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 ~~September 30,~~December 31, 2007


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 (State or other jurisdiction of incorporation or organization)		94-3207296 (IRS Employer Identification No.)

One Post Street, San Francisco, California (Address of principal executive offices)		94104 (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 ~~as of September 30,~~at December 31, 2007

Common stock, $0.01 par value		~~289,387,335~~288,764,846 shares

McKESSON CORPORATION

PART I. FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(Unaudited)


	September 30,			March 31,			December 31,			March 31,
	2007			2007			2007			2007

ASSETS
Current Assets
Cash and cash equivalents	$	2,518		$	1,954		$	1,436		$	1,954
Restricted cash		967			984
Restricted cash for Consolidated Securities Litigation Action								—			962
Receivables, net		6,820			6,566			7,465			6,566
Inventories		8,303			8,153
Inventories, net								9,568			8,153
Prepaid expenses and other		181			199			215			221

Total		18,789			17,856			18,684			17,856

Property, Plant and Equipment, Net		714			684			747			684
Capitalized Software Held for Sale, Net		185			166			192			166
Goodwill		3,055			2,975			3,353			2,975
Intangible Assets, Net		578			613			686			613
Other Assets		1,713			1,649			1,703			1,649

Total Assets	$	25,034		$	23,943		$	25,365		$	23,943


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Drafts and accounts payable	$	11,773		$	10,873		$	12,359		$	10,873
Deferred revenue		970			1,027			1,183			1,027
Current portion of long-term debt		152			155			152			155
Securities Litigation		994			983
Consolidated Securities Litigation Action								—			962
Other accrued		1,723			2,088			2,153			2,109

Total		15,612			15,126			15,847			15,126

Other Noncurrent Liabilities		1,240			741			1,216			741
Long-Term Debt		1,798			1,803			1,797			1,803

Other Commitments and Contingent Liabilities (Note 12)

Stockholders’ Equity
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding		—			—			—			—
Common stock, $0.01 par value Shares authorized: September 30, 2007 and March 31, 2007 — 800 Shares issued: September 30, 2007 — 347 and March 31, 2007 — 341		3			3
Common stock, $0.01 par value
Shares authorized: December 31, 2007 and March 31, 2007 — 800
Shares issued: December 31, 2007 — 350 and March 31, 2007 — 341								3			3
Additional Paid-in Capital		3,999			3,722			4,167			3,722
Other Capital		(18	)		(19	)		(12	)		(19	)
Retained Earnings		5,113			4,712			5,297			4,712
Accumulated Other Comprehensive Income		150			31			143			31
ESOP Notes and Guarantees		(6	)		(14	)		(5	)		(14	)
Treasury Shares, at Cost, September 30, 2007 — 58 and March 31, 2007 — 46		(2,857	)		(2,162	)
Treasury Shares, at Cost, December 31, 2007 — 61 and March 31, 2007 — 46								(3,088	)		(2,162	)

Total Stockholders’ Equity		6,384			6,273			6,505			6,273

Total Liabilities and Stockholders’ Equity	$	25,034		$	23,943		$	25,365		$	23,943

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)


	Quarter Ended						Six Months Ended						Quarter Ended						Nine Months Ended
	September 30,						September 30,						December 31,						December 31,
	2007			2006			2007			2006			2007			2006			2007			2006

Revenues	$	24,450		$	22,386		$	48,978		$	45,701		$	26,494		$	23,111		$	75,472		$	68,812

Cost of Sales		23,269			21,362			46,620			43,681			25,290			22,050			71,910			65,731


Gross Profit		1,181			1,024			2,358			2,020			1,204			1,061			3,562			3,081

Operating Expenses		827			724			1,648			1,448			922			743			2,570			2,191
Securities Litigation Credit, Net		(5	)		(6	)		(5	)		(6	)
Securities Litigation Credits, Net														—			—			(5	)		(6	)


Total Operating Expenses		822			718			1,643			1,442			922			743			2,565			2,185


Operating Income		359			306			715			578			282			318			997			896

Other Income, Net		36			32			73			67			31			39			104			106

Interest Expense		(36	)		(22	)		(72	)		(45	)		(36	)		(23	)		(108	)		(68	)


Income from Continuing Operations Before Income Taxes		359			316			716			600			277			334			993			934

Income Tax Provision		(112	)		(29	)		(233	)		(129	)		(76	)		(94	)		(309	)		(223	)


Income from Continuing Operations		247			287			483			471			201			240			684			711

Discontinued Operations, net		—			(6	)		(1	)		(6	)		—			3			(1	)		(3	)
Discontinued Operations — loss on sale, net		—			(52	)		—			(52	)
Discontinued Operations —loss on sale, net														—			—			—			(52	)

Total Discontinued Operations		—			(58	)		(1	)		(58	)		—			3			(1	)		(55	)


Net Income	$	247		$	229		$	482		$	413		$	201		$	243		$	683		$	656


Earnings Per Common Share
Diluted
Continuing operations	$	0.83		$	0.94		$	1.60		$	1.54		$	0.68		$	0.79		$	2.28		$	2.33
Discontinued operations		—			(0.02	)		—			(0.02	)
Discontinued operations — loss on sale, net		—			(0.17	)		—			(0.17	)
Discontinued operations, net														—			0.01			—			(0.01	)
Discontinued operations —loss on sale, net														—			—			—			(0.17	)

Total	$	0.83		$	0.75		$	1.60		$	1.35		$	0.68		$	0.80		$	2.28		$	2.15

Basic
Continuing operations	$	0.85		$	0.96		$	1.64		$	1.57		$	0.69		$	0.81		$	2.33		$	2.38
Discontinued operations		—			(0.02	)		—			(0.02	)
Discontinued operations — loss on sale, net		—			(0.17	)		—			(0.17	)
Discontinued operations, net														—			0.01			—			(0.01	)
Discontinued operations —loss on sale, net														—			—			—			(0.17	)

Total	$	0.85		$	0.77		$	1.64		$	1.38		$	0.69		$	0.82		$	2.33		$	2.20


Dividends Declared Per Common Share	$	0.06		$	0.06		$	0.12		$	0.12		$	0.06		$	0.06		$	0.18		$	0.18

Weighted Average Shares
Diluted		299			305			302			307			297			302			300			305
Basic		293			298			295			300			290			296			293			299

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)


	Six Months Ended September 30,						Nine Months Ended December 31,
	2007			2006			2007			2006

Operating Activities
Net income	$	482		$	413		$	683		$	656
Discontinued operations, net of income taxes		1			58			1			55
Adjustments to reconcile to net cash provided by operating activities:
Adjustments to reconcile to net cash (used in) provided by operating activities:
Depreciation and amortization		178			139			271			208
Securities Litigation credit, net		(5	)		(6	)
Securities Litigation credits, net								(5	)		(6	)
Deferred taxes		41			70			192			77
Share-based compensation expense		47			24			73			39
Excess tax benefits from share-based payment arrangements		(43	)		(36	)		(71	)		(43	)
Other non-cash items		19			(3	)		5			(25	)

Total		720			659			1,149			961

Changes in operating assets and liabilities, net of business acquisitions:
Receivables		(162	)		256			(430	)		(132	)
Inventories		(65	)		(635	)		(1,231	)		(1,464	)
Drafts and accounts payable		791			454			1,061			914
Deferred revenue		(90	)		12			110			240
Taxes		192			33			224			35
Consolidated Securities Litigation Action settlement								(962	)		—
Other		(114	)		(94	)		32			1

Total		552			26			(1,196	)		(406	)

Net cash provided by operating activities		1,272			685
Net cash (used in) provided by operating activities								(47	)		555


Investing Activities
Property acquisitions		(83	)		(51	)		(129	)		(76	)
Capitalized software expenditures		(78	)		(86	)		(118	)		(119	)
Acquisitions of businesses, less cash and cash equivalents acquired		(51	)		(95	)		(592	)		(106	)
Proceeds from sale of businesses		—			175			—			175
Restricted cash for Consolidated Securities Litigation Action								962			—
Other		(16	)		(52	)		(9	)		(31	)

Net cash used in investing activities		(228	)		(109	)
Net cash provided by (used in) investing activities								114			(157	)


Financing Activities
Repayment of debt		(8	)		(8	)		(9	)		(11	)
Capital stock transactions:
Issuances		183			191			297			239
Share repurchases		(695	)		(658	)		(926	)		(756	)
Excess tax benefits from share-based payment arrangements		43			36			71			43
ESOP notes and guarantees		8			7			9			10
Dividends paid		(36	)		(36	)		(53	)		(54	)
Other		7			1			12			—

Net cash used in financing activities		(498	)		(467	)		(599	)		(529	)
Effect of exchange rate changes on cash and cash equivalents		18			6			14			5

Net increase in cash and cash equivalents		564			115
Net decrease in cash and cash equivalents								(518	)		(126	)
Cash and cash equivalents at beginning of period		1,954			2,139			1,954			2,139

Cash and cash equivalents at end of period	$	2,518		$	2,254		$	1,436		$	2,013

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.~~subsidiaries. Significant intercompany transactions and balances have been eliminated.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with GAAP have been condensed.

To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of these financial statements and income and expenses during the reporting period. Actual amounts may differ from these estimated amounts. 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, 2007, and the results of operations for the quarters and ~~six~~nine months ended ~~September 30,~~December 31, 2007 and 2006 and cash flows for the ~~six~~nine months ended ~~September 30,~~December 31, 2007 and 2006.

The results of operations for the quarters and ~~six~~nine months ended ~~September 30,~~December 31, 2007 and 2006 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 2007 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, 2007, we realigned our businesses on April 1, ~~2007. This realignment~~2007 which resulted in changes to our reporting segments. On May 30, 2007, we provided certain financial information about the changes in our reporting segments, 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. On April 1, 2007, we adopted Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” Among other things, FIN No. 48 requires application of a “more likely than not” threshold for the recognition and derecognition of tax positions. It further requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change. The April 1, 2007 adoption of FIN No. 48 resulted in a reduction of our retained earnings by $48 million.

~~Annually, we file a federal consolidated income tax return with~~ Refer to Financial Note 6, “Income Taxes,” for additional information regarding the U.S., and over 1,100 returns with various state and foreign jurisdictions. Our major taxing jurisdictions are the U.S. and Canada. In the U.S., the Internal Revenue Service (“IRS”) has completed an examinationCompany’s adoption of our consolidated income tax returns for 2000 to 2002 resulting in a signed Revenue Agent Report (“RAR”), which is subject to approval by the Joint Committee on Taxation. The IRS and the Company have agreed to certain adjustments, principally related to transfer pricing. We have made adequate provisions related to the 2000 to 2002 IRS audit and, therefore, believe the outcome of this RAR is not likely to have a material adverse impact on our financial position, cash flows or results of operations. We further believe that we have made adequate provision for all remaining income tax uncertainties. In Canada, we are under examination for 2002 to 2005. In nearly all jurisdictions, the tax years prior to 1999 are no longer subject to examination.

At April 1, 2007, our “unrecognized tax benefits,” defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements, amounted to $465 million. This amount increased by $23 million during the six months ended September 30, 2007. If recognized, $292 million of our unrecognized tax benefits would reduce income tax expense and the effective tax rate. During the next 12 months, it is reasonably possible that audit resolutions and expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $124 million.

We continue to report interest and penalties on tax deficiencies as income tax expense. At April 1, 2007, before any tax benefits, our accrued interest on unrecognized tax benefits amounted to $95 million. This amount increased by $11 million during the six months ended September 30, 2007. We have no amounts accrued for penalties.FIN No. 48.

Effective March 31, 2007, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS No. 158 required the Company to record a transition adjustment to recognize the funded status of pension and postretirement defined benefit plans — measured as the difference between the fair value of plan assets and the benefit obligations — in our balance sheet after adjusting for derecognition of the Company’s minimum pension liability as of March 31, 2007. In addition, effective for 2009, SFAS 158 requires plan assets and liabilities to be measured at year-end rather than the December 31 measurement date that the Company currently uses.

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Subsequent to the issuance of the Company’s 2007 Annual Report on Form 10-K, it was determined that we incorrectly presented the SFAS No. 158 transition adjustment of $63 million, net, as a reduction of 2007 comprehensive income within our Consolidated ~~Statement~~Statements of Stockholders’ Equity for the year ended March 31, 2007. We will correct this error when we file the Company’s 2008 Annual Report on Form 10-K, increasing previously reported comprehensive income from $889 million to $952 million for the fiscal year ended March 31, 2007.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R amends SFAS No. 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We are currently evaluating the impact on our consolidated financial statements of this standard, which will become effective for us on April 1, 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.” This statement applies to the accounting for noncontrolling interests (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. We are currently evaluating the impact on our consolidated financial statements of this standard, which will become effective for us on April 1, 2009.

2. Acquisitions and Investments

In 2008, we made the following acquisition:

On October 29, 2007, we acquired all of the outstanding shares of Oncology Therapeutics Network (“OTN”) of San Francisco, California for approximately $531 million, including the assumption of debt and net of $31 million of cash acquired from OTN. OTN is a U.S. distributor of specialty pharmaceuticals. The acquisition was funded with cash on hand. The results of OTN are included in the consolidated financial statements within our Distribution Solutions segment.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in the acquisition as of December 31, 2007:


(In millions)

Accounts receivable	$	326
Inventory		93
Goodwill		290
Intangible assets		129
Accounts payable		(318	)
Other, net		11

Net assets acquired, less cash and cash equivalents	$	531

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Approximately $290 million of the preliminary purchase price allocation has been assigned to goodwill. Included in the purchase price allocation are acquired identifiable intangibles of $119 million representing customer relationships with a weighted-average life of 9 years, developed technology of $3 million with a weighted-average life of 4 years and trademarks and trade names of $7 million with a weighted-average life of 5 years.

In 2007, we made the following acquisitions and investments:

	•		On January 26, 2007, we acquired all of the outstanding shares of Per-Se Technologies, Inc. (“Per-Se”) of Alpharetta, Georgia for $28.00 per share in cash plus the assumption of Per-Se’s debt, or approximately $1.8 billion in aggregate, including cash acquired of $76 million. Per-Se is a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies. Financial results for Per-Se are primarily included within our Technology Solutions segment since the date of acquisition. The acquisition was initially funded with cash on hand and through the use of an interim credit facility. In March 2007, we issued $1 billion of long-term debt, with such net proceeds after offering expenses from the issuance, together with cash on hand, being used to fully repay borrowings outstanding under the interim credit facility.

			The following table summarizes the ~~preliminary~~ estimated fair values of the assets acquired and liabilities assumed in the acquisition as of ~~September 30,~~December 31, 2007:

					��
(In millions)

Accounts receivable	$	107		$	107
Property and equipment		41			41
Other current and noncurrent assets		92			91
Goodwill		1,252			1,253
Intangible assets		471			471
Accounts payable		(8	)
Other current liabilities		(119	)
Accounts payable and other current liabilities					(132	)
Deferred revenue		(30	)		(30	)
Long-term liabilities		(71	)		(69	)

Net assets acquired, less cash and cash equivalents	$	1,735		$	1,732

			Approximately ~~$1,252~~$1,253 million of the ~~preliminary~~ purchase price allocation has been assigned to goodwill. Included in the purchase price allocation are acquired identifiable intangibles of $402 million representing customer relationships with a weighted-average life of 10 years, developed technology of $56 million with a weighted-average life of 5 years and trademarks and ~~tradenames~~trade names of $13 million with a weighted-average life of 5 years.

	•		~~Our~~In the first quarter of 2007, our Technology Solutions segment acquired RelayHealth Corporation (“RelayHealth”) based in Emeryville, California. RelayHealth is a provider of secure online healthcare communication services linking patients, healthcare professionals, payors and pharmacies. This segment also acquired two other entities, one specializing in patient billing solutions designed to simplify and enhance healthcare providers’ financial interactions with their patients in the first quarter of 2007, as well as a provider of integrated software for electronic health records, medical billing and appointment scheduling for independent physician ~~practices.~~practices in the fourth quarter of 2007. The total cost of these three entities was $90 million, which was paid in cash. Goodwill recognized in these transactions amounted to $63 million.

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

	•		~~Our~~During the first quarter of 2007, our Distribution Solutions segment acquired Sterling Medical Services LLC (“Sterling”) based in Moorestown, New Jersey. Sterling is a national provider and distributor of disposable medical supplies, health management services and quality management programs to the home care market. This segment also acquired a medical supply sourcing ~~agent.~~agent in the fourth quarter of 2007. The total cost of these two entities was $95 million which was paid in cash. Goodwill recognized in these transactions amounted to $47 million.

	•		WeDuring 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 minority interest in Parata. Parata is a manufacturer of pharmacy robotic equipment. In connection with the investment, we abandoned certain assets which resulted in a $15 million charge to cost of sales and incurred $6 million of other expenses related to the transaction which were recorded within operating expenses. We did not recognize any additional gains or losses as a result of this transaction as we believe the fair value of our investment in Parata approximates the carrying value of consideration contributed to Parata. Our investment in Parata is accounted for under the equity method of accounting within our Distribution Solutions segment.

During the last two years, we also completed a number of other smaller acquisitions and investments within both 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.

3. Discontinued Operations

In the second quarter of 2007, our Distribution Solutions segment sold its Acute Care medical-surgical supply business to Owens & Minor, Inc. for net cash proceeds of approximately $160 million. Revenues associated with the Acute Care business prior to its disposition were $597 million for the first half of 2007. Financial results for the first nine months of 2007 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 included a $79 million non-tax deductible write-off of goodwill. We allocated a portion of our 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. As a result, we ~~completed~~allocated $79 million of the ~~following divestitures:~~segment’s goodwill to the Acute Care business.

	•		Our Distribution Solutions segment sold its Acute Care medical-surgical supply business to Owens & Minor, Inc. for net cash proceeds of approximately $160 million. The divestiture resulted in an after-tax loss of $61 million, which included a $79 million non-tax deductible write-off of goodwill. We allocated a portion of our 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. As a result, we allocated $79 million of the segment’s goodwill to the Acute Care business.

	•		Our Distribution Solutions segment also sold a wholly-owned subsidiary, Pharmaceutical Buyers Inc., for net cash proceeds of $10 million. The divestiture generated an after-tax gain of $5 million resulting from the tax basis of the subsidiary exceeding its carrying value. The financial results for this business were not material to our condensed consolidated financial statements.

In the second quarter of 2007, our Distribution Solutions segment also sold a wholly-owned subsidiary, Pharmaceutical Buyers Inc., for net cash proceeds of $10 million. The divestiture generated an after-tax gain of $5 million resulting from the tax basis of the subsidiary exceeding its carrying value. The financial results for this business were not material to our condensed consolidated financial statements.

The 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.

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~
~~(UNAUDITED)~~

4. Share-Based Payment

We provide 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”). PeRSUs are RSUs for which the number of RSUs awarded is conditional upon the attainment of one or more performance objectives over a specified performance period, typically one year. 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.

Share-based compensation expense is measured based on the grant-date fair value of the share-based awards. For those awards with graded vesting and service conditions, we recognize compensation expense for the portion of the awards that is ultimately expected to vest on a straight-line basis over the requisite service period. For PeRSUs that have been converted to RSUs, we recognize the expense on a straight-line basis primarily over three years and treat each vesting tranche as a separate award. We develop an estimate of the number of share-based awards which will ultimately vest primarily based on historical experience. The estimated forfeiture rate is adjusted throughout the requisite service period. As required, forfeiture estimates are adjusted to reflect actual forfeiture and vesting activity as they occur.

Compensation expense recognized for share-based compensation 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 in the balance sheet as of ~~September 30,~~December 31, 2007.

Most of the Company’s share-based awards are granted in the first quarter of each fiscal year. The components of share-based compensation expense and the related tax benefit are shown in the following table:


	Quarter Ended						Six Months Ended						Quarter Ended						Nine Months Ended
	September 30,						September 30,						December 31,						December 31,
(In millions, except per share amounts)	2007			2006			2007			2006			2007			2006			2007			2006

RSUs and RS⁽¹⁾	$	14		$	6		$	27		$	9		$	12		$	8		$	39		$	17
PeRSUs⁽²⁾		8			6			10			8			10			4			20			12
Stock options		4			2			6			3			2			2			8			5
Employee stock purchase plan		2			2			4			4			2			1			6			5

Share-based compensation expense		28			16			47			24			26			15			73			39
Tax benefit for share-based compensation expense		(10	)		(6	)		(17	)		(8	)		(9	)		(5	)		(26	)		(13	)

Share-base compensation expense, net of tax⁽³⁾	$	18		$	10		$	30		$	16		$	17		$	10		$	47		$	26

Impact of share-based compensation:
Earnings per share
Impact of share-based compensation on earnings per share:
Diluted	$	0.06		$	0.03		$	0.10		$	0.05		$	0.06		$	0.03		$	0.16		$	0.08
Basic		0.06			0.03			0.10			0.05			0.06			0.03			0.16			0.08

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Due to the accelerated vesting of share-based awards prior to 2007, we anticipate the impact of SFAS No. 123(R), “Share-Based Payment,” to increase in significance as future ~~awards of~~ share-based compensation awards are granted and amortized over the requisite service period. Share-based compensation charges are affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. These variables include, but are not limited to, the volatility of our stock price, employee stock option exercise behavior, timing, level and types of our grants of annual share-based awards, the attainment of performance goals and actual forfeiture rates. As a result, the actual future share-based compensation expense may differ from historical levels of expense.

5. Restructuring Activities, Asset Impairments and Other Severance Charges

During the third quarter of 2008, we incurred $24 million of pre-tax charges as follows:


	Distribution		Technology
(In millions)	Solutions		Solutions		Total

Restructuring charges — facility closures⁽¹⁾	$	3	$	—	$	3
Restructuring charges & related asset impairment charge — termination of a software project⁽²⁾		—		8		8
Severance expense (non-restructuring)⁽³⁾		—		9		9
Other asset impairment charge⁽⁴⁾		—		4		4

Total pre-tax charges	$	3	$	21	$	24


(1)		Consists of severance costs for two facility closures.

(2)		Represents $4 million of severance and exit-related costs and a $4 million asset impairment charge for the write-off of capitalized software costs associated with the termination of a software project.

(3)		Severance expense associated with the realignment of our workforce. Although such actions do not constitute a restructuring plan, they represent independent actions taken from time to time, as appropriate. In addition, during the first nine months of 2007, our Technology Solutions segment incurred $6 million of severance charges associated with the reallocation of product development and marketing resources and the realignment of one of the segment’s international businesses.

(4)		Asset impairment charge associated with the write-down to fair value for a property as assessed by market prices.

These expenses were recorded in our condensed consolidated statements of operations as follows:


	Distribution		Technology
(In millions)	Solutions		Solutions		Total

Cost of sales	$	—	$	3	$	3
Operating expenses		3		18		21

Total pre-tax charges	$	3	$	21	$	24

The following table summarizes the activity related to our restructuring liabilities:


	Distribution Solutions						Technology Solutions
(In millions)	Severance			Exit-Related			Severance			Exit-Related			Total

Balance, March 31, 2007	$	3		$	6		$	16		$	5		$	30
Cash expenditures		(3	)		(2	)		(20	)		(1	)		(26	)
Adjustments to liabilities related to acquisitions		5			—			11			1			17
Expense		3			—			1			3			7

Balance, December 31, 2007	$	8		$	4		$	8		$	8		$	28

Total severance costs of $4 million relate to employees primarily in our distribution centers and research and development functions.

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

6. Income Taxes

On April 1, 2007, we adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes.” Among other things, FIN No. 48 requires application of a “more likely than not” threshold for the recognition and derecognition of tax positions. It further requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change. The April 1, 2007 adoption of FIN No. 48 resulted in a reduction of our retained earnings by $48 million.

Annually, we file a federal consolidated income tax return with the U.S., and over 1,100 returns with various state and foreign jurisdictions. Our major taxing jurisdictions are the U.S. and Canada. In the U.S., the Internal Revenue Service (“IRS”) has completed an examination of our consolidated income tax returns for 2000 to 2002 resulting in a signed Revenue Agent Report (“RAR”) in the second quarter of 2008. The RAR was approved by the Joint Committee on Taxation during the third quarter of 2008. The IRS and the Company have agreed to certain adjustments, principally related to transfer pricing and tax credits. As a result, in the third quarter of 2008, we recorded $20 million of income tax benefits and related interest which primarily consisted of the approved RAR. Income tax expense for 2008 was also impacted by a non-tax deductible $13 million increase in a legal reserve. In Canada, we are under examination for 2002 to 2005. In nearly all jurisdictions, the tax years prior to 1999 are no longer subject to examination. We further believe that we have made adequate provision for all remaining income tax uncertainties.

At April 1, 2007, our “unrecognized tax benefits,” defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements, amounted to $465 million. This amount increased by $4 million during the nine months ended December 31, 2007. If recognized, $273 million of our unrecognized tax benefits would reduce income tax expense and the effective tax rate. During the next 12 months, it is reasonably possible that audit resolutions and the expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $103 million.

We continue to report interest and penalties on tax deficiencies as income tax expense. At April 1, 2007, before any tax benefits, our accrued interest on unrecognized tax benefits amounted to $95 million. This amount increased by $16 million during the nine months ended December 31, 2007. We have no amounts accrued for penalties.

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 IRS holding that our payment of ~~approximately $960~~$962 million to settle the Consolidated Securities Litigation Action (see Financial Note 12, “Other Commitments and Contingent Liabilities”) is fully tax-deductible. We previously established tax reserves to reflect the lack of certainty regarding the tax deductibility of settlement amounts paid in the Consolidated Securities Litigation Action and related litigation.

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~
~~(UNAUDITED)~~

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


	Quarter Ended					Six Months Ended						Quarter Ended				Nine Months Ended
	September 30,					September 30,						December 31,				December 31,
(In millions, except per share data)	2007		2006			2007			2006			2007		2006		2007			2006

Income from continuing operations	$	247	$	287		$	483		$	471		$	201	$	240	$	684		$	711
Discontinued operations		—		(6	)		(1	)		(6	)
Discontinued operations, net													—		3		(1	)		(3	)
Discontinued operations —loss on sale, net		—		(52	)		—			(52	)		—		—		—			(52	)

Net income	$	247	$	229		$	482		$	413		$	201	$	243	$	683		$	656


Weighted average common shares outstanding:
Basic		293		298			295			300			290		296		293			299
Effect of dilutive securities:
Options to purchase common stock		5		6			6			6			5		6		6			6
Restricted stock		1		1			1			1			2		—		1			—

Diluted		299		305			302			307			297		302		300			305


Earnings Per Common Share:⁽¹⁾
Diluted
Continuing operations	$	0.83	$	0.94		$	1.60		$	1.54		$	0.68	$	0.79	$	2.28		$	2.33
Discontinued operations, net		—		(0.02	)		—			(0.02	)		—		0.01		—			(0.01	)
Discontinued operations —loss on sale, net		—		(0.17	)		—			(0.17	)		—		—		—			(0.17	)

Total	$	0.83	$	0.75		$	1.60		$	1.35		$	0.68	$	0.80	$	2.28		$	2.15

Basic
Continuing operations	$	0.85	$	0.96		$	1.64		$	1.57		$	0.69	$	0.81	$	2.33		$	2.38
Discontinued operations, net		—		(0.02	)		—			(0.02	)		—		0.01		—			(0.01	)
Discontinued operations —loss on sale, net		—		(0.17	)		—			(0.17	)		—		—		—			(0.17	)

Total	$	0.85	$	0.77		$	1.64		$	1.38		$	0.69	$	0.82	$	2.33		$	2.20

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

In June 2007, we renewed our existing $1.3 billion five-year, senior unsecured revolving credit facility, which was scheduled to expire in September 2009. The new credit facility has terms and conditions substantially similar to those previously in place and expires in June 2012. Borrowings under this new credit facility bear interest based upon either a Prime rate or the London Interbank Offering Rate. As of December 31, 2007, no amounts were outstanding under this facility.

10. Pension and Other Postretirement Benefit Plans

Net periodic expense for the Company’s defined benefit pension and other postretirement benefit plans was $5$7 million and ~~$16~~$23 million for the ~~second~~third quarter and first ~~half~~nine months of 2008 compared to $12 million and ~~$23~~$35 million for the comparable prior year periods. Cash contributions to these plans for ~~2008~~the nine months ended December 31, 2007 and ~~2007~~2006 were ~~$19~~$30 million and ~~$20~~$31 million.

11. 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 ~~are~~were primarily provided to facilitate financing for certain strategic customers. At ~~September 30,~~December 31, 2007, the maximum amounts of inventory repurchase guarantees and other customer guarantees were approximately $125 million and $7$6 million of which a nominal amount has been accrued.

In addition, our banks and insurance companies have issued ~~$92~~$97 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.

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~
~~(UNAUDITED)~~

We also provide warranties regarding the performance of software and automation products we sell. Our ~~liability~~obligation 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.

12. Other Commitments and Contingent Liabilities

In our annual report on Form 10-K for the year ended March 31, 2007 and in our Form 10-Q for the ~~quarter~~quarters ended June 30, 2007 and September 30, 2007, 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”). Significant developments in the Securities Litigation and in other litigation and claims since the referenced filings are as follows:

I. Securities Litigation

InConsolidated Action:

On January 18, 2008, in the previously reported federal class action,In re McKesson HBOC, Inc. Securities Litigation,(No. C-99-20743 RMW) (“Consolidated Securities Litigation Action”), Judge Whyte granted final approval of the ~~last remaining defendant,~~previously reported Bear Stearns & Co., Inc. (“Bear Stearns”)~~, Lead Plaintiff for~~ settlement. No objections to the class and the Company have entered into a stipulation of settlement (“Bear Stearns Settlement”) which was given preliminary approval by Judge Whyte by order entered on September 28, 2007. The court has scheduled a hearing on final approvalfairness of the Bear Stearns Settlement for January 4, 2008. If final approval is granted, and if that approval is not upset on appeal, the Bear Stearns Settlement will dispose of the last of the claims by the class in the federal class action and will also fully and finally settle all disputes and claims brought by Bear Stearns against the Company, including the previously reported action,~~Bear Stearns & Co., Inc. v. McKesson Corporation~~~~(No. 604304/5), pending in the trial court for the State and County of New York. Also pursuant~~settlement were filed prior to ~~the terms of the Bear Stearns Settlement, on October 9, 2007, the previously reported appeal taken by Bear Stearns from~~ Judge Whyte’s ~~February 24, 2006~~ruling, and thus no appeal can be taken from the order granting final approval of the Company’s own settlement in the Consolidated Action (“McKesson Settlement”) was dismissed “with prejudice,” thus triggering the effective date of the McKesson Settlement and eliminating the last condition to its finality. The dismissal of the Bear Stearns appeal, and thus the effective date and finality of the McKesson Settlement, is not conditioned on final approval of the Bear Stearns Settlement. As a result of this development, duringapproval. During the third quarter of 2008, the Company ~~will remove~~removed its $962 million Consolidated Securities Litigation Action liability and corresponding restricted cash ~~balances~~balance from its consolidated financial statements as all criteria for the extinguishment of this liability ~~have been~~were met.

~~The previously reported federal action~~Other:

On December 13, 2007, in ~~which we brought suit against Arthur Andersen LLP (“Andersen”)~~the actions entitledHolcombe T. Green and ~~its former partner, Robert A. Putnam, on various legal theories in connection with those defendants’ role as auditors for HBOC,~~~~McKesson Corporation et al. v. Arthur Andersen et al.,~~ ~~(No. 05-04020 RMW), and the related federal action in which Andersen brought suit against us and HBOC,~~~~Arthur Andersen~~HTG Corp. v. McKesson Corporation, et al.,(Georgia State Court, Fulton County, Case No. 06-VS-096767-D) andHall Family Investments, L.P. v. McKesson Corporation, et al.,(Georgia State Court, Fulton County, Case No. 06-VS-096763-F), ~~(No. C-06-02035-JW), have been settled.~~the trial judge issued orders denying the Company’s motions to disqualify plaintiffs’ damages expert and for summary judgment. On January 3, 2008, following certification by the trial court of an appeal of the plaintiff’s expert and summary judgment rulings, we applied to the Georgia Court of Appeals to accept an interlocutory appeal from those trial court rulings and on January 29, 2008, the Court of Appeals granted our applications.

1416

On ~~August 27,~~November 13, 2007, in the previously reported class action,New England Carpenters Health Benefits Fund et al., v. First DataBank, Inc. and McKesson Corporation, (Civil Action No. 05-11148), pending in the United States District Court of Massachusetts, the court issued its ruling on plaintiffs’ petition for class certification. The court certified a class of third party payors for purposes of liability and equitable relief, but declined to certify such a class for purposes of a damages award. The court did certify a class of percentage co-pay consumers on issues of both liability and damages. The court has set a hearing ~~date of November 13,~~on class certification issues, originally addressed in the trial court’s previously described August 27, 2007 ~~to further address the class issues, including whether a damages class can be certified for third party payors. Following the court’s~~ class certification order, was conducted by Judge Saris, after which hearing the court requested supplemental briefing on class certification issues. Supplemental briefing has been completed, but the court has not yet issued any order modifying its August 27, 2007 class certification order. On October 9, 2007, plaintiffs filed a motion ~~seeking leave~~ to amend ~~their~~the complaint to add a new class made up of uninsured ~~consumers~~purchasers of branded drugs who paid ~~“usual~~what is known as the Usual and ~~customary” cash prices,~~Customary (“U&C”) price, and plaintiffs also sought to add federal and state antitrust claims on behalf of the existing classes and the proposed new U&C class. On November 6, 2007, the court denied the plaintiffs’ motion to add antitrust claims, allowed the amendment to add a ~~Sherman Act or alternatively~~class of U&C consumers and indicated that the U&C class claims would be put on a ~~state antitrust claim on behalf~~different schedule from that of ~~all classes. The~~the two classes addressed in her August, 2007 class certification order. On November 6, 2007, plaintiffs filed a Third Amended Complaint which included the U&C class, and the court has subsequently set a ~~hearing~~trial date of January ~~22,~~26, 2009, for claims by that class. No other trial date has been set in these matters. On December 13, 2007, we filed a motion to dismiss the Racketeer Influenced and Corrupt Organizations (“RICO”) claims on which the U&C class claims were based, and we also moved for judgment on the pleadings with respect to the RICO claims supporting the two original classes. No hearing date has been set for argument of those motions. On December 10, 2007, plaintiffs filed a new and separate lawsuit in the United States District Court of Massachusetts as a “related” matter (New England Carpenters Health Benefits Fund et al., v. McKesson Corporation, Civil Action No. 1:07-12277), which complaint incorporates the federal and state antitrust claims which Judge Saris had previously ruled could not be brought by way of amendment to the existing class complaint. On January 31, 2008, we filed a motion to ~~consider final approval of~~dismiss that antitrust class action. On January 23, 2008, the trial court conducted a “fairness” hearing on the previously ~~publicly reported~~described proposed ~~settlements with both~~settlement between the plaintiff classes and defendants First DataBank, Inc. and Medi-Span, Inc. A number of objections were filed to that proposed settlement by various retail chain and independent pharmacy groups. On January 24, 2008, Judge Saris entered a minute order denying approval of the settlement “without prejudice for reasons stated in court”. The court has not yet issued an opinion reflecting in more detail the bases for her denial of final approval of the proposed settlement

     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 for information in a cooperative, thorough and timely manner. These responses sometimes require considerable time and effort and can result in considerable costs to the Company. Such subpoenas and requests also can lead to the assertion of claims or the commencement of legal proceedings against the Company and other members of the health care industry, as well as to settlements, penalties or other outcomes having an adverse impact on our results of operations. We are in discussion with the Drug Inforcement Administration (“DEA”) and certain United States Attorney Offices (“USAOs”) to resolve claims that between 2005 and 2007, certain of our pharmaceutical distribution centers fulfilled customer orders for select controlled substances, which orders were not adeequately reported to the DEA. We have been implementing improvements to our comprehensive controls and reporting procedures to avoid future claims of this type. Based on our undertanding of these claims and the settlement discussions with the DEA and USAOs, we believe that the procedures and processes we are implementing will satisfy concerns of the relevant agencies, and that we have established an adequate reserve for such claims.
     While it is not possible to determine with certainty the ultimate outcome or the duration of any of the litigation or governmental proceedings discussed under this section II, “Other Litigation and Claims”, we believe based on current knowledge and the advice of our counsel that such litigation and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
13. Stockholders’ Equity
     Comprehensive income is as follows:

Quarter Ended Six Months Ended Quarter Ended Nine Months Ended
September 30, September 30, December 31, December 31,
(In millions) 2007 2006 2007 2006 2007 2006 2007 2006

Net income $ 247 $ 229 $ 482 $ 413 $ 201 $ 243 $ 683 $ 656
Foreign currency translation adjustments 59 1 110 42
Other 9 (1 ) 9 (3 )
Foreign currency translation adjustments and other (7 ) (18 ) 112 21

Comprehensive income $ 315 $ 229 $ 601 $ 452 $ 194 $ 225 $ 795 $ 677

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~
~~(UNAUDITED)~~

14. Segment Information

Beginning with the first quarter of 2008, we report our operations in two operating segments: McKesson Distribution Solutions and McKesson Technology Solutions. This change resulted from a realignment of our businesses to better coordinate our operations with the needs of our customers. The factors for determining the reportable segments included the manner in which management evaluated the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments based on operating profit before interest expense, income taxes and results from discontinued operations. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” all prior period amounts are reclassified to conform to the 2008 segment presentation.

The Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products throughout North America. We have combined two of our former segments known as our Pharmaceutical Solutions and Medical-Surgical Solutions segments into this new segment, which reflects the increasing synergies the Company seeks through combined activities and best-practice process improvements. This segment also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, sells pharmacy software and provides consulting, outsourcing and other services. This segment includes a 49% interest in Nadro, S.A. de C.V., the leading pharmaceutical distributor in Mexico and a 39% interest in Parata, which sells automated pharmaceutical dispensing systems to retail pharmacies.

The Technology Solutions segment (formerly known as our Provider Technologies segment) delivers enterprise-wide patient care, clinical, financial, supply chain, strategic management software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and other services, to healthcare organizations throughout North America, the United Kingdom and other European countries. The segment’s customers include hospitals, physicians, homecare providers, retail pharmacies and payors. We have added our Payor group of businesses, which includes our InterQual^® and clinical auditing and compliance software businesses, and our disease and medical management programs to this segment. The change to move our Payor group to this segment from our former Pharmaceutical Solutions segment reflects our decision to more closely align this business with the strategy of our Technology Solutions segment, that is to create value by promoting connectivity, economic alignment and transparency of information between payors and providers.

Revenues for our Technology Solutions segment are classified in one of three categories: services, software and software systems and hardware. Service revenues primarily include fees associated with installing our software and software systems, as well as revenues associated with software maintenance and support, remote processing, disease and medical management, and other outsourcing and professional services. Software and software systems revenues primarily include revenues from licensing our software and software systems, including the segment’s clinical auditing and compliance and InterQual^® businesses.

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.

1618

McKESSON CORPORATION

FINANCIAL NOTES ~~(CONTINUED)~~(CONCLUDED)
(UNAUDITED)

Financial information relating to our segments is as follows:


	Quarter Ended						Six Months Ended						Quarter Ended						Nine Months Ended
	September 30,						September 30,						December 31,						December 31,
(In millions)	2007			2006			2007			2006			2007			2006			2007			2006

Revenues
Distribution Solutions
U.S. pharmaceutical direct distribution & services	$	14,372		$	13,147		$	28,570		$	26,550		$	15,703		$	13,414		$	44,273		$	39,964
U.S. pharmaceutical sales to customers’ warehouses		6,826			6,483			14,068			13,577			7,183			6,836			21,251			20,413

Subtotal		21,198			19,630			42,638			40,127			22,886			20,250			65,524			60,377
Canada pharmaceutical distribution & services		1,898			1,651			3,662			3,401			2,224			1,685			5,886			5,086
Medical-Surgical distribution and services		642			580			1,236			1,157
Medical-Surgical distribution & services														648			632			1,884			1,789

Total Distribution Solutions	$	23,738		$	21,861		$	47,536		$	44,685			25,758			22,567			73,294			67,252

Technology Solutions
Services⁽¹⁾		538			355			1,091			687			553			374			1,644			1,060
Software and software systems		139			134			277			253
Software & software systems														150			132			427			385
Hardware		35			36			74			76			33			38			107			115

Total Technology Solutions		712			525			1,442			1,016			736			544			2,178			1,560

Total	$	24,450		$	22,386		$	48,978		$	45,701		$	26,494		$	23,111		$	75,472		$	68,812

Operating profit
Distribution Solutions⁽²⁾⁽³⁾	$	366		$	328		$	706		$	641
Technology Solutions⁽¹⁾		66			52			166			88
Distribution Solutions⁽²⁾^{(3) (4)}													$	312		$	340		$	1,018		$	981
Technology Solutions^{(1) (3)}														49			63			215			151

Total		432			380			872			729			361			403			1,233			1,132
Corporate		(42	)		(48	)		(89	)		(90	)		(48	)		(46	)		(137	)		(136	)
Securities Litigation credit, net		5			6			5			6
Interest Expense		(36	)		(22	)		(72	)		(45	)
Securities Litigation credits, net														—			—			5			6
Interest expense														(36	)		(23	)		(108	)		(68	)

Income from continuing operations before income taxes	$	359		$	316		$	716		$	600		$	277		$	334		$	993		$	934

McKESSON CORPORATION

FINANCIAL REVIEW

(UNAUDITED)

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

Financial Overview


	Quarter Ended									Six Months Ended									Quarter Ended									Nine Months Ended
	September 30,									September 30,									December 31,									December 31,
(In millions, except per share data)	2007			2006			Change			2007			2006			Change			2007			2006			Change			2007			2006			Change

Revenues	$	24,450		$	22,386			9	%	$	48,978		$	45,701			7	%	$	26,494		$	23,111			15	%	$	75,472		$	68,812			10	%
Securities Litigation pre-tax credit, net		(5	)		(6	)		(17	)		(5	)		(6	)		(17	)
Securities Litigation pre-tax credits, net																				—			—			—			5			6			(17	)
Income from Continuing Operations Before Income Taxes		359			316			14			716			600			19			277			334			(17	)		993			934			6
Income Tax Provision		(112	)		(29	)		286			(233	)		(129	)		81			(76	)		(94	)		(19	)		(309	)		(223	)		39
Discontinued Operations, net		—			(58	)	NM				(1	)		(58	)		(98	)		—			3		NM				(1	)		(55	)		(98	)

Net Income	$	247		$	229			8		$	482		$	413			17		$	201		$	243			(17	)	$	683		$	656			4


Diluted Earnings Per Share:
Continuing Operations	$	0.83		$	0.94			(12	)%	$	1.60		$	1.54			4	%	$	0.68		$	0.79			(14	)%	$	2.28		$	2.33			(2	)%
Discontinued Operations		—			(0.19	)	NM				—			(0.19	)	NM				—			0.01		NM				—			(0.18	)	NM

Total	$	0.83		$	0.75			11		$	1.60		$	1.35			19		$	0.68		$	0.80			(15	)	$	2.28		$	2.15			6

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Results of Operations

Revenues:


	Quarter Ended							Six Months Ended							Quarter Ended							Nine Months Ended
	September 30,							September 30,							December 31,							December 31,
(In millions)	2007		2006		Change			2007		2006		Change			2007		2006		Change			2007		2006		Change

Distribution Solutions
U.S. pharmaceutical direct distribution & services	$	14,372	$	13,147		9	%	$	28,570	$	26,550		8	%	$	15,703	$	13,414		17	%	$	44,273	$	39,964		11	%
U.S. pharmaceutical sales to customers’ warehouses		6,826		6,483		5			14,068		13,577		4			7,183		6,836		5			21,251		20,413		4

Subtotal		21,198		19,630		8			42,638		40,127		6			22,886		20,250		13			65,524		60,377		9
Canada pharmaceutical distribution & services		1,898		1,651		15			3,662		3,401		8			2,224		1,685		32			5,886		5,086		16
Medical-Surgical distribution & services		642		580		11			1,236		1,157		7			648		632		3			1,884		1,789		5

Total Distribution Solutions		23,738		21,861		9			47,536		44,685		6			25,758		22,567		14			73,294		67,252		9

Technology Solutions
Services		538		355		52			1,091		687		59			553		374		48			1,644		1,060		55
Software and software systems		139		134		4			277		253		9
Software & software systems																150		132		14			427		385		11
Hardware		35		36		(3	)		74		76		(3	)		33		38		(13	)		107		115		(7	)

Total Technology Solutions		712		525		36			1,442		1,016		42			736		544		35			2,178		1,560		40

Total Revenues	$	24,450	$	22,386		9		$	48,978	$	45,701		7		$	26,494	$	23,111		15		$	75,472	$	68,812		10

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Medical-Surgical distribution and services revenues increased for the quarter primarily reflecting market growth rates and an acquisition partially offset by a decrease in sales of flu vaccines due to earlier market availability and the discontinuance of the distribution of a product line. Revenues associated with this product line are now recorded by our U.S. distribution business. For the first nine months of 2008, Medical-Surgical distribution and services revenues increased primarily reflecting market growth rates and an acquisition ~~and greater sales of flu vaccines due to earlier market availability. For the first half of 2008, these revenues were also impacted~~partially offset by one less week of sales.

Technology Solutions segment revenues increased primarily due to the acquisition of Per-Se, increased services revenues, primarily reflecting the segment’s expanded customer bases, and clinical software implementations. On January 26, 2007, we acquired Per-Se of Alpharetta, Georgia for approximately $1.8 billion. Per-Se is a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies. For the ~~first half of 2008,~~nine months ended December 31, 2007, these revenues also benefited from the recognition of $21 million of disease management deferred revenues. Expenses associated with these revenues were previously recognized as incurred.

For the ~~second~~third quarter of 2008, gross profit margin for our Distribution Solutions segment ~~increased primarily~~was impacted from a prior year benefit associated with the launch of three generic drugs. In addition, the segment’s gross profit margin declined due to ~~higher buy side~~a decrease in our sell margin and a decrease in LIFO credits, partially offset by the benefit ~~of increased sales of generic drugs with higher margins, and a benefit associated with~~from a lower 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. These positive gross profit margin benefits were partially reduced by a decrease in sell margin, a decrease in last-in, first-out (“LIFO”) inventory credits and a decrease in anti-trust settlements. There were no LIFO inventory credits or antitrust settlements duringDuring the ~~second~~third quarter of ~~2008. For the second quarter of 2007,~~2008, we recorded $10 million of LIFO inventory credits ~~and $10~~compared with $18 million for ~~an antitrust settlement.~~the same period a year ago. LIFO inventory credits reflected a number of generic product launches partially offset by a higher level of branded pharmaceutical price increases. ~~Antitrust settlements represent cash proceeds from various antitrust class action lawsuits.~~

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

For the ~~first half of 2008,~~nine months ended December 31, 2007, gross profit margin for our Distribution Solutions segment ~~increased primarily due to~~approximated that for the prior comparable period. Gross profit margin for this segment was impacted by higher buy side margin, the benefit of increased sales of generic drugs with higher margins, a benefit associated with a lower 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 decrease in asset impairment ~~charges~~charges. These gross profit margin benefits were fully offset by a decrease in sell margin, a decrease in LIFO inventory credits and ~~an increase in antitrust settlements.~~our acquisition of OTN. During the nine months ended December 31, 2007, there were $9 million of LIFO inventory credits compared with $38 million for the same period a year ago. During the first ~~quarter~~nine months of 2007, we recorded a $15 million charge pertaining to the write-down of certain abandoned assets within our retail automation group. For the first half of 2008 and 2007, antitrust settlements were $14 million and $10 million. These positive gross profit margin benefits were partially reduced by a decrease in sell margin and a decrease in LIFO inventory credits. There were no LIFO inventory credits during the first half of 2008 compared with $20 million for the first half of 2007.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~
~~(UNAUDITED)~~

Technology Solutions segment’s gross profit margin decreased during the ~~quarter~~nine months ended ~~September 30,~~December 31, 2007 ~~and increased for the first half of 2008~~ compared to the same ~~periods~~period a year ~~ago. In 2008, gross profit margin declined~~ago primarily ~~due to~~reflecting a change in product mix, including a higher proportion of Per-Se service revenues. Partially offsetting this decrease, the segment’s 2008 gross profit margin ~~in the first half of 2008~~ was positively impacted by the recognition of $21 million of disease management deferred revenues for which expenses associated with these revenues were previously recognized as incurred.

Operating Expenses and Other ~~Income:~~Income, Net:


	Quarter Ended									Six Months Ended										Quarter Ended										Nine Months Ended
	September 30,									September 30,										December 31,										December 31,
(Dollars in millions)	2007			2006			Change			2007			2006			Change				2007			2006			Change				2007				2006				Change

Operating Expenses
Distribution Solutions	$	491		$	448			10	%	$	987		$	918			8	%		$	554		$	462			20	%		$	1,541			$	1,380				12	%
Technology Solutions		270			206			31			527			398			32				300			210			43				827				608				36
Corporate		66			70			(6	)		134			132			2				68			71			(4	)			202				203				—
Securities Litigation credit, net		(5	)		(6	)		(17	)		(5	)		(6	)		(17	)
Securities Litigation credits, net																					—			—			—				(5	)			(6	)			(17	)

Total	$	822		$	718			14		$	1,643		$	1,442			14			$	922		$	743			24			$	2,565			$	2,185				17

Operating Expenses as a Percentage of Revenues
Distribution Solutions		2.07	%		2.05	%		bp		2.08	%		2.05	%		bp			2.15	%		2.05	%		10	bp			2.10	%			2.05	%			5	bp
Technology Solutions		37.92			39.24			(132	)		36.55			39.17			(262	)			40.76			38.60			216				37.97				38.97				(100	)
Total		3.36			3.21			15			3.35			3.16			19				3.48			3.21			27				3.40				3.18				22
Other Income

Other Income, Net
Distribution Solutions	$	9		$	7			29	%	$	23		$	20			15	%		$	7		$	12			(42	)%		$	30			$	32				(6	)%
Technology Solutions		3			3			—			5			5			—				4			2			100				9				7				29
Corporate		24			22			9			45			42			7				20			25			(20	)			65				67				(3	)

Total	$	36		$	32			13		$	73		$	67			9			$	31		$	39			(21	)		$	104			$	106				(2	)

Operating expenses for the ~~second~~third quarter and first ~~half~~nine months of 2008 increased ~~14%~~24% to ~~$822~~$922 million and ~~$1,643 million.~~17% to $2.6 billion. As a percentage of revenues, operating expenses for the ~~second~~third quarter and first ~~half~~nine months of 2008 increased 1527 and 1922 basis points to ~~3.36%~~3.48% and ~~3.35%~~3.40%. The increase in our operating expenses as a percentage of revenues primarily reflects $38 million of pre-tax charges recorded during the third quarter of 2008 which are further described below, and our acquisitions of Per-Se and OTN. Operating expense dollars increased primarily due to our business acquisitions, including Per-Se and OTN, additional costs incurred to support our sales volume growth, $38 million of pre-tax charges recorded in the third quarter of 2008, and to a lesser extent, due to employee compensation costs associated with the requirement to expense share-based ~~compensation.~~compensation and foreign currency fluctuations. Pre-tax share-based compensation for the ~~second quarter and first half~~third quarters of 2008 and 2007 was ~~$28~~$26 million and ~~$47~~$15 million and ~~$16~~$73 million and ~~$24~~$39 million for the ~~comparable prior year periods. Other income, net increased slightly~~first nine months of 2008 and 2007.

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

During the third quarter of 2008, we incurred $41 million of pre-tax charges ($32 million after-tax) as follows:

Distribution Technology
(In millions) Solutions Solutions Total

Increase in legal reserves and a settlement⁽¹⁾
$ 13 $ 4 $ 17
Restructuring charges — facility closures⁽²⁾
3 — 3
Restructuring charges & related asset impairment charge — termination of a software project⁽³⁾
— 8 8
Severance expense (non-restructuring)⁽⁴⁾
— 9 9
Other asset impairment charge⁽⁵⁾
— 4 4

Total pre-tax charges $ 16 $ 25 $ 41


(1)		During the third quarter of 2008, we engaged in discussions with a governmental agency to settle claims arising out of an inquiry. As a result of these settlement discussions, we recorded an increase in a legal reserve of $13 million during the quarter within our Distributions Solutions segment. This reserve is not tax deductible.

(2)		Consists of severance costs for two facility closures.

(3)		Represents $4 million of severance and exit-related costs and a $4 million asset impairment charge for the write-off of capitalized software costs associated with the termination of a software project.

(4)		Severance expense associated with the realignment of our workforce. Although such actions do not constitute a restructuring plan, they represent independent actions taken from time to time, as appropriate. In addition, during the first nine months of 2007, our Technology Solutions segment incurred $6 million of severance charges associated with the reallocation of product development and marketing resources and the realignment of one of the segment’s international businesses.

(5)		Asset impairment charge associated with the write-down to fair value for a property as assessed by market prices.

These expenses were recorded in ~~2008 compared with 2007.~~our condensed consolidated statements of operations as follows:

Distribution Technology
(In millions) Solutions Solutions Total

Cost of sales $ — $ 3 $ 3
Operating expenses 16 22 38

Total pre-tax charges $ 16 $ 25 $ 41

Due to the accelerated vesting of share-based awards prior to 2007, we anticipate the impact of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” to increase in significance as future awards of share-based compensation are granted and amortized over the requisite service period. Share-based compensation charges are affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. These variables include, but are not limited to, the volatility of our stock price, employee stock option exercise behavior, timing, level and types of our grants of annual share-based awards, the attainment of performance goals and actual forfeiture rates. As a result, the actual future share-based compensation expense may differ from historical levels of expense. Refer to Financial Note 4, “Share-Based Payment,” to the accompanying condensed consolidated financial statements for further information on our share-based compensation.

Other income, net decreased in the third quarter of 2008 compared to the same period a year ago primarily reflecting a decrease in interest income. For the nine months ended December 31, 2007, other income, net approximated that of the comparable prior year period.

2224

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)

Segment Operating Profit and Corporate Expenses:


	Quarter Ended									Six Months Ended									Quarter Ended									Nine Months Ended
	September 30,									September 30,									December 31,									December 31,
(Dollars in millions)	2007			2006			Change			2007			2006			Change			2007			2006			Change			2007			2006			Change

Segment Operating Profit⁽¹⁾
Distribution Solutions	$	366		$	328			12	%	$	706		$	641			10	%
Segment Operating Profit⁽¹⁾ Distribution Solutions																			$	312		$	340			(8	)%	$	1,018		$	981			4	%
Technology Solutions		66			52			27			166			88			89			49			63			(22	)		215			151			42

Subtotal		432			380			14			872			729			20			361			403			(10	)		1,233			1,132			9
Corporate Expenses, net		(42	)		(48	)		(13	)		(89	)		(90	)		(1	)		(48	)		(46	)		4			(137	)		(136	)		1
Securities Litigation credit, net		5			6			(17	)		5			6			(17	)
Securities Litigation credits, net																				—			—						5			6			(17	)
Interest Expense		(36	)		(22	)		64			(72	)		(45	)		60			(36	)		(23	)		57			(108	)		(68	)		59

Income from Continuing Operations, Before Income Taxes	$	359		$	316			14		$	716		$	600			19		$	277		$	334			(17	)	$	993		$	934			6

Segment Operating Profit Margin
Distribution Solutions		1.54	%		1.50	%		bp		1.49	%		1.43	%		bp
Segment Operating Profit Margin Distribution Solutions																				1.21	%		1.51	%	(30		) bp		1.39	%		1.46	%	(7		) bp
Technology Solutions		9.27			9.90			(63	)		11.51			8.66			285			6.66			11.58			(492	)		9.87			9.68			19

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)

Corporate expenses, net of other income, increased primarily reflecting a decrease in interest income and additional costs incurred to support our revenue growth partially offset by a decrease in legal expenses associated with our Securities Litigation. For the nine months ended December 31, 2007, Corporate expenses, net of other income, was also impacted by an increase in share-based compensation. Share-based compensation expense for this segment was $8 million for both the third quarters of 2008 and 2007 and $24 million and $17 million for the nine months ended December 31, 2007 and 2006.

Securities Litigation:~~In 2008~~During the nine months ended December 31, 2007 and ~~2007,~~2006, we recorded net credits of $5 million and $6 million relating to various settlements for our Securities Litigation. Recent developments pertaining to our Securities Litigation are described in Financial Note 12, “Other Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements.

Interest Expense:Interest expense for the ~~second~~third quarter and first ~~half~~nine months of 2008 increased compared to the same periods a year ago primarily due to $1.0 billion of long-term debt issued in the fourth quarter of 2007 to fund our acquisition of Per-Se.

Income Taxes:The Company’s reported income tax rates for the ~~second~~ quarters ended December 31, 2007 and 2006 were 27.4% and 28.1%, and 31.1% and 23.9% for the first nine months of 2008 and ~~2007 were 31.2% and 9.2% and for the first half of 2008 and 2007, were 32.5% and 21.5%.~~2007. In addition to the items noted below, fluctuations in our reported tax rate are primarily due to changes within state and foreign tax rates resulting from our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates.

~~During~~Annually, we file a federal consolidated income tax return with the U.S., and over 1,100 returns with various state and foreign jurisdictions. Our major taxing jurisdictions are the U.S. and Canada. In the U.S., the Internal Revenue Service (“IRS”) has completed an examination of our consolidated income tax returns for 2000 to 2002 resulting in a signed Revenue Agent Report (“RAR”) in the second quarter of 2008. The RAR was approved by the Joint Committee on Taxation during the third quarter of 2008. The IRS and the Company have agreed to certain adjustments, principally related to transfer pricing and tax credits. As a result, in the third quarter of 2008, we recorded $20 million of income tax benefits and related interest which primarily consisted of the approved RAR. Income tax expense for 2008 was also impacted by a non-tax deductible $13 million increase in a legal reserve. In Canada, we are under examination for 2002 to 2005. In nearly all jurisdictions, the tax years prior to 1999 are no longer subject to examination. We further believe that we have made adequate provision for all remaining income tax uncertainties.

During the third quarter of 2007, we decreased our estimated annual effective tax rate from ~~a range of 34% — 35%~~35.0% to ~~33.0%~~34.0% primarily due to an estimated higher proportion of income attributed to foreign ~~countries.~~countries that have lower income tax rates. This decrease required a $3$6 million cumulative catch-up benefit to income taxes associated with the first half of 2007. Also, during the third quarter of ~~2008.~~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~~$962 million to settle ~~the~~our Consolidated Securities Litigation 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 Securities Litigation Action and related litigation.

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)

Discontinued Operations:In the second quarter of 2007, we completed the divestiture of our Distribution Solutions segment’s ~~Medical-Surgical~~ Acute Care medical-surgical supply business for net cash proceeds of approximately $160 million. ~~The divestiture generated~~Financial results for the first nine months of 2007 for this discontinued operation include an after-tax loss of $64 million, which primarily consists of an after-tax loss of $61 million ~~which~~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 included a $79 million non-tax deductible write-off of goodwill. The segment also sold a wholly-owned subsidiary, Pharmaceutical Buyers Inc., for net cash proceeds of $10 million. The divestiture ~~resulted in~~generated an after-tax gain of $5 million resulting from the tax basis of the subsidiary exceeding its carrying value. The financial results for this business were not material to our condensed consolidated financial statements. This segment also includes an after-tax gain of $4 million associated with the collection of a note receivable from a business sold in 2003. Financial results of these businesses are classified as discontinued operations for all periods presented in the accompanying condensed consolidated financial statements.

Net Income:Net income was ~~$247~~$201 million and ~~$229~~$243 million for the ~~second quarter~~third quarters of 2008 and 2007, or ~~$0.83~~$0.68 and ~~$0.75~~$0.80 per diluted share. Net income was ~~$482~~$683 million and ~~$413~~$656 million for the first ~~half~~nine months of 2008 and 2007, or ~~$1.60~~$2.28 and ~~$1.35~~$2.15 per diluted share. Net income for the first nine months of 2008 and 2007 includes a net after-tax benefit of $3 million and $87 million for our Securities Litigation. Net income for the ~~second quarter and~~ first ~~half~~nine months of 2007 also includes ~~$58~~$55 million of after-tax losses for our discontinued operations primarily pertaining to the disposition of our ~~Medical-Surgical~~ Acute Care business.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~
~~(UNAUDITED)~~

A reconciliation between our income from continuing operations 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 from continuing operations, excluding credits for the Securities Litigation for the third quarters and first nine months of 2008 and 2007 is as follows:

Quarter Ended Six Months Ended
September 30, September 30,
(In millions except per share amounts) 2007 2006 2007 2006

Income from continuing operations, as reported $ 247 $ 287 $ 483 $ 471
Exclude:
Securities Litigation credit, net (5 ) (6 ) (5 ) (6 )
Income taxes 2 2 2 2
Income tax reserve reversals — (83 ) — (83 )

Securities Litigation credit, net of tax (3 ) (87 ) (3 ) (87 )

Income from continuing operations, excluding Securities Litigation credit, net $ 244 $ 200 $ 480 $ 384

Diluted earnings per common share from continuing operations, as reported $ 0.83 $ 0.94 $ 1.60 $ 1.54
Diluted earnings per common share from continuing operations, excluding Securities Litigation credit $ 0.82 $ 0.66 $ 1.59 $ 1.25

Shares on which diluted earnings per common share, excluding the Securities Litigation credit, were based 299 305 302 307

Quarter Ended Nine Months Ended
December 31, December 31,
(In millions except per share amounts) 2007 2006 2007 2006

Net income, as reported $ 201 $ 243 $ 683 $ 656
Exclude:
Securities Litigation credits, net — — (5 ) (6 )
Income taxes — — 2 2
Income tax reserve reversals — — — (83 )

Securities Litigation credits, net of tax — — (3 ) (87 )

Net income, excluding Securities Litigation credits, net $ 201 $ 243 $ 680 $ 569

Diluted earnings per common share, as reported $ 0.68 $ 0.80 $ 2.28 $ 2.15
Diluted earnings per common share, excluding Securities Litigation credits $ 0.68 $ 0.80 $ 2.27 $ 1.87

Shares on which diluted earnings per common share, excluding the Securities Litigation credits, were based 297 302 300 305

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 relevant benchmarks of core operating performance.

2527

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)

Weighted Average Diluted Shares Outstanding:Diluted earnings per share were calculated based on an average number of diluted shares outstanding of ~~299~~297 million and 302 million for the third quarters of 2008 and 2007 and 300 million and 305 million for the ~~second quarters of 2008 and 2007 and 302 million and 307 million for the six~~nine months ended ~~September 30,~~December 31, 2007 and 2006. The decrease in the number of weighted average diluted shares outstanding primarily reflects stock repurchased, partially offset by exercised stock options.

Business Acquisitions

On October 29, 2007, we acquired all of the outstanding shares of ~~Oncology Therapeutics Network (“OTN”)~~OTN of San Francisco, California for approximately ~~$575~~$531 million, including the assumption of ~~debt.~~debt and net of $31 million of cash acquired from OTN. OTN is a U.S. distributor of specialty pharmaceuticals. The acquisition was funded with cash on hand. The results of OTN ~~will be~~are included in the consolidated financial statements within our Distribution Solutions segment.

~~In 2007, we made the following acquisitions and investment:~~

On January 26, 2007, we acquired all of the outstanding shares of Per-Se of Alpharetta, Georgia for $28.00 per share in cash plus the assumption of Per-Se’s debt, or approximately $1.8 billion in aggregate, including cash acquired of $76 million. Per-Se is a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies. Financial results for Per-Se are primarily included within our Technology Solutions segment since the date of acquisition. The acquisition was initially funded with cash on hand and through the use of an interim credit facility. In March 2007, we issued $1 billion of long-term debt, with such net proceeds after offering expenses from the issuance, together with cash on hand, being used to fully repay borrowings outstanding under the interim credit facility.

Approximately ~~$1,252~~$290 million of the preliminary purchase price allocation has been assigned to goodwill. Included in the purchase price allocation are acquired identifiable intangibles of ~~$402~~$119 million representing customer relationships with a weighted-average life of 109 years, developed technology of ~~$56~~$3 million with a weighted-average life of 54 years and trademarks and ~~tradenames~~trade names of ~~$13~~$7 million with a weighted-average life of 5 years.

In 2007, we made the following acquisitions and investment:

•		~~Our~~On January 26, 2007, we acquired all of the outstanding shares of Per-Se of Alpharetta, Georgia for $28.00 per share in cash plus the assumption of Per-Se’s debt, or approximately $1.8 billion in aggregate, including cash acquired of $76 million. Per-Se is a leading provider of financial and administrative healthcare solutions for hospitals, physicians and retail pharmacies. Financial results for Per-Se are primarily included within our Technology Solutions segment since the date of acquisition. The acquisition was initially funded with cash on hand and through the use of an interim credit facility. In March 2007, we issued $1 billion of long-term debt, with such net proceeds after offering expenses from the issuance, together with cash on hand, being used to fully repay borrowings outstanding under the interim credit facility.

		Approximately $1,253 million of the purchase price allocation has been assigned to goodwill. Included in the purchase price allocation are acquired identifiable intangibles of $402 million representing customer relationships with a weighted-average life of 10 years, developed technology of $56 million with a weighted-average life of 5 years and trademarks and trade names of $13 million with a weighted-average life of 5 years.

•		In the first quarter of 2007, our Technology Solutions segment acquired RelayHealth Corporation (“RelayHealth”) based in Emeryville, California. RelayHealth is a provider of secure online healthcare communication services linking patients, healthcare professionals, payors and pharmacies. This segment also acquired two other entities, one specializing in patient billing solutions designed to simplify and enhance healthcare providers’ financial interactions with their patients in the first quarter of 2007 and the other a provider of integrated software for electronic health records, medical billing and appointment scheduling for independent physician ~~practices.~~practices in the fourth quarter of 2007. The total cost of these three entities was $90 million which was paid in cash. Goodwill recognized in these transactions amounted to $63 million.

•		~~Our~~During the first quarter of 2007, our Distribution Solutions segment acquired Sterling Medical Services LLC (“Sterling”) based in Moorestown, New Jersey. Sterling is a national provider and distributor of disposable medical supplies, health management services and quality management programs to the home care market. This segment also acquired a medical supply sourcing ~~agent.~~agent in the fourth quarter of 2007. The total cost of these two entities was $95 million which was paid in cash. Goodwill recognized in these transactions amounted to $47 million.

•		WeDuring 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 minority interest in Parata. Our investment in Parata is accounted for under the equity method of accounting within our Distribution Solutions segment.

2628

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)

New Accounting Developments

See Financial Note 1, “Significant Accounting Policies,” to the condensed consolidated financial statements for information on recently issued accounting standards.

Contractual Obligations

There have been no significant changes to our contractual obligations and commitments table as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2007, ~~expect~~except for ~~those incurred during the normal course of business and~~ a change related to our adoption of Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income ~~Taxes.~~Taxes,” our $962 million payment for our Consolidated Securities Litigation Action and those incurred during the normal course of business. As disclosed in Financial Note ~~1, “Significant Accounting Policies,~~6, “Income Taxes,” to the accompanying condensed consolidated financial statements, we ~~had~~have $465 million and ~~$488~~$469 million of unrecognized tax benefits at April 1, 2007 and ~~September 30,~~December 31, 2007. These liabilities would increase our contractual obligations as reported in our 2007 Annual Report on Form 10-K. We can not reasonably estimate the timing of cash settlement with respective taxing authorities for these liabilities.

Financial Condition, Liquidity and Capital Resources

Operating activities utilized cash of $47 million and provided cash of ~~$1,272 million and $685~~$555 million during the first ~~half~~nine months of 2008 and 2007. Operating activities for 2008 reflect ~~improved inventory management~~the $962 million release of restricted cash for our Consolidated Securities Litigation Action and an increase in receivables, inventories and drafts and accounts payable associated with ~~longer payment terms,~~our revenue growth. These net increases were partially offset by ~~an increase in receivables associated with longer payment terms.~~improved inventory management. 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 longer payment terms. These benefits were partially offset by increases in inventory needed to support our ~~growth.~~growth and timing of inventory receipts. Operating activities for 2007 also reflect payments of $25 million for the settlement of Securities Litigation cases. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers, inventory receipts and payments to vendors.

Investing activities provided cash of $114 million and utilized cash of ~~$228 million and $109~~$157 million during the first ~~half~~nine months of 2008 and 2007. Investing activities for 2008 benefited from the $962 million release of restricted cash for our Consolidated Securities Litigation Action. Investing activities for 2008 and 2007 include ~~$83~~$129 million and ~~$51~~$76 million of property acquisitions. The increase primarily reflects investments in our distribution center network and information systems. Investing activities include ~~$51~~$592 million (including $531 million for OTN) and ~~$95~~$106 million in 2008 and 2007 of cash paid for business acquisitions. Investing activities for 2007 also reflect $36 million of cash paid for our investment in Parata and $175 million of cash proceeds from the sale of businesses, including $164 million for the sale of our Acute Care business.

Financing activities utilized cash of ~~$498~~$599 million and ~~$467~~$529 million in the first ~~half~~nine months of 2008 and 2007. Financing activities for 2008 include a ~~$37~~$170 million increase in the use of cash for stock ~~repurchases.~~repurchases partially offset by a $58 million increase in cash receipts primarily resulting from employees’ exercises of stock options.

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)

In January 2007, we entered into a $1.8 billion interim credit facility. The interim credit facility was a single-draw 364-day unsecured facility which had terms substantially similar to those contained in the Company’s existing revolving credit facility. We utilized $1.0 billion of this facility to fund a portion of our purchase of Per-Se. On March 5, 2007, we issued $500 million of 5.25% notes due 2013 and $500 million of 5.70% notes due 2017. The notes are unsecured and interest is paid semi-annually on March 1 and September 1. The notes are redeemable at any time, in whole or in part, at our option. In addition, upon occurrence of both a change of control and a ratings downgrade of the notes to non-investment-grade levels, we are required to make an offer to redeem the notes at a price equal to 101% of the principal amount plus accrued interest. We utilized net proceeds, after offering expenses, of $990 million from the issuance of the notes, together with cash on hand, to repay all amounts outstanding under the interim credit facility plus accrued interest.

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 $215 million of term debt could be accelerated. As of ~~September 30,~~December 31, 2007, this ratio was ~~23.4%~~23.1% 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.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONCLUDED)~~
~~(UNAUDITED)~~

Funds necessary for 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.

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of Part I of this report, contains 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,” “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, anticipated or implied. 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 reader should not consider this list to be a complete statement of all potential risks and uncertainties.

~~general economic conditions.~~

•		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 branded and 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.

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 ~~as disclosed~~discussed in our 2007 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) or 15d-15(e)) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this quarterly report, and our Chief Executive Officer and our Chief Financial Officer 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 control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Financial Note 12, “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 2007 Annual Report on 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 ~~second~~third quarter of 2008.

Share Repurchases⁽²⁾
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⁾

July 1, 2007 — July 31, 2007 — $ — — $ 743
August 1, 2007 — August 31, 2007 7 57.87 7 337
September 1, 2007 — September 30, 2007 1 57.61 1 1,316

Total 8 57.85 8 1,316

Share Repurchases⁽²⁾
Approximate
Dollar Value of
Total Number of Shares Shares that May
Purchased As Part of Yet Be Purchased
Total Number of Shares Average Price Paid Publicly Announced Under the
(In millions, except price per share) Purchased Per Share Program Programs⁽¹⁾

October 1, 2007 — October 31, 2007 — $ — — $ 1,316
November 1, 2007 — November 30, 2007 2 64.96 2 1,165
December 1, 2007 — December 31, 2007 1 65.78 1 1,086

Total 3 65.24 3 1,086



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

(2)		In April and September of 2007, the Company’s Board of Directors approved two plans to repurchase up to a total of $2.0 billion ($1.0 billion per plan) of the Company’s common stock.

3033

McKESSON CORPORATION

Item 3. Defaults Upon Senior Securities

None

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

The Company’s Annual Meeting of Stockholders was held on July 25, 2007. The following matters were voted upon at the meeting and the stockholder votes on each such matter are briefly described below.

~~The Board of Directors’ nominees for directors as listed in the proxy statement were each elected to serve for a one-year term. The vote was as follows:~~

Votes For Votes Against Votes Abstained
John H. Hammergren 247,355,459 15,171,327 1,763,391
M. Christine Jacobs 246,367,560 16,038,092 1,884,525

The term of the following directors continued after the meeting. In connection with the declassification of the Board of Directors described below, all Directors will be elected for a one-year term beginning with the Annual Meeting of Stockholders expected to be held in July 2008.


~~Wayne A. Budd~~		~~Alton F. Irby III~~
~~Marie L. Knowles~~		~~David M. Lawrence, M.D.~~
~~James V. Napier~~		~~Jane E. Shaw~~

~~The proposal to amend the Restated Certificate of Incorporation to declassify the Board of Directors received the following vote:~~

Votes For Votes Against Votes Abstained
260,329,272 2,024,093 1,936,812

~~The proposal to amend the 2005 Stock Plan, for purpose of increasing the number of shares of common stock reserved for issuance under the plan by 15 million shares, received the following vote:~~

Votes For Votes Against Votes Abstained Broker Non Vote
203,824,356 33,564,196 2,038,285 24,863,340

The proposal to amend the 2000 Employee Stock Purchase Plan, for purposes of increasing the number of shares of common stock reserved for issuance under the plan by 5 million shares, received the following vote:

Votes For Votes Against Votes Abstained Broker Non Vote
224,585,853 12,999,032 1,841,952 24,863,340

~~The proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending March 31, 2008 received the following vote:~~

Votes For Votes Against Votes Abstained
261,179,591 1,197,889 1,912,697
None

Item 5. Other Information

None

~~McKESSON CORPORATION~~

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

	~~3.1~~		~~Amended and Restated Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on July 25, 2007.~~

	~~10.1~~		~~McKesson Corporation 2005 Stock Plan, as amended and restated effective as of July 25, 2007.~~

	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: ~~October 31, 2007~~February 1, 2008	/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

3234


	September 30,			March 31,			December 31,			March 31,
(Dollars in millions)	2007			2007			2007			2007

Cash and cash equivalents	$	2,518		$	1,954		$	1,436		$	1,954
Working capital		3,177			2,730			2,837			2,730
Debt, net of cash and cash equivalents		(568	)		4			513			4
Debt to capital ratio⁽¹⁾		23.4	%		23.8	%		23.1	%		23.8	%
Net debt to net capital employed⁽²⁾		(9.8	)		0.1			7.3			0.1
Return on stockholders’ equity⁽³⁾		15.8			15.2			14.8			15.2


Item			Page					Page
		PART I. FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION					PART I. FINANCIAL INFORMATION
1.		Condensed Consolidated Financial Statements				Condensed Consolidated Financial Statements
						Condensed Consolidated Balance Sheets December 31, 2007 and March 31, 2007			3
		Condensed Consolidated Balance Sheets September 30, 2007 and March 31, 2007		3		Condensed Consolidated Statements of Operations Quarters and Nine Months Ended December 31, 2007 and 2006			4
						Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2007 and 2006			5
		Condensed Consolidated Statements of Operations Quarters and Six Months ended September 30, 2007 and 2006		4		Financial Notes			6

		Condensed Consolidated Statements of Cash Flows Six Months ended September 30, 2007 and 2006		5

		Financial Notes		6

2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		19-29		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20-32

3.		Quantitative and Qualitative Disclosures about Market Risk		30		Quantitative and Qualitative Disclosures about Market Risk			33

4.		Controls and Procedures		30		Controls and Procedures			33

		PART II. OTHER INFORMATION

PART II. OTHER INFORMATION					PART II. OTHER INFORMATION
1.		Legal Proceedings		30		Legal Proceedings			33

1A.		Risk Factors		30		Risk Factors			33

2.		Unregistered Sales of Equity Securities and Use of Proceeds		30		Unregistered Sales of Equity Securities and Use of Proceeds			33

3.		Defaults Upon Senior Securities		31		Defaults Upon Senior Securities			34

4.		Submission of Matters to a Vote of Security Holders		31		Submission of Matters to a Vote of Security Holders			34

5.		Other Information		31		Other Information			34

6.		Exhibits		32		Exhibits			34
						Signatures			34
		Signatures		32
Exhibit 3.1
Exhibit 10.1
EXHIBIT 31.1	EXHIBIT 31.1						EXHIBIT 31.1
EXHIBIT 31.2	EXHIBIT 31.2						EXHIBIT 31.2
EXHIBIT 32	EXHIBIT 32						EXHIBIT 32


(1)		Substantially all of the 2008 expense was the result of our 2007 PeRSUs that have been converted to RSUs in 2008 due to the attainment of goals during the 2007 performance period.

(2)		Represents estimated compensation expense for PeRSUs that are conditional upon attaining performance objectives during the ~~2008 and 2007~~current year’s performance periods.

(3)		No material share-based compensation expense was included in Discontinued Operations.


(1)		Revenues and operating profit for the first ~~half~~nine months of 2008 reflect the recognition of $21 million of disease management deferred revenues. Expenses associated with these revenues were previously recognized as incurred.

(2)		During the first ~~half~~nine months of 2008 and ~~the second quarter and first half of~~ 2007, we received $14 ~~million, $10~~ million and $10 million as our share of settlements of antitrust class action lawsuits brought against certain drug manufacturers. These settlements were recorded as reductions to cost of sales within our consolidated statements of operations in our Distribution Solutions segment.

(3)		Operating profit for 2008 for our Distribution Solutions and Technology Solutions segments includes $16 million and $25 million of pre-tax charges for increases in legal reserves and a settlement, severance expenses, asset impairments and restructuring activities.

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


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



(1)		Ratio is computed as total debt divided by total debt and stockholders’ equity.

(2)		Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by net debt and stockholders’ equity (“net capital employed”).

(3)		Ratio is computed as net income for the last four quarters, divided by a five-quarter average of stockholders’ equity.


	Share Repurchases⁽²⁾
							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⁾

July 1, 2007 — July 31, 2007		—	$	—		—	$	743
August 1, 2007 — August 31, 2007		7		57.87		7		337
September 1, 2007 — September 30, 2007		1		57.61		1		1,316

Total		8		57.85		8		1,316


	Share Repurchases⁽²⁾
							Approximate
							Dollar Value of
					Total Number of Shares		Shares that May
					Purchased As Part of		Yet Be Purchased
	Total Number of Shares		Average Price Paid		Publicly Announced		Under the
(In millions, except price per share)	Purchased		Per Share		Program		Programs⁽¹⁾

October 1, 2007 — October 31, 2007		—	$	—		—	$	1,316
November 1, 2007 — November 30, 2007		2		64.96		2		1,165
December 1, 2007 — December 31, 2007		1		65.78		1		1,086

Total		3		65.24		3		1,086


	Votes For	Votes Against	Votes Abstained
John H. Hammergren	247,355,459	15,171,327	1,763,391
M. Christine Jacobs	246,367,560	16,038,092	1,884,525