SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For quarter ended December 31, 2004

For the transition period from                    to                    

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

McKESSON CORPORATION

FINANCIAL NOTES

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 September 30,December 31, 2004, and the results of operations for the quarters and sixnine months ended September 30,December 31, 2004 and 2003 and cash flows for the sixnine months ended September 30,December 31, 2004 and 2003.

     The results of operations for the quarters and sixnine months ended September 30,December 31, 2004 and 2003 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 2004 consolidated financial statements previously filed with the Securities and Exchange Commission (“SEC”). As described in our Annual Report on Form 10-K for the year ended March 31, 2004, we reorganized our businesses on April 1, 2004. This reorganization resulted in changes to our reporting segments. On April 29 and 30, 2004, we provided financial information about this reorganization, as it relates to prior periods, in a Form 8-K. Certain prior period amounts have been reclassified to conform to the current period presentation.

     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.

     New Accounting Pronouncements.In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities” and in December 2003, a revised interpretation was issued (FIN No. 46(R)). In general, a variable interest entity (“VIE”) is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a VIE to be consolidated by a company if that company is designated as the primary beneficiary. The interpretation applies to VIEs created after January 31, 2003, and for all financial statements issued after December 15, 2003 for VIEs in which an enterprise held a variable interest that it acquired before February 1, 2003.

     We implemented FIN Nos. 46 and 46(R) on a retroactive basis as required in 2004. As a result of the implementation, the Company no longer consolidates its investment in the McKesson Financing Trust (the “Trust”) as the Company was not designated as the Trust’s primary beneficiary. In accordance with this accounting standard, the Company now recognizes the debentures issued to the Trust as long-term debt in its consolidated financial statements in lieu of the preferred securities that the Trust issued to third parties. Additionally, the consolidated financial statements include interest expense on the debentures and no longer report dividends on the preferred securities, net of tax. These changes increased the Company’s net debt to net capital employed ratio slightly but did not have a material impact on our consolidated financial statements, including diluted earnings per share.

     In April 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends SFAS No. 133 for decisions made as part of the FASB’s Derivatives Implementation Group process, other FASB projects dealing with financial instruments, and in connection with implementation issues raised in relation to the application of the definition of a derivative. This statement is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material impact on our consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the definition of a liability as currently defined in FASB Concepts Statement No. 6, “Elements of Financial Statements,” as well as other planned revisions. This statement requires a financial instrument that embodies an obligation of an issuer to be classified as a liability. In addition, the statement establishes standards for the initial and subsequent measurement of these financial instruments and disclosure requirements. SFAS No. 150 is effective for financial instruments entered into or

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modified after May 31, 2003 and for all other matters, at the beginning of our second quarter 2004. The adoption of this standard did not have a material impact on our consolidated financial statements.

     In December 2003, the Staff of the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104’s primary purpose is to rescind the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of Emerging Issues Task Force (“EITF”) Issue No. 00-21. Additionally, SAB No. 104 rescinds the SEC’s related Revenue Recognition in Financial Statements Frequently Asked Questions and Answers issued with SAB No. 101 that had previously been codified by the SEC. While the wording of SAB No. 104 reflects the issuance of EITF Issue No. 00-21, the revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104, which was effective upon issuance. The adoption of SAB No. 104 did not have a material effect on our consolidated financial position or results of operations.

     In January 2004, the FASB issued Financial Staff Position (“FSP”) No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”.2003.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) allows employers that sponsor a postretirement plan providing a qualifying or eligible prescription drug benefit to receive a federal subsidy. As permitted by FSP No. 106-1, we elected to defer recognizing the effects of the Act until authoritative guidance on accounting for the new subsidy was issued. In May 2004, the FASB issued FSP No. FAS 106-2 which provides accounting guidance for this new subsidy. Management has concluded that the prescription drug benefits provided to our Medicare-eligible retirees are actuarially equivalent based on the current interpretation of the guidance included in the Act and accordingly, the Company adopted the provisions of FSP No. 106-2 in the second quarter of 2005. The expected subsidy had the effect of reducing the Company’s accumulated postretirement benefit obligation by approximately $19 million. This reduction is recognized as an actuarial gain and will be amortized over three years. The expected subsidy will result in a reduction in interest cost of approximately $1 million in 2005. As required by the FSP, the Company recognized a total $3.7 million reductionreductions in postretirement benefit expense of $3.7 million in the second quarter, of 2005, including amounts attributable to the first quarter, and $1.8 million in the third quarter of 2005.

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies the accounting guidance included in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing” related to abnormal amounts of idle facility expense, freight, handling and spoilage costs. SFAS No. 151 is effective for inventory costs incurred during 2007. We are currently assessing the impact of SFAS No. 151 on our consolidated financial statements; however, we do not believe the adoption of this standard will have a material effect on our consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Compensation,” which requires the recognition of cost resulting from transactions in which the Company acquires goods and services by issuing its shares, share options, or other equity instruments. This standard requires a fair value-based measurement method in accounting for share-based payment transactions with both employees and nonemployees. This standard replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes 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 will be eliminated. SFAS No. 123(R) is effective for all awards of share-based payments granted, modified, or cancelled after June 15, 2005. In addition, compensation cost for the unvested portion of awards issued prior to and outstanding as of June 15, 2005 would continue to be recognized at the grant-date fair value as the remaining requisite service is rendered. We are currently assessing the impact of SFAS No. 123(R) on our consolidated financial statements.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — an amendment of APB Opinion No. 29,” which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets that do not culminate an earning process under APB Opinion No. 29, “Accounting for Nonmonetary Transactions.” SFAS No. 153 requires the measurement based on the recorded amount of the assets relinquished for nonmonetary exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the

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exchange. This standard is effective for nonmonetary asset exchanges occurring in 2007. We do not believe the adoption of this standard will have a material impact on our consolidated financial statements.

     In December 2004, the FASB issued FSP No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” On October 22, 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was signed into law. The AJCA provides a new deduction for certain qualified domestic production activities. FSP No. 109-1 is effective immediately and clarifies that such deduction should be accounted for as a special deduction, not as a tax rate reduction, under SFAS No. 109, “Accounting for Income Taxes,” no earlier than the year in which the deduction is reported on the tax return. We are currently evaluating whether such deduction may be available to us and its impact on our consolidated financial statements. We anticipate that we will recognize the tax benefit of such deductions, if any, beginning in 2006.

     In December 2004, the FASB issued FSP No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The AJCA provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan for reinvestment in the United States, provided certain criteria are met. FSP No. 109-2 is effective immediately and provides accounting and disclosure guidance for the repatriation provision. FSP No. 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earnings for the purpose of applying the “indefinite reversal criteria” under APB Opinion No. 23, “Accounting for Income Taxes — Special Areas,” and requires explanatory disclosures from companies that have not yet completed the evaluation. The Company is currently evaluating the effects of the repatriation provision and their impact on our consolidated financial statements. We do not expect to complete this evaluation before the end of 2006. The range of possible amounts of unremitted earnings that is being considered for repatriation under this provision is between zero and $500 million. The related potential range of income tax is between zero and $27.7 million.

     Employee Stock-Based Compensation. We account for our employee stock-based compensation plans using the intrinsic value method under Accounting Principles Board (“APB”)APB Opinion No. 25 “Accounting for Stock Issued to Employees.” Weand apply the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation –— Transition and Disclosure.” Had compensation cost for our employee stock-based compensation been recognized based on the fair value method, consistent with the provisions of SFAS No. 123, net income (loss) and earnings (loss) per share would have been as follows:

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before March 31, 2005 and have a seven year term. Historically, options granted by the Company generally vest over four years and have a term of ten years.

     The Compensation Committee of the Company’s Board of Directors (the “Board”) approved the accelerated vesting in 2004 and the shorter vesting period for certain 2005 stock option grants for employee retention purposes and in anticipation of the requirements of SFAS No. 123(R). As disclosed in Note 1, SFAS No. 123(R), when adopted by us in the second quarter of 2006, requires us to recognize the effect of applying the fair-value method to the unvested stock options outstanding at the grant-date fair value as the remaining requisite service is rendered. The pro forma disclosure using the fair-value method required under SFAS No. 123 will be prospectively eliminated. Accordingly, SFAS No. 123 expense of approximately $117 million (after-tax) for the stock option grants that received accelerated vesting will not be recognized in our earnings after SFAS 123(R) is adopted.

2. Acquisitions and Divesture

     On April 1,In November 2004, we invested $37.7 million in return for a 79.7% interest in Pahema, S.A. de C.V. (“Pahema”), a Mexican holding company. Two additional investors, owners of approximately 30% of the outstanding shares of Nadro S.A. de C.V. (“Nadro”) (collectively, “investors”), contributed $9.6 million for the remaining interest in Pahema. In December 2004, Pahema completed a 6.50 Mexican Pesos per share, or approximately $164 million, tender offer for approximately 284 million shares (or approximately 46%) of the outstanding publicly held shares of common stock of Nadro. Pahema financed the tender offer utilizing the cash contributed by us and the investors, and borrowings totaling 1.375 billion Mexican Pesos, in the form of two notes with Mexican financial institutions. Prior to the tender offer, the Company owned approximately 22% of the outstanding common shares of Nadro. During the first half of calendar 2006, we expect to merge Pahema into Nadro and the common stock of Pahema will be exchanged for the common stock of Nadro. After the completion of the merger, we anticipate we will own approximately 48% of Nadro.

     In the first quarter of 2005, we acquired all of the issued and outstanding shares of Moore Medical Corp. (“MMC”), of New Britain, Connecticut, for an aggregate cash purchase price of approximately $37 million. MMC is an Internet-enabled, multi-channel marketer and distributor of medical-surgical and pharmaceutical products to non-hospital provider settings. Approximately $22 million of the purchase price has been assigned to goodwill, none of which is deductible for tax purposes. The results of MMC’s operations have been included in the condensed consolidated financial statements within our Medical-Surgical Solutions segment since the acquisition date.

     We also completed several smaller acquisitions within our Medical-Surgical Solutions and Provider Technologies segments.

     Purchase prices have been allocated based on estimated fair values at the date of acquisition and may be subject to change. Pro forma results of operations have not been presented for any of the above acquisitions as the effects were not material to the condensed consolidated financial statements on either an individual or aggregate basis.

     During the nine months ended December 31, 2004, we sold a business for net cash proceeds of $12.3 million. The disposition resulted in a pre-tax loss of $1.1 million and an after-tax loss of $4.6 million. Financial results of this business were included in our Pharmaceutical Solutions segment and were not material to our condensed consolidated financial statements.

3. Contract Losses

     As disclosed in our annual report on Form 10-K for the year ended March 31, 2004, we recorded a $51.0 million provision for expected losses to fulfill our obligations on five multi-year contracts in our Provider Technologies segment’s international business in 2003.

     During the third quarter of 2004, the Company and a customer decided to exit one contract and had commenced discussions to mutually terminate the contract and negotiate settlement terms and conditions, and as a result, we recorded an incremental $20.0 million contract loss provision. In the fourth quarter of 2004, we reduced our accrued

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contract loss provision by $15.2 million primarily to reflect the final terms and conditions of our termination agreement with this customer.

4. Restructuring Activities

     NetWe recorded net reductions in restructuring reserves of $0.7 million and net charges from restructuring activities of $0.4 million for the quarter and the sixnine months ended September 30, 2004 were $0.5 million and $1.1 million. These chargesDecember 31, 2004. The net reductions primarily related to a number of smaller initiatives as well as adjustments for prior years’ restructuring plans due to a changechanges in estimated costs to complete these activities.

     The following table summarizes restructuring activities for the sixnine months ended September 30,December 31, 2004:

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5. Pension and Other Postretirement Benefit Plans

     The following table provides the components of the net periodic expense for the Company’s defined benefit pension and postretirement plans:

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     Income tax expense forDuring the secondthird quarter of 2004, includes anwe recorded a $7.9 million income tax benefit ofarising from settlements and adjustments with various taxing authorities. The nine months ended December 31, 2003 also reflect a $15.3 million income tax benefit relating to favorable tax settlements with the U.S. Internal Revenue Service. These settlements pertain toThis benefit, which was not previously recognized by the Company, resulted from the filing of amended tax returns by our subsidiary McKesson Information Solutions LLC (formerly known as HBO & Company (“HBOC”)) for the years ended December 31, 1997 and 1998 filed by1998.

     As discussed in Note 1, on October 22, 2004, the AJCA was signed into law. The AJCA provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan for reinvestment in the United States, provided certain criteria are met. FSP No. 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earnings for the purpose of applying the “indefinite reversal criteria” under APB Opinion No. 23, “Accounting for Income Taxes — Special Areas”, and requires explanatory disclosures from companies that have not yet completed the evaluation. The Company is currently analyzing the effects of the repatriation provision and their impact on our subsidiary, McKesson Information Solutions LLC, formerly known as HBO & Company.consolidated financial statements. We do not expect to complete such evaluation before the end of 2006. The benefitrange of thesepossible amounts of unremitted earnings that is being considered for repatriation under this provision is between zero and $500 million. The related potential range of income tax assets was not previously recognized by the Company.is between zero and $27.7 million.

6.7. 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. For 2005, because of the reported net loss, potentially dilutive securities were excluded from the per share computations due to their antidilutive effect.

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

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8. Goodwill and Other Intangible Assets

     Changes in the carrying amount of goodwill for the nine months ended December 31, 2004 are as follows:

     Information regarding other intangibles is as follows:

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the principal amount. The Debentures were purchased by the Trust, which is wholly owned by the Company, with proceeds from its issuance of four million shares of preferred securities to the public and 123,720 common securities to us. These preferred securities are convertible at the holder’s option into the Company’s common stock. The Debentures represent the sole assets of the Trust.

     Holders of the preferred securities are entitled to cumulative cash distributions at an annual rate of 5% of the liquidation amount of $50 per security. Each preferred security is convertible at the rate of 1.3418 shares of the Company’s common stock, subject to adjustment in certain circumstances. The preferred securities will be redeemed upon repayment of the Debentures and are 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.

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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.

     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.

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monetary judgment in this matter is unsuccessful,action. Also as previously reported, the judgment could haveCompany and other defendants moved to dismiss all of the claims on various grounds. The Delaware Court dismissed all claims against all defendants, except that the Delaware Court stayed (in favor of the Consolidated Action) the claim against the pre-merger McKesson directors based on alleged breaches of fiduciary duty arising out of the allegedly material false proxy statement issued in connection with the merger, and the Delaware Court denied the defendants’ motion to dismiss the claim against certain post-merger directors of McKesson for alleged failures to exercise oversight of the Company’s accounting practices from January 12, 1999 through April 28, 1999, leaving a single claim to be litigated in the Delaware Court. Pursuant to a stipulation and order entered by the court on January 10, 2005, the defendants must file an adverse impact on our consolidated financial statements.answer to the fourth amended complaint by January 31, 2005. No trial date has been set.

     II. Contingency

     As discussed in our annual report on Form 10-K for the year ended March 31, 2004, in 2002, we entered into a $500 million, ten year contract with the National Health Services Information Authority (“NHS”), an organization of the British government charged with the responsibility of delivering healthcare in England and Wales. The contract engages the Company to develop, implement and operate a human resources and payroll system at more than 600 NHS locations.

     To date, there have been delays to this contract which have caused increased costs and a decrease in the amount of time in which we can earn revenues. These delays have adversely impacted the contract’s projected profitability and no material revenue has yet been recognized on this contract. As of September 30,December 31, 2004, our consolidated balance sheet includes an investment of approximately $86$94 million in net assets, consisting of prepaid expenses, software and capital assets, net of cash received, related to this contract. While we believe it is likely that we can deliver and operate an acceptable system and recover our investment in this contract, we are currently negotiating with the NHS to amend certain key terms and conditions in the contract, and there is no certainty we will agree on an updated implementation plan. Our goal is to complete this negotiation by the end of fiscal 2005. However, the timing and the outcome of these negotiations is uncertain and failure to reach agreement on an updated implementation plan and amend certain key contract terms and conditions, and/or further delays in the implementation may result in losses that could be material. Even if we agree on amended contract terms and conditions and an updated implementation plan, it is possible that the terms of that agreement may result in the impairment of our net assets related to the contract as well as substantial penalties and charges, which could have a material adverse impact on our consolidated financial statements.

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ownership interest of a person or group that attempts to acquire the Company on terms not approved by the Board. The new Rights will expire in 2014, unless the date is extended or the Rights redeemed or exchanged earlier by the Board.

     13.During the nine months ended December 31, 2003, we repurchased 3.9 million shares having an aggregate cost of $115.3 million, which effectively completed the program approved by the Board in 2001 to repurchase up to $250.0 million common shares of the Company. In the third quarter of 2004, the Board approved a new program to repurchase up to $250.0 million of additional common stock of the Company in open market or private transactions. Repurchased shares will be used for general corporate purposes. No shares have been repurchased during the quarter and nine months ended December 31, 2004.

14. Segment Information

     In April 2004, we reconfigured our operating segments to better align product development and selling efforts with the evolving needs of the healthcare market. As a result, commencing in the first quarter of 2005, we are reporting the following three operating segments: Pharmaceutical Solutions, Medical-Surgical Solutions and Provider Technologies. Prior period amounts have been reclassified to conform to the 2005 segment presentation. 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. 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 manufactures and sells automated pharmaceutical dispensing systems for retail pharmacies, medical management and pharmaceutical solutions for biotech and pharmaceutical manufacturers, patient and payor services, and consulting and outsourcing services to pharmacies. We have added the Clinical Auditing and Compliance business, which was previously included in our former Information Solutions segment, to this segment’s expanded payor services business. This business sells software to payors for auditing professional claims.

     The Medical-Surgical Solutions segment distributes medical-surgical supplies and equipment and provides logistics and related services within the United States. This segment now includes Zee Medical, which was formerly included in our Pharmaceutical Solutions segment. Zee Medical provides first aid and safety products and training services to corporate customers. The operating results of this segment for the quarter and the six months ended September 30, 2004in 2005 also reflect the impact of the acquisition of MMC.

     The Provider Technologies segment consists of the former Information Solutions segment plus the McKesson Inpatient Automation business, which was previously included in our Pharmaceutical Solutions segment, and the Corporate Solutions group, which was previously managed by our Corporate group. This segment continues to deliver enterprise-wide patient care, clinical, financial, supply chain, managed care and strategic management

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     Financial information relating to our segments is as follows:

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

Financial Overview

     Revenues for the quarter and nine months ended September 30,December 31, 2004 grew 19%14% to $19.9$20.8 billion and 16% to $59.9 billion, compared to the same periods a year ago. We recorded net losses of $(665.4) million and $(415.7) million in the quarter and nine months ended December 31, 2004, compared to net income decreased 45% to $86.1of $120.2 million and $432.3 million in the comparable prior year periods. Loss per share was $(2.26) and $(1.42) in the third quarter and nine months of 2005, compared to diluted earnings per share decreased 45% to $0.29 compared toof $0.41 and $1.46 in the same periodperiods a year ago. For the sixThe quarter and nine months ended September 30,December 31, 2004 revenue increased 17% to $39.1include a pre-tax charge of $1.2 billion net income decreased 20% to $249.7($810.0 million and diluted earnings per share decreased 20% to $0.84 compared to the first halfafter-tax) for Securities Litigation as discussed on page 23 of 2004. Decreases in net income and diluted earnings per share primarily reflect lower operating profit in our Pharmaceutical Solutions segment due to a decline in volume-weighted price increases for U.S. pharmaceutical products.this financial review.

Results of Operations

     Revenues:

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     Canadian pharmaceutical distribution revenues increased reflecting market growth rates, favorable exchange rates and new business as certain manufacturers transition from direct distribution activities. On a constant currency basis, secondrevenues for the quarter and first half 2005 revenuesnine months ended December 31, 2004 from our Canadian operations would have increased approximately 11%8% and 14%12%, compared to the same periods a year ago.

     Medical-Surgical Solutions segment revenues were flatincreased slightly as growth in revenues in the alternate site sector was offset byexceeded a decline in revenues in the acute care sector. Increases in our alternate site sector include revenues derived from our recent acquisition of Moore Medical Corporation (“MMC”). On April 1, 2004, which we acquired allin the first quarter of the issued and outstanding shares of MMC, of New Britain, Connecticut, for an aggregate cash purchase price of approximately $37 million.2005. MMC is an Internet-enabled, multi-channel marketer and distributor of medical-surgical and pharmaceutical products to non-hospital provider settings. Declines in our acute care sector reflect the transition of the loss of the segment’s largest customer which began in the third quarter of the prior year.2004.

     Provider Technologies segment revenues declined slightly duringfor the third quarter primarily reflecting a reduction in software and software systems revenues duenine months of 2005 increased compared to the complexity and time required for clinical system implementations, which slow the rate at which the related revenue is recognized. Onsame periods a year-to-date basis, Provider Technologies segment revenues increased primarilyyear ago reflecting greater demand for our clinical application offerings.applications and imaging technology offerings and growth in automation revenue recognized.

     Gross Profit: