15,000 per day per violation if we fail to comply with any provision of the amended consent decree, up to $15 million per year.

We cannot currently predict the outcome of this matter, whether additional amounts will be incurred to resolve this matter, if any, or the matter’s ultimate impact on our business. We may be obligated to pay more costs in the future because, among other things, the FDA may determine that we are not fully compliant with the amended consent decree and therefore impose penalties under the amended consent decree, and/or we may be subject to future proceedings and litigation relating to the matters addressed in the amended consent decree. As of December 31, 2011, we had no reserves in connection with the amended consent decree to cover any possible future costs and expenses of compliance with the amended consent decree.

Other Matters. In addition to the matters described above, we also become involved in other litigation and regulatory matters incidental to our business, including, but not limited to, product liability claims, employment matters, commercial disputes, intellectual property matters, inclusion as a potentially responsible party for environmental clean-up costs, and litigation in connection with acquisitions and divestitures. We intend to defend ourselves in any such matters and do not currently believe that the outcome of any such matters will have a material adverse effect on our financial condition, results of operations and cash flows.

17

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

We may also determine that products manufactured or marketed by us, or our sales and marketing practices for such products, do not meet our specifications, published standards or regulatory requirements. When a quality or regulatory issue is identified, we investigate the issue and take appropriate corrective action. We may be required to report such issues to regulatory authorities, which could result in fines, sanctions or other penalties. In some cases, we may also withdraw a product from the market, correct a product at the customer location, notify the customer of revised labeling and take other actions. We have recalled, and/or conducted field alerts relating to, certain of our products from time to time. These activities can lead to costs to repair or replace affected products, temporary interruptions in product sales and action by regulators, and can impact reported results of operations. We currently do not believe that these activities (other than those specifically disclosed herein) have had or will have a material adverse effect on our business or results of operations.

NOTE 13. FINANCIAL INSTRUMENTS

We use derivative instruments to partially mitigate our business exposure to foreign currency exchange and interest rate risk. We may enter into foreign currency forward contracts to offset some of the foreign exchange risk of expected future cash flows on certain forecasted revenue and expenses, and on certain assets and liabilities. The maximum period of time that we hedge foreign currency exposure is up to twelve months. We may also enter into interest rate swap agreements to manage variability of expected future cash flows and interest expense related to our existing debt, or future debt issuances.

The following table summarizes the fair value of our assets and liabilities related to derivative instruments as of December 31, 2011 and June 30, 2011:

(in millions)	December 31, 2011		June 30, 2011
Assets:
Derivatives Designated as Hedging Instruments:
Foreign Currency Forward Contracts1	$	2	$	1
Total Assets	$	2	$	1
Liabilities:
Derivatives Designated as Hedging Instruments:
Foreign Currency Forward Contracts2	$	4	$	1
Forward Interest Rate Swap Agreements3		3		—
Total Liabilities	$	7	$	1

¹  All foreign currency forward contracts classified as derivative assets are recorded as “Other Current Assets” in the condensed consolidated balance sheets.

²  All foreign currency forward contracts classified as derivative liabilities are recorded as “Other Accrued Liabilities” in the condensed consolidated balance sheets.

³  All forward interest rate swap agreements classified as derivative liabilities are recorded as “Other Liabilities” in the condensed consolidated balance sheets.

Cash Flow Hedges. We enter into foreign currency forward contracts to protect the value of anticipated foreign currency revenues and expenses associated with certain forecasted transactions. We also enter into interest rate swap contracts to manage variability of expected future cash flows from changing interest rates related to probable future debt issuances. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain (loss) on the derivative instrument is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain (loss) on the derivative instrument is recognized in earnings immediately. The impact of cash flow hedges is included in the condensed consolidated statements of cash flows in “Other Accrued Liabilities and Operating Items, Net”.

18

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

At December 31, 2011 and June 30, 2011, we held foreign currency forward contracts to hedge probable, but not firmly committed, revenue, inventory purchases and expenses. At December 31, 2011, we also held forward interest rate swap contracts to hedge probable, but not firmly committed, future transactions associated with our debt.

The following table shows the notional amount of the outstanding cash flow hedges as of December 31, 2011 and June 30, 2011:

	December 31, 2011		June 30, 2011
(in millions)	Notional Amount		Notional Amount
Foreign Currency Forward Contracts	$	74	$	91
Interest Rate Swap Agreements		450		—
Total	$	524	$	91

As of December 31, 2011, the foreign currency forward contracts are expected to mature through December 2012.

During the quarter ended December 31, 2011, we entered into forward interest rate swap agreements related to forecasted debt issuances with a notional amount totaling $450 million. These agreements hedge the variability in future probable interest payments due to changes in the benchmark interest rate between the date the swap agreements were entered into and the expected date of future debt issuances in 2014, at which time these agreements are intended to be settled.

Credit risk of these contracts was not material as of December 31, 2011 and June 30, 2011. The unrealized net loss included in OCI on the condensed consolidated balance sheets was $5 million, at December 31, 2011, with no net gain or loss at June 30, 2011. The amounts reclassified from OCI to the condensed consolidated statements of income for the quarters and six months ended December 31, 2011 and 2010 was not material.

The amount of ineffectiveness associated with these derivative instruments was not material.

Fair Value (Non-Designated) Hedges. We enter into foreign currency forward contracts to manage foreign exchange exposure related to intercompany financing transactions and other balance sheet items subject to revaluation that do not meet the requirements for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period. The gain (loss) recorded on these instruments is substantially 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 the condensed consolidated statements of income in “Interest Expense and Other, Net”. The cash flow impact of fair value hedges is included in the condensed consolidated statements of cash flows in “Other Accrued Liabilities and Operating Items, Net”. The maximum period of time that we hedge exposure for foreign currency fair value hedges is 31 days.

The following table summarizes the notional amount of the fair value hedges outstanding as of December 31, 2011 and June 30, 2011:

	December 31, 2011		June 30, 2011
(in millions)	Notional Amount		Notional Amount
Foreign Currency Forward Contracts	$	62	$	222

19

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

During the quarter ended December 31, 2011 we recognized a loss of $1 million within “Interest Expense and Other, Net”, for foreign currency forward contracts. No net amounts were recognized related to foreign currency forward contracts during the six months ended December 31, 2011. During the quarter and six months ended December 31, 2010 we recognized $4 million and $3 million of gains, respectively, within “Interest Expense and Other, Net”, for foreign currency forward contracts.

The following is a summary of all unsettled derivative instruments and the associated amount we would have paid or received to terminate these contracts based on market prices for the same or similar instruments, as of December 31, 2011 and June 30, 2011:

	December 31, 2011					June 30, 2011
(in millions)	Notional Amount		Fair Value Gain/(Loss)			Notional Amount		Fair Value Gain/(Loss)
Foreign Currency Forward Contracts	$	136	$	(2	)	$	313	$	—
Interest Rate Swap Agreements		450		(3	)		—		—
Total	$	586	$	(5	)	$	313	$	—

NOTE 14. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at December 31, 2011:

(in millions)	Total		Level 1		Level 2		Level 3
Financial Assets:
Cash Equivalents	$	1,180	$	1,180	$	—	$	—
Other Investments		15		15		—		—
Assets-Foreign Currency Forward Contracts		2		—		2		—
Total Financial Assets	$	1,197	$	1,195	$	2	$	—
Financial Liabilities:
Liabilities-Foreign Currency Forward Contracts	$	4	$	—	$	4	$	—
Interest Rate Swap Agreements		3		—		3		—
Total Financial Liabilities	$	7	$	—	$	7	$	—

The cash equivalents balance is comprised of highly liquid investments purchased with an original maturity of three months or less from the original purchase date. The other investments balance includes investments in mutual funds classified as “Other Assets” in the condensed consolidated balance sheets, all related to our deferred compensation plan. Both the cash equivalents and other investments were valued based on quoted market prices for identical instruments. Assets and liabilities classified as Level 2 relate to foreign currency forward contracts and interest rate swap agreements. The fair value of foreign currency forward contracts is determined by using observable market spot rates and forward points adjusted by risk-adjusted discount rates. The fair value of interest rate swap agreements is determined by using methodologies similar in nature to those of our foreign currency forward contracts. The value of our derivatives represents the present value of amounts estimated to be received for the assets or paid to transfer the liabilities at the measurement date from a marketplace participant in settlement of these instruments. See note 13 to the unaudited condensed consolidated financial statements. We had no Level 3 assets or liabilities measured on a recurring basis at December 31, 2011.

Other Instruments. The estimated fair value of our long-term obligations and other short-term borrowings was $1,573 million and $1,549 million as of December 31, 2011 and June 30, 2011, respectively, as compared to the net carrying amounts of $1,402 million and $1,388 million at December 31, 2011 and June 30, 2011, respectively. The fair value of our senior notes at December 31, 2011 and June 30, 2011 was based on quoted market prices. The fair value of the other obligations at December 31, 2011 and June 30, 2011, was based on either the quoted market prices

20

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

for the same or similar debt. The fair value of the Rowa debt facility at December 31, 2011 and August 1, 2011, the date of acquisition, was determined using a discounted cash flow analysis, which approximated its carrying value. We considered the interest rates of European instruments with similar maturity dates, which involved the use of significant unobservable Level 3 inputs. See note 10 to the unaudited condensed consolidated financial statements.

NOTE 15. RELATED PARTY TRANSACTIONS

Upon our spinoff from Cardinal Health on August 31, 2009, Cardinal Health retained approximately 19% of our outstanding common stock and was considered a related party until September 15, 2010, at which time Cardinal Health sold the remaining shares of our common stock that it retained in connection with the spinoff (see note 1). In connection with the spinoff, we entered into several commercial agreements with Cardinal Health. The following paragraphs discuss related party transactions with Cardinal Health prior to September 15, 2010 and how they were accounted for in our consolidated and combined financial statements.

Pursuant to our transition services agreement, we incurred charges of $16 million for the period July 1, 2010 to September 15, 2010.

Pursuant to a distribution agreement, Cardinal Health continued to distribute certain of our products and supplies through its medical distribution business on our behalf. Pursuant to an accounts receivable factoring agreement, we sold certain of our accounts receivable associated with this distribution agreement to Cardinal Health. Under these arrangements, title to the products and supplies did not transfer to Cardinal Health and inventory related to these products was retained by CareFusion. Service fees related to this agreement were $8 million for the period July 1, 2010 to September 15, 2010. We ceased operating under substantially all of these agreements on April 1, 2011, at which point in time Cardinal Health began purchasing these products and supplies and taking title upon receipt as a reseller of CareFusion products.

In addition to the distribution agreement noted above, upon the spinoff, we entered into other agreements with Cardinal Health in which we buy from Cardinal Health and sell to Cardinal Health certain products and services. The product sales and purchases associated with these agreements are utilized for resale by each respective company to their end customers. The service fees and revenues related to these agreements are for a variety of services including the use of the sales force, marketing, sterilization and warehousing services.

Total product revenue related to these agreements was $61 million for the period July 1, 2010 to September 15, 2010. Total product purchases from Cardinal Health were $21 million for the period July 1, 2010 to September 15, 2010. Service fees paid to Cardinal Health were $5 million for the period July 1, 2010 to September 15, 2010. Service fee revenue from Cardinal Health was immaterial for the period July 1, 2010 to September 15, 2010.

For further information regarding these agreements see our Form 10-K, filed with the SEC on August 9, 2011.

NOTE 16. PRODUCT WARRANTIES

We offer warranties on certain products for various periods of time. We accrue for the estimated cost of product warranties at the time revenue is recognized. Our product warranty liability reflects management’s best estimate of probable liability based on current and historical product sales data and warranty costs incurred.

21

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

The table below summarizes the changes in the carrying amount of the liability for product warranties for the six months ended December 31, 2011:

(in millions)
Balance at June 30, 2011	$	21
Warranty Accrual		15
Warranty Claims Paid		(6	)
Adjustments to Preexisting Accruals		(4	)
Balance at December 31, 2011	$	26

As of December 31, 2011 and June 30, 2011, approximately $12 million and $8 million, respectively, of the ending liability balances related to accruals for product recalls.

NOTE 17. SEGMENT INFORMATION

As discussed in note 1 to the unaudited condensed consolidated financial statements, in order to better align our operating and reportable segments with the manner in which we organize our businesses, commencing in the quarter ended September 30, 2011, we re-segmented our businesses into two new segments: Medical Systems and Procedural Solutions. Our operations are principally managed on a products and services basis, and the Medical Systems and Procedural Solutions segments focus primarily on our medical equipment businesses and disposable products businesses, respectively.

We report segment information based on the management approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (“CODM”), for making decisions and assessing performance as the source of our reportable segments. The CODM is our Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment using information about its revenues and operating income (loss) before interest and taxes. We have determined our reportable segments as follows based on the information used by the CODM.

Medical Systems. The Medical Systems segment is organized around our medical equipment businesses. Within the Medical Systems segment, the Company operates its Dispensing Technologies, Infusion Systems and Respiratory Technologies business lines. The Dispensing Technologies business line includes equipment and related services for medication and supply dispensing. The Infusion Systems business line includes infusion pumps and dedicated disposable infusion sets and accessories. The Respiratory Technologies business line includes respiratory ventilators and dedicated disposable ventilator circuits and accessories. The Company also includes its data mining surveillance service business within the Medical Systems segment, which it reports as “Other.”

Procedural Solutions. The Procedural Solutions segment is organized around our disposable products businesses. Within the Procedural Solutions segment, the Company operates its Infection Prevention, Medical Specialties and Specialty Disposables business lines. The Infection Prevention business line includes single-use skin antiseptic and other patient-preparation products and non-dedicated disposable infusion administration sets and accessories. The Medical Specialties business line includes interventional specialty products used for biopsy, drainage and other procedures, as well as reusable surgical instruments. The Specialty Disposables business line includes non-dedicated disposable ventilator circuits and oxygen masks used in respiratory therapy. The Company also includes its respiratory diagnostics business and its neurological care business within the Procedural Solutions segment, which it reports as “Other.”

We evaluate the performance of our operating segments based upon, among other things, segment profit. Segment profit is segment revenue less segment cost of products sold, SG&A expenses, research and development expenses and restructuring and acquisition integration charges. With the exception of goodwill, we do not identify or allocate assets by operating segment; accordingly, segment related disclosures with respect to assets have been omitted. See note 8 to the unaudited condensed consolidated financial statements.

22

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

The following table presents information about our reporting segments for the quarters ended December 31, 2011 and 2010, net of reclassification adjustments to conform to the current period presentation:

(in millions)	Medical Systems		Procedural Solutions		Total
December 31, 2011:
External Revenues	$	571	$	344	$	915
Depreciation and Amortization		34		16		50
Segment Profit		121		22		143
Capital Expenditures		19		4		23
December 31, 2010:1
External Revenues	$	523	$	363	$	886
Depreciation and Amortization		29		19		48
Segment Profit		95		27		122
Capital Expenditures		23		10		33

¹  Segment results have been adjusted for discontinued operations. See note 2.

The following table presents information about our reporting segments for the six months ended December 31, 2011 and 2010, net of reclassification adjustments to conform to the current period presentation:

(in millions)	Medical Systems		Procedural Solutions		Total
December 31, 2011:
External Revenues	$	1,080	$	679	$	1,759
Depreciation and Amortization		67		33		100
Segment Profit		209		42		251
Capital Expenditures		37		10		47
December 31, 2010:1
External Revenues	$	991	$	706	$	1,697
Depreciation and Amortization		57		36		93
Segment Profit		163		38		201
Capital Expenditures		48		20		68

¹  Segment results have been adjusted for discontinued operations. See note 2.

The following table presents revenue and net property and equipment by geographic area:

	Revenue								Property and Equipment, Net
	Quarters Ended December 31,				Six Months Ended December 31,				December 31,		June 30,
(in millions)	2011		2010		2011		2010		2011		2011
United States	$	698	$	710	$	1,359	$	1,377	$	337	$	354
International		217		176		400		320		111		110
Total	$	915	$	886	$	1,759	$	1,697	$	448	$	464

23

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated and combined financial statements and related notes thereto for the fiscal year ended June 30, 2011, which were included in our Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on August 9, 2011.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.

Basis of Presentation

References in this MD&A to “CareFusion Corporation,” “CareFusion,” “we,” “us,” “our,” “the company” and “our company” refer to CareFusion Corporation and its consolidated subsidiaries. References in this MD&A to “Cardinal Health” refer to Cardinal Health, Inc., an Ohio corporation, and its consolidated subsidiaries.

We were incorporated in Delaware on January 14, 2009 for the purpose of holding the clinical and medical products businesses of Cardinal Health in anticipation of spinning off from Cardinal Health. We completed the spinoff from Cardinal Health on August 31, 2009. In connection with the spinoff, Cardinal Health contributed the majority of the businesses comprising its clinical and medical products segment to us (“the contribution”) and distributed approximately 81% of our outstanding common stock, or approximately 179.8 million shares, to its shareholders (“the distribution”). Cardinal Health retained approximately 19% of our outstanding common stock, or approximately 41.4 million shares, in connection with the spinoff. As of September 15, 2010, Cardinal Health had sold all remaining shares of our common stock retained in connection with the spinoff.

The condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the SEC instructions to Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements presented elsewhere in this Form 10-Q and discussed below are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The audited consolidated and combined financial statements for our fiscal year ended June 30, 2011, filed with the SEC on Form 10-K on August 9, 2011 include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

Leading up to the spinoff from Cardinal Health, we organized our businesses into two reportable segments: Critical Care Technologies and Medical Technologies and Services. In July 2011, we made a decision to realign our businesses into two new global operating segments to reduce complexity, provide clearer governance for our investments and make it easier for our customers to do business with us. As a result of this business realignment, we also made a determination to realign our reportable segments with our new operating segments. Commencing with the quarter ended September 30, 2011, we re-segmented our businesses into two new operating and reportable segments: Medical Systems and Procedural Solutions. The Medical Systems segment is organized around our medical equipment businesses. Within the Medical Systems segment, the Company operates its Dispensing Technologies, Infusion Systems and Respiratory Technologies business lines. The Dispensing Technologies business line includes equipment and related services for medication and supply dispensing. The Infusion Systems business line includes infusion pumps and dedicated disposable infusion sets and accessories. The Respiratory Technologies business line includes respiratory ventilators and dedicated disposable ventilator circuits and accessories. The Company also includes its data mining surveillance service business within the Medical Systems segment, which it reports as “Other.” The Procedural Solutions segment is organized around our disposable

24

products businesses. Within the Procedural Solutions segment, the Company operates its Infection Prevention, Medical Specialties and Specialty Disposables business lines. The Infection Prevention business line includes single-use skin antiseptic and other patient-preparation products and non-dedicated disposable infusion administration sets and accessories. The Medical Specialties business line includes interventional specialty products used for biopsy, drainage and other procedures, as well as reusable surgical instruments. The Specialty Disposables business line includes non-dedicated disposable ventilator circuits and oxygen masks used in respiratory therapy. The Company also includes its respiratory diagnostics business and its neurological care business within the Procedural Solutions segment, which it reports as “Other.”

For the quarter and six months ended December 31, 2010, certain amounts have been reclassified to conform to the current period presentation. See note 5, note 8 and note 17 to the unaudited condensed consolidated financial statements.

During fiscal year 2011, we divested our International Surgical Products (“ISP”) business. The results of our ISP business are reflected in discontinued operations in the financial information included throughout this Form 10-Q. See note 2 to the unaudited condensed consolidated financial statements.

Overview

We are a leading global medical technology company with clinically proven and industry-leading products and services designed to measurably improve the safety and quality of healthcare. We offer comprehensive product lines in the areas of IV infusion, medication and supply dispensing, respiratory care, infection prevention and surgical instruments to customers in the United States and over 130 countries throughout the world. Our strategy is to enhance growth by focusing on healthcare safety and productivity, driving innovation and clinical differentiation, accelerating our global growth and pursing strategic opportunities. In furtherance of our strategy, we may seek to acquire entities that meet our objectives of driving innovation and global growth, as well as assessing our portfolio of businesses with a view of divesting non-core businesses that do not align with our objectives.

Since the beginning of fiscal year 2009, challenges have existed in the capital equipment market from delays in hospital capital spending, as well as prioritization of capital spending. Additionally, there has been a trend for decreased procedure volumes in acute care facilities, which have been slower in the current year than in the prior year. Despite seeing small signs of improvement, we continue to anticipate it will take some time before significant market improvements are realized. We continue to believe that we are well positioned to benefit from increases in hospital capital equipment spending as the market recovers over time.

For the quarter ended December 31, 2011, we generated revenues and income from continuing operations of $915 million and $95 million, respectively, compared to revenues and income from continuing operations of $886 million and $73 million, respectively, for the quarter ended December 31, 2010. For the six months ended December 31, 2011, we generated revenues and income from continuing operations of $1,759 million and $162 million, respectively, compared to revenues and income from continuing operations of $1,697 million and $109 million, respectively, for the six months ended December 31, 2010.

Year over year, our revenues increased as a result of strong performance from our Infusion Systems, Dispensing Technologies and Respiratory Technologies business lines. Also, consistent with our goal of accelerating global growth and pursuing strategic opportunities, our acquisition of Rowa on August 1, 2011 contributed to increased revenues for the quarter and six months ended December 31, 2011. Year over year revenue growth was partially offset by decreased Specialty Disposables product sales.

Our financial results were negatively impacted by an increase in recall reserves in our Medical Systems segment. During the three months ended September 30, 2011, we recorded charges primarily related to expenses incurred and future expected costs associated with voluntary field corrections for a portion of our installed base of AVEA ventilators. During the six months ended December 31, 2011, the net impact of these charges was $9 million. While we are in the process of remediating the affected ventilators, we continue to manufacture and sell our AVEA ventilator products. 

25

During fiscal year 2011 our operations were impacted by our global restructuring program. This program, announced in August 2010 (“the 2011 Plan”), was designed to reduce our cost structure and streamline operations, and was initially expected to result in a reduction of approximately 700 positions. The 2011 Plan resulted in a reduction of approximately 850 positions in fiscal 2011. This program provided operating expense savings of approximately $103 million in fiscal year 2011, primarily as a result of reducing headcount and eliminating unfilled positions. Of the $103 million of savings, approximately $65 million was a result of year over year savings in selling, general and administrative expense (“SG&A”) and lower cost of sales expense, and $38 million was a result of not filling open positions. The total expected restructuring costs associated with the 2011 Plan were approximately $50 million. Substantially all of the costs associated with the 2011 Plan were incurred as of June 30, 2011.

In fiscal year 2011, we also incurred additional one-time expenditures associated with the separation from Cardinal Health (capital and expense), the total of which was approximately $80 million. All substantive expenditures associated with standing up operations from the spinoff were substantially complete as of the end of fiscal year 2011. We have funded these costs through cash from operations and cash on hand. The capital portion of these expenditures are being amortized over their useful lives and the other expenditures were expensed as incurred, depending on their nature. During the quarter and six months ended December 31, 2011, we incurred no charges and $3 million, respectively, of these one-time expenditures. During the quarter and six months ended December 31, 2010, we incurred $14 million and $37 million, respectively, of these one-time expenditures.

Our capital equipment revenues are generally subject to a certain degree of seasonality that aligns to our customer capital equipment purchasing cycles. Historically, this seasonality would manifest itself with higher sales in our second and fourth quarters and lower sales in our first and third quarters of our fiscal year.

Consolidated Results of Operations

Quarter Ended December 31, 2011 Compared to the Quarter Ended December 31, 2010

Below is a summary of comparative results of operations and a more detailed discussion of results for the quarters ended December 31, 2011 and 2010:

	Quarters Ended December 31,
(in millions)	2011		2010		Change
Revenue	$	915	$	886	$	29
Cost of Products Sold		458		441		17
Gross Margin		457		445		12
Selling, General and Administrative Expenses		267		270		(3	)
Research and Development Expenses		40		36		4
Restructuring and Acquisition Integration Charges		7		17		(10	)
Operating Income		143		122		21
Interest Expense and Other, Net		17		20		(3	)
Income Before Income Tax		126		102		24
Provision for Income Tax		31		29		2
Income from Continuing Operations		95		73		22
Income from Discontinued Operations, Net of Tax		—		3		(3	)
Net Income	$	95	$	76	$	19

26

Revenue

Revenue in our Medical Systems segment increased 9% to $571 million for the quarter ended December 31, 2011 compared to the prior year. Revenue increased largely as a result of increased sales for our Dispensing Technologies, Infusion Systems, and Respiratory Technologies business lines.

Infusion Systems revenues increased as a result of core business growth primarily in capital product volumes. Dispensing Technologies revenues increased as a result of our acquisition of Rowa and as a result of core business growth.

Revenue in our Procedural Solutions segment decreased by 5% to $344 million for the quarter ended December 31, 2011 compared to the prior year. The revenue decrease is primarily attributable to the impact of decreased sales of Specialty Disposables products and divesting our OnSite services business in March 2011.

Gross Margin and Cost of Products Sold

Gross margin increased 3% to $457 million during the quarter ended December 31, 2011 compared to the prior year. As a percentage of revenue, gross margin was 49.9% for the quarter ended December 31, 2011 compared to 50.2% in the prior year.

The decrease in gross margin as a percentage of revenue during the quarter ended December 31, 2011, was primarily the result of changes in product mix, pricing pressure on infusion pumps and our Specialty Disposables products, and investments in manufacturing and other process improvements.

Selling, General and Administrative and Research and Development Expenses

SG&A and Research and Development expenses increased $1 million to $307 million during the quarter ended December 31, 2011 compared to the prior year. Included within our SG&A expenses are certain one-time costs associated with our spinoff from Cardinal Health of $8 million for the quarter ended December 31, 2010.

Restructuring and Acquisition Integration Charges

Restructuring and acquisition integration charges decreased $10 million to $7 million during the quarter ended December 31, 2011 compared to the prior year, primarily as a result of charges associated with the 2011 Plan specific to the prior year. We periodically incur costs to implement smaller restructuring efforts for specific operations. These restructuring plans focus on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount and aligning operations in the most strategic and cost-efficient structure.

Operating Income

Segment profit in our Medical Systems reportable segment increased 27% to $121 million during the quarter ended December 31, 2011 compared to the prior year. The increase in segment profit was primarily driven by higher revenue and gross margins in our Infusion Systems, Dispensing Technologies, and Respiratory Technologies business lines, the impact of the Rowa acquisition, and reductions in restructuring and acquisition charges.

Segment profit in our Procedural Solutions reportable segment decreased 19% to $22 million during the quarter ended December 31, 2011. The decrease in segment profit was primarily attributable to lower revenues in our Specialty Disposables business line.

Interest Expense and Other, Net

Interest expense and other, net decreased 15% to $17 million during the quarter ended December 31, 2011 compared to the prior year. The decrease was primarily related to gains associated with investing activities.

27

Provision for Income Tax

Income tax expense increased 7% to $31 million for the quarter ended December 31, 2011 compared to the prior year. The effective tax rate for the quarter ended December 31, 2011 was 24.7% compared to 28.8% for the quarter ended December 31, 2010. The decrease in the effective tax rate was primarily due to a decrease in discrete tax expense as well as the favorable impact of year over year shift in earnings of the foreign jurisdictions taxed at less than the U.S. statutory rate.

Generally, fluctuations in our effective tax rate are primarily due to changes within international and state effective tax rates resulting from our business mix and changes in the tax impact of restructuring and acquisition integration charges and other discrete items, which may have unique tax implications depending on the nature of the item.

We are currently before the IRS office of appeals for fiscal years 2003 through 2007. We continue to engage in substantive discussions with the IRS Appeals office related to our 2003 through 2005 fiscal years. It is reasonably possible that we will reach a favorable settlement with the IRS in relation to the fiscal years 2003 through 2005 within the next twelve months.

During the quarter ended September 30, 2011, we commenced the tax audit for the fiscal years 2008 and 2009 and the short period July 1, 2009 through August 31, 2009 as part of Cardinal Health’s tax audit of its federal consolidated returns for fiscal years 2008 through 2010. During the quarter ended December 31, 2011, we commenced the tax audit for the short period September 1, 2009 through June 30, 2010.

We believe that we have provided adequate contingent tax reserves for these matters. However, if upon the conclusion of these audits, the ultimate determination of taxes owed is for an amount that is materially different than our current reserves, our overall tax expense and effective tax rate may be materially impacted in the period of adjustment.

For additional detail regarding the provision for income taxes, see note 11 to the unaudited condensed consolidated financial statements.

Income from Discontinued Operations, Net of Tax

During the quarter ended December 31, 2011 there were no discontinued operations, compared to income from discontinued operations of $3 million for the quarter ended December 31, 2010. The income from discontinued operations in the prior year is primarily due to the results from the International Surgical Products business, which was sold on April 1, 2011.

For additional details regarding discontinued operations, see note 2 to the unaudited condensed consolidated financial statements.

28

Six Months Ended December 31, 2011 Compared to the Six Months Ended December 31, 2010

Below is a summary of comparative results of operations and a more detailed discussion of results for the six months ended December 31, 2011 and 2010:

	Six Months Ended December 31,
(in millions)	2011		2010		Change
Revenue	$	1,759	$	1,697	$	62
Cost of Products Sold		875		839		36
Gross Margin		884		858		26
Selling, General and Administrative Expenses		540		542		(2	)
Research and Development Expenses		79		76		3
Restructuring and Acquisition Integration Charges		14		39		(25	)
Operating Income		251		201		50
Interest Expense and Other, Net		42		43		(1	)
Income Before Income Tax		209		158		51
Provision for Income Tax		47		49		(2	)
Income from Continuing Operations		162		109		53
Income from Discontinued Operations, Net of Tax		—		5		(5	)
Net Income	$	162	$	114	$	48

Revenue

Revenue in our Medical Systems segment increased 9% to $1,080 million for the six months ended December 31, 2011 compared to the prior year. Revenue increased largely as a result of increased sales for our Dispensing Technologies and Infusion Systems business lines.

Infusion Systems revenues increased as a result of core business growth in both capital products and dedicated disposable product volumes. Dispensing Technologies revenues increased as a result of our acquisition of Rowa and as a result of core business growth.

Revenue in our Procedural Solutions segment decreased by 4% to $679 million for the six months ended December 31, 2011 compared to the prior year. The revenue decrease is primarily attributable to the impact of decreased sales from our Specialty Disposables products and divesting our OnSite services business in March 2011.

Gross Margin and Cost of Products Sold

Gross margin increased 3% to $884 million during the six months ended December 31, 2011 compared to the prior year. As a percentage of revenue, gross margin was 50.3% for the six months ended December 31, 2011 compared to 50.6% in the prior year.

The decrease in gross margin as a percentage of revenue during the six months ended December 31, 2011, was primarily the result of changes in product mix, pricing pressure on infusion pumps and our Specialty Disposables products, and investments in manufacturing and other process improvements.

Selling, General and Administrative and Research and Development Expenses

SG&A and Research and Development expenses increased $1 million to $619 million during the six months ended December 31, 2011 compared to the prior year. Included within our SG&A expenses are certain one-time costs associated with our spinoff from Cardinal Health of $24 million for the six months ended December 31, 2010.

29

Restructuring and Acquisition Integration Charges

Restructuring and acquisition integration charges decreased $25 million to $14 million during the six months ended December 31, 2011 compared to the prior year, primarily as a result of charges associated with the 2011 Plan specific to the prior year.

Operating Income

Segment profit in our Medical Systems reportable segment increased 28% to $209 million during the six months ended December 31, 2011 compared to the prior year. The increase in segment profit was primarily driven by higher revenue and gross margins in our Dispensing Technologies and Infusion Systems business lines, the impact of the Rowa acquisition, and reductions in restructuring charges. Partially offsetting this increase were decreases from the impact of recall charges associated with our Respiratory Technologies business.

Segment profit in our Procedural Solutions reportable segment increased 11% to $42 million during the six months ended December 31, 2011. The increase in segment profit was primarily attributable to the impact of reductions in restructuring charges, which was partially offset by the impact of lower revenues from our Specialty Disposables business line.

Interest Expense and Other, Net

Interest expense and other, net decreased 2% to $42 million during the six months ended December 31, 2011 compared to the prior year. This decrease was primarily due to gains from investing activities, which occurred during the six months ended December 31, 2011.

Provision for Income Tax

Income tax expense decreased 4% to $47 million for the six months ended December 31, 2011 compared to the prior year. The effective tax rate for the six months ended December 31, 2011 was 22.5% compared to 30.8% for the six months ended December 31, 2010. The decrease in the effective tax rate was primarily due to a decrease in discrete tax expense as well as the favorable impact of year over year shift in earnings of the foreign jurisdictions taxed at less than the U.S. statutory rate.

For additional detail regarding the provision for income taxes, see note 11 to the unaudited condensed consolidated financial statements.

Income from Discontinued Operations, Net of Tax

During the six months ended December 31, 2011 there were no discontinued operations, compared to income from discontinued operations of $5 million for the six months ended December 31, 2010. The income from discontinued operations in the prior year is primarily due to the results from the International Surgical Products business, which was sold on April 1, 2011.

For additional details regarding discontinued operations, see note 2 to the unaudited condensed consolidated financial statements.

30

Liquidity and Capital Resources

Overview

Historically, we have generated, and expect to continue to generate, positive cash flow from operations. Cash flow from operations primarily represents inflows from net income (adjusted for depreciation and other non-cash items) and outflows from investment in sales-type leases entered into, as we sell and install dispensing equipment, and other increases in working capital needed to grow the business. Cash flows from investing activities represent our investment in intellectual property and capital equipment required to grow our business, as well as acquisitions. Our cash balance at December 31, 2011 was $1,347 million. Of this balance, $1,100 million is held outside of the United States and is denominated in United States dollars as well as other currencies. We believe that our current domestic cash flow from operations and domestic cash balances are sufficient to meet domestic operating needs. It is our intention to indefinitely reinvest all current and future foreign earnings in order to ensure sufficient working capital and expand existing operations outside the United States. Additionally, we intend to fund foreign acquisitions primarily through the use of unrepatriated cash held by foreign subsidiaries. However, should our domestic cash needs exceed our current or future domestic cash flows, we could repatriate foreign cash or utilize our senior unsecured revolving credit facility, both of which would result in increased expense.

We believe that our future cash from operations together with our access to funds available under our senior unsecured revolving credit facility and the capital markets will provide adequate resources to fund both short-term and long-term operating requirements, capital expenditures, acquisitions and new business development activities.

We are currently before the IRS office of appeals for fiscal years 2003 through 2007. In addition, we have commenced federal income tax audits for fiscal years 2008 through 2010. We believe that we have provided adequate reserves for these matters. However, even if we are adequately reserved, final settlement of these matters may require us to make cash payments to the IRS which could be material. In addition, these payments may result in increased costs if we need to utilize our revolving credit facility or repatriate foreign cash to fund these payments. See note 11 to the unaudited condensed consolidated financial statements for further information.

During the three months ended September 30, 2011, we recorded charges primarily related to expenses incurred and future expected costs associated with voluntary field corrections for a portion of our installed base of AVEA ventilators. During the six months ended December 31, 2011, the net impact of these charges was $9 million. We believe this amount will be sufficient to address the costs associated with these recalls, however, the actual cost of addressing these product recalls could be more or less than amounts reserved. See note 16 to the unaudited condensed consolidated financial statements for further information.

Sources and Uses of Cash

The following table summarizes our condensed consolidated statements of cash flows from continuing operations:

	Six Months Ended December 31,
(in millions)	2011			2010			Change
Cash Flow (Used in) Provided by:
Operating Activities	$	190		$	113		$	77
Investing Activities	$	(177	)	$	(66	)	$	(111	)
Financing Activities	$	(16	)	$	(14	)	$	(2	)

31

Six Months Ended December 31, 2011 and 2010

Net operating cash flow provided by continuing operations was $190 million for the six months ended December 31, 2011 compared to $113 million for the six months ended December 31, 2010. The increase in cash flow provided by continuing operations was due to higher net income, adjusted for the impact of non-cash items ($74 million) and an increase in cash flow associated with accounts receivable ($68 million), partially offset by a decrease in cash flow associated with inventories as a result of increased build ($32 million), a decrease in cash flow associated with accounts payable ($22 million), and a decrease in cash flow associated with other accrued liabilities and operating items ($21 million).

Net cash used in continuing operations from investing activities increased $111 million for the six months ended December 31, 2011 compared to the prior year due to the acquisition of Rowa ($131 million, net of cash received) and partially offset by a decrease in capital expenditures, intangible asset additions, and other investing activities ($20 million).

Net cash used in continuing operations from financing activities increased $2 million for the six months ended December 31, 2011 compared to the prior year.

Capital Resources

Revolving Credit Facilities. In July 2011, we terminated an existing three-year senior unsecured revolving credit facility with an aggregate available principal amount of $480 million and entered into a new five-year senior unsecured revolving credit facility with an aggregate available principal amount of $550 million, which matures in July 2016.

At December 31, 2011, there were no amounts outstanding under our senior unsecured revolving credit facility.

For additional detail regarding the five-year senior unsecured revolving credit facility, see note 10 to the unaudited condensed consolidated financial statements.

Dividends

We currently intend to retain any earnings to finance research and development, acquisitions and the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of any dividends in the future by us will be subject to the sole discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our operating subsidiaries, covenants associated with certain of our debt obligations, legal requirements, regulatory constraints and other factors deemed relevant by our board of directors. Moreover, should we pay any dividend in the future, there can be no assurance that we will continue to pay such dividends.

Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments

At December 31, 2011, we did not have any off-balance sheet arrangements. We have had no material changes related to contractual obligations since June 30, 2011. For information on contractual obligations, see the table of Contractual Obligations in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Annual Report on Form 10-K, filed with the SEC on August 9, 2011.

32

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our operations are exposed to risks associated with changes in interest rates and foreign exchange rates. We seek to manage these risks using hedging strategies that involve the use of derivative instruments. We do not enter into any derivative agreements for trading or speculative purposes.

While we believe we have designed an effective risk management program, there are inherent limitations in our ability to forecast our exposures, and therefore, we cannot guarantee that our programs will completely mitigate all risks associated with unfavorable movement in either foreign exchange rates or interest rates.

Additionally, the timing of the recognition of gains and losses related to derivative instruments can be different from the recognition of the underlying economic exposure. This may impact our consolidated operating results and financial position.

Interest Rate Risk

Interest income and expense on variable-rate instruments are sensitive to fluctuations in interest rates across the world. Changes in interest rates primarily affect the interest earned on our cash and equivalents and to a significantly lesser extent the interest expense on our debt. We seek to manage our interest rate risk by using derivative contracts such as swaps with financial institutions to hedge our risks on a portion of our probable future debt issuances. In general, we may hedge material interest rate exposures up to several years before the forecasted transaction; however, we may choose not to hedge some exposures for a variety of reasons including prohibitive economic costs.

To the extent that forward interest rate swap agreements qualify for hedge accounting, the gain (loss) will be recorded to OCI and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain (loss) on the derivative instrument is recognized in earnings immediately.

As of December 31, 2011, the notional amount of forward interest rate swap derivative instruments outstanding was $450 million with an estimated fair value loss of approximately $3 million. The agreements require us to make payments based on fixed interest rates and receive payments based on variable benchmark LIBOR interest rates. There were no interest rate swap derivative instruments outstanding as of June 30, 2011.

As of December 31, 2011, substantially all of our outstanding debt balances is fixed rate debt. While changes in interest rates will have no impact on the interest we pay on this debt, interest on any borrowings under our revolving credit facility will be exposed to interest rate fluctuations as the rate on this facility is variable. In July 2011, we terminated our three-year, $480 million senior unsecured revolving credit facility and replaced it with a five-year, $550 million senior unsecured revolving credit facility. At December 31, 2011, there were no outstanding amounts under our five-year senior unsecured revolving credit facility.

33

The tables below present information about our investment portfolio and debt obligations:

	December 31, 2011
	Maturing in Fiscal Year																					Fair Market Value
(in millions)	2012			2013			2014			2015			2016			Thereafter			Total
ASSETS
Cash and Cash Equivalents
Cash	$	167		$	—		$	—		$	—		$	—		$	—		$	167		$	167
Cash Equivalents	$	1,180		$	—		$	—		$	—		$	—		$	—		$	1,180		$	1,180
Weighted Average Interest Rate 1		0.12	%		—			—			—			—			—			0.12	%		—
LIABILITIES
Debt Obligations 2
Fixed Rate Debt 3	$	—		$	251		$	2		$	452		$	2		$	705		$	1,412		$	1,571
Weighted Average Coupon Rate		—			4.12	%		3.47	%		5.12	%		3.47	%		6.35	%		5.55	%		—
Other Obligations	$	1		$	1		$	—		$	—		$	—		$	—		$	2		$	2
Weighted Average Interest Rate		6.13	%		8.56	%		—			—			—			—			7.97	%		—
	June 30, 2011
	Maturing in Fiscal Year																					Fair Market Value
(in millions)	2012			2013			2014			2015			2016			Thereafter			Total
ASSETS
Cash and Cash Equivalents
Cash	$	139		$	—		$	—		$	—		$	—		$	—		$	139		$	139
Cash Equivalents	$	1,232		$	—		$	—		$	—		$	—		$	—		$	1,232		$	1,232
Weighted Average Interest Rate 1		0.21	%		—			—			—			—			—			0.21	%		—
LIABILITIES
Debt Obligations 2
Fixed Rate Debt 3	$	—		$	250		$	—		$	450		$	—		$	700		$	1,400		$	1,547
Weighted Average Coupon Rate		—			4.13	%		—			5.13	%		—			6.38	%		5.57	%		—
Other Obligations	$	1		$	1		$	—		$	—		$	—		$	—		$	2		$	2
Weighted Average Interest Rate		6.70	%		7.15	%		—			—			—			—			7.49	%		—

¹ Represents weighted average interest rate for cash equivalents only; cash balances generally earn no interest.

²  The estimated fair value of our long-term obligations and other short-term borrowings was $1,573 million and $1,549 million at December 31, 2011 and June 30, 2011, respectively. The fair value of our senior notes at December 31, 2011 and June 30, 2011 was based on quoted market prices. The fair value of the other obligations at December 31, 2011 and June 30, 2011 was based on either the quoted market prices for the same or similar debt. The fair value of the Rowa debt facility at December 31, 2011 and August 1, 2011, the date of acquisition, was determined using a discounted cash flow analysis, and approximated its carrying value. We considered the interest rates of European instruments with similar maturity dates, which involved the use of significant unobservable Level 3 inputs.

³  Fixed rate notes are presented gross of a $12 million and $14 million purchase discount at December 31, 2011 and June 30, 2011, respectively.

Foreign Currency Risk

We are a global company with operations in multiple countries and are a net recipient of currencies other than the United States dollar (USD). Accordingly, a strengthening of the USD will negatively impact revenues and gross margins expressed in consolidated USD terms.

34

Currently, we have foreign exchange risk associated with currency exposure associated with existing assets and liabilities, committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. We seek to manage our foreign exchange risk by using derivative contracts such as forwards, swaps and options with financial institutions to hedge our risks. In general, we will hedge material foreign exchange exposures up to twelve months in advance; however, we may choose not to hedge some exposures for a variety of reasons including prohibitive economic costs.

The realized and unrealized gains and losses of foreign currency forward contracts and the re-measurement of foreign denominated receivables, payables and loans are recorded in the condensed consolidated statement of income. To the extent that cash flow hedges qualify for hedge accounting, the gain (loss) on the forward contract will be recorded to OCI. As the forecasted exposures affect earnings, the realized gain (loss) on the forward contract will be moved from OCI to the condensed consolidated statements of income.

The following table provides information about our foreign currency derivative instruments outstanding as of December 31, 2011 and June 30, 2011:

	December 31, 2011					June 30, 2011
(in millions)	Notional Amount			Average Contract Rate		Notional Amount		Average Contract Rate
Foreign Currency Forward Contracts: (Receive USD/pay foreign currency)
Euro	$	4			1.3	$	153		1.4
Australian Dollar		34			1.0		36		1.0
New Zealand Dollar		4			0.8		9		0.8
South African Rand		2			8.2		2		7.2
Mexico Peso		—			—		7		12.0
Canadian Dollar		13			1.0		1		1.0
Swiss Franc		2			0.9		3		0.9
British Pound		19			1.6		47		1.6
Total	$	78				$	258
Estimated Fair Value	$	—				$	—
Foreign Currency Forward Contracts: (Pay USD/receive foreign currency)
Mexican Peso	$	36			13.9	$	33		12.0
Swiss Franc		15			0.9		14		0.9
British Pound		—			—		1		1.6
Total	$	51				$	48
Estimated Fair Value	$	(2	)			$	1
Foreign Currency Forward Contracts: (Pay foreign currency/receive euros)
British Pound	$	7			0.8	$	7		0.9
Total	$	7				$	7
Estimated Fair Value	$	—				$	—

35

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of the end of such period.

Changes in Internal Control Over Financial Reporting

In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

36

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See note 12 to the unaudited condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Except as set forth below, there have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

We are subject to complex and costly regulation.

Our products are subject to regulation by the FDA and other national, supranational, federal and state governmental authorities. It can be costly and time-consuming to obtain regulatory clearance and/or approval to market a medical device or other product. Clearance and/or approval might not be granted for a new or modified device or other product on a timely basis, if at all. Regulations are subject to change as a result of legislative, administrative or judicial action, which may further increase our costs or reduce sales. Unless an exception applies, the FDA requires that the manufacturer of a new medical device or a new indication for use of, or other significant change in, an existing medical device obtain either 510(k) pre-market notification clearance or pre-market approval before those products can be marketed or sold in the United States. Modifications or enhancements to a product that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling, packaging, or manufacturing process may also require a new 510(k) clearance. Most recently, the FDA has proposed changes to its 510(k) pre-market clearance process and although we cannot predict with certainty the future impact of these initiatives, it appears that the time and cost to get many of our medical devices to market could increase significantly.

In addition, we are subject to regulations covering manufacturing practices, product labeling and advertising, and adverse-event reporting that apply after we have obtained clearance or approval to sell a product. Our failure to maintain clearances or approvals for existing products, to obtain clearance or approval for new or modified products, or to adhere to regulations for manufacturing, labeling, advertising or adverse event reporting could adversely affect our results of operations and financial condition. Further, if we determine a product manufactured or marketed by us does not meet our specifications, published standards or regulatory requirements, we may seek to correct the product or withdraw the product from the market, which could have an adverse effect on our business. Many of our facilities and procedures and those of our suppliers are subject to ongoing oversight, including periodic inspection by governmental authorities. Compliance with production, safety, quality control and quality assurance regulations can be costly and time-consuming.

The sales and marketing of medical devices is under increased scrutiny by the FDA and other enforcement bodies. If our sales and marketing activities fail to comply with FDA regulations or guidelines, or other applicable laws, we may be subject to warnings or enforcement actions from the FDA or other enforcement bodies. A number of companies in the healthcare industry have been the subject of enforcement actions related to their sales and marketing practices, including their relationships with doctors and off-label promotion of products. In April 2011, we received a federal administrative subpoena from the Department of Justice. In addition, in September 2011, we received a federal administrative subpoena from the Office of Inspector General (“OIG”) of the Department of Health and Human Services. Both subpoenas contain a request for documents and other materials that relate primarily to our sales and marketing practices for our ChloraPrep skin preparation product and information regarding our relationships with healthcare professionals. See note 12 to the unaudited condensed consolidated financial statements included in this Form 10-Q for more information. We cannot control the pace or scope of any

37

investigation, and responding to the subpoena requests and any investigation will require the allocation of resources, including management time and attention. If we were to become the subject of an enforcement action, including any action resulting from the investigation by the Department of Justice or OIG, it could result in negative publicity, penalties, fines, the exclusion of our products from reimbursement under federally-funded programs and/or prohibitions on our ability to sell our products, which could have an adverse effect on our results of operations and financial condition.

38

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table contains information about our company’s purchases of equity securities during the quarter ended December 31, 2011:

Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased1		Average Price Paid per Share		Total Number of Shares Purchased as Part of  Publicly Announced Program		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Publically Announced Program
October 1 – 31, 2011		511	$	24.92		—	$	—
November 1 – 30, 2011		78		24.98		—		—
December 1 – 31, 2011		431		24.01		—		—
Total		1,020	$	24.54		—	$	—

¹  Represents restricted stock awards surrendered by employees upon vesting to meet tax withholding obligations.

39

ITEM 6. EXHIBITS

Exhibit Number	Description of Exhibits
12.1	Computation of Ratio of Earnings to Fixed Charges.*
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certifications pursuant to 18 U.S.C. Section 1350.*
101.INS	XBRL Instance Document†
101.SCH	XBRL Taxonomy Extension Schema Document†
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document†
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document†
101.LAB	XBRL Taxonomy Extension Label Linkbase Document†
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document†

* Filed herewith.

^†  XBRL (Extensible Business Reporting Language) information included herewith is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.

40

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAREFUSION CORPORATION
Date: February 3, 2012	By:	/s/ James F. Hinrichs
		James F. Hinrichs,
		Chief Financial Officer
		(Principal financial officer and duly authorized signatory)

41