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

of Operations Financial Overview Quarter Ended Six Months Ended September 30, September 30, (In millions, except per share data) 2008 2007 Change 2008 2007 Change Revenues $ 26,574 $ 24,450 9 % $ 53,278 $ 48,978 9 % Income from Continuing Operations Before Income Taxes 379 359 6 737 716 3 Income Tax Expense (52 ) (112 ) (54 ) (175 ) (233 ) (25 ) Discontinued Operations, Net - - - - (1 ) NM Net Income $ 327 $ 247 32 $ 562 $ 482 17 Diluted Earnings Per Share: $ 1.17 $ 0.83 41 % $ 2.00 $ 1.60 25 % Weighted Average Diluted Shares 280 299 (6 ) 281 302 (7 )

NM - not meaningful

Revenues for the quarter ended September 30, 2008 grew 9% to $26.6 billion, net income increased 32% to $327 million and diluted earnings per share increased 41% to $1.17 compared to the same period a year ago. For the first six months of 2009, revenue increased 9% to $53.3 billion, net income increased 17% to $562 million and diluted earnings per share increased 25% to $2.00 compared to the same period a year ago. Increases in net income and diluted earnings per share primarily reflect the recognition of $76 million of previously unrecognized tax benefits and related interest expense as a result of the effective settlement of uncertain tax positions and improvement in our Distribution Solutions segment, which includes a $24 million pre-tax gain on the sale of our 42% equity interest in Verispan, L.L.C. ("Verispan"). Diluted earnings per share also benefited from the impact of share repurchases made in 2008 and the first half of 2009.

Results of Operations Revenues: Quarter Ended Six Months Ended September 30, September 30, (In millions) 2008 2007 Change 2008 2007 Change Distribution Solutions U.S. pharmaceutical direct distribution & services $ 16,611 $ 14,372 16 % $ 33,039 $ 28,570 16 % U.S. pharmaceutical sales to customers' warehouses 6,319 6,826 (7 ) 12,983 14,068 (8 ) Subtotal 22,930 21,198 8 46,022 42,638 8 Canada pharmaceutical distribution & services 2,182 1,898 15 4,423 3,662 21 Medical-Surgical distribution & services 700 642 9 1,327 1,236 7 Total Distribution Solutions 25,812 23,738 9 51,772 47,536 9 Technology Solutions Services 582 538 8 1,146 1,091 5 Software and software systems 140 139 1 278 277 - Hardware 40 35 14 82 74 11 Total Technology Solutions 762 712 7 1,506 1,442 4 Total Revenues $ 26,574 $ 24,450 9 $ 53,278 $ 48,978 9

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Revenues increased by 9% to $26.6 billion and 9% to $53.3 billion during the quarter and six months ended September 30, 2008 compared to the same periods a year ago. The increase primarily reflects growth in our Distribution Solutions segment which accounted for over 97% of consolidated revenues.
U.S. pharmaceutical direct distribution and services revenues increased primarily reflecting market growth rates (which include growing drug utilization and price increases, offset in part by the increased use of lower priced generics), our acquisition of Oncology Therapeutics Network ("OTN") in October 2007 and expanded business with existing customers. U.S. pharmaceutical sales to customers' warehouses decreased primarily reflecting a decrease in volume from a large customer, the loss of a large customer and reduced revenues associated with the consolidation of certain customers. These decreases were partially offset by expanded business with existing customers. In addition, U.S. pharmaceutical revenues benefited from one additional day of sales in 2009 compared with the same prior year periods.
Canadian pharmaceutical distribution revenues increased primarily reflecting new and expanded business and market growth rates. For the first half of 2009, revenues also benefited from a 5% favorable foreign exchange rate impact. In addition, revenues benefited from one additional day of sales during the second quarter of 2009 and three additional days of sales during the first six months of 2009 compared to the same periods a year ago.
Medical-Surgical distribution and services revenues increased primarily reflecting market growth rates and earlier sales of flu vaccines.
Technology Solutions segment revenues increased in the second quarter of 2009 compared to the same period a year ago primarily due to increased services revenues reflecting the segment's expanded customer base and higher disease management and outsourcing revenues. Additionally, during the second quarter of 2009, the segment saw some hospital customers delay their purchasing decisions, particularly in the last two weeks of the quarter. For the first six months of 2009, Technology Solutions segment revenues increased primarily due to increased services revenues reflecting the segment's expanded customer base, partially offset by lower disease management revenues. During the first six months of 2008, the segment recognized $21 million of disease management deferred revenues for which expenses associated with these revenues were previously recognized as incurred.

Gross Profit: Quarter Ended Six Months Ended September 30, September 30, (Dollars in millions) 2008 2007 Change 2008 2007 Change Gross Profit Distribution Solutions $ 951 $ 848 12 % $ 1,885 $ 1,670 13 % Technology Solutions 351 333 5 685 688 - Total $ 1,302 $ 1,181 10 $ 2,570 $ 2,358 9 Gross Profit Margin Distribution Solutions 3.68 % 3.57 % 11 bp 3.64 % 3.51 % 13 bp Technology Solutions 46.06 46.77 (71 ) 45.48 47.71 (223 ) Total 4.90 4.83 7 4.82 4.81 1

Gross profit increased 10% and 9% in the second quarter and first six months of 2009 compared to the same periods a year ago. As a percentage of revenues, gross profit margin increased in the second quarter of 2009 and was relatively unchanged for the first six months of 2009 compared to the same periods a year ago. Gross profit margin for 2009 benefited from improvements in our Distribution Solutions segment. Gross profit margin for the first half of 2008 was impacted by our Technology Solutions segment's recognition of $21 million of disease management deferred revenues for which expenses associated with these revenues were previously recognized as incurred.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Distribution Solutions segment's gross profit margin increased by 11 basis points to 3.68% in the second quarter of 2009 and by 13 basis points to 3.64% in the first six months of 2009 compared to the same periods a year ago. In the second quarter and the first six months of 2009, gross profit margin was impacted by the benefit of increased sales of generic drugs with higher margins and 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. In the second quarter, these benefits were partially offset by lower buy side margin primarily reflecting the timing of compensation from branded pharmaceutical manufacturers. For the first six months of 2009, these positive gross profit margin benefits were partially reduced by a $14 million decrease in antitrust settlements. During the first six months of 2008, we received $14 million of antitrust settlements representing our share of cash proceeds from two antitrust class action lawsuits.
Technology Solutions segment's gross profit margin decreased in the second quarter and first six months of 2009 compared to the same periods a year ago. Gross profit margin was impacted primarily by a change in product mix and, for the first half of 2009, due to the recognition in 2008 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:

Quarter Ended Six Months Ended September 30, September 30, (Dollars in millions) 2008 2007 Change 2008 2007 Change Operating Expenses Distribution Solutions $ 570 $ 491 16 % $ 1,132 $ 987 15 % Technology Solutions 282 270 4 552 527 5 Corporate 69 66 5 134 134 - Securities Litigation credit, net - (5 ) NM - (5 ) NM Total $ 921 $ 822 12 $ 1,818 $ 1,643 11 Operating Expenses as a Percentage of Revenues Distribution Solutions 2.21 % 2.07 % 14 bp 2.19 % 2.08 % 11 bp Technology Solutions 37.01 37.92 (91 ) 36.65 36.55 10 Total 3.47 3.36 11 3.41 3.35 6 Other Income, Net Distribution Solutions (1) $ 25 $ 9 178 % $ 37 $ 23 61 % Technology Solutions 2 3 (33 ) 4 5 (20 ) Corporate 6 24 (75 ) 13 45 (71 ) Total $ 33 $ 36 (8 ) $ 54 $ 73 (26 )

(1) Includes the second quarter of 2009 Distribution Solutions segment's sale of its 42% equity interest in Verispan.

Operating expenses for the second quarter of 2009 increased 12% to $921 million and for the first half of 2009 increased 11% to $1.8 billion. As a percentage of revenues, operating expenses for the second quarter and first half of 2009 increased 11 basis points to 3.47% and 6 basis points to 3.41%. Operating expense dollars increased primarily due to our business acquisitions and additional costs incurred to support our sales volume growth.
Distribution Solutions segment's operating expenses increased primarily due to business acquisitions and additional costs incurred to support our sales volume growth. Operating expenses as a percentage of revenues increased primarily due to our business acquisitions, higher distribution and information technology costs, as well as a change in business mix.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Technology Solutions segment's operating expenses increased during the second quarter primarily due to additional costs incurred to support our sales growth and business acquisitions. For the first six months of 2009, operating expenses were also impacted by an increase in net research and development expenses, which was partially offset by a decrease in bad debt expense. Operating expenses as a percentage of revenues decreased in the second quarter of 2009 primarily reflecting the segment's business mix. Operating expenses as a percentage of revenues for the first six months of 2009 increased primarily reflecting the impact of the $21 million of disease management deferred revenues recognized for which expenses associated with these revenues were previously recognized as incurred, partially offset by a favorable business mix.
Corporate expenses remained relatively unchanged compared to prior year periods.
Other income, net decreased primarily reflecting a decrease in interest income due to lower cash balances and lower interest rates and a net increase in losses from our equity investments. These decreases were partially offset by a $24 million pre-tax gain from the sale of our 42% equity interest in Verispan. Interest income is primarily recorded at Corporate and financial results for Verispan are recorded within our Distribution Solutions segment.
Segment Operating Profit and Corporate Expenses:

Quarter Ended Six Months Ended September 30, September 30, (Dollars in millions) 2008 2007 Change 2008 2007 Change Segment Operating Profit (1) Distribution Solutions $ 406 $ 366 11 % $ 790 $ 706 12 % Technology Solutions 71 66 8 137 166 (17 ) Subtotal 477 432 10 927 872 6 Corporate Expenses, net (63 ) (42 ) 50 (121 ) (89 ) 36 Securities Litigation credit, net - 5 NM - 5 NM Interest Expense (35 ) (36 ) (3 ) (69 ) (72 ) (4 ) Income from Continuing Operations, Before Income Taxes $ 379 $ 359 6 $ 737 $ 716 3 Segment Operating Profit Margin Distribution Solutions 1.57 % 1.54 % 3 bp 1.53 % 1.49 % 4 bp Technology Solutions 9.32 9.27 5 9.10 11.51 (241 )

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

Operating profit as a percentage of revenues in our Distribution Solutions segment increased slightly primarily reflecting higher gross profit margin and the gain on the sale of our equity interest in Verispan, partially offset by higher operating expenses as a percentage of revenues.
In October 2008, we entered into an agreement to sell our Distribution Solutions' specialty pharmacy business (a business within McKesson's Specialty Care Solutions division). The sale is subject to various customary closing conditions including regulatory review and is expected to close during the third quarter of 2009. The financial impact of this sale is not expected to be material to our condensed consolidated financial statements.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Operating profit as a percentage of revenues in our Technology Solutions segment increased during the second quarter of 2009 primarily reflecting favorable operating expenses as a percentage of revenues, partially offset by a decrease in gross profit margin. Operating profit as a percentage of revenues decreased during the first half of 2009 primarily reflecting a decrease in gross profit margin, including the $21 million of deferred revenue recognized during the first half of 2008 for which expenses had been recognized in prior years and by an increase in operating expenses as a percentage of revenues.
Corporate expenses, net increased primarily due to lower interest income. Securities Litigation: During the second quarter of 2008, we recorded net credits of $5 million relating to certain settlements for our Securities Litigation.
Interest Expense: Interest expense decreased primarily reflecting the repayment of $150 million of term debt during the fourth quarter of 2008.
Income Taxes: The Company's reported income tax rates for the second quarters of 2009 and 2008 were 13.7% and 31.2% and for the first six months of 2009 and 2008, were 23.7% and 32.5%. 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 the second quarter of 2009, income tax expense included $76 million of net income tax benefits for discrete items primarily relating to previously unrecognized tax benefits and related accrued interest. The recognition of these discrete items is primarily due to the lapsing of the statutes of limitations. Of the $76 million of net tax benefits, $65 million represents a non-cash benefit to McKesson. During the first six months of 2009, income tax expense included $71 million of net income tax benefits for discrete items.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 ("The Act"), which included a retroactive reinstatement of the federal research and development credit, was signed into law. The Act extends the federal research and development credit to December 31, 2009 and we are in the process of assessing the tax impact of this extension.
During the second quarter of 2008, our estimated annual effective tax rate decreased from a range of 34% - 35% to 33.0% primarily due to an estimated higher proportion of income attributed to foreign countries. This decrease required a $3 million cumulative catch-up benefit to income taxes associated with the first quarter of 2008.
Net Income: Net income was $327 million and $247 million for the second quarters of 2009 and 2008, or $1.17 and $0.83 per diluted share. Net income was $562 million and $482 million for the first six months of 2009 and 2008, or $2.00 and $1.60 per diluted share.

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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 280 million and 299 million for the second quarters of 2009 and 2008 and 281 million and 302 million for the six months ended September 30, 2008 and 2007. The decrease in the number of weighted average diluted shares outstanding primarily reflects a decrease in the number of common shares outstanding as a result of repurchased stock, partially offset by exercised stock options. Business Acquisitions

In 2009, we made the following acquisition:

- On May 21, 2008, we acquired McQueary Brothers Drug Company ("McQueary Brothers"), of Springfield, Missouri for approximately $191 million. McQueary Brothers is a regional distributor of pharmaceutical, health, and beauty products to independent and regional chain pharmacies in the Midwestern U.S. This acquisition expanded our existing U.S. pharmaceutical distribution business. The acquisition was funded with cash on hand. Approximately $125 million of the preliminary purchase price allocation has been assigned to goodwill, which primarily reflects the expected future benefits from synergies to be realized upon integrating the business. Financial results for McQueary Brothers are included within our Distribution Solutions segment since the date of acquisition.

In 2008, we made the following acquisition:

- On October 29, 2007, we acquired all of the outstanding shares of OTN of San Francisco, California for approximately $532 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 of OTN expanded our existing specialty pharmaceutical distribution business. The acquisition was funded with cash on hand. Approximately $257 million of the preliminary purchase price allocation has been assigned to goodwill, which primarily reflects the expected future benefits from synergies to be realized upon integrating the business. Financial results of OTN are included within our Distribution Solutions segment since the date of acquisition.

During the first six months of 2009 and over 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 as we continue to evaluate and implement various restructuring initiatives. Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. Pro forma results of operations for our business acquisitions have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis. Refer to Financial Note 2, "Acquisitions and Investments," to the accompanying condensed consolidated financial statements for further discussions regarding our acquisitions and investing activities.
New Accounting Developments
New accounting pronouncements that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Financial Note 1, "Significant Accounting Policies" to the accompanying condensed consolidated financial statements.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Financial Condition, Liquidity and Capital Resources Operating activities provided cash of $548 million and $1,272 million during the first six months of 2009 and 2008. Operating activities for 2009 reflect a decrease in accounts payable, as well as increases in our accounts receivable and inventory balances primarily associated with the timing of payments and receipts, as well as inventory purchases. Operating activities for 2008 reflect an increase in accounts payable associated with longer payment terms, partially offset by an increase in receivables associated with longer payment terms. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors.
Investing activities utilized cash of $453 million and $228 million during the first six months of 2009 and 2008. Investing activities include $320 million and $51 million in 2009 and 2008 of payments for business acquisitions. Activity for 2009 includes the McQueary Brothers acquisition for approximately $191 million. Investing activities for 2009 and 2008 include $80 million and $83 million of property acquisitions.
Financing activities utilized cash of $329 million and $498 million in the first six months of 2009 and 2008. Financing activities for 2009 were favorably impacted by a $344 million reduction in the use of cash for share repurchases partially offset by a $118 million decrease in cash receipts from employees' exercises of stock options compared to the first six months of 2008.
In April and September 2007, the Company's Board of Directors (the "Board") approved two plans to repurchase up to $2.0 billion of the Company's common stock ($1.0 billion per plan). In 2008, we repurchased a total of 28 million shares for $1,686 million, fully utilizing the April 2007 plan and leaving $314 million remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase an additional $1.0 billion of the Company's common stock. During the second quarter and first six months of 2009, we repurchased 4 million and 6 million shares for $204 million and $334 million, fully utilizing the September 2007 plan and leaving $980 million available for future repurchase as of September 30, 2008. Stock repurchases may be made from time to time in open market or private transactions.
In July 2008, the Board authorized the retirement of shares of the Company's common stock that may be repurchased from time to time pursuant to its stock repurchase program. During the second quarter of 2009, all repurchased shares were formally retired by the Company. The retired shares constitute authorized but unissued shares. Shares repurchased prior to the second quarter of 2009 were designated as treasury shares.
Selected Measures of Liquidity and Capital Resources

September 30, March 31, (Dollars in millions) 2008 2008 Cash and cash equivalents $ 1,123 $ 1,362 Working capital 2,390 2,438 Debt, net of cash and cash equivalents 676 435 Debt to capital ratio (1) 22.1 % 22.7 % Net debt to net capital employed (2) 9.6 6.6 Return on stockholders' equity (3) 16.9 15.6

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