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, 2008

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

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 whether 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 whether the registrant is not required to file reports pursuant to Section 13 or 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 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 Exchange 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 2007, was approximately $16.3 billion.

     Number of shares of common stock outstanding on April 30, 2008: 277,279,250

     Portions of the Registrant’s Proxy Statement for its 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

McKESSON CORPORATION

TABLE OF CONTENTS

		Item		Page
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			10
		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 Results of Operations and Financial Condition			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
EXHIBIT 10.2
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.19
EXHIBIT 12
EXHIBIT 21
EXHIBIT 23
EXHIBIT 24
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 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 18 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 (the “Exchange Act”), as amended, 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”) the leading pharmaceutical distributor 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)		2008								2007								2006
Distribution Solutions		$	98.7				97	%		$	90.7				98	%		$	85.1				98	%
Technology Solutions			3.0				3				2.3				2				1.9				2
Total		$	101.7				100	%		$	93.0				100	%		$	87.0				100	%

Distribution Solutions

     McKesson Distribution Solutions consists of the following businesses: McKesson U.S. Pharmaceutical, McKesson Canada, McKesson Medical-Surgical, McKesson Retail Automation and McKesson Specialty Distribution. We also own an approximate 49% interest in Nadro and an approximate 39% interest in Parata.

     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 other acute-care facilities and long-term care providers).

McKESSON CORPORATION

     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 the best product availability for our customers. For example, in all of our distribution centers we use Acumax® Plus, a Smithsonian award-winning technology, which integrates and tracks all internal 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 our customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% 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 Supply Management Online^SM, an Internet-based tool that provides item look-up and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. Together, these features help ensure that our 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. Furthermore, we continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers.

     Our U.S. pharmaceutical distribution business’ major value-added offerings, by customer group, include the following:

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

•		Central Fill — Prescription refill service that enables pharmacies to refill prescriptions remotely, faster, 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.
•		RxPakSM — Bulk repackaging service that leverages our purchasing power 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.

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

•		Health Mart® — Franchise program that provides independent pharmacies 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.
•		AccessHealth® — Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow.
•		McKesson OneStop Generics® — Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, lower up-front pricing and one-stop shopping.
•		Prefer Rx — Discount program that offers aggressive prices on more than 100 branded drugs, helping retail independent pharmacies increase margins and eliminate rebate paperwork.
•		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.

McKESSON CORPORATION

     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. Enables acute care, long-term care and institutional pharmacies to provide cost-effective, uniform packaging.
•		McKesson 340B Manager — Software solution that manages, tracks, and reports on the medication replenishment associated with the federal 340B Drug Pricing Program, helping institutional providers maximize their 340B return.
•		AccessHealth® — Expert service for third-party contracting and payment consolidation that helps institutional providers save time and accelerate reimbursement.
•		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 Tool and the High Performance Pharmacy Benchmarking Service enable hospital pharmacies to measure against comparable institutions and chart a step-by-step path to high performance.

     International Pharmaceutical Distribution: McKesson Canada, a wholly-owned subsidiary, is the largest pharmaceutical distributor 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.

     We also own an approximate 49% interest in Nadro, the leading pharmaceutical distributor in Mexico.

     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 the 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 the industry’s most extensive product offering, including our own private label line. This business also includes ZEE® Medical, North America’s leading provider 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 Retail Automation: This business supplies integrated pharmacy management systems and services to retail and institutional outpatient pharmacies as well as payors. We also own an approximate 39% interest in Parata which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies.

     McKesson Specialty Distribution: This business’ product-specific solutions are directed towards manufacturers, payors and physicians to enable delivery and administration of high-cost, often injectable, bio-pharmaceutical drugs used to treat patients with chronic disease. The business facilitates patient and provider access to specialty pharmaceuticals across multiple delivery channels (direct-to-physician wholesale, patient-direct specialty pharmacy dispensing and access to retail pharmacy), provides clinical support and treatment compliance programs that help patients stay on complex therapies and offers reimbursement, data collection and analysis services.

McKESSON CORPORATION

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 markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payors. This segment also includes our Payor group of businesses, which includes our InterQual® and clinical auditing and compliance software businesses and our disease and medical management programs. 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.

     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.

McKESSON CORPORATION

     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.

     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.

     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.

     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.

     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 workflow;
•		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 payment.

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 3 to the consolidated financial statements, “Acquisitions and Investments” and “Discontinued Operations,” appearing in this Annual Report on Form 10-K.

McKESSON CORPORATION

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 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.

     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™, Fulfill-Rx™, Health Mart®, High Performance Pharmacy^SM, LoyaltyScript^SM, 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®, 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®, CarePoint-RN™, Connect-RN™, Connect-Rx®, CRMS®, DataStat®, ePremis®, Episode Profiler®, E-Script™, Fulfill-Rx^SM, HealthQuest®, Horizon Admin-Rx™, Horizon Clinicals®, HorizonWP®, InterQual®, Lytec®, MedCarousel®, Medisoft™, One-Call®, One-Staff^®, ORSOS™, PACMED™, Pak Plus-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.

McKESSON CORPORATION

Other Information About the Business

     Customers: In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2008, sales to our ten largest customers accounted for approximately 53% 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 13% of our total consolidated revenues. At March 31, 2008, accounts receivable from our ten largest customers were approximately 43% of total accounts receivable. Accounts receivable from Caremark and Rite Aid were approximately 12% and 11% 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 2008. 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 2008 accounted for approximately 48% 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. In 2008 and 2007, we benefited from certain branded manufacturers’ price increases on selected drugs.

     Research and Development: Our development expenditures primarily consist of our investment in software development held for sale. We expended $420 million, $359 million and $285 million for development activities in 2008, 2007 and 2006, and of these amounts, we capitalized 17%, 21% and 22%. 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 to the consolidated financial statements, “Significant Accounting Policies,” 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 17 to the consolidated financial statements, “Other Commitments and Contingent Liabilities,” 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 2008 and is not expected to be material in the next year.

     Employees: On March 31, 2008, we employed approximately 32,900 persons compared to 31,800 in 2007 and 26,400 in 2006.

     Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic operations is included in Financial Notes 1 and 21 to the consolidated financial statements, “Significant Accounting Policies” and “Segments of Business,” appearing in this Annual Report on Form 10-K.

McKESSON CORPORATION

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 49 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. 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 12 to the consolidated financial statements, “Lease Obligations,” 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 17 to our consolidated financial statements, “Other Commitments and Contingent Liabilities,” appearing in this Annual Report on Form 10-K.

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, 2008.

McKESSON CORPORATION

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			49			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 – 12 years.
Jeffrey C. Campbell			47			Executive Vice President and Chief Financial Officer since April 2004; Senior Vice President and Chief Financial Officer from December 2003 to April 2004. Senior Vice President and Chief Financial Officer, AMR Corporation (2002-2003). Service with the Company – 4 years.
Paul C. Julian			52			Executive Vice President, Group President since April 2004; Senior Vice President from August 1999 to April 2004; President of the Distribution Solutions business since March 2000. Service with the Company – 12 years.
Paul E. Kirincic			57			Executive Vice President, Human Resources since April 2004; Senior Vice President, Human Resources from January 2001 to April 2004. Service with the Company – 7 years.
Marc E. Owen			48			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 – 7 years.
Pamela J. Pure			47			Executive Vice President, President, McKesson Technology Solutions (formerly, McKesson Provider Technologies) since April 2004; Chief Operating Officer of McKesson Information Solutions from January 2002 to April 2004. Service with the Company – 7 years.
Laureen E. Seeger			46			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 – 8 years.
Randall N. Spratt			56			Executive Vice President, Chief Information Officer since July 2005; 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 – 22 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 22 to the consolidated financial statements, “Quarterly Financial Information (Unaudited),” 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, 2008 was approximately 9,500.
(c)		Dividends: Dividend information is included in Financial Note 22 to the consolidated financial statements, “Quarterly Financial Information (Unaudited),” 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, which will apply to ensuing quarterly dividend declarations until further action by the Board.
(d)		Share Repurchase Plans: The following table provides information on the Company’s share repurchases during the fourth quarter of 2008:

		Share Repurchases (1)
														Approximate
										Total Number of				Dollar Value of
										Shares Purchased				Shares that May
										As Part of Publicly				Yet Be Purchased
		Total Number of				Average Price Paid				Announced				Under the
(In millions, except price per share)		Shares Purchased				Per Share				Program				Programs
January 1, 2008 – January 31, 2008			—			$	—				—			$	1,086
February 1, 2008 – February 29, 2008			8				58.64				8				630
March 1, 2008 – March 31, 2008			5				57.42				5				314
Total			13				58.14				13				314

(1)

This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.

     In April and September 2007, the Board approved two new plans to repurchase up to $2.0 billion of the Company’s common stock ($1.0 billion per plan). In 2008, we repurchased a total of 28 million shares for $1,686 million, fully utilizing the April 2007 plan, leaving $314 million remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase an additional $1.0 billion of the Company’s common stock. Stock repurchases may be made from time-to-time in open market or private transactions.

McKESSON CORPORATION

(e)

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,
		2003				2004				2005				2006				2007				2008
McKesson Corporation		$	100.00			$	121.66			$	153.74			$	213.39			$	240.76			$	216.23
S&P 500 Index		$	100.00			$	135.12			$	144.16			$	161.07			$	180.13			$	170.98
Value Line Healthcare Sector Index		$	100.00			$	117.09			$	122.89			$	138.67			$	146.74			$	137.80

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 Results of Operations and Financial Condition

     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 defined in the 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 Rules 13a-15(f) and 15d-15(f) in the Exchange Act), and the related report of our independent registered public accounting firm, are included on page 58 and page 59 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 2008 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 20, 2007, 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 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 Governance tab.

     Copies of these documents may be obtained from:

Corporate Secretary
McKesson Corporation
One Post Street, 35^th 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, 2008 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

the first column )

Equity compensation plans approved by security holders(1)

16.5

$

55.25

21.4

(2)

Equity compensation plans not approved by security holders(3),(4)

9.5

36.11

—

     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 initially provided for the grant of up to 13 million shares in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance shares and other share-based awards. The 2005 Stock Plan was subsequently amended by the Board of Directors on May 23, 2007 to increase the common stock reserved for issuance by 15 million shares, which was approved by stockholders on July 25, 2007. For any one share of common stock issued in connection with a stock-settled stock appreciation right, restricted stock award, restricted stock unit award, performance share 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 appreciation right or 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.

     Options are granted at not less than fair market value and have a term of seven 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 award or vesting of restricted stock, restricted stock units (“RSUs”) or performance based RSUs may be conditioned upon the attainment of one or more performance objectives. Vesting of such awards is generally a three year cliff.

     Non-employee directors receive an annual grant of up to 5,000 RSUs, which vest immediately; however, payment of any shares is delayed until the director is no longer performing services for the Company. The 2005 Stock Plan replaced the 1997 Non-Employee Directors Equity Compensation and Deferral Plan.

     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 so qualify under Section 423 of the Internal Revenue Code. Currently, 16.1 million shares have been approved by stockholders for issuance under the ESPP.

McKESSON CORPORATION

     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, the Stock Option Plans adopted in January 1999 and August 1999, 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, restricted stock and RSUs. Stock options under the terminated plans generally have a ten-year life and vest over four years. Restricted stock 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 related party 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 2009” 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
Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm See “Index to Consolidated Financial Information”			25
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

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 7, 2008

McKESSON CORPORATION

SCHEDULE II

SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 31, 2008, 2007 and 2006
(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, 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
Year Ended March 31, 2006
Allowances for doubtful accounts		$	113			$	26	(5)		$	23			$	(38	) (5)		$	124
Other allowances			3				3				1				—				7
		$	116			$	29			$	24			$	(38	)		$	131

		2008				2007				2006
(1)  Deductions:
Written off		$	32			$	24			$	23
Credited to other accounts			2				—				15	(5)
Total		$	34			$	24			$	38
(2)  Amounts shown as deductions from receivables		$	172			$	150			$	131

McKESSON CORPORATION

EXHIBIT INDEX

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

						Incorporated by Reference
Exhibit								File
Number				Description		Form		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 January 4, 2007.		8-K		1-13252			3.1			January 8, 2007
	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			Amended and Restated Declaration of Trust of McKesson Financing Trust, dated as of February 20, 1997, among the Company, The First National Bank of Chicago, as Institutional Trustee, First Chicago, Inc., as Delaware Trustee, and the Regular Trustees.		S-3		333-26443			4.2			June 18, 1997
	4.3			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
	4.4			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			Letter Agreement, dated January 11, 2005, and Annex A (Stipulation and Agreement of Settlement between Lead Plaintiff and Defendants McKesson HBOC, Inc. and HBO & Company) thereto in connection with the consolidated securities class action.		8-K		1-13252			99.1			January 18, 2005
	10.2*			McKesson Corporation 1999 Stock Option and Restricted Stock Plan, as amended through May 26, 2004.		—		—			—			—
	10.3*			Statement of Terms and Conditions Applicable to certain Stock Options granted on August 16, 1999.		10-K		1-13252			10.38			June 13, 2000
	10.4*			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
	10.5*			McKesson Corporation Supplemental Profit Sharing Investment Plan, as amended and restated as of January 29, 2003.		10-K		1-13252			10.6			June 6, 2003
	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.		—		—			—			—

McKESSON CORPORATION

Incorporated by Reference

Exhibit

File

Number

Description

Form

Number

Exhibit

Filing Date

10.8* †

McKesson Corporation Deferred Compensation Administration Plan III, effective January 1, 2005, including Amendment No. 1 thereto effective July 25, 2007.

—

—

—

—

10.9*

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

10-K

1-13252

10.8

May 13, 2005

10.10*

McKesson Corporation Management Deferred Compensation Plan, as amended and restated as of October 28, 2004.

10-K

1-13252

10.9

May 13, 2005

10.11*

McKesson Corporation Executive Benefit Retirement Plan, as amended and restated as of May 22, 2007.

10-Q

1-13252

10.2

July 30, 2007

10.12*

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

10-K

1-13252

10.11

May 13, 2005

10.13*

McKesson Corporation Severance Policy for Executive Employees, as amended and restated January 1, 2005.

10-Q

1-13252

10.13

November 1, 2006

10.14*

McKesson Corporation 2005 Management Incentive Plan, as amended and restated effective as of October 27, 2006.

10-Q

1-13252

10.14

November 1, 2006

10.15*

McKesson Corporation Long-Term Incentive Plan, as amended and restated as of January 1, 2005.

10-Q

1-13252

10.15

November 1, 2006

10.16*

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

10-K

1-13252

10.19

June 6, 2003

10.17*

Statement of Terms and Conditions Applicable to Certain Stock Options Granted on January 27, 1999.

10-K

1-13252

10.28

July 16, 1999

10.18*

Form of Restricted Stock Unit Agreement under the 2005 Stock Plan.

10-K

1-13252

10.19

May 16, 2006

10.19*

Statement of Terms and Conditions Applicable to Restricted Stock Units Granted to Outside Directors Pursuant to the 2005 Stock Plan, effective July 27, 2007.

—

—

—

—

10.20*

Form of Stock Option Grant Notice under the 2005 Stock Plan.

10-K

1-13252

10.20

May 16, 2006

10.21*

McKesson Corporation 2005 Stock Plan, as amended and restated on July 25, 2007.

10-Q

1-13252

10.1

October 31, 2007

10.22*

Statement of Terms and Conditions Applicable to Options, Restricted Stock, Restricted Stock Units and Performance Shares Granted to Employees Pursuant to the 2005 Stock Plan, effective April 25, 2006.

10-K

1-13252

10.23

May 16, 2006

10.23*

Statement of Terms and Conditions Applicable to Officers Pursuant to the 2005 Stock Plan.

8-K

1-13252

10.1

May 26, 2006

10.24*

Statement of Terms and Conditions Applicable to the Chief Executive Officer Pursuant to the 2005 Stock Plan.

8-K

1-13252

10.2

May 26, 2006

McKESSON CORPORATION

Incorporated by Reference

Exhibit

File

Number

Description

Form

Number

Exhibit

Filing Date

10.25 †††

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

10.26

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

10.27

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

10.28

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

10.29

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

10.30

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

10.31*

Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Chairman, President and Chief Executive Officer.

10-Q

1-13252

10.30

November 11, 2006

10.32*

Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Executive Vice President and President, McKesson Technology Solutions.

10-Q

1-13252

10.31

January 30, 2007

McKESSON CORPORATION

						Incorporated by Reference
Exhibit								File
Number				Description		Form		Number		Exhibit				Filing Date
	10.33*			Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Executive Vice President and Group President.		10-Q		1-13252			10.32			January 30, 2007
	10.34*			McKesson Corporation Change in Control Policy for Selected Executive Employees, effective as of November 1, 2006.		10-Q		1-13252			10.33			November 1, 2006
	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			58
Report of Independent Registered Public Accounting Firm			59
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended March 31, 2008, 2007 and 2006			60
Consolidated Balance Sheets as of March 31, 2008 and 2007			61
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2008, 2007 and 2006			62
Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007 and 2006			63
Financial Notes			64

McKESSON CORPORATION

FIVE-YEAR HIGHLIGHTS

		As of and for the Years Ended March 31,
(In millions, except per share amounts and ratios)		2008				2007				2006				2005				2004
Operating Results
Revenues		$	101,703			$	92,977			$	86,983			$	79,096			$	67,993
Percent change			9.4	%			6.9	%			10.0	%			16.3	%			22.0	%
Gross profit			5,009				4,332				3,777				3,342				3,107
Income (loss) from continuing operations before income taxes			1,457				1,297				1,171				(266	)			869
Income (loss) after income taxes
Continuing operations			989				968				745				(173	)			621
Discontinued operations			1				(55	)			6				16				26
Net income (loss)			990				913				751				(157	)			647
Financial Position
Working capital			2,438				2,730				3,527				3,658				3,706
Days sales outstanding for: (1)
Customer receivables			22				21				22				23				25
Inventories			33				32				29				34				36
Drafts and accounts payable			44				43				41				40				40
Total assets			24,603				23,943				20,961				18,775				16,240
Total debt, including capital lease obligations			1,797				1,958				991				1,211				1,485
Stockholders’ equity			6,121				6,273				5,907				5,275				5,165
Property acquisitions			195				126				166				135				110
Acquisitions of businesses, net			610				1,938				589				76				49
Common Share Information
Common shares outstanding at year-end			277				295				304				299				290
Shares on which earnings (loss) per common share were based
Diluted			298				305				316				294				299
Basic			291				298				306				294				290
Diluted earnings (loss) per common share (2)
Continuing operations		$	3.32			$	3.17			$	2.36			$	(0.59	)		$	2.10
Discontinued operations			—				(0.18	)			0.02				0.06				0.09
Total			3.32				2.99				2.38				(0.53	)			2.19
Cash dividends declared			70				72				74				71				70
Cash dividends declared per common share			0.24				0.24				0.24				0.24				0.24
Book value per common share (3)			22.10				21.26				19.43				17.64				17.81
Market value per common share — year end			52.37				58.54				52.13				37.75				30.09
Supplemental Data
Capital employed (4)			7,918				8,231				6,898				6,486				6,650
Debt to capital ratio (5)			22.7	%			23.8	%			14.4	%			18.7	%			22.3	%
Net debt to net capital employed (6)			6.6	%			0.1	%			(24.1	)%			(12.6	)%			13.1	%
Average stockholders’ equity (7)			6,344				6,022				5,736				5,264				4,835
Return on stockholders’ equity (8)			15.6	%			15.2	%			13.1	%			(3.0	)%			13.4	%

Footnotes to Five-Year Highlights:

McKESSON CORPORATION

FINANCIAL REVIEW

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

GENERAL

     Management’s discussion and analysis of results of operations and financial condition, 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.

     In April 2007, we reconfigured our operating segments to better align product development and selling efforts with the evolving needs of the healthcare market, resulting in the following operating segments: Distribution Solutions and Technology Solutions. See Financial Note 21 to the accompanying consolidated financial statements, “Segments of Business,” for a description of these segments. All periods presented have been reclassified to conform to the April 2007 changes in our organization.

RESULTS OF OPERATIONS

     Overview:

		Years Ended March 31,
(In millions, except per share data)		2008				2007				2006
Revenues		$	101,703			$	92,977			$	86,983
Securities Litigation pre-tax credits (charge), net			5				6				(45	)
Income from Continuing Operations Before Income Taxes		$	1,457			$	1,297			$	1,171
Income Tax Provision			(468	)			(329	)			(426	)
Income from Continuing Operations			989				968				745
Discontinued Operations, net			1				(55	)			6
Net Income		$	990			$	913			$	751
Diluted Earnings Per Share
Continuing Operations		$	3.32			$	3.17			$	2.36
Discontinued Operations			—				(0.18	)			0.02
Total		$	3.32			$	2.99			$	2.38

     Revenues increased 9% to $101.7 billion and 7% to $93.0 billion in 2008 and 2007. The increase in revenues primarily reflects market growth rates in our Distribution Solutions segment, which accounted for 97% of our consolidated revenues. Revenues for 2008 also benefited from our acquisitions of Oncology Therapeutics Network (“OTN”) in October 2007 and Per-Se Technologies, Inc. (“Per-Se”) in January 2007. Revenues for 2007 also benefited from our acquisition of D&K Healthcare Resources, Inc. (“D&K”) in August 2005.

     Gross profit increased 16% to $5.0 billion in 2008 and 15% to $4.3 billion in 2007. As a percentage of revenues, gross profit increased 27 basis points (“bp”) to 4.93% in 2008 and 32 bp to 4.66% in 2007. The increase in our 2008 gross profit margin primarily reflects a greater proportion of higher margin Technology Solutions products and an improvement in our Distribution Solutions’ segment margin. The increase in our 2007 gross profit margin primarily reflects improvement in our U.S. pharmaceutical distribution business, including a decrease in our receipt of antitrust class action lawsuits settlements. Our 2008, 2007 and 2006 gross profit includes the receipt of $14 million, $10 million and $95 million of cash proceeds representing our share of settlements of antitrust class action lawsuits.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Operating expenses were $3.5 billion, $3.1 billion and $2.7 billion in 2008, 2007 and 2006. Operating expenses increased 15% in 2008 and 16% in 2007 primarily reflecting additional operating expenses incurred to support our sales growth, expenses associated with our business acquisitions and higher employee compensation expenses including expenses for share-based compensation. Additionally, operating expenses for 2007 were impacted by a decrease in charges associated with our Securities Litigation. Operating expenses for 2008, 2007 and 2006 include pre-tax credits of $5 million and $6 million and pre-tax charges of $45 million for our Securities Litigation.

     Other income, net decreased in 2008 primarily reflecting a decrease in interest income due to lower cash balances and lower interest rates. Other income, net in 2007 approximated that of 2006.

     Interest expense increased 43% to $142 million in 2008 primarily reflecting the issuance of $1.0 billion of long-term debt as part of our $1.8 billion acquisition of Per-Se. Interest expense increased 5% to $99 million in 2007.

     Income from continuing operations before income taxes was $1,457 million, $1,297 million and $1,171 million in 2008, 2007 and 2006, reflecting the above noted factors.

     Our reported income tax rates were 32.1%, 25.4% and 36.4% in 2008, 2007 and 2006. 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. Additionally, 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. The tax reserves were initially established in 2005 and were favorably resolved in 2007.

     In 2007, 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. Financial results for the Acute Care business have been reclassified as a discontinued operation for all periods presented. Results from discontinued operations for 2008 and 2006 were $1 million and $6 million after-tax, or nil and $0.02 per diluted share.

     Net income was $990 million, $913 million and $751 million in 2008, 2007 and 2006 and diluted earnings per share was $3.32, $2.99 and $2.38. Excluding the Securities Litigation charges or credit, net income would have been $987 million, $826 million and $781 million in 2008, 2007 and 2006 and diluted earnings per share would have been $3.31, $2.71 and $2.48 (see reconciliation on page 37).

     Revenues:

		Years Ended March 31,
(In millions)		2008				2007				2006
Distribution Solutions
U.S. pharmaceutical direct distribution & services		$	60,436			$	54,127			$	51,730
U.S. pharmaceutical sales to customers’ warehouses			27,668				27,555				25,462
Subtotal			88,104				81,682				77,192
Canada pharmaceutical distribution & services			8,106				6,692				5,910
Medical-Surgical distribution & services			2,509				2,364				2,037
Total Distribution Solutions			98,719				90,738				85,139
Technology Solutions
Services			2,240				1,537				1,217
Software and software systems			591				536				476
Hardware			153				166				151
Total Technology Solutions			2,984				2,239				1,844
Total Revenues		$	101,703			$	92,977			$	86,983

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Revenues increased 9% to $101.7 billion in 2008 and 7% to $93.0 billion in 2007. The growth in revenues was primarily driven by our Distribution Solutions segment, which accounted for 97% of revenues.

     U.S. pharmaceutical direct distribution and service revenues increased in 2008 primarily reflecting market growth rates, new and expanded business and to a lesser extent, due to our acquisition of OTN. During the third quarter of 2008, we acquired OTN, a U.S. distributor of specialty pharmaceuticals. In 2007, revenues increased primarily reflecting market growth rates, expanded business and to a lesser extent, due to our acquisition of D&K. These increases were partially offset by the loss of OTN as a customer. During the second quarter of 2006, we acquired D&K, a wholesale distributor of branded and generic pharmaceuticals and over-the-counter health and beauty products to independent and regional pharmacies, primarily in the Midwest. Market growth rates reflect growing drug utilization and price increases, which are offset in part by the increased use of lower priced generics.

     U.S. pharmaceutical sales to customers’ warehouses increased over the last two years primarily as a result of new and expanded agreements with customers. In 2008, these increases were partially offset by a customer’s loss of a customer 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 have significantly lower gross profit margin 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:

		2008				2007				2006
Direct Sales
Independents			13	%			13	%			12	%
Institutions			30				29				32
Retail Chains			24				23				22
Subtotal			67				65				66
Sales to retail customers’ warehouses			33				35				34
Total			100	%			100	%			100	%

     From 2006 to 2007, the percentage of total revenue direct and warehouse attributed to the Company’s retail chain customers has grown faster than our other customer groups. This growth has resulted in a negative impact on the Company’s gross profit margin as the retail chain customer group typically has lower gross profit margins as compared to our other customer groups. From 2007 to 2008, the percentage of total direct and warehouse revenue attributed to the Company’s retail chain customers grew slower than 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 has 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 revenues increased over the last two years primarily reflecting market growth rates and favorable foreign exchange rates. Additionally in 2008, these revenues benefited from new and expanded business, partially offset by six fewer days of sales compared to 2007. Canadian revenues benefited from a 12%, 5% and 7% foreign currency impact in 2008, 2007 and 2006.

     Medical-Surgical distribution and services revenues increased in 2008 primarily reflecting market growth rates and an acquisition, partially offset by the discontinuance of the distribution of a product line. Revenues associated with this product line are now recorded by our U.S. pharmaceutical distribution business. In 2008, these revenues were partially offset by one less week of sales compared to 2007. In 2007, revenues increased primarily reflecting stronger than average market growth rates and due to the acquisition of Sterling Medical Services LLC (“Sterling”) during the first quarter of 2007. Sterling is a national provider and distributor of disposable medical supplies, health management services and quality management programs to the home care market.

     Technology Solutions revenues increased in 2008 primarily due to the acquisition of Per-Se and increased services revenues, primarily reflecting the segment’s expanded customer bases and clinical software implementations. During the fourth quarter of 2007, we acquired Per-Se, a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies. In 2007, revenues for this segment benefited from increased clinical software implementations and to a lesser extent, our acquisition of Per-Se.

     Gross Profit:

		Years Ended March 31,
(Dollars in millions)		2008				2007				2006
Gross Profit
Distribution Solutions		$	3,586			$	3,252			$	2,883
Technology Solutions			1,423				1,080				894
Total		$	5,009			$	4,332			$	3,777
Gross Profit Margin
Distribution Solutions			3.63	%			3.58	%			3.39	%
Technology Solutions			47.69				48.24				48.48
Total			4.93				4.66				4.34

     Gross profit increased 16% to $5.0 billion in 2008 and 15% to $4.3 billion in 2007. As a percentage of revenues, gross profit increased 27 bp in 2008 and 32 bp in 2007. 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’s margin. Gross profit margin increased in 2007 primarily due to an increase in our Distribution Solutions segment’s gross profit margin.

     In 2008, our Distribution Solutions segment’s gross profit margin increased slightly from that of the prior year. 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 retail automation group and an increase associated with a smaller proportion of revenues within the segment attributed to sales to customers’ warehouses. These increases were partially offset by a decline in sell margin and last-in, first-out (“LIFO”) inventory credits ($14 million in 2008 compared with $64 million in 2007).

     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 2006 to 2007 the percentage of total direct and warehouse revenue attributed to our retail chain customers, grew faster than our other customer groups. This change resulted in a negative impact on the Company’s gross profit margin as this customer group typically has lower margins as compared to our other customer groups. From 2007 to 2008, the percentage of total direct and warehouse revenue attributed to our retail chain customers grew slower than our other customer groups. This decline resulted in a positive impact on the Company’s gross profit margin.

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 do 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” included in this Financial Review.

     In 2007, our Distribution Solutions segment’s gross profit margin increased compared to the prior year. Gross profit margin was impacted by higher buy side margins, the benefit of increased sales of generic drugs with higher margins and an increase in LIFO inventory credits ($64 million in 2007 compared with $32 million in 2006). In addition, gross profit margin benefited from a relatively stable sell side margin. Partially offsetting these increases was a decrease associated with antitrust settlements ($10 million in 2007 compared with $95 million in 2006), $15 million of impairment charges associated with the write-down of certain abandoned assets within our retail automation group and a decrease associated with a larger proportion of revenues within the segment attributed to sales to customers’ warehouses.

     During the first quarter of 2007, we contributed $36 million in cash and $45 million in net assets primarily from our Automated Prescription Systems 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 believe the fair value of our investment in Parata approximates the carrying value of consideration contributed to Parata. Our investment in Parata is accounted for under the equity method of accounting within our Distribution Solutions segment.

     Technology Solutions segment’s gross profit margin decreased primarily reflecting a change in product mix. In 2008, this segment’s product mix included a higher proportion of lower margin Per-Se service revenues. Partially offsetting this decrease, 2008 gross profit margin was positively impacted by the recognition of $21 million of disease management deferred revenues for a contract for which expenses associated with these revenues were previously recognized as incurred.

     Operating Expenses:

		Years Ended March 31,
(Dollars in millions)		2008				2007				2006
Operating Expenses
Distribution Solutions		$	2,138			$	1,896			$	1,673
Technology Solutions			1,115				884				720
Corporate			283				294				213
Subtotal			3,536				3,074				2,606
Securities Litigation (credits) charge, net			(5	)			(6	)			45
Total		$	3,531			$	3,068			$	2,651
Operating Expenses as a Percentage of Revenues
Distribution Solutions			2.17	%			2.09	%			1.97	%
Technology Solutions			37.37				39.48				39.05
Total			3.47				3.30				3.05

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Operating expenses increased 15% to $3.5 billion in 2008 and 16% to $3.1 billion in 2007. Operating expenses for 2008, 2007 and 2006 include pre-tax credits of $5 million and $6 million and a pre-tax charge of $45 million for our Securities Litigation. Excluding the impact of our Securities Litigation, operating expenses increased 15% and 18% in 2008 and 2007. Operating expenses as a percentage of revenues increased 17 bp to 3.47% in 2008 and 25 bp to 3.30% in 2007 (or 17 bp and 31 bp in 2008 and 2007, excluding the impact of our Securities Litigation). Excluding the Securities Litigation credits, increases in operating expenses primarily reflect additional operating expenses incurred to support our sales growth, expenses associated with our business acquisitions, and higher employee compensation expenses including expenses for share-based compensation, research and development expenses, foreign currency exchange rates and higher bad debt expense.

     Operating expenses included the following significant items:

2008

–		$91 million of share-based compensation expense or $31 million more than the previous year. On April 1, 2006, 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. The incremental compensation expense was recorded as follows: $9 million and $16 million in our Distribution Solutions and Technology Solutions segments, and $6 million in Corporate expenses,
		Due to the accelerated vesting of share-based awards prior to 2007, we anticipate the impact of SFAS No. 123(R) to increase in significance as future awards of share-based compensation are granted and amortized over the requisite service period. Share-based compensation charges are affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. These variables include, but are not limited to, the volatility of our stock price, employee stock option exercise behavior, timing, level and types of our grants of annual share-based awards, the attainment of performance goals and actual forfeiture rates. As a result, the actual future share-based compensation expense may differ from historical levels of expense. Information regarding our share based payments is included in Financial Note 19 to the consolidated financial statements, “Share-Based Payment,” appearing in this Annual Report on Form 10-K,
–		$14 million of restructuring charges primarily associated with the abandonment of a Technology Solutions software project, the closure of two Distribution Solutions’ segment distribution centers and the integration of OTN. An additional $5 million of these expenses were recorded to cost of sales. Information regarding our restructuring activities is included in Financial Note 4 to the consolidated financial statements, “Restructuring Activities,” appearing in this Annual Report on Form 10-K,
–		$13 million increase in a legal reserve. During the third quarter of 2008, we engaged in discussions with a governmental agency to settle claims arising out of an inquiry. As a result of these settlement discussions, we recorded an increase in a legal reserve of $13 million within our Distributions Solutions segment. These claims were settled in May 2008 consistent with this reserve. This reserve is not tax deductible, and
–		$8 million of severance expense associated with the realignment of our Technology Solutions workforce. An additional $2 million of severance expense was recorded to cost of sales. Although such actions do not constitute a restructuring plan, they represent independent actions taken from time to time, as appropriate.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

2007

–		$60 million of share-based compensation expense, or $44 million more than the previous year. The incremental compensation expense was recorded as follows: $13 million and $18 million in our Distribution Solutions and Technology Solutions segments, and $13 million in Corporate expenses,
–		$15 million of severance restructuring expense primarily to reallocate product development and marketing resources and to realign one of the international businesses within our Technology Solutions segment, and
–		an $11 million credit to our Distribution Solution’s operating expenses due to a favorable adjustment to a legal reserve.

2006

–		a $45 million net charge for our Securities Litigation and a decrease in legal expenses associated with the litigation which were both recorded in Corporate expenses, and
–		a $15 million credit to our Distribution Solutions’ bad debt expense due to a recovery of a previously reserved customer account.

     Other Income, net:

		Years Ended March 31,
(In millions)		2008				2007				2006
By Segment
Distribution Solutions		$	35			$	39			$	40
Technology Solutions			11				10				13
Corporate			75				83				86
Total		$	121			$	132			$	139

     Other income, net decreased in 2008 primarily reflecting a decrease in interest income due to lower cash balances and lower interest rates. Other income, net in 2007 approximated that of 2006. Interest income, which is primarily recorded in Corporate expenses, was $89 million, $103 million and $105 million in 2008, 2007 and 2006.

     Segment Operating Profit and Corporate Expenses:

		Years Ended March 31,
(Dollars in millions)		2008				2007				2006
Segment Operating Profit
Distribution Solutions		$	1,483			$	1,395			$	1,250
Technology Solutions			319				206				187
Subtotal			1,802				1,601				1,437
Corporate Expenses, net			(208	)			(211	)			(127	)
Securities Litigation credit (charge), net			5				6				(45	)
Interest Expense			(142	)			(99	)			(94	)
Income from Continuing Operations Before Income Taxes		$	1,457			$	1,297			$	1,171
Segment Operating Profit Margin
Distribution Solutions			1.50	%			1.54	%			1.47	%
Technology Solutions			10.69				9.20				10.14

     Segment operating profit includes gross margin, net of operating expenses, and other income for our two operating segments. Operating profit increased in 2008 primarily reflecting revenue growth and improved operating profit in both of our segments and for 2007, primarily reflecting revenue growth and improved operating profit in our Distribution Solutions segment.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Operating profit as a percentage of revenues in our Distribution Solutions segment decreased slightly in 2008 primarily reflecting higher operating expenses as a percentage of revenues, partially offset by improved gross profit margin. Operating expenses increased in both dollars and as a percentage of revenues primarily due to a $13 million increase in a legal reserve, our acquisition of OTN, which has a higher ratio of operating expenses as a percentage of revenues and, to a lesser extent, an increase in share-based compensation. Increases in operating expenses were also due to additional costs incurred to support our sales volume growth. Share-based compensation expense for this segment was $26 million and $17 million for 2008 and 2007.

     Operating profit as a percentage of revenues in our Distribution Solutions segment increased in 2007 primarily reflecting an increase in gross profit margin, offset in part by an increase in operating expenses as a percentage of revenues. Operating expenses increased in both dollars and as a percentage of revenues primarily due to additional compensation expense, our acquisition of D&K which had a higher ratio of operating expenses as a percentage of revenues, an increase in bad debt expense and, to a lesser extent, due to an increase in share-based compensation. These increases were partially offset by an $11 million credit to operating expense due to an adjustment to a legal reserve. Increases in operating expenses were also due to additional costs incurred to support our sales volume growth. In 2006, operating profit benefited from a $15 million credit to bad debt expense due to a recovery on a previously reserved customer account. Share-based compensation expense for this segment was $17 million and $4 million for 2007 and 2006.

     Operating profit as a percentage of revenues in our Technology Solutions segment increased during 2008 primarily due to a decrease in operating expenses as a percentage of revenues partially offset by a decrease in gross profit margin. Operating expenses as a percentage of revenues were favorably impacted by the acquisition of Per-Se which has a lower ratio of operating expenses as a percentage of revenues. This decrease was partially offset by an increase in share-based compensation and bad debt expense. Operating expenses increased primarily due to business acquisitions, including Per-Se, investments in research and development activities and additional share-based compensation. Share-based compensation expense for this segment was $35 million and $19 million for 2008 and 2007.

     Operating profit as a percentage of revenues in our Technology Solutions segment decreased during 2007 primarily due to a decrease in gross profit margin as well as an increase in operating expenses as a percentage of revenues. Operating expenses increased in both dollars and as a percentage of revenues primarily reflecting additional compensation expense, including share-based compensation, severance charges incurred to reallocate product development and marketing resources and to realign one of the segment’s international businesses and investments in research and development activities. Share-based compensation expense for this segment was $19 million and $1 million for 2007 and 2006.

     Corporate expenses, net of other income, decreased in 2008 and increased in 2007. Corporate expenses, net of other income, reflect additional costs incurred to support various initiatives and our revenue growth, an increase in share-based compensation and a decrease in interest income. For 2008, these increases were fully offset by a decrease in legal expenses associated with our Securities Litigation, a decrease in charitable contributions and a decrease in other long-term compensation. Legal expenses associated with our Securities Litigation declined in 2007; however, other legal costs offset this benefit. Legal expenses associated with our Securities Litigation were $4 million, $19 million and $27 million in 2008, 2007 and 2006. Share-based compensation expense for Corporate was $30 million, $24 million and $11 million in 2008, 2007 and 2006.

     Securities Litigation Credit/(Charge), Net: We recorded net credits of $5 million and $6 million in 2008 and 2007 and net charges of $45 million in 2006 relating to various settlements for our Securities Litigation. Recent developments pertaining to our Securities Litigation are described in Financial Note 17, “Other Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     Interest Expense: Interest expense increased in the last two years primarily due to $1.0 billion of long-term debt issued in the fourth quarter of 2007 to fund our acquisition of Per-Se. Refer to our discussion under the caption “Credit Resources” within this Financial Review for additional information regarding our financing for the Per-Se acquisition.

     Income Taxes: Our reported tax rates were 32.1%, 25.4% and 36.4% in 2008, 2007 and 2006. In addition to the items noted below, fluctuations in our reported tax rate are primarily due to changes within state and foreign tax rates resulting from our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates.

     In 2008, the U.S. Internal Revenue Service (“IRS”) completed an examination of our consolidated income tax returns for 2000 to 2002 resulting in a signed Revenue Agent Report (“RAR”), which was approved by the Joint Committee on Taxation during the third quarter. The IRS and the Company have agreed to certain adjustments, primarily related to transfer pricing and income tax credits. As a result of the approved RAR, we recognized approximately $25 million of net federal and state income tax benefits. We are in the process of amending state income tax returns for 2000 to 2002 to reflect the IRS settlement. We recorded the anticipated state tax impact of the IRS examination in our 2008 income tax provision and do not anticipate any material impact when the final amended state tax returns have been completed. In Canada, we received an assessment from the Canada Revenue Agency for a total of $9 million related to transfer pricing for 2003. We plan to further pursue this issue and will appeal the assessment. We believe we have adequately provided for any potential adverse results for 2003 and future years. During 2008, we have also favorably concluded various foreign examinations, which resulted in the recognition of approximately $4 million of income tax benefits. In nearly all jurisdictions, the tax years prior to 1999 are no longer subject to examination. We believe that we have made adequate provision for all remaining income tax uncertainties. Income tax expense for 2008 was also impacted by a non-tax deductible $13 million increase in a legal reserve.

     In 2007, we recorded a credit to current income tax expense of $83 million, which primarily pertained to our receipt of a private letter ruling from the IRS holding that our payment of approximately $960 million to settle our Consolidated Securities Litigation Action (refer to Financial Note 17, “Other Commitments and Contingent Liabilities” of the accompanying consolidated financial statements) is fully tax-deductible. We previously established tax reserves to reflect the lack of certainty regarding the tax deductibility of settlement amounts paid in the Consolidated Securities Litigation Action and related litigation. In 2007, we also recorded $24 million in income tax benefits arising primarily from settlements and adjustments with various taxing authorities and research and development investment tax credits from our Canadian operations.

     In 2006, we made a $960 million payment into an escrow account relating to the Consolidated Securities Litigation Action. This payment was deducted in our 2006 income tax returns and as a result, our current tax expense decreased and our deferred tax expense increased in 2006 primarily reflecting the utilization of the deferred tax assets associated with the Consolidated Securities Litigation Action. In 2006, we also recorded a $14 million income tax expense, which primarily related to a basis adjustment in an investment and adjustments with various taxing authorities.

McKESSON CORPORATION