UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended March 31, 2009

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

For the transition period from                      to                     

McKESSON CORPORATION

(Title of Each Class)		(Name of Each Exchange on Which Registered)
Common Stock, $0.01 par value		New York Stock Exchange

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     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 þ No o

     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 (§229.405 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 o No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     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. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, September 2008, was approximately $14.5 billion.

     Number of shares of common stock outstanding on April 30, 2009: 271,418,501.

     Portions of the registrant’s Proxy Statement for its 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

McKESSON CORPORATION

				Page
		Item
		PART I
1.		Business			3
1A.		Risk Factors			10
1B.		Unresolved Staff Comments			10
2.		Properties			10
3.		Legal Proceedings			10
4.		Submission of Matters to a Vote of Security Holders			11
		Executive Officers of the Registrant			11
		PART II
5.		Market for the Registrant’s Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities and Stock Price Performance Graph			12
6.		Selected Financial Data			13
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
7A.		Quantitative and Qualitative Disclosures About Market Risk			14
8.		Financial Statements and Supplementary Data			14
9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			14
9A.		Controls and Procedures			14
9B.		Other Information			14
		PART III
10.		Directors, Executive Officers and Corporate Governance			15
11.		Executive Compensation			15
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			15
13.		Certain Relationships and Related Transactions and Director Independence			17
14.		Principal Accounting Fees and Services			17
		PART IV
15.		Exhibits and Financial Statement Schedule			18
		Signatures			19
EX-10.12
EX-10.13
EX-10.15
EX-10.19
EX-12
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32

McKESSON CORPORATION

PART I

Item 1. Business

General

     McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar pronouns), is a Fortune 15 corporation providing supply, information and care management products and services designed to reduce costs and improve quality across the healthcare industry.

     The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year.

     Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act,”) are available free of charge on our Web site (www.mckesson.com under the “Investors — SEC Filings” caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC” or the “Commission”). The content on any Web site referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise.

Business Segments

     We operate in two segments. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products throughout North America. This segment also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, sells pharmacy software and provides consulting, outsourcing and other services. This segment includes a 49% interest in Nadro, S.A. de C.V. (“Nadro”), one of the leading pharmaceutical distributors in Mexico and a 39% interest in Parata Systems, LLC (“Parata”), which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies.

     The McKesson Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chain, and strategic management software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and other services. Our Payor group of businesses, which includes our InterQual^®, clinical auditing and compliance and medical management software businesses and our care management programs, are also included in this segment. The segment’s customers include hospitals, physicians, homecare providers, retail pharmacies and payors from North America, the United Kingdom, other European countries and Asia Pacific.

     Net revenues for our segments for the last three years were as follows:

(Dollars in billions)		2009								2008								2007
Distribution Solutions		$	103.6				97	%		$	98.7				97	%		$	90.7				98	%
Technology Solutions			3.0				3				3.0				3				2.3				2
Total		$	106.6				100	%		$	101.7				100	%		$	93.0				100	%

Distribution Solutions

     McKesson Distribution Solutions consists of the following businesses: U.S. Pharmaceutical Distribution, McKesson Canada, Medical-Surgical Distribution, McKesson Pharmacy Systems and Automation and McKesson Specialty Care Solutions. This segment also includes our 49% interest in Nadro and 39% interest in Parata.

McKESSON CORPORATION

     U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and other healthcare-related products to customers in three primary customer segments: 1) retail national accounts (including national and regional chains, food/drug combinations, mail order pharmacies and mass merchandisers); 2) independent retail pharmacies; and 3) institutional healthcare providers (including hospitals, health systems, integrated delivery networks, clinics and long-term care providers).

     Our U.S. pharmaceutical distribution business operates and serves thousands of customer locations through a network of 29 distribution centers, as well as a master redistribution center, a strategic redistribution center and two repackaging facilities, serving all 50 states and Puerto Rico. We invest in technology and other systems at all of our distribution centers to enhance safety, reliability and provide the best product availability for our customers. For example, in all of our distribution centers we use Acumax^® Plus, a Smithsonian award-winning technology that integrates and tracks all internal inventory-related functions such as receiving, put-away and order fulfillment. Acumax Plus uses bar code technology, wrist-mounted computer hardware and radio frequency signals to provide customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% adjusted accuracy. In addition, we offer Mobile Manager^SM, which integrates portable handheld technology with Acumax Plus to give customers complete ordering and inventory control. We also offer McKesson Connect (formerly Supply Management Online^SM), an Internet-based ordering system that provides item lookup and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. Together, these features help ensure customers have the right products at the right time for their facilities and patients.

     To maximize distribution efficiency and effectiveness, we follow the Six Sigma methodology — an analytical approach that emphasizes setting high-quality objectives, collecting data and analyzing results to a fine degree in order to improve processes, reduce costs and minimize errors. We continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers.

     The major offerings of the McKesson U.S. Pharmaceutical Distribution business, by customer group can be categorized as retail national accounts, independent retail pharmacies and institutional healthcare providers.

     Retail National Accounts — Business solutions that help national account customers increase revenues and profitability:

•		Central Fill — Prescription refill service that enables pharmacies to more quickly refill prescriptions remotely, more accurately and at a lower cost, while reducing inventory levels and improving customer service.
•		Redistribution Centers — Two facilities totaling 420 thousand square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologicals. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery.
•		EnterpriseRx™ — McKesson EnterpriseRx™ is a fully integrated and centrally hosted pharmacy management solution (Application Service Provider model). Built utilizing the latest technology, EnterpriseRx centralizes data, reporting, pricing and drug updates, providing the operational control, visibility and support needed to reduce costs and streamline administrative tasks.
•		RxPakSM — Bulk-to-bottle repackaging service that leverages our purchasing scale and supplier relationships to provide pharmaceuticals at reduced prices, help increase inventory turns and reduce working capital investment.
•		Inventory Management — An integrated solution comprising forecasting software and automated replenishment technologies that reduce inventory carrying costs.

McKESSON CORPORATION

     Independent Retail Pharmacies — Solutions for managed care contracting, branding and advertising, merchandising, purchasing, operational efficiency and automation that help independent pharmacists focus on patient care while improving profitability:

•

Health Mart® —Health Mart® is a national network of more than 2,000 independently-owned pharmacies and is one of the industry’s most comprehensive pharmacy franchise programs. Health Mart® provides franchisees with managed care that drives Pharmacy Benefit Manager recognition, branding that drives consumer recognition, in-store programs that drive manufacturer and payor recognition and community advocacy programs that drive industry recognition. Health Mart® helps franchisees grow their businesses by focusing on the three principles of successful retailing:

	–		Attract new customers;
	–		Maximize the value of current customers; and
	–		Enhance business efficiency.

•		AccessHealth® — Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow.
•		McKesson Reimbursement Advantage (“MRA”) — MRA is one of the industry’s most comprehensive reimbursement optimization packages, comprising financial services (automated claim resubmission), analytic services and customer care.
•		McKesson OneStop Generics® — Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, low pricing and one-stop shopping.
•		Sunmark® — Complete line of more than 1,000 products that provide retail independent pharmacies with value-priced alternatives to national brands.
•		FrontEdge™ — Strategic planning, merchandising and price maintenance program that helps independent pharmacies maximize store profitability.
•		McKesson Home Health Care — Comprehensive line of more than 1,800 home health care products, including durable medical equipment, diabetes supplies, self-care supplies and disposables from national brands and the Sunmark® line.

     Institutional Healthcare Providers — Electronic ordering/purchasing and supply chain management systems that help improve efficiencies, save labor and improve asset utilization:

•		Fulfill-Rx™ — Ordering and inventory management system that integrates McKesson pharmaceutical distribution services with our automation solutions, thus empowering hospitals to optimize the often complicated and disjointed processes related to unit-based cabinet replenishment and inventory management.
•		Asset Management — Award-winning inventory optimization and purchasing management program that helps institutional providers lower costs while ensuring product availability.
•		SKY Packaging — Blister-format packaging containing the most widely prescribed dosages and strengths in generic oral solid-medications. SKY enables acute care, long-term care and institutional pharmacies to provide cost-effective, uniform packaging.
•		McKesson OneStop Generics® The McKesson OneStop Generics program enables acute care pharmacies to capture the full potential of purchasing generic pharmaceuticals. The Long-Term Care OneStop Generics program allows a long-term care pharmacy to capture savings on generic purchases.
•		McKesson 340B Manager and Easy340B — Solutions that help providers manage, track, and report on the medication replenishment associated with the federal 340B Drug Pricing Program.
•		High Performance Pharmacy — Framework that identifies and categorizes hospital pharmacy best practices to help improve clinical outcomes and financial results. The High Performance Pharmacy Assessment and Benchmarking tools enable hospital pharmacies to measure against comparable institutions and chart a step-by-step path to high performance.

McKESSON CORPORATION

     McKesson Canada: McKesson Canada, a wholly-owned subsidiary, is one of the largest pharmaceutical distributors in Canada. McKesson Canada, through its network of 17 distribution centers, provides logistics and distribution to more than 800 manufacturers — delivering their products to retail pharmacies, hospitals, long-term care centers, clinics and institutions throughout Canada. Beyond pharmaceutical distribution, logistics and order fulfillment, McKesson Canada has automated over 2,500 retail pharmacies and is also active in hospital automation solutions, dispensing more than 100 million doses each year. In partnership with other McKesson businesses, McKesson Canada provides a full range of services to Canadian manufacturers and healthcare providers, contributing to the quality and safety of care for Canadian patients.

     Medical—Surgical Distribution: Medical-Surgical Distribution provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers including physicians’ offices, surgery centers, extended care facilities, homecare and occupational health sites through a network of 29 distribution centers within the U.S. This business is a leading provider of supplies to the full range of alternate-site healthcare facilities, including physicians’ offices, clinics and surgery centers (primary care), long-term care, occupational health facilities and homecare sites (extended care). Through a variety of technology products and services geared towards the supply chain, our Medical-Surgical Distribution business is focused on helping its customers operate more efficiently while providing one of the industry’s most extensive product offerings, including our own private label line. This business also includes ZEE^® Medical, one of the most extensive product offerings in the industry of first aid, safety and training solutions, providing services to industrial and commercial customers. This business offers an extensive line of products and services aimed at maximizing productivity and minimizing the liability and cost associated with workplace illnesses and injuries.

     McKesson Pharmacy Systems and Automation: This business supplies integrated pharmacy management systems, automated dispensing systems and related services to retail, outpatient, central fill, specialty and mail order pharmacies. We also own a 39% interest in Parata which sells automated pharmacy and supply management systems and services to retail and institutional pharmacies.

     McKesson Specialty Care Solutions: This business provides solutions for patients with complex diseases and advances specialty care by facilitating collaboration among healthcare providers, drug manufacturers and payors through our expertise in specialty drug reimbursement and patient access program development. The business also supports manufacturers in product life cycle management as well as physicians and patients in gaining cost effective access to needed therapies. McKesson Specialty Care Solutions facilitates direct-to-physician specialty distribution services ensuring specialty drugs are received in manufacturer recommended conditions. This business also offers our industry leading Lynx^® integrated technologies which help organizations improve reimbursement services and business efficiencies as well as clinical and patient support tools for improving safety and therapy adherence.

Technology Solutions

     Our Technology Solutions segment provides a comprehensive portfolio of software, automation, support and services to help healthcare organizations improve quality and patient safety, reduce the cost and variability of care and better manage their resources and revenue stream. This segment also includes our Payor group of businesses, which includes our InterQual,^® clinical auditing and compliance software businesses and our disease and medical management programs. This segment markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payors. The segment sells its solutions and services internationally through subsidiaries and/or distribution agreements in Canada, the United Kingdom, Ireland, other European countries, Asia Pacific and Israel.

McKESSON CORPORATION

     The product portfolio for the Technology Solutions segment is designed to address a wide array of healthcare clinical and business performance needs ranging from medication safety and information access to revenue cycle management, resource utilization and physician adoption of electronic health records (“EHR”). Analytics software enables organizations to measure progress as they automate care processes for optimal clinical outcomes, business and operating results and regulatory compliance. To ensure that organizations achieve the maximum value for their information technology investment, the Technology Solutions segment also offers a wide range of services to support the implementation and use of solutions as well as assist with business and clinical redesign, process re-engineering and staffing (both information technology and back-office).

     Key solution areas are as follows:

     Clinical management: Horizon Clinicals^® is built with architecture to facilitate integration and enable modular system deployment. It includes a clinical data repository, clinical decision support, physician order entry, point-of-care documentation with bar-coded medication administration, enterprise laboratory, radiology, pharmacy, surgical management, an emergency department solution and an ambulatory EHR system. Horizon Clinicals^® also includes solutions to facilitate physician access to patient information such as a Web-based physician portal and wireless devices that draw on information from the hospital’s information systems. In addition, the Horizon Clinicals^® suite includes a comprehensive solution for homecare, including telehealth and hospice.

     Enterprise imaging: In addition to document imaging to facilitate maintenance and access to complete medical records, the segment provides a suite of enterprise medical imaging and information management systems, including a picture archiving communications system and a comprehensive cardiovascular information system. The segment’s enterprise-wide approach to medical imaging enables organizations to take advantage of specialty-specific workstations while building an integrated image repository that manages all of the images and information captured throughout the care continuum.

     Financial management: The segment’s revenue cycle solutions are designed to reduce days in accounts receivable, prevent insurance claim denials, reduce costs and improve productivity. Examples of solutions include online patient billing, contract management, electronic claims processing and coding compliance checking. The segment’s hospital information systems play a key role in managing the revenue cycle by automating the operation of individual departments and their respective functions within the inpatient environment.

     Resource management: Resource management solutions consist of an integrated suite of applications that enhance an organization’s ability to plan and optimize the delivery of quality patient care. These solutions automate the management of the workforce, supply chain, surgical and anesthesia documentation and provide analytics for performance measurement. Linking resource requirements to care protocols, the resource management solutions enhance predictability, improve communication, reduce variability and lower overall costs associated with care delivery.

     Automation: Automation solutions include technologies that help hospitals re-engineer and improve their medication use and supply management processes. Examples include centralized pharmacy automation for unit-dose medications, unit-based cabinet technologies for secure medication storage and rapid retrieval, point-of-use supply automation systems for inventory management and revenue capture and an automated medication administration system for ensuring accuracy at the point of care. Based on a foundation of bar-code scanning technology, these integrated solutions are designed to reduce errors and bring new levels of safety to patients.

     Physician practice solutions: The segment provides a complete solution for physician practices of all sizes that includes software, revenue cycle outsourcing and connectivity services. Software solutions include practice management and EHR software for physicians of every size, specialty or geographic location. The segment’s physician practice offering also includes outsourced billing and collection services as well as services that connect physicians with their patients, hospitals, retail pharmacies and payors. Revenue cycle outsourcing enables physician groups to avoid the infrastructure investment and administrative costs of their own in-house billing office. Services include clinical data collection, data input, medical coding, billing, contract management, cash collections, accounts receivable management and extensive reporting of metrics related to the physician practice.

McKESSON CORPORATION

     Connectivity: Through the segment’s vendor-neutral RelayHealth^® and its intelligent network, the company provides interactive solutions that streamline clinical, financial and administrative communication between patients, providers, payors, pharmacies and financial institutions. RelayHealth^® helps to accelerate the delivery of high-quality care and improve financial performance through online consultation of physicians by patients, electronic prescribing by physicians, point-of-service resolution of pharmacy claims by payors, pre-visit financial clearance of patients by providers and post-visit settlement of provider bills by payors and patients. RelayHealth^® securely processes more than 12 billion financial and clinical transactions annually.

     In addition to the product offerings described above, the Technology Solutions segment offers a comprehensive range of services to help organizations derive greater value, enhance satisfaction and return on investment throughout the life of the solutions implemented. The range of services includes:

     Technology Services: The segment has worked with numerous healthcare organizations to support the smooth operation of their information systems by providing the technical infrastructure designed to maximize application accessibility, availability, security and performance.

     Outsourcing Services: The segment helps organizations focus their resources on healthcare while the segment manages their information technology or operations through managed services, including outsourcing. Service options include remote hosting, managing hospital data processing operations, as well as strategic information systems planning and management, revenue cycle processes, payroll processing, business office administration and major system conversions.

     Professional Services: Professional services help customers achieve business results from their software or automation investment. The segment offers a wide array of quality service options, including consulting for business and/or clinical process improvement and re-design as well as implementation, project management, technical and education services relating to all products in the Technology Solutions segment.

     Payor Group: The following suite of services and software products is marketed to payors, employers and government organizations to help manage the cost and quality of care:

•		Disease management programs to improve the health status and health outcomes of patients with chronic conditions;
•		Nurse triage services to provide health information and recommend appropriate levels of care;
•		Clinical and analytical software to support utilization, case and disease management workflows;
•		Business intelligence tools for measuring, reporting and improving clinical and financial performance;
•		InterQual® Criteria for clinical decision support; and
•		Claims performance solutions to facilitate accurate and efficient medical claim payments.

Acquisitions, Investments and Discontinued Operations

     We have undertaken strategic initiatives in recent years designed to further focus on our core healthcare businesses and enhance our competitive position. We expect to continue to undertake such strategic initiatives in the future. These initiatives are detailed in Financial Notes 2 and 7, “Acquisitions and Investments” and “Discontinued Operations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Competition

     In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition, both in price and service, from national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution and large payor organizations. In addition, this segment faces competition from various other service providers and from pharmaceutical and other healthcare manufacturers (as well as other potential customers of the segment) which may from time to time decide to develop, for their own internal needs, supply management capabilities which would otherwise be provided by the segment. Price, quality of service, and in some cases, convenience to the customer are generally the principal competitive elements in this segment.

McKESSON CORPORATION

     Our Technology Solutions segment experiences substantial competition from many firms, including other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, hardware vendors and Internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and in scope and breadth of products and services offered.

Intellectual Property

     The principal trademarks and service marks of the Distribution Solutions segment include: AccessHealth^®, Acumax^®, Closed Loop Distribution^SM, Comets^®, ConsumerScript^SM,.com Pharmacy Solutions^®, Econolink^®, Empowering Healthcare^®, EnterpriseRx™, Expect More From Moore^SM, FrontEdge™, Health Mart^®, High Performance Pharmacy^SM, LoyaltyScript^®, Lynx^®, Max Impact^SM, McKesson^®, McKesson Advantage^®, McKesson Empowering Healthcare^®, McKesson Max Rewards^®, McKesson OneStop Generics^®, McKesson Priority Express^®, McKesson Supply Manager^SM, MediNet™, Medi-Pak^®, Mobile Manager^SM, Moore Medical^®, Moorebrand^SM, NOA^®, Northstar RX^SM, Onmark^®, Pharma360^®, PharmacyRx™, Pharmaserv^®, PharmAssure^SM, ProIntercept^®, ProMed^®, ProPBM^®, RX Pak^SM, RX Savings Access^®, ServiceFirst^®, Staydry^®, Sunmark^®, Supply Management Online^SM, TrialScript^®, Valu-Rite^®, XVIII B Medi Mart^® and ZEE^®.

     The substantial majority of technical concepts and codes embodied in our Technology Solutions segment’s computer programs and program documentation are protected as trade secrets. The principal trademarks and service marks for this segment are: AcuDose-Rx^®, ANSOS™, Ask-A-Nurse^®, Care Fully Connected™, CareEnhance^®, Connect-RN™, Connect-Rx^®, CRMS^®, DataStat^®, ePremis^®, Episode Profiler^®, E-Script™, Fulfill-Rx^TM, HealthQuest^®, Horizon Admin-Rx™, Horizon Clinicals^®, HorizonWP^®, InterQual^®, Lytec^®, MedCarousel^®, Medisoft^®, One-Call^®, One-Staff^®, ORSOS™, PACMED™, PakPlus-Rx^®, Paragon^®, Pathways 2000^®, Patterns Profiler™, Per-Se^®, Per-Se Technologies^® (and logo), PerYourHealth.com^®, Practice Partner^®, Premis^®, RelayHealth^®, ROBOT-Rx^®, SelfPace^®, Series 2000™, STAR 2000™, SupplyScan™, TRENDSTAR^® and WebVisit™.

     We also own other registered and unregistered trademarks and service marks and similar rights used by our business segments. All of the principal trademarks and service marks are registered in the United States, or registrations have been applied for with respect to such marks, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. We believe we have taken all necessary steps to preserve the registration and duration of our trademarks and service marks, although no assurance can be given that we will be able to successfully enforce or protect our rights thereunder in the event that they are subject to third-party infringement claims. We do not consider any particular patent, license, franchise or concession to be material to our business. We also hold copyrights in, and patents related to, many of our products.

Other Information about the Business

     Customers: During 2009, sales to our ten largest customers accounted for approximately 52% of our total consolidated revenues. Sales to our two largest customers, CVS Caremark Corporation (“Caremark,”) and Rite Aid Corporation (“Rite Aid”) accounted for 14% and 12% of our total consolidated revenues. At March 31, 2009, accounts receivable from our ten largest customers were approximately 49% of total accounts receivable. Accounts receivable from Caremark and Rite Aid were approximately 14% and 10% of total accounts receivable. Substantially all of these revenues and accounts receivable are included in our Distribution Solutions segment.

     Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for more than approximately 9% of our purchases in 2009. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable. We believe that our relationships with our suppliers on the whole are good. The ten largest suppliers in 2009 accounted for approximately 46% of our purchases.

     A significant portion of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. However, we also have certain distribution arrangements with manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our inventory being held at the new higher prices. For these manufacturers, a reduction in the frequency and magnitude of price increases, as well as restrictions in the amount of inventory available to us, could adversely impact our gross profit margin.

McKESSON CORPORATION

     Research and Development: Our development expenditures primarily consist of our investment in software development held for sale. We spent $438 million, $420 million and $359 million for development activities in 2009, 2008 and 2007 and of these amounts, we capitalized 17%, 17% and 21%. Development expenditures are primarily incurred by our Technology Solutions segment. Our Technology Solutions segment’s product development efforts apply computer technology and installation methodologies to specific information processing needs of hospitals and other customers. We believe a substantial and sustained commitment to such expenditures is important to the long-term success of this business. Additional information regarding our development activities is included in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

     Environmental Regulation: We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in Financial Note 18, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Other than any expenditures that may be required in connection with those legal matters, we do not anticipate making substantial capital expenditures either for environmental issues, or to comply with environmental laws and regulations in the future. The amount of our capital expenditures for environmental compliance was not material in 2009 and is not expected to be material in the next year.

     Employees: On March 31, 2009, we employed approximately 32,500 persons compared to 32,900 in 2008 and 31,800 in 2007.

     Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic operations is included in Financial Notes 1 and 22, “Significant Accounting Policies” and “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Item 1A. Risk Factors

     Information regarding our risk factors is included in the Financial Review under the captions “Factors Affecting Forward-Looking Statements” and “Additional Factors That May Affect Future Results,” beginning on page 51 of this Annual Report on Form 10-K.

Item 1B. Unresolved Staff Comments

     Not applicable.

Item 2. Properties

     Because of the nature of our principal businesses, our plant, warehousing, office and other facilities are operated in widely dispersed locations, mostly throughout the U.S. and Canada. The warehouses are typically owned or leased on a long-term basis. We consider our operating properties to be in satisfactory condition and adequate to meet our needs for the next several years without making capital expenditures materially higher than historical levels. Information as to material lease commitments is included in Financial Note 16, “Lease Obligations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Item 3. Legal Proceedings

     Certain legal proceedings in which we are involved are discussed in Financial Note 18, “Other Commitments and Contingent Liabilities,” to our consolidated financial statements appearing in this Annual Report on Form 10-K.

McKESSON CORPORATION

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

     No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the three months ended March 31, 2009.

Executive Officers of the Registrant

     The following table sets forth information regarding the executive officers of the Company, including their principal occupations during the past five years. The number of years of service with the Company includes service with predecessor companies.

     There are no family relationships between any of the executive officers or directors of the Company. The executive officers are chosen annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and have qualified, or until death, resignation or removal, whichever is sooner.

Name		Age				Position with Registrant and Business Experience
John H. Hammergren			50			Chairman of the Board since July 2002; President and Chief Executive Officer since April 2001; and a director since July 1999. Service with the Company — 13 years.
Jeffrey C. Campbell			48			Executive Vice President and Chief Financial Officer since April 2004; Senior Vice President and Chief Financial Officer from December 2003 to April 2004. Service with the Company — 5 years.
Paul C. Julian			53			Executive Vice President, Group President since April 2004; Senior Vice President from August 1999 to April 2004; President of McKesson Distribution Solutions since March 2000. Service with the Company — 13 years.
Jorge L. Figueredo			48			Executive Vice President, Human Resources since May 2008; Senior Vice President, Human Resources, Dow Jones, Inc. from February 2007 to January 2008; President, International, Liz Claiborne Inc. from October 1984 to May 2006. Service with the Company — 1 year.
Marc E. Owen			49			Executive Vice President, Corporate Strategy and Business Development since April 2004; Senior Vice President, Corporate Strategy and Business Development from September 2001 to April 2004. Service with the Company — 8 years.
Laureen E. Seeger			47			Executive Vice President, General Counsel and Secretary since March 2006; Vice President and General Counsel of McKesson Provider Technologies from February 2000 to March 2006. Service with the Company — 9 years.
Randall N. Spratt			57			Executive Vice President, Chief Technology Officer and Chief Information Officer since April 2009; Executive Vice President, Chief Information Officer from July 2005 to April 2009; Senior Vice President, Chief Process Officer, McKesson Provider Technologies from April 2003 to July 2005; Senior Vice President, Imaging, Technology and Business Process Improvement from January 2000 to April 2003. Service with the Company — 23 years

McKESSON CORPORATION

PART II

Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities and Stock Price Performance Graph

(a)		Market Information: The principal market on which the Company’s common stock is traded is the New York Stock Exchange (“NYSE”). High and low prices for the common stock by quarter are included in Financial Note 23, “Quarterly Financial Information (Unaudited),” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
(b)		Holders: The number of record holders of the Company’s common stock at March 31, 2009 was approximately 9,200.
(c)		Dividends: Dividend information is included in Financial Note 23, “Quarterly Financial Information (Unaudited),” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
		In April 2008, the Company’s Board of Directors (“Board”) approved a change in the Company’s dividend policy by increasing the amount of the Company’s quarterly dividend from six cents to twelve cents per share, applicable to ensuing quarterly dividend declarations until further action by the Board. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other factors.
(d)		Securities Authorized for Issuance under Equity Compensation Plans: Information relating to this item is provided under Part III, Item 12, to this Annual Report on Form 10-K.
(e)		Share Repurchase Plans: The following table provides information on the Company’s share repurchases during the fourth quarter of 2009:

		Share Repurchases (1)
														Approximate
										Total Number of				Dollar Value of
										Shares Purchased				Shares that May
		Total								As Part of Publicly				Yet Be Purchased
		Number of Shares				Average Price Paid				Announced				Under the
(In millions, except price per share)		Purchased(2) (3)				Per Share				Program				Programs
January 1, 2009 – January 31, 2009			—			$	—				—			$	980
February 1, 2009 – February 28, 2009			1				44.66				1				944
March 1, 2009 – March 31, 2009			3				39.25				3				830
Total			4				40.41				4				830

     In April 2008, the Board approved a plan to repurchase $1.0 billion of the Company’s common stock of which $830 million remained available as of March 31, 2009. Stock repurchases may be made from time to time in open market or private transactions.

     In July 2008, the Board authorized the retirement of shares of the Company’s common stock that may be repurchased from time to time pursuant to its stock repurchase program. During the second quarter of 2009, we repurchased 4 million shares for $204 million and all of these shares were formally retired by the Company. The retired shares constitute authorized but unissued shares.

McKESSON CORPORATION

(f)

Stock Price Performance Graph*: The following graph compares the cumulative total stockholder return on the Company’s common stock for the periods indicated with the Standard & Poor’s 500 Index and the Value Line Healthcare Sector Index (composed of 154 companies in the health care industry, including the Company).

		March 31,
		2004				2005				2006				2007				2008				2009
McKesson Corporation		$	100.00			$	126.38			$	175.41			$	197.91			$	177.74			$	120.18
S&P 500 Index		$	100.00			$	106.69			$	119.21			$	133.31			$	126.54			$	78.34
Value Line Healthcare Sector Index		$	100.00			$	105.11			$	117.52			$	125.09			$	117.35			$	91.93

Item 6. Selected Financial Data

     Selected financial data is presented in the Five-Year Highlights section of this Annual Report on Form 10-K.

McKESSON CORPORATION

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Management’s discussion and analysis of the Company’s results of operations and financial condition are presented in the Financial Review section of this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Information required by this item is included in the Financial Review section of this Annual Report on Form 10-K.

Item 8. Financial Statements and Supplementary Data

     Financial Statements and Supplementary Data are included as separate sections of this Annual Report on Form 10-K. See Item 15.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     Not applicable.

Item 9A. Controls and Procedures

     Disclosure Controls and Procedures

     Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, and have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

     Internal Control over Financial Reporting

     Management’s report on the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) and the related report of our independent registered public accounting firm are included on page 62 and page 63 of this Annual Report on Form 10-K, under the headings, “Management’s Annual Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” and are incorporated herein by reference.

     Changes in Internal Controls

     There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

     Not applicable.

McKESSON CORPORATION

PART III

Item 10. Directors, Executive Officers and Corporate Governance

     Information about our Directors is incorporated by reference from the discussion under Item 1 of our Proxy Statement for the 2009 Annual Meeting of Stockholders (the “Proxy Statement”) under the heading “Election of Directors.” Information about compliance with Section 16(a) of the Exchange Act is incorporated by reference from the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Information about our Audit Committee, including the members of the committee and our Audit Committee Financial Expert, is incorporated by reference from the discussion under the headings “Audit Committee Report” and “Audit Committee Financial Expert” in our Proxy Statement. The balance of the information required by this item is contained in the discussion entitled “Executive Officers of the Registrant” in Item 4 of Part I of this Annual Report on Form 10-K.

     Pursuant to Section 303A.12 (a) of the NYSE Listed Company Manual, the Company’s Chief Executive Officer submitted to the NYSE a certification, dated August 18, 2008, stating that, as of such date, he was not aware of any violation by the Company of any NYSE corporate governance listing standards.

     Information about the Code of Ethics governing our Chief Executive Officer, Chief Financial Officer, Controller and Financial Managers can be found on our Web site, www.mckesson.com, under the Investors — Corporate Governance tab. The Company’s Corporate Governance Guidelines and Charters for the Audit and Compensation Committees and the Committee on Directors and Corporate Governance can also be found on our Web site under the Investors — Corporate Governance tab.

     Copies of these documents may be obtained from:

		Corporate Secretary
		McKesson Corporation
		One Post Street, 35th Floor
		San Francisco, CA 94104
		(800) 826-9360

     The Company intends to disclose required information regarding any amendment to or waiver under the Code of Ethics referred to above by posting such information on our Web site within four business days after any such amendment or waiver.

Item 11. Executive Compensation

     Information with respect to this item is incorporated by reference from the discussion under the heading “Executive Compensation” in our Proxy Statement.

Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Principal Stockholders” in our Proxy Statement.

McKESSON CORPORATION

     The following table sets forth information as of March 31, 2009 with respect to the plans under which the Company’s common stock is authorized for issuance:

Number of securities

remaining available for

Number of securities

future issuance under

to be issued upon

Weighted-average

equity compensation

exercise of

exercise price of

plans (excluding

Plan Category

outstanding options,

outstanding options,

securities reflected in

(In millions, except per share amounts)

warrants and rights

warrants and rights(1)

the first column)

Equity compensation plans approved by security holders(2)

14.8

$

43.74

15.9

(3)

Equity compensation plans not approved by security holders(4),(5)

7.7

32.57

—

     The following are descriptions of equity plans that have been approved by the Company’s stockholders. The plans are administered by the Compensation Committee of the Board of Directors, except for the portion of the 2005 Stock Plan related to Non-Employee Directors, which is administered by the Committee on Directors and Corporate Governance.

     2005 Stock Plan: The 2005 Stock Plan was adopted by the Board of Directors on May 25, 2005 and approved by the Company’s stockholders on July 27, 2005. The 2005 Stock Plan permits the granting of up to 28 million shares in the form of stock options, restricted stock (“RS”), RSUs, performance-based restricted stock units (“PeRSUs”) and other share-based awards. For any one share of common stock issued in connection with a RS, RSU, PeRSU or other share-based award, two shares shall be deducted from the shares available for future grants. Shares of common stock not issued or delivered as a result of the net exercise of a stock option, shares used to pay the withholding taxes related to a stock award or shares repurchased on the open market with proceeds from the exercise of options shall not be returned to the reserve of shares available for issuance under the 2005 Stock Plan.

     Stock options are granted at no less than fair market value and those options granted under the 2005 Stock Plan generally have a contractual term of seven years. Prior to 2005, stock options typically had a contractual term of ten years. Options generally become exercisable in four equal annual installments beginning one year after the grant date or after four years from the date of grant. The vesting of RS or RSUs is determined by the Compensation Committee at the time of grant. RS and RSUs generally vest over four years. Vesting of PeRSUs ranges from one to three-year periods following the end of the performance period and may follow the graded or cliff method of vesting.

     Non-employee directors may be granted an award on the date of each annual meeting of the stockholders for up to 5,000 RSUs, as determined by the Board. Such non-employee director award is fully vested on the date of the grant.

McKESSON CORPORATION

     2000 Employee Stock Purchase Plan (the “ESPP”): The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. In March 2002, the Board amended the ESPP to allow for participation in the plan by employees of certain of the Company’s international and certain other subsidiaries. As to those employees, the ESPP does not qualify under Section 423 of the Internal Revenue Code. Currently, 16 million shares have been approved by stockholders for issuance under the ESPP.

     The ESPP is implemented through a continuous series of three-month purchase periods (“Purchase Periods”) during which contributions can be made toward the purchase of common stock under the plan.

     Each eligible employee may elect to authorize regular payroll deductions during the next succeeding Purchase Period, the amount of which may not exceed 15% of a participant’s compensation. At the end of each Purchase Period, the funds withheld by each participant will be used to purchase shares of the Company’s common stock. The purchase price of each share of the Company’s common stock is based on 85% of the fair market value of each share on the last day of the applicable Purchase Period. In general, the maximum number of shares of common stock that may be purchased by a participant for each calendar year is determined by dividing $25,000 by the fair market value of one share of common stock on the offering date.

     The following are descriptions of equity plans that have not been submitted for approval by the Company’s stockholders:

     On July 27, 2005, the Company’s stockholders approved the 2005 Stock Plan which had the effect of terminating the 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan and certain 1999 one time stock option plan awards, which plans had not been submitted for approval by the Company’s stockholders, and the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, which had previously been approved by the Company’s stockholders. Prior grants under these plans include stock options, RS and RSUs. Stock options under the terminated plans generally have a ten-year life and vest over four years. RS contains certain restrictions on transferability and may not be transferred until such restrictions lapse. Each of these plans has outstanding equity grants, which are subject to the terms and conditions of their respective plans, but no new grants will be made under these terminated plans.

Item 13. Certain Relationships and Related Transactions and Director Independence

     Information with respect to certain transactions with management is incorporated by reference from the Proxy Statement under the heading “Certain Relationships and Related Transactions.” Additional information regarding certain related party balances and transactions is included in the Financial Review section of this Annual Report on Form 10-K and Financial Note 20, “Related Party Balances and Transactions,” to the consolidated financial statements.

Item 14. Principal Accounting Fees and Services

     Information regarding principal accounting fees and services is set forth under the heading “Ratification of Appointment of Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for Fiscal 2010” in our Proxy Statement and all such information is incorporated herein by reference.

McKESSON CORPORATION

PART IV

Item 15. Exhibits and Financial Statement Schedule

(a)

Financial Statements, Financial Statement Schedule and Exhibits

		Page
Supplementary Consolidated Financial Statement Schedule— Valuation and Qualifying Accounts			20
Financial statements and schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information.
Exhibits submitted with this Annual Report on Form 10-K as filed with the SEC and those incorporated by reference to other filings are listed on the Exhibit Index			21
Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. See “Index to Consolidated Financial Information”			25

McKESSON CORPORATION

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

     On behalf of the Registrant and pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated:

*		*
John H. Hammergren		Marie L. Knowles, Director
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
*		*
Jeffrey C. Campbell		David M. Lawrence M.D., Director
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
*		*
Nigel A. Rees		Edward A. Mueller, Director
Vice President and Controller
(Principal Accounting Officer)
*		*
Andy D. Bryant, Director		James V. Napier, Director
*		*
Wayne A. Budd, Director		Jane E. Shaw, Director
*		/s/ Laureen E. Seeger
Alton F. Irby III, Director		Laureen E. Seeger
		*Attorney-in-Fact
*
M. Christine Jacobs, Director		Dated: May 5, 2009

McKESSON CORPORATION

SCHEDULE II

SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2009, 2008 and 2007
(In millions)

						Additions								Deductions
		Balance at				Charged to				Charged to				From				Balance at
		Beginning of				Costs and				Other				Allowance				End of
Description		Year				Expenses				Accounts (3)				Accounts (1)				Year (2)
Year Ended March 31, 2009
Allowances for doubtful accounts		$	163			$	27			$	3			$	(41	)		$	152
Other allowances			9				6				1				(4	)			12
		$	172			$	33			$	4			$	(45	)		$	164
Year Ended March 31, 2008
Allowances for doubtful accounts		$	139			$	41			$	17			$	(34	)		$	163	(4)
Other allowances			11				—				—				(2	)			9
		$	150			$	41			$	17			$	(36	)		$	172
Year Ended March 31, 2007
Allowances for doubtful accounts		$	124			$	24			$	15			$	(24	)		$	139	(4)
Other allowances			7				4				—				—				11
		$	131			$	28			$	15			$	(24	)		$	150

						2009				2008				2007
(1)		Deductions:
		Written off				$	27			$	32			$	24
		Operation sold					6				—				—
		Credited to other accounts					12				2				—
		Total				$	45			$	34			$	24
(2)		Amounts shown as deductions from receivables				$	164			$	172			$	150
(3)		Primarily represents additions relating to acquisitions.
(4)		Includes a $10 million allowance for non-current receivables.

McKESSON CORPORATION

EXHIBIT INDEX

     The agreements included as exhibits to this report are included to provide information regarding their terms and not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement that were made solely for the benefit of the other parties to the applicable agreement, and;

•		should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
•		may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
•		were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

     Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

     Exhibits identified under “Incorporated by Reference” in the table below are on file with the Commission and are incorporated by reference as exhibits hereto.

Exhibit

Incorporated by Reference

Number

Description

Form

File Number

Exhibit

Filing Date

3.1

Amended and Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on July 25, 2007.

10-Q

1-13252

3.1

October 31, 2007

3.2

Amended and Restated By-Laws of the Company, dated as of April 22, 2009.

8-K

1-13252

3.2

April 28, 2009

4.1

Indenture, dated as of March 11, 1997, between the Company, as Issuer, and The First National Bank of Chicago, as Trustee.

10-K

1-13252

4.4

June 19, 1997

4.2

Indenture, dated as of January 29, 2002, between the Company, as Issuer, and the Bank of New York, as Trustee.

10-K

1-13252

4.6

June 12, 2002

4.3

Indenture, dated as of March 5, 2007, by and between the Company, as Issuer, and The Bank of New York Trust Company, N.A., as Trustee.

8-K

1-13252

4.1

March 5, 2007

10.1*

McKesson Corporation 1994 Stock Option and Restricted Stock Plan as amended through July 31, 2001.

10-K

1-13252

10.4

June 12, 2002

10.2*

McKesson Corporation 1999 Stock Option and Restricted Stock Plan, as amended through May 26, 2004.

10-K

1-13252

10.2

May 7, 2008

10.3*

McKesson Corporation 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, as amended through January 29, 2003.

10-K

1-13252

10.4

June 10, 2004

10.4*

McKesson Corporation Supplemental Profit Sharing Investment Plan, as amended and restated on January 29, 2003.

10-K

1-13252

10.6

June 6, 2003

10.5*

McKesson Corporation Supplemental Profit Sharing Investment Plan II, as amended and restated on October 24, 2008.

10-Q

1-13252

10.1

October 29, 2008

McKESSON CORPORATION

Exhibit

Incorporated by Reference

Number

Description

Form

File Number

Exhibit

Filing Date

10.6*

McKesson Corporation Deferred Compensation Administration Plan, amended and restated effective October 28, 2004.

10-K

1-13252

10.6

May 13, 2005

10.7*

McKesson Corporation Deferred Compensation Administration Plan II, as amended and restated effective October 28, 2004, including Amendment No. 1 thereto effective July 25, 2007.

10-K

1-13252

10.7

May 7, 2008

10.8*

McKesson Corporation Deferred Compensation Administration Plan III, as amended and restated on October 24, 2008.

10-Q

1-13252

10.2

October 29, 2008

10.9*

McKesson Corporation 1994 Option Gain Deferral Plan, as amended and restated as of October 28, 2004.

10-K

1-13252

10.8

May 13, 2005

10.10*

McKesson Corporation Executive Benefit Retirement Plan, as amended and restated on October 24, 2008.

10-Q

1-13252

10.3

October 29, 2008

10.11*

McKesson Corporation Executive Survivor Benefits Plan, as amended and restated as of October 28, 2004.

10-K

1-13252

10.11

May 13, 2005

10.12*†

McKesson Corporation Severance Policy for Executive Employees, as amended and restated on December 29, 2008.

—

—

—

—

10.13*†

McKesson Corporation Change in Control Policy for Selected Executive Employees, as amended and restated on April 21, 2009.

—

—

—

—

10.14*

McKesson Corporation 2005 Management Incentive Plan, as amended and restated on October 24, 2008 and effective as of January 1, 2009.

10-Q

1-13252

10.5

October 29, 2008

10.15*†

Form of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation 2005 Management Incentive Plan, effective April 1, 2009.

—

—

—

—

10.16*

McKesson Corporation Long-Term Incentive Plan, as amended and restated on October 24, 2008 and effective as of January 1, 2009.

10-Q

1-13252

10.6

October 29, 2008

10.17*

McKesson Corporation Stock Purchase Plan, as amended through July 31, 2002.

10-K

1-13252

10.19

June 6, 2003

10.18*

McKesson Corporation 2005 Stock Plan, as amended and restated on July 23, 2008.

10-Q

1-13252

10.7

October 29, 2008

10.19*†

Forms of (i) Statement of Terms and Conditions applicable to Options, Restricted Stock, Restricted Stock Units and Performance Shares, (ii) Stock Option Grant Notice and (iii) Restricted Stock Unit Agreement, under the McKesson Corporation 2005 Stock Plan, as amended and restated on July 23, 2008.

—

—

—

—

McKESSON CORPORATION

Exhibit

Incorporated by Reference

Number

Description

Form

File Number

Exhibit

Filing Date

10.20 †††

Deed of Settlement and Amendment in Relation to Human Resources and Payroll Services Contract dated as of June 22, 2005 between the Secretary of State for Health for the United Kingdom and McKesson Information Solutions UK Limited.

10-Q

1-13252

10.1

August 1, 2005

10.21

Amended and Restated Receivables Purchase Agreement, dated as of June 11, 2004, among the Company, as servicer, CGSF Funding Corporation, as seller, the several conduit purchasers from time to time party to the Agreement, the several committed purchasers from time to time party to the Agreement, the several managing agents from time to time party to the Agreement, and Bank One, N.A. (Main Office Chicago), as collateral agent.

10-K

1-13252

10.20

May 13, 2005

10.22

Amended and Restated Credit Agreement, dated as of June 8, 2007 among the Company and McKesson Canada Corporation, collectively, the Borrowers, Bank of America, N.A., as Administrative Agent, Bank of America, N.A. (acting through its Canada branch), as Canadian Administrative Agent, JPMorgan Chase Bank and Wachovia Bank, National Association, as Co-Syndication Agents, Wachovia Bank, National Association, as L/C Issuer, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, LTD., Seattle branch, as Co-Documentation Agents, and The Other Lenders Party Hereto Banc of America Securities LLC, as sole lead arranger and sole book manager.

8-K

1-13252

10.1

June 14, 2007

10.23

Purchase Agreement, dated as of December 31, 2002, between McKesson Capital Corp. and General Electric Capital Corporation.

10-K

1-13252

10.41

June 6, 2003

10.24

Services Agreement, dated as of December 31, 2002, between McKesson Capital Corp. and General Electric Capital Corporation.

10-K

1-13252

10.42

June 6, 2003

10.25

Interim Credit Agreement, dated as of January 26, 2007, among the Company, Bank of America N.A., as Administrative Agent, Wachovia Bank, National Association, as Syndication Agent, the other Lenders party there to, and Banc of America Securities LLC and Wachovia Capital Markets, LLC, as Joint Lead Arrangers and Joint Book Managers.

8-K

1-13252

10.1

January 26, 2007

10.26*

Amended and Restated Employment Agreement, dated as of November 1, 2008, by and between the Company and its Chairman, President and Chief Executive Officer.

10-Q

1-13252

10.10

October 29, 2008

Exhibit				Incorporated by Reference
Number		Description		Form		File Number		Exhibit				Filing Date
10.27*		Amended and Restated Employment Agreement, dated as of November 1, 2008, by and between the Company and its Former Executive Vice President and President, McKesson Technology Solutions.		10-Q		1-13252			10.11			October 29, 2008
10.28*		Amended and Restated Employment Agreement, dated as of November 1, 2008, by and between the Company and its Executive Vice President and Group President.		10-Q		1-13252			10.12			October 29, 2008
12†		Computation of Ratio of Earnings to Fixed Charges.		—		—			—			—
21†		List of Subsidiaries of the Registrant.		—		—			—			—
23†		Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP.		—		—			—			—
24†		Power of Attorney.		—		—			—			—
31.1†		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		—		—			—			—
31.2†		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		—		—			—			—
32††		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		—		—			—			—

     Registrant agrees to furnish to the Commission upon request a copy of each instrument defining the rights of security holders with respect to issues of long-term debt of the registrant, the authorized principal amount of which does not exceed 10% of the total assets of the registrant.

McKESSON CORPORATION

INDEX TO CONSOLIDATED FINANCIAL INFORMATION

		Page
Five-Year Highlights			26
Financial Review			27
Management’s Annual Report on Internal Control Over Financial Reporting			62
Report of Independent Registered Public Accounting Firm			63
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended March 31, 2009, 2008 and 2007			64
Consolidated Balance Sheets as of March 31, 2009 and 2008			65
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2009, 2008 and 2007			66
Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2008 and 2007			67
Financial Notes			68

McKESSON CORPORATION

FIVE-YEAR HIGHLIGHTS

		As of and for the Years Ended March 31,
(In millions, except per share amounts and ratios)		2009				2008				2007				2006				2005
Operating Results
Revenues		$	106,632			$	101,703			$	92,977			$	86,983			$	79,096
Percent change			4.8	%			9.4	%			6.9	%			10.0	%			16.3	%
Gross profit			5,378				5,009				4,332				3,777				3,342
Income (loss) from continuing operations before income taxes			1,064				1,457				1,297				1,171				(266	)
Income (loss) after income taxes
Continuing operations			823				989				968				745				(173	)
Discontinued operations			—				1				(55	)			6				16
Net income (loss)			823				990				913				751				(157	)
Financial Position
Working capital			3,065				2,438				2,730				3,527				3,658
Days sales outstanding for: (1)
Customer receivables			24				22				21				22				23
Inventories			31				33				32				29				34
Drafts and accounts payable			43				44				43				41				40
Total assets			25,267				24,603				23,943				20,961				18,775
Total debt, including capital lease obligations			2,512				1,797				1,958				991				1,211
Stockholders’ equity			6,193				6,121				6,273				5,907				5,275
Property acquisitions			195				195				126				166				135
Acquisitions of businesses, net			358				610				1,938				589				76
Common Share Information
Common shares outstanding at year-end			271				277				295				304				299
Shares on which earnings (loss) per common share were based
Diluted			279				298				305				316				294
Basic			275				291				298				306				294
Diluted earnings (loss) per common share (2)
Continuing operations		$	2.95			$	3.32			$	3.17			$	2.36			$	(0.59	)
Discontinued operations			—				—				(0.18	)			0.02				0.06
Total			2.95				3.32				2.99				2.38				(0.53	)
Cash dividends declared			134				70				72				74				71
Cash dividends declared per common share			0.48				0.24				0.24				0.24				0.24
Book value per common share (2)(3)			22.87				22.10				21.26				19.43				17.64
Market value per common share — year end			35.04				52.37				58.54				52.13				37.75
Supplemental Data
Capital employed (4)			8,705				7,918				8,231				6,898				6,486
Debt to capital ratio (5)			28.9	%			22.7	%			23.8	%			14.4	%			18.7	%
Net debt to net capital employed (6)			6.1	%			6.6	%			0.1	%			(24.1	)%			(12.6	)%
Average stockholders’ equity (7)			6,214				6,344				6,022				5,736				5,264
Return on stockholders’ equity (8)			13.2	%			15.6	%			15.2	%			13.1	%			(3.0	)%

McKESSON CORPORATION

FINANCIAL REVIEW

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

     Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year.

     We conduct our business through two operating segments: Distribution Solutions and Technology Solutions. See Financial Note 22, “Segments of Business,” to the accompanying consolidated financial statements for a description of these segments.

RESULTS OF OPERATIONS

     Overview:

		Years Ended March 31,
(In millions, except per share data)		2009				2008				2007
Revenues		$	106,632			$	101,703			$	92,977
Litigation Charge (Credits), Net			493				(5	)			(6	)
Income from Continuing Operations Before Income Taxes		$	1,064			$	1,457			$	1,297
Income Tax Provision			(241	)			(468	)			(329	)
Income from Continuing Operations			823				989				968
Discontinued Operations, Net			—				1				(55	)
Net Income		$	823			$	990			$	913
Diluted Earnings Per Share
Continuing Operations		$	2.95			$	3.32			$	3.17
Discontinued Operations			—				—				(0.18	)
Total		$	2.95			$	3.32			$	2.99
Weighted Average Diluted Shares			279				298				305

     Revenues increased 5% to $106.6 billion and 9% to $101.7 billion in 2009 and 2008. The increase in revenues primarily reflects market growth rates in our Distribution Solutions segment, which accounted for 97% of our consolidated revenues. Revenues for 2009 also benefited from our acquisitions of Oncology Therapeutics Network (“OTN”) in October 2007 and McQueary Brothers Drug Company (“McQueary Brothers”) in May 2008. Revenues for 2008 also benefited from our acquisitions of OTN and Per-Se Technologies, Inc. (“Per-Se”) in January 2007.

     Gross profit increased 7% to $5.4 billion and 16% to $5.0 billion in 2009 and 2008. As a percentage of revenues, gross profit increased 11 basis points (“bp”) to 5.04% and 27 bp to 4.93% in 2009 and 2008. The increase in our 2009 gross profit margin was primarily due to an improvement in our Distribution Solutions segment margin, partially offset by a decline in our Technology Solutions segment margin. Gross profit margin increased in 2008 primarily reflecting a greater proportion of higher margin Technology Solutions products and an improvement in our Distribution Solutions segment margin.

     Operating expenses were $4.2 billion, $3.5 billion and $3.1 billion in 2009, 2008 and 2007. Operating expenses increased primarily due to additional expenses incurred to support our sales growth, expenses associated with our business acquisitions and higher employee compensation expenses. In addition, operating expenses for 2009 include a pre-tax charge of $493 million for the Average Wholesale Price (“AWP”) Litigation as further discussed under the caption “Operating Expenses” in this Financial Review.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     In 2009, other income, net includes a pre-tax impairment charge of $63 million ($60 million after-tax) on two equity-held investments and a pre-tax gain of $24 million ($14 million after-tax) from the sale of an equity-held investment. Excluding these items, other income, net decreased over the last two years primarily due to a decrease in interest income due to lower average cash and cash equivalents balances and interest rates.

     Interest expense increased slightly in 2009 and 43% to $142 million in 2008. Interest expense for 2009 reflects the repayment of $150 million of long-term debt during the fourth quarter of 2008 and the issuance of $700 million of long-term debt during the fourth quarter of 2009. Interest expense in 2008 reflects additional expense associated with the issuance of $1.0 billion of long-term debt in the fourth quarter of 2007 as part of our $1.8 billion acquisition of Per-Se.

     Income from continuing operations before income taxes was $1.1 billion, $1.5 billion and $1.3 billion in 2009, 2008 and 2007 reflecting the above noted factors.

     Our reported income tax rates were 22.7%, 32.1% and 25.4% in 2009, 2008 and 2007. Fluctuations in our reported income tax rates are primarily due to changes in income within states and foreign countries that have lower tax rates as well as other discrete tax events that occurred during the year. In 2009, income tax expense included $111 million of net income tax benefits for discrete items, which primarily consists of the recognition of previously unrecognized tax benefits and related accrued interest. The recognition of these discrete items is primarily due to the lapsing of the statutes of limitations. In 2007, we recorded an $83 million credit to our income tax provision relating to the reversal of income tax reserves related to uncertain tax matters surrounding our Consolidated Securities Litigation Action costs. These tax reserves were initially established in 2005 and were favorably resolved in 2007.

     In 2007, our results from discontinued operations were an after-tax loss of $55 million or $0.18 per diluted share which included the divestiture of our Distribution Solutions segment’s Acute Care medical-surgical supply business. This business was sold for net cash proceeds of $160 million and resulted in an after-tax loss of $66 million, which included a $79 million non-tax deductible write-off of goodwill.

     Net income was $823 million, $990 million and $913 million in 2009, 2008 and 2007 and diluted earnings per share was $2.95, $3.32 and $2.99.

     Revenues:

		Years Ended March 31,
(In millions)		2009				2008				2007
Distribution Solutions
U.S. pharmaceutical direct distribution & services		$	66,876			$	60,436			$	54,127
U.S. pharmaceutical sales to customers’ warehouses			25,809				27,668				27,555
Subtotal			92,685				88,104				81,682
Canada pharmaceutical distribution & services			8,225				8,106				6,692
Medical-Surgical distribution & services			2,658				2,509				2,364
Total Distribution Solutions			103,568				98,719				90,738
Technology Solutions
Services			2,337				2,240				1,537
Software and software systems			572				591				536
Hardware			155				153				166
Total Technology Solutions			3,064				2,984				2,239
Total Revenues		$	106,632			$	101,703			$	92,977

     Revenues increased 5% to $106.6 billion in 2009 and 9% to $101.7 billion in 2008. The growth in revenues was primarily driven by our Distribution Solutions segment, which accounted for 97% of revenues.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     U.S. pharmaceutical direct distribution and services revenues increased in 2009 compared with 2008 primarily reflecting market growth rates (which include growing drug utilization and price increases, offset in part by the increased use of lower priced generics), our acquisitions of OTN in October 2007 and McQueary Brothers in May 2008, expanded business with existing customers and a shift of revenues from sales to customers’ warehouses to direct store delivery. U.S. pharmaceutical direct distribution and services revenues increased in 2008 compared with 2007 primarily due to market growth rates, new and expanded business and to a lesser extent, due to our acquisition of OTN. OTN is a U.S. distributor of specialty pharmaceuticals and McQueary Brothers is a regional distributor of pharmaceutical, health and beauty products to independent and regional chain pharmacies in the Midwestern U.S.

     U.S. pharmaceutical sales to customers’ warehouses decreased in 2009 compared with 2008 primarily reflecting a customer’s loss of business, the loss of a large customer and reduced revenues associated with the consolidation of certain customers. Additionally, these revenues were also impacted by a shift to direct store delivery. These decreases were partially offset by expanded business with existing customers. U.S. pharmaceutical sales to customers’ warehouses increased in 2008 compared with 2007 primarily as a result of new and expanded agreements with customers, which were partially offset by a customer’s loss of business and reduced revenues associated with the consolidation of certain customers.

     Sales to retail customers’ warehouses represent large volume sales of pharmaceuticals primarily to a limited number of large self-warehousing retail chain customers whereby we order bulk product from the manufacturer, receive and process the product through our central distribution facility and subsequently deliver the bulk product (generally in the same form as received from the manufacturer) directly to our customers’ warehouses. This distribution method is typically not marketed or sold by the Company as a stand alone service; rather, it is offered as an additional distribution method for our large retail chain customers that have an internal self-warehousing distribution network. Sales to customers’ warehouses provide a benefit to these customers because they can utilize the Company as one source for both their direct to-store business and their warehouse business. We generally have significantly lower gross profit margins on sales to customers’ warehouses as we pass much of the efficiency of this low cost-to-serve model on to the customer. These sales do, however, contribute to our gross profit dollars.

     The customer mix of our U.S. pharmaceutical distribution revenues was as follows:

		2009				2008				2007
Direct Sales
Independents			13	%			13	%			13	%
Institutions			32				30				29
Retail Chains			26				24				23
Subtotal			71				67				65
Sales to retail customers’ warehouses			29				33				35
Total			100	%			100	%			100	%

     From 2007 to 2009, the percentage of total direct and warehouse revenue attributed to the Company’s retail chain customers declined compared to our other customer groups. This decline resulted in a positive impact on the Company’s gross profit margin. As previously described, a limited number of our large retail chain customers purchase products through both the Company’s direct and warehouse distribution methods, the latter of which generally has a significantly lower gross profit margin due to the low cost-to-serve model. When evaluating and pricing customer contracts, we do so based on our assessment of total customer profitability. As a result, we do not evaluate the Company’s performance or allocate resources based on sales to customers’ warehouses or gross profit associated with such sales.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Canadian pharmaceutical distribution and services revenues for 2009 increased slightly primarily reflecting new and expanded business and market growth rates, which were almost fully offset by unfavorable foreign exchange rates and the loss of a customer. Revenues for 2008 increased primarily reflecting market growth rates, favorable foreign exchange rates and new and expanded business, partially offset by six fewer days of sales compared to 2007. Canadian revenues in 2009 were negatively impacted by 9% unfavorable foreign exchange rates and in 2008 and 2007, benefited from 12% and 5% favorable foreign exchange rates.

     Medical-Surgical distribution and services revenues increased over the last two years primarily reflecting market growth rates and acquisitions. In addition, revenues in 2008 were impacted by the discontinuance of the distribution of a product line and by one less week of sales compared to 2007. Revenues associated with this product line are now recorded by our U.S. pharmaceutical distribution business.

     Technology Solutions revenues increased in 2009 primarily due to increased services revenues reflecting the segment’s expanded customer base and outsourcing revenues. These increases were partially offset by unfavorable foreign exchange rates and a decrease in software revenues, particularly in the hospital and physician office customer segments. Technology Solutions’ revenues increased in 2008 primarily reflecting the acquisition of Per-Se, a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies, increased services revenues, the segment’s expanded customer base and clinical software implementations.

     Gross Profit:

		Years Ended March 31,
(Dollars in millions)		2009				2008				2007
Gross Profit
Distribution Solutions		$	3,955			$	3,586			$	3,252
Technology Solutions			1,423				1,423				1,080
Total		$	5,378			$	5,009			$	4,332
Gross Profit Margin
Distribution Solutions			3.82	%			3.63	%			3.58	%
Technology Solutions			46.44				47.69				48.24
Total			5.04				4.93				4.66

     Gross profit increased 7% to $5.4 billion in 2009 and 16% to $5.0 billion in 2008. As a percentage of revenues, gross profit increased 11 bp in 2009 and 27 bp in 2008. Gross profit margin increased in 2009 primarily due to margin improvements in our Distribution Solutions segment, partially offset by a decline in our Technology Solutions segment reflecting a change in product mix and the recognition of $21 million of disease management deferred revenues in 2008 for which associated expenses were previously recognized as incurred. Gross profit margin increased in 2008 primarily reflecting a greater proportion of higher margin Technology Solutions products, the recognition of $21 million of disease management deferred revenues and an improvement in our Distribution Solutions segment’s margin.

     In 2009, our Distribution Solutions segment’s gross profit margin increased compared to 2008. Gross profit margin was impacted by the benefit of increased sales of generic drugs with higher margins, higher buy side margins and an increase associated with a lower proportion of revenues within the segment attributed to sales to customers’ warehouses, which generally have lower gross profit margins relative to other revenues within the segment. These increases were partially offset by a modest decline in sell margin during the latter part of the year and last-in, first-out (“LIFO”) net inventory credits ($8 million LIFO net expense in 2009 compared with a $14 million LIFO net credit in 2008).

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Our Distribution Solutions segment uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than other accounting methods, thereby mitigating the effects of inflation and deflation on operating profit. The practice in the Distribution Solutions’ distribution businesses is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price-related inventory losses. Price declines on many generic pharmaceutical products in this segment over the last few years have moderated the effects of inflation in other product categories, which resulted in minimal overall price changes in those years. Additional information regarding our LIFO accounting is included under the caption “Critical Accounting Policies and Estimates” included in this Financial Review.

     For each of the last three years, we estimate that the Company’s total gross profit margin on sales to customers’ warehouses represented about 5% of the segment’s total gross profit dollars. As previously discussed, from 2007 to 2009, the percentage of total direct and warehouse revenue attributed to our retail chain customers declined compared to our other customer groups. This decline resulted in a positive impact on the Company’s gross profit margin.

     In 2008, our Distribution Solutions segment’s gross profit margin increased slightly compared to 2007. Gross profit margin was impacted by higher buy side margins, the benefit of increased sales of generic drugs with higher margins, a decline in impairment charges associated with the write-down of certain abandoned assets within our Pharmacy Systems and Automation group and an increase associated with a lower proportion of revenues within the segment attributed to sales to customers’ warehouses. These increases were partially offset by a decline in sell margin and LIFO inventory credits ($14 million in 2008 compared with $64 million in 2007).

     In 2007, we contributed $36 million in cash and $45 million in net assets primarily from our Pharmacy Systems and Automation business to Parata Systems, LLC (“Parata,”) in exchange for a significant minority interest in Parata. Parata is a manufacturer of pharmacy robotic equipment. In connection with the investment, we abandoned certain assets which resulted in a $15 million charge to cost of sales and we incurred $6 million of other expenses related to the transaction which were recorded within operating expenses. We did not recognize any additional gains or losses as a result of this transaction as we believed the fair value of our investment in Parata approximated the carrying value of consideration contributed to Parata.

     In 2009, our Technology Solutions segment’s gross profit margin decreased compared to the prior year primarily reflecting a change in product mix and the recognition in 2008 of $21 million of disease management deferred revenues for which associated expenses were previously recognized as incurred. In 2008, Technology Solutions segment’s gross profit margin decreased primarily reflecting a change in product mix which included a higher proportion of lower margin Per-Se services revenues. Partially offsetting this decrease was the recognition of $21 million of disease management deferred revenues for which associated expenses were previously recognized as incurred.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Operating Expenses:

		Years Ended March 31,
(Dollars in millions)		2009				2008				2007
Operating Expenses
Distribution Solutions (1)		$	2,777			$	2,138			$	1,896
Technology Solutions			1,096				1,115				884
Corporate			309				283				294
Subtotal			4,182				3,536				3,074
Securities Litigation credits, net			—				(5	)			(6	)
Total		$	4,182			$	3,531			$	3,068
Operating Expenses as a Percentage of Revenues
Distribution Solutions			2.68	%			2.17	%			2.09	%
Technology Solutions			35.77				37.37				39.48
Total			3.92				3.47				3.30

(1)		Operating expenses for 2009 include the $493 million AWP Litigation charge.

     Operating expenses increased 18% to $4.2 billion in 2009 and 15% to $3.5 billion in 2008. Operating expenses for 2009 include a pre-tax charge of $493 million for the AWP Litigation. Excluding this charge, operating expenses increased primarily due to additional expenses incurred to support our sales growth, expenses associated with our business acquisitions and higher employee compensation expenses.

     In 2009, we recorded a $493 million charge for the AWP Litigation. As discussed in Financial Note 18, “Other Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements, we reached an agreement to settle all private party claims relating to First DataBank, Inc.’s published drug reimbursement benchmarks for $350 million. The settlement terms, which are subject to final court approval, include an express denial of liability of any kind. We also recorded a reserve for pending and expected AWP-related claims by public payors, which is currently estimated to be $143 million.

     The combination of the AWP settlement for all private party claims and the decision by us to establish an estimated reserve for the pending and expected AWP-related claims by public payors resulted in a pre-tax, non-cash charge of $493 million ($311 million after-tax). We do not currently expect to have difficulties funding the settlement payments associated with the claims by private parties and any settlement or other resolution of the claims by public payors.

     In 2009, 2008 and 2007, we recorded share-based compensation expense of $99 million, $91 million and $60 million. At the beginning of our fiscal 2007, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which requires the recognition of expense resulting from transactions in which we acquire goods and services by issuing our shares, share options or other equity instruments. Due to the accelerated vesting of share-based awards prior to 2007, share-based compensation expense has increased over the past two years as share-based compensation is granted and amortized over the requisite service period. The rate of increase from 2009 and 2008 was mitigated by a decrease in our stock price and a change in terms of the grants. Share-based compensation charges are affected by a number of variables as further described under the caption “Critical Accounting Policies and Estimates” included in this financial review. As a result, actual future share-based compensation expense may differ from historical levels of expense. Additional information regarding our share based payments is also included in Financial Note 3, “Share-Based Payment,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Over the last three years, we recorded the following reduction in workforce and restructuring charges:

		Years Ended March 31,
(In millions)		2009				2008				2007
Reduction in workforce charges (1)
Distribution Solutions		$	7			$	—			$	—
Technology Solutions			25				8				—
Total			32				8				—
Restructuring charges (credits)
Distribution Solutions (2)			4				8				2
Technology Solutions (3) (4)			(2	)			9				13
Corporate			(1	)			2				—
Total			1				19				15
Total reduction in workforce and restructuring charges		$	33			$	27			$	15
Cost of sales (5)		$	5			$	7			$	—
Operating expenses			28				20				15
Total reduction in workforce and restructuring charges		$	33			$	27			$	15

(1)		Although reductions in workforce actions do not constitute a restructuring plan (as defined under U.S. generally accepted accounting principles (“GAAP,”)) they do represent independent actions taken from time to time, as appropriate.
(2)		In 2008, we incurred $4 million of severance costs associated with the closure of two facilities and $1 million and $3 million of severance and asset impairments associated with the integration of OTN.
(3)		In 2008, we incurred $5 million of severance and exit-related costs and a $4 million asset impairment charge for the write-off of capitalized software costs associated with the termination of a software project.
(4)		Expenses for 2007 primarily consisted of $8 million for employee severance costs associated with the reallocation of product development and marketing resources and the realignment of an international business within our Technology Solutions segment.
(5)		Amounts recorded to cost of sales pertain solely to our Technology Solutions segment.

     Up to 2009, we have provided contributions for our profit sharing investment plan (“PSIP”) for U.S. employees primarily through a leveraged employee stock ownership plan (“ESOP”). In 2008 and 2007, we granted 1 million shares per year to plan participants. ESOP expense and other contribution expense, including interest expense on ESOP debt, was $53 million, $13 million and $13 million in 2009, 2008 and 2007. ESOP expense for 2008 and 2007 was significantly lower than 2009 due to the utilization of lower cost basis shares in the ESOP to fund the Company’s matching contributions. At March 31, 2009, almost all of the 24 million common shares in the ESOP had been allocated to plan participants. As a result, we will need to fund most of our future PSIP contributions with cash or treasury shares.

     As previously reported on the PSIP’s Annual Report on Form 11-K for the year ended March 31, 2008, the PSIP is a member of the settlement class in the Consolidated Securities Litigation Action (refer to Financial Note 18, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K). On April 27, 2009, the court issued an order approving the distribution of the settlement funds. At this time, we do not know the date on which the distribution of settlement funds to the PSIP will occur.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     On a segment basis, Distribution Solutions’ operating expenses increased over the past two years primarily due to the $493 million AWP Litigation charge in 2009, business acquisitions (including OTN and McQueary Brothers) and additional costs incurred to support our sales volume growth. Operating expenses as a percentage of revenues increased primarily due to the AWP Litigation charge as well as additional costs incurred to support our sales volume growth. Share-based compensation expense for this segment was $26 million for 2009 and 2008 and $17 million for 2007.

     Technology Solutions segment’s operating expenses decreased in 2009 and increased in 2008. Operating expenses for 2009 benefited from cost containment efforts and a decrease in bad debt expense, partially offset by an increase in net research and development expenses and additional costs for business acquisitions. Operating expenses increased in 2008 primarily reflecting higher employee compensation, an increase in net research and development expenses, additional costs for business acquisitions and higher bad debt expense. Operating expenses as a percentage of revenues for this segment have decreased over the last two years primarily reflecting the segment’s cost containment efforts and a more favorable business mix. Share-based compensation expense for this segment was $40 million, $35 million and $19 million for 2009, 2008 and 2007.

     Corporate expenses increased in 2009 compared with 2008 primarily reflecting an increase in accounts receivable sales facility fees, compensation expense and additional costs incurred to support various initiatives. Corporate expenses decreased in 2008 compared with 2007 primarily reflecting a decrease in legal expenses associated with our Securities Litigation, a decrease in charitable contributions and a decrease in other long-term compensation. Share-based compensation expense for Corporate was $33 million, $30 million and $24 million for 2009, 2008 and 2007.

     Other Income, net:

		Years Ended March 31,
(In millions)		2009				2008				2007
By Segment
Distribution Solutions		$	(20	)		$	35			$	39
Technology Solutions			7				11				10
Corporate			25				75				83
Total		$	12			$	121			$	132

     In 2009, other income, net includes a pre-tax impairment charge of $63 million ($60 million after-tax) on two equity-held investments (as further described below) and a pre-tax gain of $24 million ($14 million after-tax) from the sale of our 42% equity interest in Verispan, L.L.C. (“Verispan,”) a data analytics company. The impairment charge and the gain on sale of our investment were both recorded within our Distribution Solutions segment. Excluding these items, other income, net decreased over the last two years primarily due to a decrease in interest income due to lower cash balances and interest rates. Interest income, which is primarily recorded in Corporate expenses, was $31 million, $89 million and $103 million in 2009, 2008 and 2007.

     We evaluate our investments for impairment when events or changes in circumstances indicate that the carrying values of such investment may have experienced an other than temporary decline in value. During the fourth quarter of 2009, we determined that the fair value of our interest in Parata was lower than its carrying value and that such impairment was other than temporary. Fair value was determined using a discounted cash flow analysis based on estimated future results and market capitalization rates. We determined the impairment was other than temporary based on our assessment of all relevant factors including a deterioration in the investee’s financial condition and weak market conditions. As a result, we recorded a pre-tax impairment of $58 million ($55 million after-tax) on this investment which is recorded within other income, net in the consolidated statements of operations. Our investment in Parata is accounted for under the equity method of accounting within our Distribution Solutions segment.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     In 2009, we also recorded a pre-tax impairment of $5 million ($5 million after-tax) on another equity-held investment within our Distribution Solutions segment.