10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarter ended December 31, 2006

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

For the transition period from                      to                     

Commission file number 1-13252

McKESSON CORPORATION

(Exact name of Registrant as specified in its charter)

Delaware	94-3207296
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
One Post Street, San Francisco, California	94104
(Address of principal executive offices)	(Zip Code)

(415) 983-8300
(Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o      Non-accelerated filer o

     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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at December 31, 2006
Common stock, $0.01 par value	295,397,045 shares

McKESSON CORPORATION

TABLE OF CONTENTS

Item	Page
PART I. FINANCIAL INFORMATION
1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets December 31, 2006 and March 31, 2006		3
Condensed Consolidated Statements of Operations Quarters and Nine Months ended December 31, 2006 and 2005		4
Condensed Consolidated Statements of Cash Flows Nine Months ended December 31, 2006 and 2005		5
Financial Notes		6
2. Management’s Discussion and Analysis of Results of Operations and Financial Condition		25-38
3. Quantitative and Qualitative Disclosures about Market Risk		39
4. Controls and Procedures		39
PART II. OTHER INFORMATION
1. Legal Proceedings		39
1A. Risk Factors		39
2. Unregistered Sales of Equity Securities and Use of Proceeds		39
3. Defaults Upon Senior Securities		39
4. Submission of Matters to a Vote of Security Holders		40
5. Other Information		40
6. Exhibits		40
Signatures		40
EXHIBIT 10.31
EXHIBIT 10.32
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

2

McKESSON CORPORATION

PART I. FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)
(Unaudited)

	December 31,			March 31,
	2006			2006
ASSETS
Current Assets
Cash and cash equivalents	$	2,013		$	2,139
Restricted cash		962			962
Receivables, net		6,427			6,247
Inventories		8,616			7,127
Prepaid expenses and other		286			522
Total		18,304			16,997
Property, Plant and Equipment, Net		616			663
Capitalized Software Held for Sale, Net		156			139
Goodwill		1,694			1,637
Intangible Assets, Net		132			116
Other Assets		1,588			1,409
Total Assets	$	22,490		$	20,961
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Drafts and accounts payable	$	10,859		$	9,944
Deferred revenue		1,048			827
Current portion of long-term debt		25			26
Securities Litigation		984			1,014
Other		1,810			1,659
Total		14,726			13,470
Postretirement Obligations and Other Noncurrent Liabilities		709			619
Long-Term Debt		957			965
Other Commitments and Contingent Liabilities (Note 14)
Stockholders’ Equity
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding		—			—
Common stock, $0.01 par value Shares authorized: December 31, 2006 and March 31, 2006 – 800 Shares issued: December 31, 2006 – 336 and March 31, 2006 – 330		3			3
Additional paid-in capital		3,508			3,238
Other capital		(32	)		(75	)
Retained earnings		4,473			3,871
Accumulated other comprehensive income		76			55
ESOP notes and guarantees		(15	)		(25	)
Treasury shares, at cost, December 31, 2006 – 41 and March 31, 2006 – 26		(1,915	)		(1,160	)
Total Stockholders’ Equity		6,098			5,907
Total Liabilities and Stockholders’ Equity	$	22,490		$	20,961

See Financial Notes

3

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)
(Unaudited)

	Quarter Ended						Nine Months Ended
	December 31,						December 31,
	2006			2005			2006			2005
Revenues	$	23,111		$	22,240		$	68,812		$	64,193
Cost of Sales		22,050			21,266			65,731			61,455
Gross Profit		1,061			974			3,081			2,738
Operating Expenses		743			665			2,191			1,897
Securities Litigation Charge (Credit), Net		—			1			(6	)		53
Total Operating Expenses		743			666			2,185			1,950
Operating Income		318			308			896			788
Other Income, Net		39			35			106			97
Interest Expense		(23	)		(22	)		(68	)		(69	)
Income from Continuing Operations Before Income Taxes		334			321			934			816
Income Tax Provision		(94	)		(117	)		(223	)		(294	)
Income from Continuing Operations		240			204			711			522
Discontinued Operations, net		3			(11	)		(3	)		(4	)
Discontinued Operations – gain (loss) on sales, net		—			—			(52	)		13
Total Discontinued Operations		3			(11	)		(55	)		9
Net Income	$	243		$	193		$	656		$	531
Earnings Per Common Share
Diluted
Continuing operations	$	0.79		$	0.64		$	2.33		$	1.66
Discontinued operations		0.01			(0.03	)		(0.01	)		(0.01	)
Discontinued operations – gain (loss) on sales, net		—			—			(0.17	)		0.04
Total	$	0.80		$	0.61		$	2.15		$	1.69
Basic
Continuing operations	$	0.81		$	0.66		$	2.38		$	1.71
Discontinued operations		0.01			(0.03	)		(0.01	)		(0.01	)
Discontinued operations – gain (loss) on sales, net		—			—			(0.17	)		0.04
Total	$	0.82		$	0.63		$	2.20		$	1.74
Dividends Declared Per Common Share	$	0.06		$	0.06		$	0.18		$	0.18
Weighted Average Shares
Diluted		302			316			305			315
Basic		296			307			299			306

See Financial Notes

4

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)
(Unaudited)

	Nine Months Ended December 31,
	2006			2005
Operating Activities
Net income	$	656		$	531
Discontinued operations, net of income taxes		55			(9	)
Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization		208			194
Securities Litigation charge (credit), net		(6	)		53
Deferred taxes		77			226
Other non-cash items		(29	)		(15	)
Total		961			980
Changes in operating assets and liabilities, net of business acquisitions:
Receivables		(132	)		(438	)
Inventories		(1,464	)		(350	)
Drafts and accounts payable		914			1,221
Deferred revenue		240			307
Taxes		35			2
Securities Litigation settlement payments		(25	)		(227	)
Proceeds from sale of notes receivable		—			28
Other		26			(57	)
Total		(406	)		486
Net cash provided by operating activities		555			1,466
Investing Activities
Property acquisitions		(76	)		(138	)
Capitalized software expenditures		(119	)		(127	)
Acquisitions of businesses, less cash and cash equivalents acquired		(106	)		(560	)
Proceeds from sale of businesses		175			63
Other		(26	)		(6	)
Net cash used in investing activities		(152	)		(768	)
Financing Activities
Repayment of debt		(11	)		(23	)
Capital stock transactions:
Issuances		239			435
Share repurchases		(756	)		(579	)
ESOP notes and guarantees		10			12
Dividends paid		(54	)		(55	)
Other		43			(107	)
Net cash used in financing activities		(529	)		(317	)
Net increase (decrease) in cash and cash equivalents		(126	)		381
Cash and cash equivalents at beginning of period		2,139			1,800
Cash and cash equivalents at end of period	$	2,013		$	2,181

See Financial Notes

5

McKESSON CORPORATION

FINANCIAL NOTES

(Unaudited)

1. Significant Accounting Policies

     Basis of Presentation. The condensed consolidated financial statements of McKesson Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns) include the financial statements of all majority-owned or controlled companies. Significant intercompany transactions and balances have been eliminated. In our opinion, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial position as of December 31, 2006, and the results of operations for the quarters and nine months ended December 31, 2006 and 2005 and cash flows for the nine months ended December 31, 2006 and 2005.

     The results of operations for the quarters and nine months ended December 31, 2006 and 2005 are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes included in our 2006 consolidated financial statements previously filed with the Securities and Exchange Commission (“SEC”).

     The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

     New Accounting Pronouncements. 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. This standard requires a fair-value based measurement method in accounting for share-based payment transactions. The share-based compensation expense is recognized for the portion of the awards that is ultimately expected to vest. This standard replaced SFAS No. 123, “Accounting for Stock-Based Compensation,” and superseded Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the use of the intrinsic value method as provided under APB Opinion No. 25, which was utilized by the Company, was eliminated. We adopted SFAS No. 123(R) using the modified prospective method of transition. See Financial Note 4, “Share-Based Payment,” for further details.

     As a result of the provisions of SFAS No. 123(R), in 2007, we expect share-based compensation charges to approximate $0.10 to $0.12 per diluted share. These charges are expected to be approximately $0.07 to $0.09 per diluted share more than the share-based compensation expense recognized in our net income in 2006. Our assessments of estimated 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 behaviors, timing, level and types of our grants of annual share-based awards and the attainment of performance goals. As a result, the actual share-based compensation expense in 2007 may differ from the Company’s current estimate.

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN No. 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 will become effective for us in 2008. We are currently assessing the impact of FIN No. 48 on our consolidated financial statements.

6

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. SFAS No. 157 will become effective for us in 2009. We are currently assessing the impact of SFAS No. 157; however, we do not believe the adoption of this standard will have a material effect on our consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires us to recognize the funded status of our defined benefit plans in the consolidated balance sheets and changes in the funded status in comprehensive income. This standard also requires us to recognize the gains/losses, prior year service costs and transition assets/obligations as a component of other comprehensive income upon adoption, and provide additional annual disclosure. SFAS No.158 does not affect the computation of benefit expense recognized in our consolidated statements of operations. The recognition and disclosure provisions are effective in 2007. In addition, SFAS No. 158 requires us to measure plan assets and benefit obligations as of the year-end balance sheet date effective in 2009. We are required to apply the provisions of this standard prospectively. We are currently assessing the impact of SFAS No. 158 on our consolidated financial statements.

     In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This guidance indicates that the materiality of a misstatement must be evaluated using both the rollover and iron curtain approaches. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, while the rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. SAB No. 108 is effective for our 2007 annual consolidated financial statements. We are currently assessing the impact of SAB No. 108; however, we do not believe its adoption will have a material effect on our consolidated financial statements.

2. Acquisitions and Investments

     On November 5, 2006, we entered into a definitive agreement to acquire all of the outstanding shares of Per-Se Technologies, Inc. (“Per-Se”) of Alpharetta, Georgia for $28.00 per share in cash, or approximately $1.8 billion in aggregate including the assumption of Per-Se’s debt. Per-Se is a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies. On January 26, 2007, we acquired Per-Se. The acquisition was funded with cash on hand and through the use of a new interim credit facility (refer to Financial Note 9, “Financing Activities”). Financial results for Per-Se will primarily be included within our Provider Technologies segment.

7

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     In the first quarter of 2007, we acquired the following three entities for a total cost of $92 million, which was paid in cash:

– Sterling Medical Services LLC (“Sterling”), based in Moorestown, New Jersey, a national provider and distributor of disposable medical supplies, health management services and quality management programs to the home care market. Financial results for Sterling are included in our Medical-Surgical Solutions segment;

– HealthCom Partners LLC (“HealthCom”), based in Mt. Prospect, Illinois, a leading provider of patient billing solutions designed to simplify and enhance healthcare providers’ financial interactions with their patients; and

– RelayHealth Corporation (“RelayHealth”), based in Emeryville, California, a provider of secure online healthcare communication services linking patients, healthcare professionals, payors and pharmacies. Financial results for HealthCom and RelayHealth are included in our Provider Technologies segment.

     Goodwill recognized in these transactions amounted to $61 million.

     In addition, in 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. 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, as determined by a third-party valuation, approximates the carrying value of consideration contributed to Parata. Our investment in Parata is accounted for under the equity method of accounting within our Pharmaceutical Solutions segment.

	In 2006, we made the following acquisitions:
–	In the second quarter of 2006, we acquired all of the issued and outstanding stock of D&K Healthcare Resources, Inc. (“D&K”) of St. Louis, Missouri for an aggregate cash purchase price of $479 million, including the assumption of D&K’s debt. D&K is primarily 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. Approximately $158 million of the purchase price has been assigned to goodwill. Included in the purchase price were acquired identifiable intangibles of $43 million primarily representing customer lists and not-to-compete covenants which have an estimated weighted-average useful life of nine years. Financial results for D&K are included in our Pharmaceutical Solutions segment.
–	Also in the second quarter of 2006, we acquired all of the issued and outstanding shares of Medcon, Ltd. (“Medcon”), an Israeli company, for an aggregate purchase price of $82 million. Medcon provides web-based cardiac image and information management services to healthcare providers. Approximately $60 million of the purchase price was assigned to goodwill and $20 million was assigned to intangibles which represent technology assets and customer lists which have an estimated weighted-average useful life of four years. Financial results for Medcon are included in our Provider Technologies segment.

     During the last two years, we also completed a number of other acquisitions and investments within all three of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition and, for certain recent acquisitions, may be subject to change. Goodwill recognized for our business acquisitions is not expected to be deductible for tax purposes. Pro forma results of operations for our business acquisitions have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.

8

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

3. Discontinued Operations

     Results from discontinued operations were as follows:

	Quarter Ended						Nine Months Ended
	December 31,						December 31,
(In millions)	2006			2005			2006			2005
Income (loss) from discontinued operations
Acute Care	$	5		$	(18	)	$	(5	)	$	(8	)
BioServices		—			—			—			2
Income taxes		(2	)		7			2			2
Total	$	3		$	(11	)	$	(3	)	$	(4	)
Gain (loss) on sale of discontinued operations
Acute Care	$	—		$	—		$	(49	)	$	—
BioServices		—			—			—			22
Other		—			—			6			—
Income taxes					—			(9	)		(9	)
Total	$	—		$	—		$	(52	)	$	13
Discontinued operations, net of taxes
Acute Care	$	3		$	(11	)	$	(64	)	$	(5	)
PBI		—			—			5			—
BioServices		—			—			—			14
Other		—			—			4			—
Total	$	3		$	(11	)	$	(55	)	$	9

     In the second quarter of 2007, we sold our Medical-Surgical Solutions segment’s Acute Care supply business to Owens & Minor, Inc. (“OMI”) for net cash proceeds of approximately $160 million. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the financial results of this business are classified as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. Such presentation includes the classification of all applicable assets of the disposed business under the caption “Prepaid expenses and other” and all applicable liabilities under the caption “Other” under “Current Liabilities” within our condensed consolidated balance sheets for all periods presented. Revenues associated with the Acute Care business prior to its disposition were $269 million and $797 million for the third quarter and first nine months of 2006 and $573 million for the first half of 2007.

     Financial results for the nine months ended December 31, 2006 for this discontinued operation include an after-tax loss of $64 million, which primarily consists of an after-tax loss of $61 million for the business’ disposition and $3 million of after-tax losses associated with operations, other asset impairment charges and employee severance costs. The after-tax loss of $61 million for the business’ disposition includes a $79 million non-tax deductible write-off of goodwill, as further described below.

9

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     In connection with this divestiture, we allocated a portion of our Medical-Surgical Solutions segment’s goodwill to the Acute Care business as required by SFAS No. 142, “Goodwill and Other Intangible Assets.” The allocation was based on the relative fair values of the Acute Care business and the continuing businesses that are being retained by the Company. The fair value of the Acute Care business was determined based on the net cash proceeds resulting from the divestiture and the fair value of the continuing businesses was determined by a third-party valuation. As a result, we allocated $79 million of the segment’s goodwill to the Acute Care business.

     Additionally, as part of the divestiture, we entered into a transition services agreement (“TSA”) with OMI under which we continue to provide certain services to the Acute Care business during a transition period of approximately nine months. We also anticipate incurring approximately $5 million of pre-tax employee severance charges over the transition period. These charges, as well as the financial results from the TSA, are recorded as part of discontinued operations. The continuing cash flows generated from the TSA are not material to our condensed consolidated financial statements.

     In 2005, our Acute Care business entered into an agreement with a third party vendor to sell the vendor’s proprietary software and services. The terms of the contract required us to prepay certain royalties. During the third quarter of 2006, we ended marketing and sale of the software under the contract. As a result of this decision, we recorded a $15 million pre-tax charge in the third quarter of 2006 to write-off the remaining balance of the prepaid royalties.

     In the second quarter of 2007, we also sold a wholly-owned subsidiary, Pharmaceutical Buyers Inc. (“PBI”), for net cash proceeds of $10 million. The divestiture resulted in an after-tax gain of $5 million resulting from the tax basis of the subsidiary exceeding its carrying value. Financial results of this business, which were previously included in our Pharmaceutical Solutions segment, have been presented as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. These results were not material to our condensed consolidated financial statements.

     Results for discontinued operations for the nine months ended December 31, 2006 also include an after-tax gain of $4 million associated with the collection of a note receivable from a business sold in 2003.

     In the second quarter of 2006, we sold our wholly-owned subsidiary, McKesson BioServices Corporation (“BioServices”), for net cash proceeds of $63 million. The divestiture resulted in an after-tax gain of $13 million. Financial results for this business, which were previously included in our Pharmaceutical Solutions segment, have been presented as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. These results were not material to our condensed consolidated financial statements.

10

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

4. Share-Based Payment

     We provide various share-based compensation for our employees, officers and non-employee directors, including stock options, an employee stock purchase plan, restricted stock (“RS”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PeRSUs”) (collectively, “share-based awards.”) On April 1, 2006, we adopted SFAS No. 123(R), as discussed in Financial Note 1, “Significant Accounting Policies.” Accordingly, we began to recognize compensation expense for the fair value of share-based awards granted, modified, repurchased or cancelled from April 1, 2006 forward. For the unvested portion of awards issued prior to and outstanding as of April 1, 2006, the expense is recognized at the grant-date fair value as the remaining requisite service is rendered. We recognize compensation expense on a straight-line basis over the requisite service period for those awards with graded vesting and service conditions. For the awards with performance conditions, we recognize the expense on a straight-line basis, treating each vesting tranche as a separate award. In 2006, 2005 and 2004, we reduced the vesting period of substantially all of the then outstanding stock options for employee retention purposes and in anticipation of the requirements of SFAS No. 123(R), either through acceleration or shortened vesting schedules at grant. We adopted SFAS No. 123(R) using the modified prospective method and therefore have not restated prior period financial statements. Prior to adopting SFAS No. 123(R), we accounted for our employee share-based compensation plans using the intrinsic value method under APB Opinion No. 25. This standard generally did not require recognition of compensation expense for the majority of our share-based awards except for RS and RSUs. In addition, as required under APB Opinion No. 25, we previously recognized forfeitures as they occurred.

     The compensation expense recognized under SFAS No. 123(R) has been classified in the income statement or capitalized on the balance sheet in the same manner as cash compensation paid to our employees. There was no material share-based compensation expense capitalized as part of the balance sheet at December 31, 2006. In addition, SFAS No. 123(R) requires that the benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense be reported as a financing cash flow rather than an operating cash flow, as was done under APB Opinion No. 25. For the quarter and nine months ended December 31, 2006, $7 million and $43 million of excess tax benefits were recognized.

     In conjunction with the adoption of SFAS No. 123(R), in the first quarter of 2007, we elected the “short-cut” method for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of share-based compensation. Under this method, a simplified calculation is applied in establishing the beginning APIC pool balance as well as determining the future impact on the APIC pool and our consolidated statements of cash flows relating to the tax effects of share-based compensation. The election of this accounting policy did not have a material impact on our consolidated financial statements.

     I. Impact on Net Income

     During the third quarter and first nine months of 2007, we recorded $15 million and $39 million of pre-tax share-based compensation expense, compared to $39 million and $71 million pre-tax pro forma expense for the comparable prior year periods. The share-based compensation expense for the third quarter and first nine months of 2007 was comprised of RS, RSUs and PeRSUs expense of $12 million and $29 million, stock option expense of $2 million and $5 million, and employee stock purchase plan expense of $1 million and $5 million. We recognized tax benefits related to the share-based compensation of $5 million and $13 million in the third quarter and first nine months of 2007.

11

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     The following table illustrates the impact of share-based compensation on reported amounts:

	Quarter Ended				Nine Months Ended
	December 31, 2006				December 31, 2006
			Impact of				Impact of
			Share-Based				Share-Based
(In millions, except per share data)	As Reported		Compensation		As Reported		Compensation
Income from continuing operations before income taxes	$	334	$	15	$	934	$	39
Net income		243		10		656		26
Earnings per share:
Diluted	$	0.80	$	0.03	$	2.15	$	0.08
Basic		0.82		0.03		2.20		0.08

     II. SFAS No. 123 Pro Forma Information for 2006

     As noted above, prior to April 1, 2006 we accounted for our employee share-based compensation plans using the intrinsic value method under APB Opinion No. 25. Had compensation expense for our employee share-based compensation been recognized based on the fair value method, consistent with the provisions of SFAS No. 123, net income and earnings per share would have been as follows:

				Nine Months
	Quarter Ended			Ended
	December 31,			December 31,
(In millions, except per share data)	2005			2005
Net income, as reported	$	193		$	531
Share-based compensation expense included in reported net income, net of income taxes		3			7
Share-based compensation expense determined under the fair value method, net of income taxes		(24	)		(43	)
Pro forma net income	$	172		$	495
Earnings per common share:
Diluted — as reported	$	0.61		$	1.69
Diluted — pro forma		0.54			1.57
Basic — as reported		0.63			1.74
Basic — pro forma		0.56			1.62

     III. Stock Plans

     The 2005 Stock Plan (the “2005 Plan”) provides our employees, officers and non-employee directors share-based long-term incentives. The 2005 Plan permits the granting of stock options, RS, RSUs, PeRSUs and other share-based awards. Under the 2005 Plan, 13 million shares were authorized for issuance, and as of December 31, 2006, 5 million shares remain available for future grant. The 2005 Plan replaced the following three plans in advance of their expirations: 1999 Stock Option and Restricted Stock Plan, the 1997 Directors’ Equity Compensation and Deferral Plan and the 1998 Canadian Incentive Plan (collectively, the “Legacy Plans”). The aggregate remaining 11 million authorized shares under the Legacy Plans were cancelled, although awards under those plans remain outstanding. The 2005 Plan is now the Company’s only plan for providing share-based incentive compensation to employees and non-employee directors of the Company and its affiliates.

     In anticipation of the requirements of SFAS No. 123(R), the Compensation Committee of the Company’s Board of Directors (“Compensation Committee”) reviewed our long-term compensation program for key employees across the Company. As a result, beginning in 2006, reliance on options was reduced with more long-term incentive value delivered by grants of PeRSUs and performance-based cash compensation.

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     IV. Stock Options

     Stock options are granted at not less than fair market value and those options granted under the 2005 Plan have a contractual term of seven years. Prior to 2004, stock options typically vested over a four-year period and had a contractual term of ten years. As noted above, in 2006, 2005 and 2004, we reduced the vesting period of substantially all of the then outstanding unvested stock options, either through acceleration or shortened vesting schedules at grant. It is expected that options granted in 2007 and future years will have a seven-year contractual life and generally follow the four-year vesting schedule. Stock options under the Legacy Plans, which are substantially vested, generally have a ten-year contractual life.

     Compensation expense for stock options is recognized on a straight-line basis over the requisite service period and is based on the grant-date fair value for the portion of the awards that is ultimately expected to vest. We continue to use the Black-Scholes model to estimate the fair value of our stock options. Once the fair value of an employee stock option value is determined, current accounting practices do not permit it to be changed, even if the estimates used are different from actual. The option pricing model requires the use of various estimates and assumptions, as follows:

– Expected stock price volatility is based on a combination of historical volatility of our common stock and implied market volatility. We believe that this market-based input provides a better estimate of our future stock price movements and is consistent with emerging employee stock option valuation considerations. Our expected stock price volatility assumption continues to reflect a constant dividend yield during the expected term of the option.

– Expected dividend yield is based on historical experience and investors’ current expectations.

– The risk-free interest rate for periods within the expected life of the option is based on the constant maturity U.S. Treasury rate in effect at the time of grant.

– The expected life of the options is determined based on historical option exercise behavior data, and also reflects the impact of changes in contractual life of current option grants compared to our historical grants.

     Weighted-average assumptions used to estimate the fair value of employee stock options were as follows:

	2007			2006
Expected stock price volatility		27	%		36	%
Expected dividend yield		0.5	%		0.5	%
Risk-free interest rate		5	%		4	%
Expected life (in years)		5			6

     The estimated forfeiture rate, which reduces all share-based awards expense, is based on historical experience. The estimated forfeiture rate at grant is re-assessed periodically and revised if actual forfeitures differ materially from those estimates. In addition, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests. In the Company’s pro forma information required under SFAS No. 123 for the periods prior to 2007, we accounted for forfeitures as they occurred. The weighted-average forfeiture rate is approximately 9%. The actual forfeitures in the future reporting periods could be materially higher or lower than our current estimates. As a result, the share-based compensation expense in 2007 may differ from the Company’s current estimate.

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     The following table summarizes stock option activity during the first nine months of 2007:

						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average Exercise		Contractual		Intrinsic
(In millions, except per share data)	Shares			Price		Term (Years)		Value (2)
Outstanding, April 1, 2006		46		$	43.38
Granted		1			48.12
Exercised		(6	)		33.19
Outstanding, December 31, 2006		41			45.03		4	$	468
Vested and expected to vest (1), December 31, 2006		40			45.06		4		465
Exercisable, December 31, 2006		39			45.10		4		455

(1)	The number of options expected to vest takes into account an estimate of expected forfeitures.
(2)	The aggregate intrinsic value is calculated as the difference between the period-end market price of the Company’s stock and the option exercise price, times the number of “in-the-money” option shares.

     The total intrinsic value of stock options exercised during the third quarters and first nine months of 2007 and 2006 was $19 million and $73 million and $111 million and $182 million. The total fair value of stock options vested in the third quarter and first nine months of 2007 was $1 million and $2 million. The weighted average grant-date fair value of stock options granted during the first nine months of 2007 and the third quarter and first nine months of 2006 was $15.43 and $17.79 and $18.23. Cash received from the exercise of stock options in the third quarters and first nine months of 2007 and 2006 was $38 million and $145 million and $205 million and $413 million, and the related tax benefits realized were $7 million and $23 million and $42 million and $71 million. Total compensation expense, net of estimated forfeitures, related to unvested stock options not yet recognized at December 31, 2006 was approximately $20 million, and the weighted-average period over which the cost is expected to be recognized is 3 years.

     V. RS, RSUs and PeRSUs

     RS and RSUs, which entitle the holder to receive, at the end of a vesting term, a specified number of shares of the Company’s common stock, are accounted for at fair value at the date of grant. The fair value of RS and RSUs under our stock plans is determined by the product of the number of shares that are expected to vest and the grant date market price of the Company’s common stock. The Compensation Committee determines the vesting terms at the time of grant. These awards generally vest in full after three years. The fair value of RS and RSUs with graded vesting and service conditions is expensed on a straight-line basis over the requisite service period. RS contains certain restrictions on transferability and may not be transferred until such restrictions lapse.

     Each non-employee director currently receives 2,500 RSUs annually, which vest immediately, and which are expensed upon grant. However, issuance of any shares is delayed until the director is no longer performing services for the Company. At December 31, 2006, 40,000 RSUs for our directors are vested, but shares have not been issued.

     PeRSUs are RSUs for which the number of RSUs awarded may be conditional upon the attainment of one or more performance objectives over a specified period. Vesting of such awards ranges from one to three-year periods following the end of the performance period and may follow the graded or cliff method of vesting.

     PeRSUs are accounted for as variable awards until the performance goals are reached and the grant date is established. The fair value of PeRSUs is determined by the product of the number of shares eligible to be awarded and expected to vest, and the market price of the Company’s common stock, commencing at the inception of the requisite service period. During the performance period, the PeRSUs are re-valued using the market price and the performance modifier at the end of a reporting period. At the end of the performance period, if the goals are attained, the award is classified as a RSU and is accounted for on that basis. The fair value of PeRSUs is expensed

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on a straight-line basis, treating each vesting tranche as a separate award, over the requisite service period of four years. For RS and RSUs with service conditions, we have elected to amortize the expense on a straight-line basis.

     The following table summarizes RS and RSU activity during the first nine months of 2007:

			Weighted-
			Average
			Grant Date Fair
(In millions, except per share data)	Shares		Value Per Share
Nonvested, April 1, 2006		1	$	37.09
Granted		1		48.22
Nonvested, December 31, 2006		2		44.01

     The total fair value of shares vested during the third quarter and first nine months of 2007 was nil and $4 million. As of December 31, 2006, the total compensation cost, net of estimated forfeitures, related to nonvested RS and RSU awards not yet recognized was approximately $32 million, pre-tax, and the weighted-average period over which the cost is expected to be recognized is 3 years.

     In May 2006, the Compensation Committee approved 1 million PeRSU target share units representing the base number of awards that could be granted, if goals are attained, and would be granted in the first quarter of 2008 (the “2007 PeRSU”). These target share units are not included in the table above as they have not been granted in the form of a RSU. As of December 31, 2006, the total compensation cost, net of estimated forfeitures, related to nonvested 2007 PeRSUs not yet recognized was approximately $43 million, pre-tax (based on the period-end market price of the Company’s common stock), and the weighted-average period over which the cost is expected to be recognized is 2 years.

     In accordance with the provisions of SFAS No. 128, “Earnings per Share,” the 2007 PeRSUs are not included in the calculation of diluted weighted average shares until the performance goals have been achieved.

     VI. Employee Stock Purchase Plan (“ESPP”)

     The ESPP allows eligible employees to purchase shares of our common stock through payroll deductions. The deductions occur over three-month purchase periods and the shares are then purchased at 85% of the market price at the end of each purchase period. Employees are allowed to terminate their participation in the ESPP at any time during the purchase period prior to the purchase of the shares, and any amounts accumulated during that period are refunded.

     The 15% discount provided to employees on these shares is included in compensation expense. The funds outstanding at the end of a quarter are included in the calculation of diluted weighted average shares outstanding. These amounts have not been significant.

5. Income Taxes

     During the third quarter of 2007, we decreased our estimated effective tax rate from 35.0% to 34.0% primarily due to a higher proportion of income attributed to foreign countries that have lower income tax rates. This decrease required a $6 million cumulative catch-up benefit to income taxes in the third quarter of 2007 for income associated with the first half of 2007. Also, during the third quarter of 2007, we recorded an $8 million income tax benefit arising primarily from settlements and adjustments with various taxing authorities and a $6 million income tax benefit due to research and development investment tax credits from our Canadian operations.

     During the second quarter of 2007, we recorded a credit to income tax expense of $83 million which primarily pertains to our receipt of a private letter ruling from the U.S. Internal Revenue Service (“IRS”) holding that our payment of approximately $960 million to settle our Securities Litigation Consolidated Action is fully tax-

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FINANCIAL NOTES (Continued)
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deductible. We previously established tax reserves to reflect the lack of certainty regarding the tax deductibility of settlement amounts paid in the Consolidated Action and related litigation. Income tax expense for the nine months ended December 31, 2005 includes a $7 million charge which primarily relates to tax settlements and adjustments with various taxing authorities.

6. Restructuring Activities

	Pharmaceutical						Provider
	Solutions						Technologies
(In millions)	Severance			Exit-Related			Severance			Total
Balance, March 31, 2006	$	6		$	29		$	1		$	36
Expenses		1			(1	)		5			5
Cash expenditures		(5	)		(7	)		(5	)		(17	)
Adjustment to liabilities related to the acquisition of D&K		—			(14	)		—			(14	)
Balance, December 31, 2006	$	2		$	7		$	1		$	10

     During the first nine months of 2007, we recorded pre-tax restructuring expense of $5 million, which primarily reflected employee termination costs within our Provider Technologies segment. This segment’s restructuring plan was intended to realign product development and marketing resources. Approximately 125 employees were terminated as part of this plan.

     In connection with the D&K acquisition, in 2006 we recorded $10 million of liabilities relating to employee severance costs and $28 million for facility exit and contract termination costs. Approximately 260 employees, consisting primarily of distribution, general and administrative staff, were terminated as part of this restructuring plan. To date, $8 million of severance and $9 million of exit costs have been paid. In connection with the Company’s investment in Parata, $13 million of contract termination costs that were initially estimated as part of the D&K acquisition were extinguished and, as a result, the Company decreased goodwill and decreased its restructuring liability during the first nine months of 2007. At December 31, 2006, the remaining severance liability for this plan was $2 million, which is anticipated to be paid by the end of 2007, and the remaining facility exit liability was $5 million, which is anticipated to be paid at various dates through 2015.

7. Earnings Per Share

     Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similarly except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

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(Unaudited)

     The computations for basic and diluted earnings per share are as follows:

	Quarter Ended					Nine Months Ended
	December 31,					December 31,
(In millions, except per share data)	2006		2005			2006			2005
Income from continuing operations	$	240	$	204		$	711		$	522
Interest expense on convertible junior subordinated debentures, net of tax		—		—			—			1
Income from continuing operations – diluted		240		204			711			523
Discontinued operations		3		(11	)		(3	)		(4	)
Discontinued operations – gain (loss) on sales, net		—		—			(52	)		13
Net income – diluted	$	243	$	193		$	656		$	532
Weighted average common shares outstanding:
Basic		296		307			299			306
Effect of dilutive securities:
Options to purchase common stock		6		8			6			8
Convertible junior subordinated debentures		—		—			—			1
Restricted stock				1						—
Diluted		302		316			305			315
Earnings Per Common Share: (1)
Diluted
Continuing operations	$	0.79	$	0.64		$	2.33		$	1.66
Discontinued operations, net		0.01		(0.03	)		(0.01	)		(0.01	)
Discontinued operations – gain (loss) on sales, net		—		—			(0.17	)		0.04
Total	$	0.80	$	0.61		$	2.15		$	1.69
Basic
Continuing operations	$	0.81	$	0.66		$	2.38		$	1.71
Discontinued operations, net		0.01		(0.03	)		(0.01	)		(0.01	)
Discontinued operations – gain (loss) on sales, net		—		—			(0.17	)		0.04
Total	$	0.82	$	0.63		$	2.20		$	1.74

(1) Certain computations may reflect rounding adjustments.

     Approximately 12 million stock options were excluded from the computations of diluted net earnings per share for the quarters ended December 31, 2006 and 2005 as their exercise price was higher than the Company’s average stock price. For the nine months ended December 31, 2006 and 2005, the number of stock options excluded was approximately 12 million and 17 million.

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8. Goodwill and Intangible Assets, Net

     Changes in the carrying amount of goodwill for the nine months ended December 31, 2006 are as follows:

	Pharmaceutical			Medical-Surgical		Provider
(In millions)	Solutions			Solutions		Technologies		Total
Balance, March 31, 2006	$	495		$	672	$	470	$	1,637
Goodwill acquired, net of purchase price adjustments		(26	)		29		43		46
Translation adjustments		1			—		10		11
Balance, December 31, 2006	$	470		$	701	$	523	$	1,694

     Information regarding intangible assets is as follows:

	December 31,			March 31,
(In millions)	2006			2006
Customer lists	$	164		$	139
Technology		98			83
Trademarks and other		43			40
Gross intangibles		305			262
Accumulated amortization		(173	)		(146	)
Intangible assets, net	$	132		$	116

     Amortization expense of other intangibles was $10 million and $29 million for the quarter and nine months ended December 31, 2006 and $8 million and $20 million for the quarter and nine months ended December 31, 2005. The weighted average remaining amortization periods for customer lists, technology and trademarks and other intangible assets at December 31, 2006 were: 8 years, 4 years and 4 years. Estimated future annual amortization expense of these assets is as follows: $9 million, $31 million, $22 million, $12 million and $10 million for 2007 through 2011, and $28 million thereafter. At December 31, 2006, there was $20 million of other intangibles not subject to amortization.

9. Financing Activities

     In June 2006, we renewed our committed accounts receivable sales facility. The facility was renewed under substantially similar terms to those previously in place with the exception that the facility amount was reduced to $700 million from $1.4 billion. The renewed facility expires in June 2007. At December 31, 2006 and March 31, 2006, there were no amounts outstanding under any of our borrowing facilities.

     In connection with our purchase of Per-Se in January 2007, we entered into a new $1.8 billion interim credit facility. The interim credit facility is a 364-day unsecured facility which has terms substantially similar to those contained in the Company’s existing revolving credit facility. We anticipate replacing the interim credit facility with a permanent bond financing in an amount up to $1.2 billion by the end of the fourth quarter of 2007.

10. Convertible Junior Subordinated Debentures

     In February 1997, we issued 5% Convertible Junior Subordinated Debentures (the “Debentures”) in an aggregate principal amount of $206 million. The Debentures were purchased by McKesson Financing Trust (the “Trust”) with proceeds from its issuance of four million shares of preferred securities to the public and 123,720 common securities to us. The Debentures represented the sole assets of the Trust and bore interest at an annual rate of 5%, payable quarterly. These preferred securities of the Trust were convertible into our common stock at the holder’s option.

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     Holders of the preferred securities were entitled to cumulative cash distributions at an annual rate of 5% of the liquidation amount of $50 per security. Each preferred security was convertible at the rate of 1.3418 shares of our common stock, subject to adjustment in certain circumstances. The preferred securities were to be redeemed upon repayment of the Debentures and were callable by us on or after March 4, 2000, in whole or in part, initially at 103.5% of the liquidation preference per share, and thereafter at prices declining at 0.5% per annum to 100% of the liquidation preference on and after March 4, 2007 plus, in each case, accumulated, accrued and unpaid distributions, if any, to the redemption date.

     During the first quarter of 2006, we called for the redemption of the Debentures, which resulted in the exchange of the preferred securities for 5 million shares of our newly issued common stock.

11. Pension and Other Postretirement Benefit Plans

     Net expense for the Company’s defined benefit pension and postretirement plans was $12 million and $35 million for the third quarter and first nine months of 2007 compared to $10 million and $32 million for the comparable prior year periods. The third quarter of 2007 expense reflects a $2 million curtailment and special termination benefit charge in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.” In July 2006, we made a lump sum cash payment of $7 million from an unfunded U.S. pension plan. In accordance with SFAS No. 88, a $2 million settlement charge was recorded in the second quarter of 2007 associated with the payment.

12. Financial Guarantees and Warranties

     Financial Guarantees

     We have agreements with certain of our customers’ financial institutions under which we have guaranteed the repurchase of inventory (primarily for our Canadian businesses), at a discount, in the event these customers are unable to meet certain obligations to those financial institutions. Among other limitations, these inventories must be in resalable condition. We have also guaranteed loans and the payment of leases for some customers; and we are a secured lender for substantially all of these guarantees. Customer guarantees range from one to ten years and were primarily provided to facilitate financing for certain strategic customers. At December 31, 2006, the maximum amounts of inventory repurchase guarantees and other customer guarantees were approximately $100 million and $7 million of which a nominal amount has been accrued.

     At December 31, 2006, we had commitments of $2 million of cash contributions to our equity-held investments, for which no amounts had been accrued.

     In addition, our banks and insurance companies have issued $103 million of standby letters of credit and surety bonds on our behalf in order to meet the security requirements for statutory licenses and permits, court and fiduciary obligations, and our workers’ compensation and automotive liability programs.

     Our software license agreements generally include certain provisions for indemnifying customers against liabilities if our software products infringe a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification agreements and have not accrued any liabilities related to such obligations.

     In conjunction with certain transactions, primarily divestitures, we may provide routine indemnification agreements (such as retention of previously existing environmental, tax and employee liabilities) whose terms vary in duration and often are not explicitly defined. Where appropriate, obligations for such indemnifications are recorded as liabilities. Because the amounts of these indemnification obligations often are not explicitly stated, the overall maximum amount of these commitments cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have historically not made significant payments as a result of these indemnification provisions.

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FINANCIAL NOTES (Continued)
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     Warranties

     In the normal course of business, we provide certain warranties and indemnification protection for our products and services. For example, we provide warranties that the pharmaceutical and medical-surgical products we distribute are in compliance with the Food, Drug and Cosmetic Act and other applicable laws and regulations. We have received the same warranties from our suppliers, who customarily are the manufacturers of the products. In addition, we have indemnity obligations to our customers for these products, which have also been provided to us from our suppliers, either through express agreement or by operation of law.

     We also provide warranties regarding the performance of software and automation products we sell. Our liability under these warranties is to bring the product into compliance with previously agreed upon specifications. For software products, this may result in additional project costs which are reflected in our estimates used for the percentage-of-completion method of accounting for software installation services within these contracts. In addition, most of our customers who purchase our software and automation products also purchase annual maintenance agreements. Revenue from these maintenance agreements is recognized on a straight-line basis over the contract period and the cost of servicing product warranties is charged to expense when claims become estimable. Accrued warranty costs were not material to the condensed consolidated balance sheets.

13. Contract Settlement

     During the second quarter of 2007, we entered into an agreement (the “Settlement Agreement”) that settled a patent infringement litigation we filed against TriZetto Group, Inc. (“TriZetto”) on September 13, 2004, McKesson Information Solutions LLC v. The TriZetto Group, Inc. (No. 04-1258-SLR). In the lawsuit, we alleged that clinical editing functionality included in TriZetto’s Facets^®, QicLink^TM and ClaimFacts^® software products infringed one of our patents. As part of the Settlement Agreement, TriZetto agreed to pay us a one-time royalty fee of $15 million (payable in two equal installments in October 2006 and September 2007) for a license for the relevant patent that covers past and future use of TriZetto products and services by all of their existing customers. TriZetto continues to include its clinical editing functionality in versions of Facets^® sold to new health plan customers with 100,000 or fewer members and in versions of QicLink^TM sold to any new customers. TriZetto also agreed to pay us a royalty fee of 5% of the net licensing revenue received from new sales of Facets^® and QicLink^TM containing its clinical editing functionality. Additionally, as part of the Settlement Agreement, TriZetto no longer includes its clinical editing functionality in versions of Facets^® sold to new customers with more than 100,000 members, effective November 1, 2006. In these cases, new customers may choose their clinical editing solution from available third-party providers, including McKesson. The Company started amortizing the $15 million settlement over the four-year term of the contract, commencing in the third quarter of 2007.

14. Other Commitments and Contingent Liabilities

     I. Securities Litigation

     In our annual report on Form 10-K for the year ended March 31, 2006 and in our Form 10-Q for the quarters ended June 30, 2006, and September 30, 2006, we reported on numerous legal proceedings, including those arising out of our 1999 announcement of accounting improprieties at HBO & Company (“HBOC”), now known as McKesson Information Solutions LLC (the “Securities Litigation”). Although most of the Securities Litigation matters have been resolved, as reported previously, certain matters remain pending. Significant developments in the Securities Litigation and significant developments relating to other litigation and claims since the earlier referenced reports, are as follows:

     The previously reported action, James Gilbert v. McKesson Corporation, et al., (Georgia State Court, Fulton County, Case No. 02VS032502C), was settled in January of 2007 for approximately the same amount accrued for this action at December 31, 2006.

     In 2005, as previously reported, we recorded a $1,200 million pre-tax ($810 million after-tax) charge with respect to the Company’s Securities Litigation. The charge consisted of $960 million for the previously reported

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FINANCIAL NOTES (Continued)
(Unaudited)

action in the Northern District of California captioned, In re McKesson HBOC, Inc. Securities Litigation, (No. C-99-20743 RMW) (the “Consolidated Action”) and $240 million for other Securities Litigation proceedings. During 2006, we settled many of the other Securities Litigation proceedings and paid $243 million pursuant to those settlements. Based on the payments made in the Consolidated Action and the other Securities Litigation proceedings, settlements reached in certain of the other Securities Litigation proceedings and our assessment of the remaining cases, the estimated accrual was increased by net pre-tax charges of $52 million and $1 million during the first and third quarters of 2006 and a total net pre-tax charge of $45 million for fiscal 2006. Additionally, on February 24, 2006, the Court gave final approval to the settlement of the Consolidated Action, and as a result, we paid approximately $960 million into an escrow account established by the lead plaintiff in connection with the settlement of the Consolidated Action. As of March 31, 2006, the Securities Litigation accrual was $1,014 million. The timing of any distribution of escrowed funds is uncertain in that it is conditioned on completion of the class claims administration process and also, the Company believes, on the final resolution of the pending Bear Stearns & Co. appeal.

     As previously reported, in March 2006, we reached an agreement to settle all claims brought under the Employee Retirement Income Security Act of 1974 (“ERISA”) on behalf of a class of certain participants in the McKesson Profit-Sharing Investment Plan, In re McKesson HBOC, Inc. ERISA Litigation, (No. C-00-20030 RMW). Such settlement called for the payment of $19 million, plus certain accrued interest, minus certain costs and expenses such as plaintiffs’ attorneys’ fees. On September 1, 2006, the Honorable Ronald M. Whyte entered an order granting final approval to the proposed settlement. The net cash proceeds of the settlement were distributed in October 2006. That order of final approval, and the expiration of the time in which an appeal could have been taken from that order, concludes this matter.

     During the first nine months of 2007, the Securities Litigation accrual decreased $30 million primarily reflecting a net pre-tax credit of $6 million representing the settlement of the ERISA claims and a reassessment of another case in the second quarter of 2007, and $25 million of cash payments made in connection with the ERISA and another settlement. As of December 31, 2006, the Securities Litigation accrual was $984 million. We believe the Securities Litigation reserves are adequate to address our remaining potential exposure with respect to the Securities Litigation. However, in light of the uncertainties of the timing and outcome of this type of litigation, and the substantial amounts involved, it is possible that the ultimate cost of these matters could impact our earnings, either negatively or positively, in the quarter of their resolution. We do not believe that the resolution of these matters will have a material adverse effect on our results of operations, liquidity or financial position taken as a whole.

     II. Other Litigation and Claims

     As previously reported, a civil class action entitled New England Carpenters Health Benefits Fund et al., v. First DataBank and McKesson Corporation (Civil Action No. 05-11148) has been filed against the Company in the United States District Court, District of Massachusetts based on allegations that the Company, in concert with co-defendant First DataBank, Inc. (“FDB”), took certain actions to increase the “Average Wholesale Prices” (“AWPs”) of certain branded drugs in violation of the federal Racketeer Influenced and Corrupt Organizations Act and in violation of other statutory and common law requirements. On November 22, 2006, the trial court granted plaintiffs leave to amend their complaint to assert claims on behalf of a purported class of consumers, in addition to the original class of third party payors. On December 20, 2006, plaintiffs filed an amended motion seeking class certification of classes for both third party payor and consumer class members. The Company filed its opposition to that motion on January 24, 2007. The hearing on plaintiffs’ motion for class certification is scheduled for April 12, 2007. On October 4, 2006, the New England Carpenters Health Benefits Fund plaintiffs and defendant FDB announced a proposed settlement, as to the defendant FDB only. The proposed settlement calls for downward adjustments to certain FDB published AWPs, a prohibition against all future changes to such AWPs and a prescribed timetable for the cessation of all publication of AWPs by FDB. On November 22, 2006, immediately following its order allowing plaintiffs to amend the complaint to add allegations regarding a consumer class, the trial court granted preliminary approval of the FDB settlement. The court has not yet set any schedule for class notice, the filling of objections to the settlement, or for a hearing on final approval of the settlement.

     In the previously disclosed matter, Roby v. McKesson HBOC, Inc. et al., (Superior Court of Yolo County, California, Case No. CV01-573), oral argument in the Company’s appeal from judgments in favor of plaintiff Roby

21

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

was held on December 12, 2006. On December 26, 2006, the California Court of Appeals issued its opinion (“Opinion”) in the matter, reducing Roby’s compensatory award from $3 million to $2 million and the punitive damages award from $15 million to $2 million. Roby’s petition for reconsideration of the Opinion was denied by the Court of Appeals on January 25,2007.

     The United States Attorney’s Office (“USAO”) for the Northern District of Mississippi is conducting an investigation into whether it will intervene in a civil qui tam action filed in the Northern District by an unknown private relator against the Company and other defendants. The Company is informed that the action attempts to allege violations of the anti-kickback statute in connection with the Company’s provision of Medicare claims billing services to an affiliate of a multi-facility nursing home customer. The Company has not seen the civil complaint that is the subject of the investigation, but does not believe there have been any violations of the anti-kickback statute in connection with its relationships or dealings with the customer. The Company has provided documents to the USAO and is fully cooperating with the investigation.

     As indicated in our previous periodic reports, the health care industry is highly regulated, and government agencies continue to increase their scrutiny over certain practices affecting government programs. From time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require considerable time and effort, and can result in considerable costs to the Company.

15. Stockholders’ Equity

     Comprehensive income is as follows:

	Quarter Ended						Nine Months Ended
	December 31,						December 31,
(In millions)	2006			2005			2006		2005
Net income	$	243		$	193		$	656	$	531
Foreign currency translation adjustments and other		(18	)		(1	)		21		18
Comprehensive income	$	225		$	192		$	677	$	549

     On January 4, 2007, the Company’s Board of Directors (the “Board”) amended the Company’s common stock rights plan to provide for the termination of the rights plan effective January 31, 2007. The common stock rights plan was structured to have certain antitakeover effects that would cause substantial dilution to the ownership interest of a person or group that attempted to acquire the Company on terms not approved by the Board.

     The Board approved share repurchase plans in October 2003, August 2005, December 2005 and January 2006 which permitted the Company to repurchase up to a total of $1 billion ($250 million per plan) of the Company’s common stock. Under these plans, we repurchased 19 million shares for $958 million during 2006 and as of March 31, 2006, less than $1 million remained available for future repurchases under these plans.

     In April and July 2006, the Board approved share repurchase plans which permitted the Company to repurchase up to an additional $1 billion ($500 million per plan) of the Company’s common stock. In the third quarter and the first nine months of 2007, we repurchased a total of 2 million and 15 million shares for $98 million and $753 million, and $247 million remains available for future repurchases as of December 31, 2006. Repurchased shares will be used to support our stock-based employee compensation plans and for other general corporate purposes. Stock repurchases may be made from time to time in open market or private transactions.

     As previously discussed, during the first quarter of 2006, we called for the redemption of the Debentures, which resulted in the exchange of the preferred securities for 5 million shares of our newly issued common stock.

22

McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

16. Segment Information

     Our operating segments consist of Pharmaceutical Solutions, Medical-Surgical Solutions and Provider Technologies. We evaluate the performance of our operating segments based on operating profit before interest expense, income taxes and results from discontinued operations. Our Corporate segment includes expenses associated with corporate functions and projects, certain employee benefits, and the results of certain joint venture investments. Corporate expenses are allocated to the operating segments to the extent that these items can be directly attributable to the segment.

     The Pharmaceutical Solutions segment distributes ethical and proprietary drugs, and health and beauty care products throughout North America. This segment also provides medical management and specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, patient and other services for payors, software and consulting and outsourcing services to pharmacies, and, through its investment in Parata, sells automated pharmaceutical dispensing systems for retail pharmacies.

     The Medical-Surgical Solutions segment distributes medical-surgical supplies, first-aid products and equipment, and provides logistics and other services within the United States and Canada.

     The Provider Technologies segment delivers enterprise-wide patient care, clinical, financial, supply chain, managed care and strategic management software solutions, automated pharmaceutical dispensing systems for hospitals, as well as outsourcing and other services to healthcare organizations throughout North America, the United Kingdom and other European countries.

     Financial information relating to our segments is as follows:

	Quarter Ended						Nine Months Ended
	December 31,						December 31,
(In millions)	2006			2005			2006			2005
Revenues
Pharmaceutical Solutions	$	22,028		$	21,295		$	65,715		$	61,553
Medical-Surgical Solutions		632			544			1,789			1,529
Provider Technologies
Services		322			269			930			782
Software and software systems		91			90			263			218
Hardware		38			42			115			111
Total Provider Technologies		451			401			1,308			1,111
Total	$	23,111		$	22,240		$	68,812		$	64,193
Operating profit
Pharmaceutical Solutions (1) (2)	$	338		$	305		$	954		$	859
Medical-Surgical Solutions		25			26			70			67
Provider Technologies		40			38			108			95
Total		403			369			1,132			1,021
Corporate		(46	)		(25	)		(136	)		(83	)
Securities Litigation (charge) credit, net		—			(1	)		6			(53	)
Interest Expense		(23	)		(22	)		(68	)		(69	)
Income from continuing operations before income taxes	$	334		$	321		$	934		$	816

(1) During the first nine months of 2007 and the third quarter and first nine months of 2006, we received $10 million, $37 million and $88 million as our share of settlements of antitrust class action lawsuits brought against drug manufacturers. These settlements were recorded as a credit in cost of sales within our Pharmaceutical Solutions segment in our condensed consolidated statements of operations.

(2) During the first nine months of 2007, we recorded $21 million of charges within our Pharmaceutical Solutions segment as a result of our transaction with Parata. Refer to Financial Note 2, “Acquisitions and Investments.”

23

McKESSON CORPORATION

FINANCIAL NOTES (Concluded)
(Unaudited)

	December 31,		March 31,
(In millions)	2006		2006
Segment assets
Pharmaceutical Solutions	$	15,162	$	13,737
Medical-Surgical Solutions		1,385		1,268
Provider Technologies		1,920		1,602
Total		18,467		16,607
Corporate
Cash and cash equivalents		2,013		2,139
Other		2,010		2,215
Total	$	22,490	$	20,961

24

McKESSON CORPORATION

FINANCIAL REVIEW
(Unaudited)

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

Financial Overview

	Quarter Ended									Nine Months Ended
	December 31,									December 31,
(In millions, except per share data)	2006		2005			Change				2006			2005			Change
Revenues	$	23,111	$	22,240				4	%	$	68,812			$	64,193		7	%
Securities Litigation pre-tax charge (credit), net		—		1			NM				(6	)			53	NM
Income from Continuing Operations Before Income Taxes		334		321				4			934				816		14
Discontinued Operations, net		3		(11	)		NM				(55	)			9	NM
Net Income		243		193				26			656				531		24
Diluted Earnings Per Share:
Continuing Operations	$	0.79	$	0.64				23	%	$	2.33			$	1.66		40	%
Discontinued Operations		0.01		(0.03	)		NM				(0.18	)			0.03	NM
Total	$	0.80	$	0.61				31		$	2.15			$	1.69		27

NM – not meaningful

     Revenues for the quarter ended December 31, 2006 grew 4% to $23.1 billion, net income increased 26% to $243 million and diluted earnings per share increased 31% to $0.80 compared to the same period a year ago. For the nine months ended December 31, 2006, revenue increased 7% to $68.8 billion, net income increased 24% to $656 million and diluted earnings per share increased 27% to $2.15 compared to the same period a year ago.

     Increases in net income and diluted earnings per share for the third quarter and first nine months of 2007 compared to the same period a year ago primarily reflect:

• higher operating profit in our Pharmaceutical Solutions segment, and

• a decrease in our reported tax rate.

     Net income and diluted earnings per share for the first nine months of 2007 were also impacted by:

• a $59 million decrease in pre-tax charges relating to our Securities Litigation,

• an $83 million credit to our income tax provision relating to the reversal of income tax reserves for our Securities Litigation, and

• $55 million of after-tax losses associated with our discontinued operations. In the second quarter of 2007, we sold our Medical-Surgical Solutions segment’s Acute Care business for net cash proceeds of $160 million. Financial results for this business for the first nine months of 2007 reflect an after-tax loss of $64 million, which includes a $79 million non-tax deductible write-off of goodwill. The financial results for the Acute Care business have been reclassified as a discontinued operation for all periods presented.

25

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

Results of Operations

     Revenues:

	Quarter Ended							Nine Months Ended
	December 31,							December 31,
(In millions)	2006		2005		Change			2006		2005		Change
Pharmaceutical Solutions
U.S. Healthcare direct distribution & services	$	13,507	$	13,242		2	%	$	40,216	$	38,270		5	%
U.S. Healthcare sales to customers’ warehouses		6,836		6,523		5			20,413		18,799		9
Subtotal		20,343		19,765		3			60,629		57,069		6
Canada distribution & services		1,685		1,530		10			5,086		4,484		13
Total Pharmaceutical Solutions		22,028		21,295		3			65,715		61,553		7
Medical-Surgical Solutions		632		544		16			1,789		1,529		17
Provider Technologies
Services		322		269		20			930		782		19
Software and software systems		91		90		1			263		218		21
Hardware		38		42		(10	)		115		111		4
Total Provider Technologies		451		401		12			1,308		1,111		18
Total Revenues	$	23,111	$	22,240		4		$	68,812	$	64,193		7

     Revenues increased by 4% and 7% to $23.1 billion and $68.8 billion during the quarter and nine months ended December 31, 2006 compared to the same periods a year ago. The increase primarily reflects growth in our Pharmaceutical Solutions segment, which accounted for over 95% of consolidated revenues.

     U.S. Healthcare pharmaceutical direct distribution and services revenues increased primarily reflecting market growth rates, which was partially offset by the loss of a large customer. For the nine months ended December 31, 2006, these revenues also reflect our acquisition of D&K Healthcare Resources, Inc. (“D&K”) during the second quarter of 2006 and expanded agreements with customers. U.S. Healthcare sales to customers’ warehouses increased primarily as a result of new and expanded agreements with customers, offset in part by a decrease in volume from a large customer.

     Canadian pharmaceutical distribution revenues increased reflecting favorable foreign exchange rates and market growth rates. Had the same U.S. and Canadian dollar exchange rates applied in 2007 as in 2006, revenues for the third quarter and first nine months of 2007 from our Canadian operations would have increased approximately 7% and 6% compared to the same periods a year ago.

     Medical-Surgical Solutions segment distribution revenues increased primarily reflecting stronger than average market growth rates as well as the acquisition of Sterling Medical Services LLC (“Sterling”) during the first quarter of 2007. Sterling is based in Moorestown, New Jersey, and is a national provider and distributor of disposable medical supplies, health management services and quality management programs to the home care market. Additionally, revenues for the third quarter of 2007 benefited from increased sales of flu vaccines and revenues for the first nine months of 2007 include an extra week of sales compared to the same period a year ago.

     Provider Technologies segment revenues increased reflecting greater implementations of clinical, imaging, revenue cycle and resource management software solutions domestically and continued progress on software solution implementations in international operations. Partially offsetting these increases, 2006 revenues for this segment benefited from a lower software deferral rate. Growth in this segment’s revenues was not materially impacted by business acquisitions.

26

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     Gross Profit:

	Quarter Ended									Nine Months Ended
	December 31,									December 31,
(Dollars in millions)	2006			2005			Change			2006			2005			Change
Gross Profit
Pharmaceutical Solutions	$	671		$	642			5	%	$	1,963		$	1,801			9	%
Medical-Surgical Solutions		174			143			22			505			425			19
Provider Technologies		216			189			14			613			512			20
Total	$	1,061		$	974			9		$	3,081		$	2,738			13
Gross Profit Margin
Pharmaceutical Solutions		3.05	%		3.01	%	4		bp		2.99	%		2.93	%	6		bp
Medical-Surgical Solutions		27.53			26.29			124			28.23			27.80			43
Provider Technologies		47.89			47.13			76			46.87			46.08			79
Total		4.59			4.38			21			4.48			4.27			21

     Gross profit for the third quarter and first nine months of 2007 increased 9% and 13% to $1,061 million and $3,081 million. As a percentage of revenues, gross profit margin increased 21 basis points to 4.59% for the third quarter of 2007 and 21 basis points to 4.48% for the first nine months of 2007. Gross profit margin increased due to an increase in our gross profit margins in all three of our segments.

     Gross profit margin for our Pharmaceutical Solutions segment increased during the third quarter of 2007 compared to the same period a year ago primarily as a result of:

•	the benefit of increased sales of generic drugs with higher margins,
•	a last-in, first-out (“LIFO”) inventory credit of $18 million in the third quarter of 2007 compared to $10 million for the same period a year ago. LIFO credits reflect our expectation of a LIFO benefit for the full fiscal year. Our Pharmaceutical 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 gross profit. The practice in the Pharmaceutical Solutions distribution business is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which prevents 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, and
•	improved buy profit margin.
	These increases were partially offset by:
•	a decrease in amounts of antitrust settlements. Results for the third quarter of 2006 include $37 million of cash proceeds representing our share of a settlement of an antitrust class action lawsuit, and
•	a decrease associated with a greater proportion of revenues within the segment attributed to sales to customers’ warehouses, which have lower gross profit margins relative to other revenues within the segment.

27

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     Gross profit margin for our Pharmaceutical Solutions segment also increased during the first nine months of 2007 compared to the same period a year ago primarily as a result of:

•	the benefit of increased sales of generic drugs with higher margins,
•	improved buy profit margin, and
•	a last-in, first-out (“LIFO”) inventory credit of $38 million in the first nine months of 2007 compared to $20 million for the same prior year period.
	These increases were partially offset by:
•	a decrease in amounts of antitrust settlements. Results for the first nine months of 2007 and 2006 include $10 million and $88 million of cash proceeds representing our share of various settlements of antitrust class action lawsuits,
•	a decrease associated with a greater proportion of revenues within the segment attributed to sales to customers’ warehouses, which have lower gross profit margins relative to other revenues within the segment, and
•	a $15 million charge in 2007 pertaining to the write-down of certain abandoned assets within our retail automation group. 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. 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, as determined by a third-party valuation, approximates the carrying value of consideration contributed to Parata. Our investment in Parata is accounted for under the equity method of accounting within our Pharmaceutical Solutions segment.

     In addition, gross profit margin for our U.S. pharmaceutical distribution business benefited from a relatively stable sell side margin in 2007.

     Gross profit margins increased in our Medical-Surgical Solutions segment during the third quarter and first nine months of 2007 compared to the same periods a year ago primarily reflecting favorable product mix and buy side margins. Provider Technologies segment’s gross profit margin increased primarily due to a change in product mix.

28

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     Operating Expenses and Other Income:

	Quarter Ended									Nine Months Ended
	December 31,									December 31,
(Dollars in millions)	2006			2005			Change			2006			2005			Change
Operating Expenses
Pharmaceutical Solutions	$	343		$	346			(1	)%	$	1,039		$	967			7	%
Medical-Surgical Solutions		150			118			27			437			360			21
Provider Technologies		179			153			17			512			426			20
Corporate		71			48			48			203			144			41
Subtotal		743			665			12			2,191			1,897			15
Securities Litigation charge (credit), net		—			1		NM				(6	)		53		NM
Total	$	743		$	666			12		$	2,185		$	1,950			12
Operating Expenses as a Percentage of Revenues
Pharmaceutical Solutions		1.56	%		1.62	%	(6		)bp		1.58			1.57	%	1		bp
Medical-Surgical Solutions		23.73			21.69			204			24.43			23.54			89
Provider Technologies		39.69			38.15			154			39.14			38.34			80
Total		3.21			2.99			22			3.18			3.04			14
Other Income
Pharmaceutical Solutions	$	10		$	9			11	%	$	30		$	25			20	%
Medical-Surgical Solutions		1			1			—			2			2			—
Provider Technologies		3			2			50			7			9			(22	)
Corporate		25			23			9			67			61			10
Total	$	39		$	35			11		$	106		$	97			9

     Operating expenses increased 12% to $743 million in the third quarter of 2007 and to $2.2 billion for the first nine months of 2007 (or 15% excluding the Securities Litigation charges and credits). As a percentage of revenues, operating expenses increased 22 and 14 basis points to 3.21% and 3.18% for the third quarter and first nine months of 2007. Excluding the Securities Litigation charges and credits, operating expenses as a percentage of revenues increased 22 basis points to 3.18% for the first nine months of 2007. Operating expense dollars, excluding the Securities Litigation, increased primarily due to additional costs to support our sales volume growth, our business acquisitions, and employee compensation costs associated with the requirement to expense all share-based compensation. Results for the first nine months of 2007 and 2006 include a pre-tax Securities Litigation credit of $6 million and a pre-tax charge of $53 million. Other income increased slightly in the third quarter and first nine months of 2007 compared to the same periods a year ago.

     During the first quarter of 2007, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which requires the recognition of expense resulting from transactions in which we acquire goods and services by issuing our shares, share options, or other equity instruments. As a result of the implementation, included in our third quarter and first nine months 2007 operating expenses, we recorded $15 million and $39 million of pre-tax share-based compensation expense, or $10 million and $28 million more than the same periods a year ago.

     We expect share-based compensation charges to approximate $0.10 to $0.12 per diluted share. These charges are expected to be approximately $0.07 to $0.09 per diluted share more than the share-based compensation expense recognized in our net income in 2006. 2006 net income includes $0.03 per diluted share of compensation expense associated with restricted stock whose intrinsic value as of the grant date is being amortized over the vesting period. Our assessments of estimated 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 behaviors, timing, level and types of our grants of annual share-based awards, and the attainment of performance goals. As a result, the actual share-based compensation expense in 2007 may differ from the Company’s current estimate.

29

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     Refer to Financial Notes 1 and 4, “Significant Accounting Policies” and “Share-Based Payment,” to the accompanying condensed consolidated financial statements for further discussions regarding our share-based compensation.

     Segment Operating Profit and Corporate Expenses:

	Quarter Ended									Nine Months Ended
	December 31,									December 31,
(Dollars in millions)	2006			2005			Change			2006			2005			Change
Segment Operating Profit (1)
Pharmaceutical Solutions (2) (3)	$	338		$	305			11	%	$	954		$	859			11	%
Medical-Surgical Solutions		25			26			(4	)		70			67			4
Provider Technologies		40			38			5			108			95			14
Subtotal		403			369			9			1,132			1,021			11
Corporate Expenses, net		(46	)		(25	)		84			(136	)		(83	)		64
Securities Litigation (charge) credit, net		—			(1	)	NM				6			(53	)	NM
Interest Expense		(23	)		(22	)		5			(68	)		(69	)		(1	)
Income from Continuing Operations, Before Income Taxes	$	334		$	321			4		$	934		$	816			14
Segment Operating Profit Margin
Pharmaceutical Solutions		1.53	%		1.43	%	10		bp		1.45	%		1.40	%	5		bp
Medical-Surgical Solutions		3.96			4.78			(82	)		3.91			4.38			(47	)
Provider Technologies		8.87			9.48			(61	)		8.26			8.55			(29	)

(1) Segment operating profit includes gross profit, net of operating expenses plus other income for our three business segments.

(2) During the first nine months of 2007 and the third quarter and first nine months of 2006, we received $10 million and $37 million and $88 million as our share of settlements of antitrust class action lawsuits brought against drug manufacturers.

(3) During the first nine months of 2007, we recorded $21 million of charges within our Pharmaceutical Solutions segment as a result of our transaction with Parata.

     Operating profit as a percentage of revenues increased in our Pharmaceutical Solutions segment largely as a result of an increase in the segment’s gross profit margin. Additionally, the segment’s operating profit for the third quarter of 2007 benefited from expense control and efficiency programs. Operating expenses increased in the first nine months of 2007 primarily reflecting additional costs to support the segment’s sales volume growth, our D&K acquisition, and employee share-based compensation costs.

     Medical-Surgical Solutions segment’s operating profit as a percentage of revenues decreased for the third quarter and first nine months of 2007 as increases in operating expenses as a percentage of revenues exceeded the increase in gross profit margin. Operating expenses for the segment increased primarily reflecting additional costs to support the segment’s sales volume growth, the acquisition of Sterling and an increase in bad debt expense. Additionally, operating expenses in 2006 benefited from a settlement with a vendor. As part of this segment’s divestiture of its Acute Care business, we expect to incur total restructuring charges of approximately $5 million in order to align the segment’s remaining operations. We anticipate incurring these charges during the first quarter of 2008.

     Provider Technologies segment’s operating profit as a percentage of revenues decreased primarily reflecting an increase in operating expenses as a percentage of revenues partially offset by an increase in gross profit margins. Operating expenses for the segment increased primarily as a result of investments in research and development activities and sales and marketing functions to support the segment’s revenue growth, the segment’s business acquisitions, and increases in employee share-based compensation costs, partially offset by a decrease in bad debt expense. Operating expenses for the first nine months of 2007 also include $5 million of restructuring charges as a result of a plan intended to reallocate product development and marketing resources. Operating expenses for the

30

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

first nine months of 2006 include a $3 million write-off of acquired in-process research and development costs resulting from the Medcon, Ltd. (“Medcon”) acquisition.

     Corporate expenses, net of other income, increased primarily reflecting additional costs incurred to support various initiatives and revenue growth, an increase in employee share-based compensation costs, a loss on the disposition of an asset, and an increase in reserves for notes on stock loans. These unfavorable variances were partially offset by a favorable legal settlement. Corporate expenses, net of other income, for the first nine months of 2006 benefited from a change in estimate for certain compensation and benefits plans.

     Securities Litigation Charges, Net: In 2005, we recorded a $1,200 million pre-tax ($810 million after-tax) charge with respect to the Company’s Securities Litigation. The charge consisted of $960 million for the previously reported action in the Northern District of California captioned, In re McKesson HBOC, Inc. Securities Litigation, (No. C-99-20743 RMW) (the “Consolidated Action”) and $240 million for other Securities Litigation proceedings. During 2006, we settled many of the other Securities Litigation proceedings and paid $243 million pursuant to those settlements. Based on the payments made in the Consolidated Action and the other Securities Litigation proceedings, settlements reached in certain of the other Securities Litigation proceedings and our assessment of the remaining cases, the estimated accrual was increased by pre-tax charges of $52 million and $1 million during the first and third quarters of 2006 and a total net pre-tax charge of $45 million for fiscal 2006. Additionally, on February 24, 2006, the Court gave final approval to the settlement of the Consolidated Action, and as a result, we paid approximately $960 million into an escrow account established by the lead plaintiff in connection with the settlement of the Consolidated Action. As of March 31, 2006, the Securities Litigation accrual was $1,014 million. The timing of any distribution of escrowed funds is uncertain in that it is conditioned on completion of the class claims administration process and also, the Company believes, on the final resolution of the pending Bear Stearns & Co. appeal.

     As previously reported, in March 2006, we reached an agreement to settle all claims brought under the Employee Retirement Income Security Act of 1974 (“ERISA”) on behalf of a class of certain participants in the McKesson Profit-Sharing Investment Plan, In re McKesson HBOC, Inc. ERISA Litigation, (No. C-00-20030 RMW). Such settlement called for the payment of $19 million, plus certain accrued interest, minus certain costs and expenses such as plaintiffs’ attorneys’ fees. On September 1, 2006, the Honorable Ronald M. Whyte entered an order granting final approval to the proposed settlement. The net cash proceeds of the settlement were distributed in October 2006. That order of final approval, and the expiration of the time in which an appeal could have been taken from that order, concludes this matter.

     The previously reported action, James Gilbert v. McKesson Corporation, et al., (Georgia State Court, Fulton County, Case No. 02VS032502C), was settled in January of 2007 for approximately the same amount accrued for this action at December 31, 2006.

     During the first nine months of 2007, the Securities Litigation accrual decreased $30 million primarily reflecting a net pre-tax credit of $6 million representing the settlement of the ERISA claims and a reassessment of another case in the second quarter of 2007, and $25 million of cash payments made in connection with the ERISA and another settlement. As of December 31, 2006, the Securities Litigation accrual was $984 million. We believe the Securities Litigation reserves are adequate to address our remaining potential exposure with respect to the Securities Litigation. However, in light of the uncertainties of the timing and outcome of this type of litigation, and the substantial amounts involved, it is possible that the ultimate cost of these matters could impact our earnings, either negatively or positively, in the quarter of their resolution. We do not believe that the resolution of these matters will have a material adverse effect on our results of operations, liquidity or financial position taken as a whole.

31

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     Interest Expense: Interest expense for 2007 approximated that of the prior year comparable periods.

     Income Taxes: The Company’s reported income tax rates for the quarters ended December 31, 2006 and 2005 were 28.1% and 36.4%, and 23.9% and 36.0% for the first nine months of 2007 and 2006.

     During the third quarter of 2007, we decreased our estimated effective tax rate from 35.0% to 34.0% primarily due to a higher proportion of income attributed to foreign countries that have lower income tax rates. This decrease required a $6 million cumulative catch-up benefit to income taxes in the third quarter of 2007 for income associated with the first half of 2007. Also, during the third quarter of 2007, we recorded an $8 million income tax benefit arising primarily from settlements and adjustments with various taxing authorities and a $6 million income tax benefit due to research and development investment tax credits from our Canadian operations.

     During the second quarter of 2007, we recorded a credit to income tax expense of $83 million which primarily pertains to our receipt of a private letter ruling from the U.S. Internal Revenue Service (“IRS”) holding that our payment of approximately $960 million to settle our Securities Litigation Consolidated Action 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 Action and related litigation. Income tax expense for the nine months ended December 31, 2005 includes a $7 million charge which primarily relates to tax settlements and adjustments with various taxing authorities.

     Discontinued Operations:

     Results from discontinued operations were as follows:

	Quarter Ended					Nine Months Ended
	December 31,					December 31,
(In millions)	2006		2005			2006			2005
Discontinued operations, net of taxes
Acute Care	$	3	$	(11	)	$	(64	)	$	(5	)
PBI		—		—			5			—
BioServices		—		—			—			14
Other		—		—			4			—
Total	$	3	$	(11	)	$	(55	)	$	9

     In the second quarter of 2007, we sold our Medical-Surgical Solutions segment’s Acute Care supply business to Owens & Minor, Inc. (“OMI”) for net cash proceeds of approximately $160 million. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the financial results of this business are classified as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. Such presentation includes the classification of all applicable assets of the disposed business under the caption “Prepaid expenses and other” and all applicable liabilities under the caption “Other” under “Current Liabilities” within our condensed consolidated balance sheets for all periods presented. Revenues associated with the Acute Care business were $269 million and $797 million for the third quarter and first nine months of 2006, and $573 million for the first half of 2007.

     Financial results for the nine months ended December 31, 2006 for this discontinued operation include an after-tax loss of $64 million, which primarily consists of an after-tax loss of $61 million for the business’ disposition and $3 million of after-tax losses associated with operations, other asset impairment charges and employee severance costs. The after-tax loss of $61 million for the business’ disposition includes a $79 million non-tax deductible write-off of goodwill, as further described below.

     In connection with this divestiture, we allocated a portion of our Medical-Surgical Solutions segment’s goodwill to the Acute Care business as required by SFAS No. 142, “Goodwill and Other Intangible Assets.” The allocation was based on the relative fair values of the Acute Care business and the continuing businesses that are

32

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

being retained by the Company. The fair value of the Acute Care business was determined based on the net cash proceeds resulting from the divestiture and the fair value of the continuing businesses was determined by a third-party valuation. As a result, we allocated $79 million of the segment’s goodwill to the Acute Care business.

     Additionally, as part of the divestiture, we entered into a transition services agreement (“TSA”) with OMI under which we continue to provide certain services to the Acute Care business during a transition period of approximately nine months. We also anticipate incurring approximately $5 million of pre-tax employee severance charges over the transition period. These charges, as well as the financial results from the TSA, are recorded as part of discontinued operations. The continuing cash flows generated from the TSA are not anticipated to be material to our condensed consolidated financial statements.

     In 2005, our Acute Care business entered into an agreement with a third party vendor to sell the vendor’s proprietary software and services. The terms of the contract required us to prepay certain royalties. During the third quarter of 2006, we ended marketing and sale of the software under the contract. As a result of this decision, we recorded a $15 million pre-tax charge in the third quarter of 2006 to write-off the remaining balance of the prepaid royalties.

     In the second quarter of 2007, we also sold a wholly-owned subsidiary, Pharmaceutical Buyers Inc. (“PBI”), for net cash proceeds of $10 million. The divestiture resulted in an after-tax gain of $5 million resulting from the tax basis of the subsidiary exceeding its carrying value. Financial results of this business, which were previously included in our Pharmaceutical Solutions segment, have been presented as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. These results were not material to our condensed consolidated financial statements.

     Results for discontinued operations for the nine months ended December 31, 2006 also include an after-tax gain of $4 million associated with the collection of a note receivable from a business sold in 2003.

     In the second quarter of 2006, we sold our wholly-owned subsidiary, McKesson BioServices Corporation (“BioServices”), for net cash proceeds of $63 million. The divestiture resulted in an after-tax gain of $13 million. Financial results for this business, which were previously included in our Pharmaceutical Solutions segment, have been presented as a discontinued operation for all periods presented in the accompanying condensed consolidated financial statements. These results were not material to our condensed consolidated financial statements.

     Refer to Financial Note 3, “Discontinued Operations,” to the accompanying condensed consolidated financial statements for further discussions regarding our divestitures.

     Net Income: Net income was $243 million and $193 million for the third quarters of 2007 and 2006, or $0.80 and $0.61 per diluted share. Net income was $656 million and $531 million for the first nine months of 2007 and 2006, or $2.15 and $1.69 per diluted share. Net income for the first nine months of 2007 includes an $87 million after-tax credit, or $0.28 per diluted share, relating to our Securities Litigation. Net income for the first nine months of 2006 includes a $35 million after-tax Securities Litigation charge, or ($0.11) per diluted share. Net income for the first nine months of 2007 also includes $55 million of after-tax losses for our discontinued operations primarily pertaining to the disposition of our Acute Care business.

33

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     A reconciliation between our net income per share reported in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and our earnings per diluted share, excluding charges for the Securities Litigation for the third quarters and first nine months of 2007 and 2006 is as follows:

	Quarter Ended					Nine Months Ended
	December 31,					December 31,
(In millions except per share amounts)	2006		2005			2006			2005
Net income, as reported	$	243	$	193		$	656		$	531
Exclude:
Securities Litigation charge (credit), net		—		1			(6	)		53
Income taxes		—		(1	)		2			(18	)
Income tax reserve reversals		—		—			(83	)		—
Securities Litigation charge (credit), net of tax		—		—			(87	)		35
Net income, excluding Securities Litigation charges	$	243	$	193		$	569		$	566
Diluted earnings per common share, as reported (1) (2)	$	0.80	$	0.61		$	2.15		$	1.69
Diluted earnings per common share, excluding Securities Litigation charge (credit) (1) (2)	$	0.80	$	0.61		$	1.87		$	1.80
Shares on which diluted earnings per common share, excluding the Securities Litigation charge (credit), were based		302		316			305			315

(1)	For the nine months ended December 31, 2005, interest expense, net of related income taxes, of $1 million, has been added to net income, excluding the Securities Litigation net charges, for purpose of calculating diluted earnings per share. This calculation also includes the impact of dilutive securities (stock options, convertible junior subordinated debentures and restricted stock).
(2)	Certain computations may reflect rounding adjustments.

     These pro forma amounts are non-GAAP financial measures. We use these measures internally and consider these results to be useful to investors as they provide the most relevant benchmarks of core operating performance.

     Weighted Average Diluted Shares Outstanding: Diluted earnings per share were calculated based on an average number of diluted shares outstanding of 302 million and 316 million for the third quarters of 2007 and 2006 and 305 million and 315 million for the nine months ended December 31, 2006 and 2005. The decrease in the number of weighted average diluted shares outstanding reflects a decrease in the number of common shares outstanding as a result of repurchased stock, partially offset by exercised stock options, as well as an increase in the common stock equivalents from stock options due to the increase in the Company’s common stock price.

34

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

Business Acquisitions

     On November 5, 2006, we entered into a definitive agreement to acquire all of the outstanding shares of Per-Se Technologies, Inc. (“Per-Se”) of Alpharetta, Georgia for $28.00 per share in cash, or approximately $1.8 billion in aggregate including the assumption of Per-Se’s debt. Per-Se is a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies. On January 26, 2007, we acquired Per-Se. The acquisition was funded with cash on hand and through the use of a new interim credit facility (refer to “Credit Resources”). Financial results for Per-Se will primarily be included within our Provider Technologies segment.

     In the first quarter of 2007, we acquired the following three entities for a total cost of $92 million, which was paid in cash:

•	Sterling, based in Moorestown, New Jersey, a national provider and distributor of disposable medical supplies, health management services and quality management programs to the home care market. Financial results for Sterling are included in our Medical-Surgical Solutions segment;
•	HealthCom Partners LLC (“HealthCom”), based in Mt. Prospect, Illinois, a leading provider of patient billing solutions designed to simplify and enhance healthcare providers’ financial interactions with their patients; and
•	RelayHealth Corporation (“RelayHealth”), based in Emeryville, California, a provider of secure online healthcare communication services linking patients, healthcare professionals, payors and pharmacies. Financial results for HealthCom and RelayHealth are included in our Provider Technologies segment.
	Goodwill recognized in these transactions amounted to $61 million.

     In addition, in 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, in exchange for a significant minority interest in Parata. 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, as determined by a third-party valuation, approximates the carrying value of consideration contributed to Parata. Our investment in Parata is accounted for under the equity method of accounting within our Pharmaceutical Solutions segment.

	In 2006, we made the following acquisitions:
•	In the second quarter of 2006, we acquired all of the issued and outstanding stock of D&K of St. Louis, Missouri for an aggregate cash purchase price of $479 million, including the assumption of D&K’s debt. D&K is primarily 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. Approximately $158 million of the purchase price has been assigned to goodwill. Included in the purchase price were acquired identifiable intangibles of $43 million primarily representing customer lists and not-to-compete covenants which have an estimated weighted-average useful life of nine years. Financial results for D&K are included in our Pharmaceutical Solutions segment.
•	Also in the second quarter of 2006, we acquired all of the issued and outstanding shares of Medcon, an Israeli company, for an aggregate purchase price of $82 million. Medcon provides web-based cardiac image and information management services to healthcare providers. Approximately $60 million of the purchase price was assigned to goodwill and $20 million was assigned to intangibles which represent technology assets and customer lists which have an estimated weighted-average useful life of four years. Financial results for Medcon are included in our Provider Technologies segment.

35

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     During the last two years, we also completed a number of other acquisitions and investments within all three of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition and, for certain recent acquisitions, may be subject to change. Goodwill recognized for our business acquisitions is not expected to be deductible for tax purposes. Pro forma results of operations for our business acquisitions have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.

     Refer to Financial Note 2, “Acquisitions and Investments,” to the accompanying condensed consolidated financial statements for further discussions regarding our business acquisitions.

Financial Condition, Liquidity, and Capital Resources

     Operating activities provided cash of $555 million and $1,466 million during the first nine months of 2007 and 2006. Operating activities for 2007 benefited from improved accounts receivable management, reflecting changes in our customer mix, our termination of a customer contract and an increase in accounts payable associated with improved payment terms. These benefits were fully offset by increases in inventory needed to support our growth and timing of inventory receipts. Operating activities for 2007 also reflect payments of $25 million for the settlements of Securities Litigation cases. Cash flows from operations in 2006 benefited from improved working capital balances for our U.S. pharmaceutical distribution business as purchases from certain of our suppliers were better aligned with customer demand and as a result, net financial inventory (inventory net of accounts payable) decreased. Operating activities for 2006 also benefited from better inventory management. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors. Operating activities for 2006 also include a $143 million cash receipt in connection with an amended agreement entered into with a customer and cash settlement payments of $227 million for certain Securities Litigation cases.

     Investing activities utilized cash of $152 million and $768 million during the first nine months of 2007 and 2006. Investing activities for 2007 reflect payments of $106 million for our business acquisitions and $36 million for our investment in Parata. Investing activities for 2007 also reflect $175 million of cash proceeds from the sale of our businesses, including $164 million for the sale of our Acute Care business. Investing activities for 2006 include increases in property acquisitions and capitalized software expenditures which primarily reflect our investment in our U.S. pharmaceutical distribution center network and our Provider Technologies segment’s investment in software for a contract with the British government’s National Health Services Information Authority organization. Investing activities for 2006 also include $560 million of expenditures for our business acquisitions, including D&K and Medcon. Partially offsetting these increases were cash proceeds of $63 million pertaining to the sale of BioServices.

     Financing activities utilized cash of $529 million and $317 million in the first nine months of 2007 and 2006. Financing activities for 2007 include an incremental use of cash of $177 million for stock repurchases and $196 million less cash receipts primarily resulting from employees’ exercises of stock options. Financing activities for 2006 include $102 million of cash paid for the repayment of life insurance policy loans.

     The Company’s Board of Directors (the “Board”) approved share repurchase plans in October 2003, August 2005, December 2005 and January 2006 which permitted the Company to repurchase up to a total of $1 billion ($250 million per plan) of the Company’s common stock. Under these plans, we repurchased 19 million shares for $958 million during 2006 and as of March 31, 2006, less than $1 million remained available for future repurchases under these plans.

     In April and July 2006, the Board approved share repurchases plans which permitted the Company to repurchase up to an additional $1 billion ($500 million per plan) of the Company’s common stock. In the third quarter and the first nine months of 2007, we repurchased a total of 2 million and 15 million shares for $98 million and $753 million, and $247 million remains available for future repurchases as of December 31, 2006. Repurchased shares will be used to support our stock-based employee compensation plans and for other general corporate purposes. Stock repurchases may be made from time to time in open market or private transactions.

36

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

     Selected Measures of Liquidity and Capital Resources

	December 31,			March 31,
(Dollars in millions)	2006			2006
Cash and cash equivalents	$	2,013		$	2,139
Working capital		3,578			3,527
Debt, net of cash and cash equivalents		(1,031	)		(1,148	)
Debt to capital ratio (1)		13.9	%		14.4	%
Return on stockholders’ equity (2)		14.7			13.1

(1)	Ratio is computed as total debt divided by total debt and stockholders’ equity.
(2)	Ratio is computed as net income (loss) over the past four quarters, divided by a five-quarter average of stockholders’ equity.

     Working capital primarily includes cash and cash equivalents, receivables, inventories, drafts and accounts payable, and deferred revenue. Our Pharmaceutical Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year that are a result of a number of factors, including inventory purchase activities, seasonal demands, customer and supplier mix and the timing of receipts from customers and payments to suppliers. Inventory purchase activities are a function of sales volume, product mix, new customer build-up requirements and a level of investment inventory. As of December 31, 2006, consolidated working capital increased slightly from March 31, 2006.

     During the first quarter of 2006, we called for the redemption of the Company’s convertible junior subordinated debentures, which resulted in the exchange of preferred securities for 5 million shares of our newly issued common stock.

Credit Resources

     We fund our working capital requirements primarily with cash, short-term borrowings and our receivables sale facility. We have a $1.3 billion five-year, senior unsecured revolving credit facility that expires in September 2009. Borrowings under this credit facility bear interest at a fixed base rate, a floating rate based on the London Interbank Offering Rate (“LIBOR”) rate or a Eurodollar rate. In June 2006, we renewed our committed accounts receivable sales facility. The facility was renewed under substantially similar terms to those previously in place with the exception that the facility was reduced to $700 million from $1.4 billion. The renewed facility expires in June 2007. No amounts were outstanding under any of these facilities at December 31, 2006.

     In connection with our purchase of Per-Se in January 2007, we entered into a new $1.8 billion interim credit facility. The interim credit facility is a 364-day unsecured facility which has terms substantially similar to those contained in the Company’s existing revolving credit facility. We anticipate replacing the interim credit facility with a permanent bond financing in an amount up to $1.2 billion by the end of the fourth quarter of 2007.

     Our various borrowing facilities and long-term debt are subject to certain covenants. Our principal debt covenant is our debt to capital ratio, which cannot exceed 56.5%. If we exceed this ratio, repayment of debt outstanding under the revolving credit facility and $235 million of term debt could be accelerated. At December 31, 2006, this ratio was 13.9% and we were in compliance with our other financial covenants. A reduction in our credit ratings or the lack of compliance with our covenants could negatively impact our ability to finance operations through our credit facilities, or issue additional debt at the interest rates then currently available.

     Funds necessary for the resolution of the Securities Litigation, future debt maturities and our other cash requirements are expected to be met by existing cash balances, cash flows from operations, existing credit sources and other capital market transactions.

37

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

     In addition to historical information, management’s discussion and analysis includes certain forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended. Some of the forward-looking statements can be identified by use of forward-looking words such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximates,” “intends,” “plans,” or “estimates,” or the negative of these words, or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors. The readers should not consider this list to be a complete statement of all potential risks and uncertainties.

• adverse resolution of pending shareholder litigation regarding the 1999 restatement of our historical financial statements;

• the changing U.S. healthcare environment, including changes in government regulations and the impact of potential future mandated benefits;

• competition;

• changes in private and governmental reimbursement or in the delivery systems for healthcare products and services;

• governmental and manufacturers’ efforts to regulate or control the pharmaceutical supply chain;

• changes in pharmaceutical and medical-surgical manufacturers’ pricing, selling, inventory, distribution or supply policies or practices;

• changes in the availability or pricing of generic drugs;

• changes in customer mix;

• substantial defaults in payment or a material reduction in purchases by large customers;

• challenges in integrating and implementing the Company’s internally used or externally sold software and software systems, or the slowing or deferral of demand or extension of the sales cycle for external software products;

• continued access to third-party licenses for software and the patent positions of the Company’s proprietary software;

• the Company’s ability to meet performance requirements in its disease management programs;

• the adequacy of insurance to cover liability or loss claims;

• new or revised tax legislation;

• foreign currency fluctuations or disruptions to foreign operations;

• the Company’s ability to successfully identify, consummate and integrate strategic acquisitions;

• changes in generally accepted accounting principles (GAAP); and

• general economic conditions.

     These and other risks and uncertainties are described herein or in our Forms 10-K, 10-Q, 8-K and other public documents filed with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after this date or to reflect the occurrence of unanticipated events.

38

McKESSON CORPORATION

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     We believe there has been no material change in our exposure to risks associated with fluctuations in interest and foreign currency exchange rates discussed in our 2006 Annual Report on Form 10-K.

Item 4. Controls and Procedures

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

     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 our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     See Financial Note 14, “Other Commitments and Contingent Liabilities,” of our unaudited condensed consolidated financial statements contained in Part I of this Quarterly Report on Form 10-Q.

Item 1A. Risk Factors

     There have been no material changes from the risk factors disclosed in Part 1, Item 1A, of our 2006 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     The following table provides information on the Company’s share repurchases during the third quarter of 2007.

	Share Repurchases
							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(1)
October 1, 2006 – October 31, 2006		—	$	—		—	$	345
November 1, 2006 – November 30, 2006		—		—		—		345
December 1, 2006 – December 31, 2006		2		50.85		2		247
Total		2				2		247

(1) In April and July 2006, the Company’s Board of Directors approved plans to repurchase up to a total of $1 billion ($500 million per plan) of the Company’s common stock. These plans have no expiration date. 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.

Item 3. Defaults Upon Senior Securities

     None

39

McKESSON CORPORATION

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

     None

Item 5. Other Information

     None

Item 6. Exhibits

     Exhibits identified in parentheses below are on file with the Securities and Exchange Commission and are incorporated by reference as exhibits hereto.

Exhibit
Number	Description
3.3	Amended and Restated By-Laws of the Company, dated as of January 4, 2007 (Exhibit 3.1 to the Company’s Current Report on Form 8-K, Date of Report January 4, 2007, File No. 1-13252).
4.2	Amendment No. 1 to Rights Agreement, dated as of January 4, 2007, between the Company and The Bank of New York, as Rights Agent (Exhibit 4.1 to the Company’s Current Report on Form 8-K, Date of Report January 4, 2007, File No. 1-13252).
10.31	Amended and Restated Employment Agreement, effective as of November 1, 2006, by and between the Company and its Executive Vice President and President, McKesson Provider Technologies.
10.32	Amended and Restated Employment Agreement, effective as of November 1, 2006, by and between the Company and its Executive Vice President and Group President.
31.1	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as 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.

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.

	McKesson Corporation
Dated: January 30, 2007	/s/ Jeffrey C. Campbell
	Jeffrey C. Campbell
	Executive Vice President and Chief Financial Officer
	/s/ Nigel A. Rees
	Nigel A. Rees
	Vice President and Controller

40

EX-10.31

Exhibit 10.31

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”), dated as of November 1, 2006 (the “Effective Date”), is by and between McKesson Corporation (the “Company”), a Delaware corporation with its principal office at One Post Street, San Francisco, California, and Pamela J. Pure (“Executive”).

RECITALS

     A. WHEREAS, Executive and the Company have previously entered into that certain Employment Agreement dated as of April 1, 2004 (the “Prior Employment Agreement”);

     B. WHEREAS, Executive and the Company wish to amend and restate the terms of Executive’s employment with the Company, as set forth herein;

     C. The Company, in its business, develops and uses certain Confidential Information (as defined in Paragraph 7(c) below). Such Confidential Information will necessarily be communicated to or acquired by Executive by virtue of her employment with the Company, and the Company has spent time, effort and money to develop such Confidential Information and to promote and increase its goodwill; and

     D. The Company desires to retain the services of, and employ, Executive on its own behalf and on behalf of its affiliated companies for the period provided in this Agreement and, in so doing, to protect its Confidential Information and goodwill, and Executive is willing to accept employment by the Company on a full-time basis for such period, upon the terms and conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows:

          1. Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ Executive, and Executive agrees to accept employment from, and remain in the employ of, the Company for the period stated in Paragraph 3 hereof.

          2. Position and Responsibilities. During the period of her employment hereunder, Executive agrees to serve the Company, and the Company shall employ Executive, as Executive Vice President and President, McKesson Provider Technologies, or in such other senior corporate executive capacity or capacities as may be specified from time to time by the Chief Executive Officer of the Company (the “Chief Executive Officer”).

          3. Terms and Duties.

               (a) Term of Employment. The period of Executive’s employment under this Agreement shall be deemed to have commenced on the date of this Agreement and shall continue until the third anniversary of the Effective Date; provided, however, that the term of this Agreement shall automatically be extended for one (1) additional year on

each anniversary of the Effective Date, unless terminated earlier in accordance with Paragraph 8 below (the “Term”).

               (b) Duties. During the period of her employment hereunder and except for illness, reasonable vacation periods and reasonable leaves of absence, Executive shall devote her best efforts and all her business time, attention and skill to the business and affairs of the Company and its affiliated companies, as such business and affairs now exist and as they may be hereafter changed or added to, under and pursuant to the general direction of the Board of Directors of the Company (the “Board”); provided, however, that, with the approval of the Chief Executive Officer, Executive may serve, or continue to serve, on the boards of directors of, hold any other offices or positions in, companies or organizations which, in such officer’s judgment, will not present any conflict of interest with the Company or any of its subsidiaries or affiliates or divisions, or materially adversely affect the performance of Executive’s duties pursuant to this Agreement. The Company shall retain full direction and control of the means and methods by which Executive performs the services for which she is employed hereunder. The services which are to be employed by Executive hereunder are to be rendered in the State of Georgia, or in such other place or places in the United States or elsewhere as may be determined from time to time by the Board.

          4. Compensation and Reimbursement of Expenses.

               (a) Compensation. During the period of her employment hereunder, Executive shall be paid a salary, in monthly or semi-monthly installments (in accordance with the Company’s normal payroll practices for senior executive officers), at the rate of Six Hundred Thirty-Four Thousand, Seven Hundred and Seventy-Six Dollars ($634,776) per year, or such higher salary as may be from time to time approved by the Board (or any duly authorized Committee thereof) (any such higher salary so approved to be thereafter the minimum salary payable to Executive during the remainder of the term hereof), plus such additional incentive compensation, if any, as may be awarded to her yearly by the Board (or any duly authorized Committee thereof). For purposes of the MIP (as defined in paragraph 5 below), for each of the Company’s fiscal years ending during the term of this Agreement, Executive’s Individual Target Award shall be 85% of her base salary for the applicable Year (as defined in the MIP). Executive shall also receive a Mortgage Allowance of Two Thousand Six Hundred Forty-Six Dollars and Four Cents ($2,646.04) per month through February 2013, or termination of employment, if earlier, provided that her current residence remains her principal residence.

               (b) Reimbursement of Expenses. The Company shall pay or reimburse Executive, in accordance with its normal policies and practices, for all reasonable travel and other expenses incurred by Executive in performing her obligations hereunder.

          5. Other Benefits. During the period of her employment hereunder, Executive shall be entitled to receive all other benefits of employment generally available to other members of the Company’s senior management and those benefits for which key executives are or shall become eligible, when and as she becomes eligible therefore,

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including without limitation, group health and life insurance benefits, short and long-term disability plans, deferred compensation plans, and participation in the Company’s Profit-Sharing Investment Plan, Employee Stock Purchase Plan, Executive Medical Plan, Management Incentive Plan (“MIP”), Executive Benefit Retirement Plan (“EBRP”), Executive Survivor Benefits Plan (“ESBP”), Long-Term Incentive Plan (“LTIP”). Stock Purchase Plan and 1994 Stock Option and Restricted Stock Plan, the 2005 Stock Plan, (or any other similar plan or arrangement).

          6. Benefits Payable Upon Disability or Death.

               (a) Disability Benefits. If, during the term of this Agreement, Executive shall be prevented from properly performing services hereunder by reason of her illness or other physical or mental incapacity, the Company shall continue to pay Executive her then current salary hereunder during the period of such disability or, if less, for a period of (12) calendar months, at which time the Company’s obligations hereunder shall cease and terminate.

               (b) Death Benefits. In the event of the death of Executive during the term of this Agreement, Executive’s salary payable hereunder shall continue to be paid to Executive’s surviving spouse or, if there is no spouse surviving, then to Executive’s designee or representative (as the case may be) through the six-month period following the end of the calendar month in which Executive’s death occurs. Thereafter, all of the Company’s obligations hereunder shall cease and terminate.

               (c) Other Plans. The provisions of this Paragraph 6 shall not affect any rights of Executive’s heirs, administrators, executors, legatees, beneficiaries or assigns under the Company’s Profit-Sharing Investment Plan, EBRP, ESBP, 1994 Stock Option and Restricted Stock Plan (or any other similar plan or arrangement), any stock purchase plan or any other employee benefit plan of the Company, and any such rights shall be governed by the terms of the respective plans.

          7. Obligations of Executive During and After Employment.

               (a) Noncompetition. Executive agrees that during the term of her employment hereunder, that she will work exclusively for and devote her substantial working energies solely to the benefit of the Company. Executive further agrees that for a period of two (2) years following the termination of her employment for whatever reason, that Executive will not perform, in any state of the United States of America, any like or similar services that Executive performed during the course of her employment with Company, for any competitor of Company. Executive agrees that, at the time of execution of this Agreement, (1) the Company is currently conducting or planning to solicit and conduct business in each of the states of the United States of America, and (2) that she has direct or indirect supervisory responsibilities for such conduct or plans in each such state.

               (b)  Trade Secret and Confidential Information. Executive acknowledges and agrees that, during the course of her employment, Executive will have produced and/or

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have access to trade secrets and Confidential Information (as defined below), of the Company and that the unauthorized use or disclosure of any of such trade secrets and Confidential Information would harm the Company.

               (i) Trade Secrets. Executive promises and agrees to take all reasonable steps to maintain and protect the trade secrets of the Company and its affiliates during and after Executive’s employment with the Company. Executive further agrees not to use or disclose any trade secret of the Company and its affiliates after the termination of her employment.

               (ii) Confidential Information. Executive promises and agrees to take all reasonable steps to maintain and protect the Confidential Information (as defined below) of the Company during and for a period of three years after Executive’s employment with the Company. Executive further agrees not to use or disclose any Confidential Information of the Company for a three year period after the termination of her employment with the Company. Therefore subject to these restrictions, Executive agrees to hold in confidence and not, directly or indirectly, disclose, use, copy or make lists of any such information, except to the extent expressly authorized by the Company in writing or as required by law. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to the Company’s business which Executive shall prepare, use, or come into contact with, shall be and remain the sole property of the Company, and shall not be removed (except to allow Executive to perform her responsibilities hereunder while traveling for business purposes or otherwise working away from her office) from the Company’s premises without its prior written consent, and shall be promptly returned to the Company upon termination of employment with the Company. This Paragraph 7 (b) shall survive the termination or expiration of this Agreement.

               (iii) Confidential Information Defined. For purposes of this Agreement, “Confidential Information” excludes trade secrets of the Company, but includes all other information (whether reduced to written, electronic, magnetic or other tangible form) acquired in any way by Executive during the course of her employment with the Company concerning the products, projects, activities, business or affairs of the Company, or the Company’s customers, including without limitation, (i) all information concerning computer programs, system documentation, special hardware, product hardware, related software development, manuals, formulae, processes, methods, machines, compositions, ideas, improvements or inventions of the Company and its affiliated companies, (ii) all sales and financial information concerning the Company and its affiliated companies, (iii) all customer and supplier lists of the Company and its affiliated companies, (iv) all information concerning products or projects under development by the Company or any of its affiliated companies or marketing plans for any of those products or projects, and (v) all information in any way concerning the products, projects, activities, business or affairs of customers of the Company or any of its affiliated companies which was furnished to her by the Company or any of its agents or customers; provided, however, that Confidential Information does not include information which (A) becomes available to the public other than as a result of a disclosure by Executive, (B) was available to her on a non-confidential basis outside of

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her employment with the Company, or (C) becomes available to her on a non-confidential basis from a source other than the Company or any of its agents, creditors, suppliers, lessors, lessees or customers.

               (c) Non-solicitation of Employees. Executive agrees that for a period of two years following the termination of Executive’s employment for any reason, that Executive will not solicit, recruit or hire any employee of Company with whom Executive had business contact or about whom Executive had access to Confidential Information regarding the employee’s pay, performance, duties or customer contacts.

               (d) Non-solicitation of Customers. Executive recognizes and acknowledges that it is essential for the proper protection of the business of the Company that Executive be restrained for a reasonable period following the termination of Executive’s employment with the Company from soliciting customers of the Company. Executive agrees for a period of two years following the termination of Executive’s employment for whatever reason, that Executive will not solicit for any competitive purpose the customers of Company, such customers shall be limited to those customers with whom Executive had material personal, business contact within the last three years of Executive’s employment with Company.

               (e) Remedy for Breach. Executive agrees that in the event of a breach or threatened breach of any of the covenants contained in this Paragraph 7, the Company shall have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed that any material breach of any of the covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company.

               (f) Blue-Penciling. Executive acknowledges and agrees that the noncompetition and nonsolicitation provisions contained herein are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than are necessary to protect the goodwill, Confidential Information and other business interests of the Company. Nevertheless, if any court determines that any of said noncompetition and other restrictive covenants and agreements, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable to the maximum extent permitted by applicable law.

               (g) Mutual Dependence. Executive understands and agrees that her full compliance with Section 7 of this Agreement is an express condition for and mutually dependent upon the obligations of the Company to pay Executive her compensation and benefits, including severance pay, during the remainder of the Term. Executive further understands and agrees that in the event that any provisions of Section 7 of this Agreement are rendered void, invalid, illegal or otherwise unenforceable, in whole or in substantial part, as a result of actions not initiated by the Company or its agent, the

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Company’s obligations to pay Executive her Base Salary, bonus or any other compensation and benefits, including severance pay, may be terminated immediately.

               (h) Right to Resign. The parties expressly acknowledge that Executive may terminate her employment at any time for any reason upon giving written notice of termination to the Company, and that such resignation shall not constitue a breach of this Agreement.

          8. Termination.

               (a) For Cause. Notwithstanding anything herein to the contrary, the Company may, without liability, terminate Executive’s employment hereunder for Cause (as defined below) at any time upon written notice from the Board (or any duly authorized Committee thereof) specifying such Cause, and thereafter, the Company’s obligations hereunder shall cease and terminate; provided, however, that such written notice shall not be delivered until after the Board (or any duly authorized Committee thereof) shall have given Executive written notice specifying the conduct alleged to have constituted such Cause and Executive has failed to cure such conduct, if curable, within fifteen (15) days following receipt of such notice. As used herein, the term “Cause” shall mean ...(i) Executive’s willful misconduct, habitual neglect or dishonesty with respect to matters involving the Company or its subsidiaries which is materially and demonstrably injurious to the Company, or (ii) a material breach by Executive of one or more terms of this Agreement.

               (b) Arbitration Required to Confirm Cause. In the event of a termination for Cause pursuant to subparagraph (a) above, the Company shall continue to pay Executive’s then current compensation as specified in this Agreement until the issuance of an arbitration award affirming the Company’s action. Such arbitration shall be held in accordance with the provisions of Paragraph 12(d) below. In the event the award upholds the action of the Company, Executive shall promptly repay to the Company any sums received pursuant to this subparagraph 8(b), following termination of employment.

               (c) Other than For Cause, Performance, Reorganization. Notwithstanding anything herein to the contrary, the Company may also terminate Executive’s employment (without regard to any general or specific policies of the Company relating to the employment or termination of its employees) (i) should Executive fail to perform her duties hereunder in a manner satisfactory to the Chief Executive Officer, (ii) should Executive’s position be eliminated as a result of a reorganization or restructuring of the Company or any of its affiliated companies, or (iii) for any other reason or reasons, in the Company’s sole discretion.

               (d) Obligations of the Company on Termination of Employment.

                    (i) If the Company terminates Executive’s employment pursuant to subparagraph 8(a) above and the Company’s action is affirmed as specified in subparagraph 8(b) above or Executive terminates her employment with the Company other than for Good Reason (as defined in subparagraph (d)(iii) below), then all of the

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Company’s obligations hereunder shall immediately cease and terminate. Executive shall thereupon have no further right or entitlement to additional salary, incentive compensation payments or awards, or any perquisites from the Company whatsoever, and Executive’s rights, if any, under the Company’s employee and executive benefit plans shall be determined solely in accordance with the express terms of the respective plans.

                    (ii) If the Company terminates Executive’s employment pursuant to subparagraph 8(c) above or Executive terminates her employment with the Company for Good Reason prior to the expiration of the Term, then in lieu of any benefits payable pursuant to the Company’s Executive Severance Policy (so long as the compensation and benefits payable hereunder equal or exceed those payable under said Policy) and in complete satisfaction and discharge of all of its obligations to Executive hereunder, the Company shall, provided Executive is not in breach of the provisions of Paragraph 7 hereof and except as provided in Paragraph 9 below, and conditioned upon Executive’s execution of a standard, full release of claims, (it being understood that such release shall be mutual, and shall contain standard “carve-outs” from Executive’s release for indemnification rights, vested rights under pension, insurance and other benefit plans, and the like) (A) provide Executive with monthly cash payments equal to Executive’s final monthly base salary (“Severance”) for the remainder of the Term (the “Severance Period”); provided that, if such payment is deferred in accordance with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), it shall accrue interest at the Deferred Compensation Administration Plan III Rate (the “DCAP Rate”) for the period of such deferral, which interest shall be paid together with such payment, and further provided that the Company’s obligation to make such Severance payments shall be reduced by any compensation received by Executive from a subsequent employer during the Severance Period, (B) consider Executive for a bonus under the terms of the Company’s MIP for the fiscal year in which termination occurs (but not for any subsequent year) provided that any such bonus, if earned, shall be pro-rated to reflect the portion of the year for which Executive was actively employed, and shall be made at the time and in the manner applicable to MIP payments for current employees; provided, however, that, if such payment is deferred in accordance with Section 409A of the Code (“Section 409A”), it shall accrue interest at the DCAP Rate for the period of such deferral, which interest shall be paid together with such payment, (C) continue Executive’s Executive Medical Plan benefits until the end of the Severance Period, (D) subject to the express special forfeiture and repayment provisions of the respective plans (or the terms and conditions applicable thereto), continue the accrual and vesting of Executive’s rights, benefits and existing awards for the remainder of the Severance Period for purposes of the EBRP, ESBP, and the Stock Option and Restricted Stock Plan (or any other similar plan or arrangement); provided, however, that (unless otherwise provided by the terms of the applicable plan; or unless the Board, or any duly authorized Committee thereof, in its sole discretion determines otherwise) Executive shall in no event receive or be entitled either to additional grants or awards subsequent to the date of termination, nor “Approved Retirement” status, under the foregoing plans, and (E) terminate Executive’s participation in the Company’s tax-qualified profit-sharing plans, long-term incentive plan, and stock purchase plans, pursuant to the terms of the respective plans, as of the date of Executive’s termination of employment.

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                    (iii) For purposes of this Agreement, “Good Reason” shall mean any of the following actions, if taken without the express written consent of Executive: (A) any material change by the Company in Executive’s functions, duties or responsibilities as Executive Vice President and President, McKesson Provider Technologies, which change would cause Executive’s position with the Company to become of less dignity, responsibility, importance, or scope as compared to the position and attributes that applied to Executive as of the Effective Date; (B) any reduction in Executive’s base salary, other than a proportional reduction effected as part of an across-the-board reduction affecting all executive employees of the Company; (C) any material failure by the Company to comply with any of the provisions of the Agreement; (D) the Company’s requiring Executive to be based at any office or location more than 25 miles from the office at which Executive is based as of the Effective Date, except for travel reasonably required in the performance of Executive’s responsibilities and consistent with practices as of the Effective Date; or (E) in the event of a Change in Control, any change in the level of officer within the Company to whom Executive reports, as this reporting relationship existed immediately prior to a Change in Control.

          9. Termination in Connection with a Change in Control. Notwithstanding the provisions of Paragraph 8(d), in the event of an occurrence of a Change in Control, the following provisions shall apply in the event of Executive’s termination of employment (i) within two (2) years following such Change in Control, or (ii) within the six (6) month period immediately preceding such Change in Control if such termination of employment occurs at the direction of the person or entity that is involved in, or otherwise in connection with, such Change in Control:

               (a) If the Company terminates Executive’s employment pursuant to Paragraph 8(c) above or otherwise without Cause or Executive terminates her employment with the Company for Good Reason, then the Company shall, in lieu of the benefits payable under Paragraph 8(d)(ii) above, immediately pay to Executive in a cash lump sum an amount equal to 2.99 multiplied by Executive’s Earnings (as defined in the Company’s Change in Control Policy for Selected Executive Employees) and shall take all actions described in clauses (C) through (E) in Paragraph 8(d)(ii) hereof; provided that, if such payment is deferred in accordance with Section 409A, it shall accrue interest at the DCAP Rate for the period of such deferral, which interest shall be paid together with such payment. For purposes of this Section 9(a), “Earnings” shall mean the sum of (i) Executive’s annual base salary and (ii) the greater of Executive’s target bonus under the MIP or the average MIP bonus paid Executive over the prior three fiscal years.

               (b) Change in Control. For purposes of this Agreement, a “Change in Control” of the Company shall mean the occurrence of any change in ownership of the Company, change in effective control of the Company, or change in the ownership of a substantial portion of the assets of the Company, as defined in Section 409A(a)(2)(A)(v), the regulations thereunder, and any other published interpretive authority, as issued or amended from time to time.

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          10. Excise Tax Payment.

               (a) If, as a result of Executive’s employment with the Company or termination thereof, the benefits received by Executive under Paragraph 9 above (the “Total Payments”) are subject to the excise tax provision set forth in Section 4999 of the Code (the “Excise Tax”), the Company shall pay to Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by Executive, after deduction of any Excise Tax on the benefits received hereunder and any Federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

               (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent “reasonable compensation” for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount (as defined in Section, 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence on the date of termination (or if there is no date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Paragraph 10(b)), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

               (c) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Executive’s taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at

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120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess plus any interest, penalties or additions payable by Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

               (d) Notwithstanding anything else herein, this Paragraph 10 shall survive any termination of employment, any payments hereunder or any termination of obligations hereunder; provided, however, that this Paragraph 10 shall not survive any termination of employment for Cause that occurs prior to a Change in Control or any payments or termination of obligations in connection with such termination for Cause.

          11. Compliance with Section 409A. Notwithstanding anything in this Agreement to the contrary, the Company shall administer and construe this Agreement in accordance with Section 409A, the regulations promulgated thereunder, and any other published interpretive authority, as issued or amended from time to time, so as not to subject Executive to the additional tax and interest imposed under Section 409A. To the extent that the Company and/or Executive reasonably determine that any amount payable under this Agreement would trigger the additional tax imposed by Section 409A, the Company and Executive shall promptly agree in good faith on appropriate modifications to the Agreement (including delaying or restructuring payments) to avoid such additional tax yet preserve (to the nearest extent reasonably possible) the intended benefit payable to Executive. If Executive incurs liability under Section 409A(a)(1)(B) as a direct result of the Company’s failure to fulfill the foregoing obligations, the Company will indemnify and hold Executive harmless from such liability; provided, however, that the Company shall have no obligation under this provision for any such failures that are attributable to Executive’s own willful acts or omissions or to Executive’s demand for a distribution of benefits notwithstanding a recommendation of the Company against the distribution.

          12. General Provisions.

               (a) Executive’s rights and obligations hereunder shall not be transferable by assignment or otherwise. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets; and this Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor surviving or resulting corporation, or other entity to which such assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company.

               (b) This Agreement and Executive’s “Indemnification Agreement” (as defined below) constitutes the entire agreement between the parties hereto in respect of the

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matters addressed herein regarding the employment of Executive by the Company. This Agreement and Executive’s Indemnification Agreement supersedes and replaces all prior oral and written agreements, understandings, commitments, and practices between the parties pertaining to Executive’s employment by the Company, including, but not limited to, the Prior Employment Agreement. “For purposes of this Agreement, “Indemnification Agreement” means the Company’s standard form of indemnification agreement for executives, as amended, restated and revised from time to time.

               (c) In the event Executive’s employment with the Company shall terminate under circumstances otherwise providing Executive with a right to benefits under both the Company’s Executive Severance Policy and Paragraph 8(d)(ii) of this Agreement, Executive shall be entitled to receive the greater of the benefits provided therein or herein, calculated individually, without duplication.

               (d) Executive and the Company agree that any dispute, controversy or claim between them, other than any dispute, controversy claim or breach arising under Paragraph 7 of this Agreement, shall be settled exclusively by final and binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (the “AAA Rules”). A neutral and impartial arbitrator shall be chosen by mutual agreement of the parties or, if the parties are unable to agree upon an arbitrator within a reasonable period of time, then a neutral and impartial arbitrator shall be appointed in accordance with the arbitrator nomination and selection procedure set forth in the AAA Rules. The arbitrator shall apply the same substantive law, with the same statutes of limitations and remedies, that would apply if the claims were brought in court. The arbitrator also shall prepare a written decision containing the essential findings and conclusions upon which the decision is based. Either party may bring an action in court to compel arbitration under this Agreement or to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit in any way related to any claim subject to this agreement to arbitrate. Any arbitration held pursuant to this Paragraph shall take place in San Francisco, California. Each party shall pay its own costs and attorneys’ fees, unless a party prevails on a statutory claim and the statute provides that the prevailing party is entitled to payment of its or her attorneys’ fees. In that case, the arbitrator may award reasonable attorneys’ fees and costs to the prevailing party as provided by law. The Company agrees to pay any administrative costs and fees of the AAA, as well as the costs and fees of the arbitrator. THE PARTIES UNDERSTAND AND AGREE THAT THIS AGREEMENT CONSTITUTES A WAIVER OF THEIR RIGHT TO A TRIAL BY JURY OF ANY CLAIMS OR CONTROVERSIES COVERED BY THIS AGREEMENT.

               (e) Executive expressly acknowledges and agrees that, except as expressly set forth in paragraph 10 of this Agreement, in the event the benefits provided hereunder are subject to the excise tax provision set forth in Section 4999 of the Internal Revenue Code of 1986, as amended, (i) Executive shall be responsible for, and (ii) Executive shall not be entitled to any additional payment from the Company for any Federal, state, and local income and employment taxes, interest or penalties that may arise in connection with such benefits.

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               (f) The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability hereof shall not be affected thereby.

               (g) This Agreement may not be amended or modified except by a written instrument executed by the Company and Executive.

               (h) This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to its principles of conflict of laws.

     IN WITNESS WHEREOF, The parties have executed this Agreement as of the date first above written.

ATTEST:
	McKesson Corporation A Delaware Corporation
/s/ Laureen E. Seeger	By:	/s/ Paul E. Kirincic
Laureen E. Seeger		Paul E. Kirincic
Executive Vice President and Secretary		Executive Vice President, Human Resources
By the Authority of the Compensation Committee of the McKesson Corporation
	/s/ Pamela J. Pure
	Pamela J. Pure
	Executive Vice President and President, McKesson Provider Technologies

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EX-10.32

Exhibit 10.32

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the “Agreement”), dated as of November 1, 2006 (the “Effective Date”), is by and between McKesson Corporation (the “Company”), a Delaware corporation with its principal office at One Post Street, San Francisco, California, and Paul C. Julian (“Executive”).

RECITALS

     A. WHEREAS, Executive and the Company have previously entered into that certain Employment Agreement dated as of April 1, 2004 (the “Prior Employment Agreement”);

     B. WHEREAS, Executive and the Company wish to amend and restate the terms of Executive’s employment with the Company, as set forth herein;

     C. The Company, in its business, develops and uses certain Confidential Information (as defined in Paragraph 7(c) below). Such Confidential Information will necessarily be communicated to or acquired by Executive by virtue of his employment with the Company, and the Company has spent time, effort and money to develop such Confidential Information and to promote and increase its goodwill; and

     D. The Company desires to retain the services of, and employ, Executive on its own behalf and on behalf of its affiliated companies for the period provided in this Agreement and, in so doing, to protect its Confidential Information and goodwill, and Executive is willing to accept employment by the Company on a full-time basis for such period, upon the terms and conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows:

          1. Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ Executive, and Executive agrees to accept employment from, and remain in the employ of, the Company for the period stated in Paragraph 3 hereof.

          2. Position and Responsibilities. During the period of his employment hereunder, Executive agrees to serve the Company, and the Company shall employ Executive, as Executive Vice President and Group President, or in such other senior corporate executive capacity or capacities as may be specified from time to time by the Chief Executive Officer of the Company (the “Chief Executive Officer”).

          3. Terms and Duties.

               (a) Term of Employment. The period of Executive’s employment under this Agreement shall be deemed to have commenced on the date of this Agreement and shall continue until the third anniversary of the Effective Date; provided, however, that the term of this Agreement shall automatically be extended for one (1) additional year on each anniversary of the Effective Date, unless terminated earlier in accordance with Paragraph 8 below (the “Term”).

               (b) Duties. During the period of his employment hereunder and except for illness, reasonable vacation periods and reasonable leaves of absence, Executive shall devote his best efforts and all his business time, attention and skill to the business and affairs of the Company

and its affiliated companies, as such business and affairs now exist and as they may be hereafter changed or added to, under and pursuant to the general direction of the Board of Directors of the Company (the “Board”); provided, however, that, with the approval of the Chief Executive Officer, Executive may serve, or continue to serve, on the boards of directors of, hold any other offices or positions in, companies or organizations which, in such officer’s judgment, will not present any conflict of interest with the Company or any of its subsidiaries or affiliates or divisions, or materially adversely affect the performance of Executive’s duties pursuant to this Agreement. The Company shall retain full direction and control of the means and methods by which Executive performs the services for which he is employed hereunder. The services which are to be employed by Executive hereunder are to be rendered in the State of California, or in such other place or places in the United States or elsewhere as may be determined from time to time by the Board, but are to be rendered primarily at the headquarters of the Company in San Francisco, California.

          4. Compensation and Reimbursement of Expenses.

               (a) Compensation. During the period of his employment hereunder, Executive shall be paid a salary, in monthly or semi-monthly installments (in accordance with the Company’s normal payroll practices for senior executive officers), at the rate of Eight Hundred Forty Thousand, Eight Hundred and Twenty-Nine Dollars ($840,829) per year, or such higher salary as may be from time to time approved by the Board (or any duly authorized Committee thereof) (any such higher salary so approved to be thereafter the minimum salary payable to Executive during the remainder of the term hereof), plus such additional incentive compensation, if any, as may be awarded to him yearly by the Board (or any duly authorized Committee thereof). For purposes of the MIP (as defined in paragraph 5 below), for each of the Company’s fiscal years ending during the term of this Agreement, Executive’s Individual Target Award shall be 100% during fiscal year 2007 and 110% thereafter of his base salary for the applicable Year (as defined in the MIP).

               (b) Reimbursement of Expenses. The Company shall pay or reimburse Executive, in accordance with its normal policies and practices, for all reasonable travel and other expenses incurred by Executive in performing his obligations hereunder.

          5. Other Benefits. During the period of his employment hereunder, Executive shall be entitled to receive all other benefits of employment generally available to other members of the Company’s senior management and those benefits for which key executives are or shall become eligible, when and as he becomes eligible therefore, including without limitation, group health and life insurance benefits, short and long-term disability plans, deferred compensation plans, and participation in the Company’s Profit-Sharing Investment Plan, Employee Stock Purchase Plan, Executive Medical Plan, Management Incentive Plan (“MIP”), Executive Benefit Retirement Plan (“EBRP”), Executive Survivor Benefits Plan (“ESBP”), Long-Term Incentive Plan (“LTIP”). Stock Purchase Plan and 1994 Stock Option and Restricted Stock Plan, the 2005 Stock Plan, (or any other similar plan or arrangement).

          6. Benefits Payable Upon Disability or Death.

               (a) Disability Benefits. If, during the term of this Agreement, Executive shall be prevented from properly performing services hereunder by reason of his illness or other physical or mental incapacity, the Company shall continue to pay Executive his then current salary hereunder during the period of such disability or, if less, for a period of (12) calendar months, at which time the Company’s obligations hereunder shall cease and terminate.

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               (b) Death Benefits. In the event of the death of Executive during the term of this Agreement, Executive’s salary payable hereunder shall continue to be paid to Executive’s surviving spouse or, if there is no spouse surviving, then to Executive’s designee or representative (as the case may be) through the six-month period following the end of the calendar month in which Executive’s death occurs. Thereafter, all of the Company’s obligations hereunder shall cease and terminate.

               (c) Other Plans. The provisions of this Paragraph 6 shall not affect any rights of Executive’s heirs, administrators, executors, legatees, beneficiaries or assigns under the Company’s Profit-Sharing Investment Plan, EBRP, ESBP, 1994 Stock Option and Restricted Stock Plan (or any other similar plan or arrangement), any stock purchase plan or any other employee benefit plan of the Company, and any such rights shall be governed by the terms of the respective plans.

          7. Obligations of Executive During and After Employment.

               (a) Noncompetition. Executive agrees that during the term of his employment hereunder, and for the “Noncompetition Period” (as hereinafter defined) thereafter following the termination of Executive’s employment with the Company for any reason, he will not, within the United States, participate, engage or have any interest in, directly or indirectly, any person, firm, corporation, or business (where as an employee, officer, director, agent, creditor, or consultant or in any capacity which calls for the rendering of personal services, advice, acts of management, operation or control) which carries on any business or activity competitive with the Company or any affiliated company (including, without limitation, any products or services sold, investigated, developed or otherwise pursued by the Company or any affiliated company at any time or from time to time) without the prior written consent of the Chief Executive Officer. For purposes of this Paragraph 7(a), the “Noncompetition Period” shall be deemed to be the period during which Executive is receiving salary continuation payments hereunder. Should Executive violate his obligations under this Paragraph 7(a), any further salary continuation payments or other severance benefits shall immediately cease. This Paragraph 7(a) shall survive the termination or expiration of this Agreement.

               (b) Unauthorized Use of Confidential Information. Executive acknowledges and agrees that (i) during the course of his employment Executive will have produced and/or have access to Confidential Information (as defined in subparagraph (c) hereof), of the Company and its affiliated companies, and (ii) the unauthorized use or sale of any of such confidential or proprietary information at any time would harm the Company and would constitute unfair competition with the Company either during or after the term of this Agreement. Therefore, during and subsequent to his employment by the Company and its affiliated companies, Executive agrees to hold in confidence and not, directly or indirectly, disclose, use, copy or make lists of any such information, except to the extent expressly authorized by the Company in writing or as required by law. All records, files, drawings, documents, equipment, and the like, or copies thereof, relating to the Company’s business, or the business of any of its affiliated companies, which Executive shall prepare, use, or come into contact with, shall be and remain the sole property of the Company, and shall not be removed (except to allow Executive to perform his responsibilities hereunder while traveling for business purposes or otherwise working away from his office) from the Company’s or the affiliated company’s premises without its prior written consent, and shall be promptly returned to the Company upon termination of employment with the Company and its affiliated companies. This Paragraph 7 (b) shall survive the termination or expiration of this Agreement.

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               (c) Confidential Information Defined. For purposes of this Agreement, “Confidential Information” means all information (whether reduced to written, electronic, magnetic or other tangible form) acquired in any way by Executive during the course of his employment with the Company or any of its affiliated companies concerning the products, projects, activities, business or affairs of the Company and its affiliated companies, or the Company’s or any of its affiliated company’s customers, including without limitation, (i) all information concerning trade secrets of the Company and its affiliated companies, including computer programs, system documentation, special hardware, product hardware, related software development, manuals, formulae, processes, methods, machines, compositions, ideas, improvements or inventions of the Company and its affiliated companies, (ii) all sales and financial information concerning the Company and its affiliated companies, (iii) all customer and supplier lists of the Company and its affiliated companies, (iv) all information concerning products or projects under development by the Company or any of its affiliated companies or marketing plans for any of those products or projects, and (v) all information in any way concerning the products, projects, activities, business or affairs of customers of the Company or any of its affiliated companies which was furnished to him by the Company or any of its agents or customers; provided, however, that Confidential Information does not include information which (A) becomes available to the public other than as a result of a disclosure by Executive, (B) was available to him on a non-confidential basis outside of his employment with the Company, or (C) becomes available to him on a non-confidential basis from a source other than the Company or any of its agents, creditors, suppliers, lessors, lessees or customers.

               (d) Nonsolicitation of Employees. Executive recognizes and acknowledges that it is essential for the proper protection of the business of the Company and its affiliated companies that Executive be restrained for a reasonable period following the termination of Executive’s employment with the Company and its affiliated companies from (i) soliciting or inducing any employee of the Company or any of its affiliated companies to leave the employ of the Company or any of its affiliated companies, and (ii) hiring or attempting to hire any employee of the Company or any of its affiliated companies. Accordingly, Executive agrees that during the term of his employment hereunder, and for the Nonsolicitation Period thereafter following the termination of Executive’s employment with the Company and its affiliated companies for any reason, Executive shall not, directly or indirectly, hire, solicit, aid in or encourage the hiring and/or solicitation of, contract with, aid in or encourage the contracting with, or induce or encourage to leave the employment of the Company or any its affiliated companies any employee of the Company or any of its affiliated Companies. For purposes of this Paragraph 7(d), the “Nonsolicitation Period” shall be deemed to be the longer of (i) two (2) years following termination of Executive’s employment for any reason, or (ii) the period during which Executive is receiving salary continuation payments hereunder. Should Executive violate his obligations under this Paragraph 7(d), any further salary continuation payments or other severance benefits shall immediately cease. This Paragraph 7(d) shall survive the termination or expiration of this Agreement.

               (e) Nonsolicitation of Customers. Executive recognizes and acknowledges that it is essential for the proper protection of the business of the Company and its affiliated companies that Executive be restrained for a reasonable period following the termination of Executive’s employment with the Company and its affiliated companies from soliciting the trade of or trading with the customers of the Company or any of its affiliated companies for any competitive business purpose. Accordingly, Executive agrees that during the term of his employment hereunder, and for the Nonsolicitation Period thereafter following the termination of Executive’s employment with the Company and its affiliated companies for any reason, Executive shall not,

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directly or indirectly, solicit, aid in or encourage the solicitation of, contract with, aid in or encourage the contracting with, service, or contact any person or entity which is, or was, within three years prior to the termination of Executive’s employment with the Company and its affiliated companies, a customer or client of the Company or any of its affiliated companies for the purpose of offering or selling a product or service competitive with any of those offered by the Company or any of its affiliated companies. For purposes of this Paragraph 7(e), the “Nonsolicitation Period” shall be deemed to be the longer of (i) two (2) years following termination of Executive’s employment for any reason, or (ii) the period during which Executive is receiving salary continuation payments hereunder. Should Executive violate his obligations under this Paragraph 7(e), any further salary continuation payments or other severance benefits shall immediately cease. This Paragraph 7(e) shall survive the termination or expiration of this Agreement

               (f) Remedy for Breach. Executive agrees that in the event of a breach or threatened breach of any of the covenants contained in this Paragraph 7, the Company shall have the right and remedy to have such covenants specifically enforced by any court having jurisdiction, it being acknowledged and agreed that any material breach of any of the covenants will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company.

               (g) Blue-Penciling. Executive acknowledges and agrees that the noncompetition and nonsolicitation provisions contained herein are reasonable and valid in geographic, temporal and subject matter scope and in all other respects, and do not impose limitations greater than are necessary to protect the goodwill, Confidential Information and other business interests of the Company. Nevertheless, if any court determines that any of said noncompetition and other restrictive covenants and agreements, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable to the maximum extent permitted by applicable law.

               (h) Mutual Dependence. Executive understands and agrees that his full compliance with Section 7 of this Agreement is an express condition for and mutually dependent upon the obligations of the Company to pay Executive his compensation and benefits, including severance pay, during the remainder of the Term. Executive further understands and agrees that in the event that any provisions of Section 7 of this Agreement are rendered void, invalid, illegal or otherwise unenforceable, in whole or in substantial part, as a result of actions not initiated by the Company or its agent, the Company’s obligations to pay Executive his Base Salary, bonus or any other compensation and benefits, including severance pay, may be terminated immediately.

               (i) Right to Resign. The parties expressly acknowledge that Executive may terminate his employment at any time for any reason upon giving written notice of termination to the Company, and that such resignation shall not constitue a breach of this Agreement.

          8. Termination.

               (a) For Cause. Notwithstanding anything herein to the contrary, the Company may, without liability, terminate Executive’s employment hereunder for Cause (as defined below) at any time upon written notice from the Board (or any duly authorized Committee thereof) specifying such Cause, and thereafter, the Company’s obligations hereunder shall cease and terminate; provided, however, that such written notice shall not be delivered until after the Board (or any duly authorized Committee thereof) shall have given Executive written notice specifying

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the conduct alleged to have constituted such Cause and Executive has failed to cure such conduct, if curable, within fifteen (15) days following receipt of such notice. As used herein, the term “Cause” shall mean ...(i) Executive’s willful misconduct, habitual neglect or dishonesty with respect to matters involving the Company or its subsidiaries which is materially and demonstrably injurious to the Company, or (ii) a material breach by Executive of one or more terms of this Agreement.

               (b) Arbitration Required to Confirm Cause. In the event of a termination for Cause pursuant to subparagraph (a) above, the Company shall continue to pay Executive’s then current compensation as specified in this Agreement until the issuance of an arbitration award affirming the Company’s action. Such arbitration shall be held in accordance with the provisions of Paragraph 12(d) below. In the event the award upholds the action of the Company, Executive shall promptly repay to the Company any sums received pursuant to this subparagraph 8(b), following termination of employment.

               (c) Other than For Cause, Performance, Reorganization. Notwithstanding anything herein to the contrary, the Company may also terminate Executive’s employment (without regard to any general or specific policies of the Company relating to the employment or termination of its employees) (i) should Executive fail to perform his duties hereunder in a manner satisfactory to the Chief Executive Officer, (ii) should Executive’s position be eliminated as a result of a reorganization or restructuring of the Company or any of its affiliated companies, or (iii) for any other reason or reasons, in the Company’s sole discretion.

               (d) Obligations of the Company on Termination of Employment.

                    (i) If the Company terminates Executive’s employment pursuant to subparagraph 8(a) above and the Company’s action is affirmed as specified in subparagraph 8(b) above or Executive terminates his employment with the Company other than for Good Reason (as defined in subparagraph (d)(iii) below), then all of the Company’s obligations hereunder shall immediately cease and terminate. Executive shall thereupon have no further right or entitlement to additional salary, incentive compensation payments or awards, or any perquisites from the Company whatsoever, and Executive’s rights, if any, under the Company’s employee and executive benefit plans shall be determined solely in accordance with the express terms of the respective plans.

                    (ii) If the Company terminates Executive’s employment pursuant to subparagraph 8(c) above or Executive terminates his employment with the Company for Good Reason prior to the expiration of the Term, then in lieu of any benefits payable pursuant to the Company’s Executive Severance Policy (so long as the compensation and benefits payable hereunder equal or exceed those payable under said Policy) and in complete satisfaction and discharge of all of its obligations to Executive hereunder, the Company shall, provided Executive is not in breach of the provisions of Paragraph 7 hereof and except as provided in Paragraph 9 below, and conditioned upon Executive’s execution of a standard, full release of claims (it being understood that such release shall be mutual, and shall contain standard “carve-outs” from Executive’s release for indemnification rights, vested rights under pension, insurance and other benefit plans, and the like) (A) provide Executive with monthly cash payments equal to Executive’s final monthly base salary (“Severance”) for the remainder of the Term (the “Severance Period”); provided that, if such payment is deferred in accordance with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), it shall accrue interest at the Deferred Compensation Administration Plan III Rate (the “DCAP Rate”) for the period of such deferral, which interest shall be paid together with such payment, and further provided that the Company’s obligation to make such

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Severance payments shall be reduced by any compensation received by Executive from a subsequent employer during the Severance Period, (B) consider Executive for a bonus under the terms of the Company’s MIP for the fiscal year in which termination occurs (but not for any subsequent year) provided that any such bonus, if earned, shall be pro-rated to reflect the portion of the year for which Executive was actively employed, and shall be made at the time and in the manner applicable to MIP payments for current employees; provided, however, that, if such payment is deferred in accordance with Section 409A of the Code (“Section 409A”), it shall accrue interest at the DCAP Rate for the period of such deferral, which interest shall be paid together with such payment, (C) continue Executive’s Executive Medical Plan benefits until the end of the Severance Period, (D) subject to the express special forfeiture and repayment provisions of the respective plans (or the terms and conditions applicable thereto), continue the accrual and vesting of Executive’s rights, benefits and existing awards for the remainder of the Severance Period for purposes of the EBRP, ESBP, and the Stock Option and Restricted Stock Plan (or any other similar plan or arrangement); provided, however, that (unless otherwise provided by the terms of the applicable plan; or unless the Board, or any duly authorized Committee thereof, in its sole discretion determines otherwise) Executive shall in no event receive or be entitled either to additional grants or awards subsequent to the date of termination, nor “Approved Retirement” status, under the foregoing plans, (E) terminate Executive’s participation in the Company’s tax-qualified profit-sharing plans, long-term incentive plan, and stock purchase plans, pursuant to the terms of the respective plans, as of the date of Executive’s termination of employment.

                    (iii) For purposes of this Agreement, “Good Reason” shall mean any of the following actions, if taken without the express written consent of Executive: (A) any material change by the Company in Executive’s functions, duties or responsibilities as Executive Vice President and Group President, which change would cause Executive’s position with the Company to become of less dignity, responsibility, importance, or scope as compared to the position and attributes that applied to Executive as of the Effective Date; (B) any reduction in Executive’s base salary, other than a proportional reduction effected as part of an across-the board reduction affecting all executive employees of the Company; (C) any material failure by the Company to comply with any of the provisions of the Agreement; (D) the Company’s requiring Executive to be based at any office or location more than 25 miles from the office at which Executive is based as of the Effective Date, except for travel reasonably required in the performance of Executive’s responsibilities and consistent with practices as of the Effective Date; or (E) in the event of a Change in Control, any change in the level of officer within the Company to whom Executive reports, as this reporting relationship existed immediately prior to a Change in Control.

          9. Termination in Connection with a Change in Control. Notwithstanding the provisions of Paragraph 8(d), in the event of an occurrence of a Change in Control, the following provisions shall apply in the event of Executive’s termination of employment (i) within two (2) years following such Change in Control, or (ii) within the six (6) month period immediately preceding such Change in Control if such termination of employment occurs at the direction of the person or entity that is involved in, or otherwise in connection with, such Change in Control:

               (a) If the Company terminates Executive’s employment pursuant to Paragraph 8(c) above or otherwise without Cause or Executive terminates his employment with the Company for Good Reason, then the Company shall, in lieu of the benefits payable under Paragraph 8(d)(ii) above, immediately pay to Executive in a cash lump sum an amount equal to 2.99 multiplied by Executive’s Earnings (as defined in the Company’s Change in Control Policy for Selected Executive Employees) and shall take all actions described in clauses (C) through (E) in

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Paragraph 8(d)(ii) hereof; provided that, if such payment is deferred in accordance with Section 409A, it shall accrue interest at the DCAP Rate for the period of such deferral, which interest shall be paid together with such payment. For purposes of this Section 9(a), “Earnings” shall mean the sum of (i) Executive’s annual base salary and (ii) the greater of Executive’s target bonus under the MIP or the average MIP bonus paid Executive over the prior three fiscal years.

               (b) Change in Control. For purposes of this Agreement, a “Change in Control” of the Company shall mean the occurrence of any change in ownership of the Company, change in effective control of the Company, or change in the ownership of a substantial portion of the assets of the Company, as defined in Section 409A(a)(2)(A)(v), the regulations thereunder, and any other published interpretive authority, as issued or amended from time to time.

          10. Excise Tax Payment.

               (a) If, as a result of Executive’s employment with the Company or termination thereof, the benefits received by Executive under Section 9 above (the “Total Payments”) are subject to the excise tax provision set forth in Section 4999 of the Code (the “Excise Tax”), the Company shall pay to Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by Executive, after deduction of any Excise Tax on the benefits received hereunder and any Federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

               (b) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as “parachute payments” (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments” within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent “reasonable compensation” for services actually rendered (within the meaning of Section 280G(b)(4)(B) of the Code) in excess of the Base Amount (as defined in Section, 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence on the date of termination (or if there is no date of termination, then the date on which the Gross-Up Payment is calculated for purposes of this Paragraph 10(b)), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

               (c) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, Executive shall repay to the Company, within five (5) business days following the time that the amount of such reduction in the Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by

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Executive, to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in Executive’s taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess plus any interest, penalties or additions payable by Executive with respect to such excess) within five (5) business days following the time that the amount of such excess is finally determined. Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

               (d) Notwithstanding anything else herein, this Paragraph 10 shall survive any termination of employment, any payments hereunder or any termination of obligations hereunder; provided, however, that this Paragraph 10 shall not survive any termination of employment for Cause that occurs prior to a Change in Control or any payments or termination of obligations in connection with such termination for Cause.

          11. Compliance with Section 409A. Notwithstanding anything in this Agreement to the contrary, the Company shall administer and construe this Agreement in accordance with Section 409A, the regulations promulgated thereunder, and any other published interpretive authority, as issued or amended from time to time, so as not to subject Executive to the additional tax and interest imposed under Section 409A. To the extent that the Company and/or Executive reasonably determine that any amount payable under this Agreement would trigger the additional tax imposed by Section 409A, the Company and Executive shall promptly agree in good faith on appropriate modifications to the Agreement (including delaying or restructuring payments) to avoid such additional tax yet preserve (to the nearest extent reasonably possible) the intended benefit payable to Executive. If Executive incurs liability under Section 409A(a)(1)(B) as a direct result of the Company’s failure to fulfill the foregoing obligations, the Company will indemnify and hold Executive harmless from such liability; provided, however, that the Company shall have no obligation under this provision for any such failures that are attributable to Executive’s own willful acts or omissions or to Executive’s demand for a distribution of benefits notwithstanding a recommendation of the Company against the distribution.

          12. General Provisions.

               (a) Executive’s rights and obligations hereunder shall not be transferable by assignment or otherwise. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets; and this Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor surviving or resulting corporation, or other entity to which such assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company.

               (b) This Agreement and Executive’s “Indemnification Agreement” (as defined below) constitutes the entire agreement between the parties hereto in respect of the matters addressed herein regarding the employment of Executive by the Company. This Agreement and Executive’s Indemnification Agreement supersedes and replaces all prior oral and written agreements, understandings, commitments, and practices between the parties pertaining to Executive’s employment by the Company, including, but not limited to, the Prior Employment Agreement.

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“For purposes of this Agreement, “Indemnification Agreement” means the Company’s standard form of indemnification agreement for executives, as amended, restated and revised from time to time.

               (c) In the event Executive’s employment with the Company shall terminate under circumstances otherwise providing Executive with a right to benefits under both the Company’s Executive Severance Policy and Paragraph 8(d)(ii) of this Agreement, Executive shall be entitled to receive the greater of the benefits provided therein or herein, calculated individually, without duplication.

               (d) Executive and the Company agree that any dispute, controversy or claim between them, other than any dispute, controversy claim or breach arising under Paragraph 7 of this Agreement, shall be settled exclusively by final and binding arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (the “AAA Rules”). A neutral and impartial arbitrator shall be chosen by mutual agreement of the parties or, if the parties are unable to agree upon an arbitrator within a reasonable period of time, then a neutral and impartial arbitrator shall be appointed in accordance with the arbitrator nomination and selection procedure set forth in the AAA Rules. The arbitrator shall apply the same substantive law, with the same statutes of limitations and remedies, that would apply if the claims were brought in court. The arbitrator also shall prepare a written decision containing the essential findings and conclusions upon which the decision is based. Either party may bring an action in court to compel arbitration under this Agreement or to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit in any way related to any claim subject to this agreement to arbitrate. Any arbitration held pursuant to this Paragraph shall take place in San Francisco, California. Each party shall pay its own costs and attorneys’ fees, unless a party prevails on a statutory claim and the statute provides that the prevailing party is entitled to payment of its or his attorneys’ fees. In that case, the arbitrator may award reasonable attorneys’ fees and costs to the prevailing party as provided by law. The Company agrees to pay any administrative costs and fees of the AAA, as well as the costs and fees of the arbitrator. THE PARTIES UNDERSTAND AND AGREE THAT THIS AGREEMENT CONSTITUTES A WAIVER OF THEIR RIGHT TO A TRIAL BY JURY OF ANY CLAIMS OR CONTROVERSIES COVERED BY THIS AGREEMENT.

               (e) Executive expressly acknowledges and agrees that, except as expressly set forth in paragraph 10 of this Agreement, in the event the benefits provided hereunder are subject to the excise tax provision set forth in Section 4999 of the Internal Revenue Code of 1986, as amended, (i) Executive shall be responsible for, and (ii) Executive shall not be entitled to any additional payment from the Company for any Federal, state, and local income and employment taxes, interest or penalties that may arise in connection with such benefits.

               (f) The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability hereof shall not be affected thereby.

               (g) This Agreement may not be amended or modified except by a written instrument executed by the Company and Executive.

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               (h) This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of California without regard to its principles of conflict of laws.

     IN WITNESS WHEREOF, The parties have executed this Agreement as of the date first above written.

ATTEST:
	McKesson Corporation A Delaware Corporation
/s/ Laureen E. Seeger	By:	/s/ Paul E. Kirincic
Laureen E. Seeger		Paul E. Kirincic
Executive Vice President and Secretary		Executive Vice President, Human Resources
By the Authority of the Compensation
Committee of the McKesson Corporation	/s/ Paul C. Julian
On January 23, 2007	Paul C. Julian
	Executive Vice President and Group President

11

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002

     I, John H. Hammergren, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of McKesson Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2007	/s/ John H. Hammergren
	John H. Hammergren
	Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO
RULE 13a-14(a) AND RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT, AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002

     I, Jeffrey C. Campbell, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of McKesson Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: January 30, 2007	/s/ Jeffrey C. Campbell
	Jeffrey C. Campbell
	Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of McKesson Corporation (the “Company”) on Form 10-Q for the quarter ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, each hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John H. Hammergren

John H. Hammergren
Chairman, President and Chief Executive Officer
January 30, 2007

/s/ Jeffrey C. Campbell

Jeffrey C. Campbell
Executive Vice President and Chief Financial Officer
January 30, 2007

This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002, and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.