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

Financial Overview Quarter Ended June 30, (In millions, except per share data) 2009 2008 Change Revenues $ 26,657 $ 26,704 - % Income Before Income Taxes $ 421 $ 358 18 Net Income $ 288 $ 235 23 Diluted Earnings Per Share $ 1.06 $ 0.83 28 Weighted Average Diluted Shares 272 282 (4 )

Revenues for the first quarter of 2010 of $26.7 billion approximated the same period a year ago primarily due to increases associated with market growth rates being fully offset by lost business. Net income for the first quarter of 2010 increased by 23% from $235 million to $288 million compared to the same period a year ago and diluted earnings per share increased 28% from $0.83 to $1.06. Financial results for 2010 were positively impacted by an increase in our Distribution Solutions and Technology Solutions segments' operating profit and a decrease in our weighted average shares outstanding due to our share repurchases.

Results of Operations Revenues: Quarter Ended June 30, (In millions) 2009 2008 Change Distribution Solutions Direct distribution & services $ 17,038 $ 16,428 4 % Sales to customers' warehouses 6,051 6,664 (9 ) Total U.S. pharmaceutical distribution & services 23,089 23,092 - Canada pharmaceutical distribution & services 2,140 2,241 (5 ) Medical-Surgical distribution & services 685 627 9 Total Distribution Solutions 25,914 25,960 - Technology Solutions Services 589 564 4 Software and software systems 130 138 (6 ) Hardware 24 42 (43 ) Total Technology Solutions 743 744 - Total Revenues $ 26,657 $ 26,704 -

Revenues for the first quarter of 2010 approximated the same period a year ago. Our Distribution Solutions segment accounted for approximately 97% of our consolidated revenues.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
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), a shift of revenues from sales to customers' warehouses to direct store delivery and expanded business with new and existing customers. This increase was partially offset by the loss of several customers. U.S. pharmaceutical sales to customers' warehouses decreased primarily as a result of a shift of revenues to direct store delivery and the loss of a large customer.
Canadian pharmaceutical distribution and services revenues decreased primarily reflecting a 15% unfavorable foreign exchange rate impact, partially offset by market growth rates and new and expanded business. On a constant currency basis, revenues grew 10%.
Medical-Surgical distribution and services revenues increased primarily reflecting business acquisitions and market growth rates. These revenues were also aided by an increase in demand stemming from the H1N1 virus.
Technology Solutions revenues approximated that of the same period a year ago. Increased services revenues reflecting greater claims processing and maintenance revenues were fully offset by lower installations and unfavorable foreign exchange rates.
Gross Profit:

Quarter Ended June 30, (Dollars in millions) 2009 2008 Change Gross Profit Distribution Solutions $ 954 $ 934 2 % Technology Solutions 349 334 4 Total $ 1,303 $ 1,268 3 Gross Profit Margin Distribution Solutions 3.68 % 3.60 % 8 bp Technology Solutions 46.97 44.89 208 Total 4.89 4.75 14

Gross profit increased in the first quarter of 2010 compared to the same period a year ago. As a percentage of revenues, gross profit margin increased in both of our segments compared to the same period a year ago.
During the first quarter of 2010, gross profit margin for our Distribution Solutions segment was positively impacted by higher buy side margins (primarily reflecting the volume and timing of compensation from branded pharmaceuticals), 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 generally have lower gross profit margins relative to other revenues within the segment. These increases were partially offset by a decline in sell margin.
Technology Solutions segment's gross profit margin increased primarily due to a change in product mix.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Operating Expenses and Other Income: Quarter Ended June 30, (Dollars in millions) 2009 2008 Change Operating Expenses Distribution Solutions $ 531 $ 562 (6 )% Technology Solutions 247 270 (9 ) Corporate 66 65 2 Total $ 844 $ 897 (6 ) Operating Expenses as a Percentage of Revenues Distribution Solutions 2.05 % 2.16 % (11 ) bp Technology Solutions 33.24 36.29 (305 ) Total 3.17 3.36 (19 ) Other Income, Net Distribution Solutions $ 7 $ 12 (42 )% Technology Solutions 1 2 (50 ) Corporate 2 7 (71 ) Total $ 10 $ 21 (52 )

Operating expenses decreased 6% compared to the same period a year ago. Operating expenses in 2010 benefited from a decrease in employee compensation costs, which includes various cost containment efforts as well as lower profit sharing investment plan expenses as more fully described below, and other cost containment efforts. Additionally, operating expenses in 2010 decreased as a result of foreign exchange rates and the sale of two businesses during the first and third quarters of 2009. Decreases in operating expenses were partially offset by an increase in expenses associated with our 2009 business acquisitions. As a percentage of revenues, operating expenses decreased 19 basis points ("bp") compared to the same period a year ago primarily reflecting the decrease in employee compensation expenses, other cost containment efforts and the sale of the two businesses.
As previously reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, the McKesson Corporation Profit Sharing Investment Plan ("PSIP") is a member of the settlement class in the Consolidated Securities Litigation Action. On April 27, 2009, the court issued an order approving the distribution of the settlement funds. The PSIP is anticipating receiving its share of the settlement of approximately $90 million during 2010. Approximately $30 million of the Consolidated Securities Litigation Action proceeds are attributable to the allocated shares of McKesson common stock owned by the PSIP participants during the Consolidated Securities Litigation Action class holding period and will be allocated to the respective participants on that basis. Approximately $60 million of the proceeds are attributable to the unallocated shares (the "Unallocated Proceeds") of McKesson common stock owned by the PSIP in an employee stock ownership plan (the "ESOP") suspense account. In accordance with the plan terms, the PSIP will distribute all of the Unallocated Proceeds to current PSIP participants as soon as administratively feasible after the close of the plan year. The receipt of the Unallocated Proceeds by the PSIP is reimbursement for the loss in value of the Company's common stock held by the PSIP in its ESOP suspense account during the Consolidated Securities Litigation Action class holding period and is not a contribution made by the Company to the PSIP or ESOP. Accordingly, there are no accounting consequences to the Company's financial statements relating to the receipt of the Unallocated Proceeds by the PSIP.
The Company anticipates that its PSIP expense for the full year will be negligible, as it currently does not anticipate making or committing to make additional contributions to the PSIP or ESOP. As a result, our compensation expense in 2010 will be lower than 2009. During the first quarter and full year 2009, PSIP expense was $17 million and $53 million.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) PSIP expense by segment for the quarters ended June 30, 2009 and 2008 was as follows: Quarter Ended June 30, (In millions) 2009 2008 Distribution Solutions $ - $ 7 Technology Solutions 1 9 Corporate - 1 PSIP expense $ 1 $ 17

Distribution Solutions segment's operating expenses decreased compared to the same period a year ago primarily reflecting the sale of two businesses during the first and third quarters of 2009, lower employee compensation costs and the impact of foreign exchange rates. These decreases were partially offset by an increase in expenses associated with our 2009 business acquisitions. Operating expenses as a percentage of revenues decreased compared with the same period a year ago primarily due to the sale of two businesses during the first and third quarters of 2009 and due to lower employee compensation costs.
Technology Solutions segment's operating expenses decreased during the first quarter of 2010 compared to the same period a year ago mostly due to cost containment efforts and lower employee compensation costs. During the third and fourth quarters of 2009, the segment implemented reduction in workforce plans which benefited the first quarter of 2010.
Corporate expenses during the first quarter of 2010 approximated that of the same period a year ago as additional costs incurred to support various initiatives were offset by lower employee compensation costs.
Other income, net decreased in the first quarter of 2010 compared to the same period a year ago primarily reflecting a decrease in interest income due to lower interest rates and a decrease in income from our equity investments.
Segment Operating Profit and Corporate Expenses:

Quarter Ended June 30, (Dollars in millions) 2009 2008 Change Segment Operating Profit (1) Distribution Solutions $ 430 $ 384 12 % Technology Solutions 103 66 56 Subtotal 533 450 18 Corporate Expenses, Net (64 ) (58 ) 10 Interest Expense (48 ) (34 ) 41 Income Before Income Taxes $ 421 $ 358 18 Segment Operating Profit Margin Distribution Solutions 1.66 % 1.48 % 18 bp Technology Solutions 13.86 8.87 499

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

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Operating profit as a percentage of revenues in our Distribution Solutions and Technology Solutions segments increased compared to the same period a year ago primarily reflecting a decline in operating expenses as a percentage of revenues and an increase in gross profit margin.
Corporate expenses, net of other income, increased primarily due to additional operating expenses as previously discussed and a decrease in interest income.
Interest Expense: Interest expense for the first quarter of 2010 increased compared to the same period a year ago primarily due to our issuance of $700 million of long-term notes in February 2009.
Income Taxes: The Company's reported income tax rate for the first quarters of 2010 and 2009 was 31.6% and 34.4%. Fluctuations in our reported tax rate are primarily due to changes within state and foreign tax rates resulting from our business mix, including varying proportions of income attributable to foreign countries that have lower income tax rates. In addition, income tax expense includes net discrete items of a benefit of $1 million and an expense of $5 million during the first quarters of 2010 and 2009.
Net Income: Net income was $288 million and $235 million for the first quarters of 2010 and 2009, or $1.06 and $0.83 per diluted share.
Weighted Average Diluted Shares Outstanding: Diluted earnings per share were calculated based on an average number of shares outstanding of 272 million and 282 million for the quarters ended June 30, 2009 and 2008. 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. Our earnings per share amounts have benefited from our share repurchases. Business Acquisitions
During the first quarter of 2009, we acquired McQueary Brothers Drug Company ("McQueary Brothers") of Springfield, Missouri for approximately $190 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 $126 million of the purchase price allocation was assigned to goodwill, which primarily reflects the expected future benefits from synergies to be realized upon integrating the business. During the first quarter of 2010, the acquisition accounting was completed. Financial results for McQueary Brothers have been included within our Distribution Solutions segment since the date of acquisition.
Additional information regarding our business acquisitions is included in Financial Note 2, "Business Acquisitions," to the accompanying condensed consolidated financial statements.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
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. Financial Condition, Liquidity and Capital Resources We expect our available cash generated from operations, together with our existing sources of liquidity from our accounts receivable sales facility and short-term borrowings under the revolving credit facility and commercial paper, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. In addition, from time-to-time, we may access the long-term debt capital markets to discharge our other liabilities.
Operating activities provided cash flow of $907 million and $314 million during the first quarters of 2010 and 2009. Operating activities for 2010 benefited from improved management of accounts receivable, inventory and drafts and accounts payable. Operating activities for 2009 benefited from the accelerated receipt of $325 million of our accounts receivable through our accounts receivable sales facility. Operating activities for 2009 also reflect an increase in our net financial inventory (inventory, net of drafts and accounts payable) and accounts receivable primarily as a result of our revenue growth. 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 utilized cash of $86 million and $362 million during the first quarters of 2010 and 2009. Investing activities for 2010 and 2009 include nil and $242 million of cash paid for business acquisitions. In 2009, we acquired McQueary Brothers for $190 million.
Financing activities utilized cash of $303 million and $130 million during the first quarters of 2010 and 2009. Financing activities for 2010 and 2009 include $298 million and $147 million in cash paid for stock repurchases.
In April 2008, the Company's Board of Directors approved a plan to repurchase $1.0 billion of the Company's common stock, of which $830 million remained available at March 31, 2009. During the first quarter of 2010, we repurchased 7 million shares for $275 million, leaving $555 million available for future repurchases as of June 30, 2009. Stock repurchases may be made from time-to-time in open market or private transactions.
Although we believe that our operating cash flow, financial assets and current access to capital and credit markets, as evidenced by our debt issuance in February 2009, including our existing credit and sales facilities, will give us the ability to meet our financing needs for the foreseeable future, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Selected Measures of Liquidity and Capital Resources June 30, March 31, (Dollars in millions) 2009 2009 Cash and cash equivalents $ 2,644 $ 2,109 Working capital 3,121 3,065 Debt, net of cash and cash equivalents (133 ) 403 Debt to capital ratio (1) 28.6 % 28.9 % Net debt to net capital employed (2) (2.2 )% 6.1 % Return on stockholders' equity (3) 14.0 % 13.2 %

(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. Working capital primarily includes cash and cash equivalents, receivables and inventories, net of drafts and accounts payable, deferred revenue and other liabilities. Our Distribution Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and customer requirements. Consolidated working capital increased primarily as a result of a favorable increase in cash and cash equivalents, net of an increase in drafts and accounts payable. Our ratio of net debt to net capital employed decreased in 2010 primarily due to higher cash and cash equivalents balances. Credit Resources
We fund our working capital requirements primarily with cash and cash equivalents, our accounts receivable sales facility, short-term borrowings under the revolving credit facility and commercial paper. Accounts Receivable Sales Facility
In May 2009, we renewed our accounts receivable sales facility for an additional one year period under terms similar to those previously in place. The renewed facility will expire in May 2010. The May 2009 renewal increased the committed balance from $1.0 billion to $1.1 billion, although from time-to-time the available amount may be less than $1.1 billion based on concentration limits and receivable eligibility requirements.
Through this facility, McKesson Corporation sells certain U.S. pharmaceutical trade accounts receivable on a non-recourse basis to a wholly-owned and consolidated subsidiary which then sells these receivables to a special purpose entity ("SPE"), which is a wholly-owned, bankruptcy-remote subsidiary of McKesson Corporation that is consolidated in our financial statements. This SPE then sells undivided interests in the receivables to third-party purchaser groups, each of which includes commercial paper conduits ("Conduits"), which are special purpose legal entities administered by financial institutions.

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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Additional information regarding our accounts receivable sales facility is included in Financial Note 7, "Financing Activities," to the accompanying condensed consolidated financial statements. Revolving Credit Facility
We have a syndicated $1.3 billion five-year, senior unsecured revolving credit facility which expires in June 2012. Borrowings under this credit facility bear interest based upon either a Prime rate or the London Interbank Offering Rate. Total borrowings under this facility were nil and $62 million for the first quarters of 2010 and 2009. As of June 30, 2009 and March 31, 2009, there were no amounts outstanding under this facility. Commercial Paper
We issued and repaid nil and $496 million in commercial paper for the first quarters of 2010 and 2009. There were no commercial paper issuances outstanding at June 30, 2009 and March 31, 2009.
Long-Term Debt
On February 12, 2009, we issued 6.50% notes due February 15, 2014 (the "2014 Notes") in an aggregate principal amount of $350 million and 7.50% notes due February 15, 2019 (the "2019 Notes") in an aggregate principal amount of $350 million. Interest is payable on February 15 and August 15 of each year beginning on August 15, 2009. The 2014 Notes will mature on February 15, 2014 and the 2019 Notes will mature on February 15, 2019. We utilized net proceeds, after offering expenses, of $693 million from the issuance of the 2014 Notes and 2019 Notes for general corporate purposes. Debt Covenants
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 June 30, 2009, this ratio was 28.6% and we were in compliance with our other financial covenants. A reduction in our credit ratings or the lack of compliance with our covenants could negatively impact our ability to finance operations through our credit facilities or issue additional debt at the interest rates then currently available.
Funds necessary for 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.

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McKESSON CORPORATION FINANCIAL REVIEW (CONCLUDED) (UNAUDITED)
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 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 these statements can be identified by use of forward-looking words such as "believes," "expects," "anticipates," "may," "will," "should," "seeks," "approximates," "intends," "plans," or "estimates," or the negative of these words, or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, 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:
§ material adverse resolution of pending legal proceedings;

§ changes in the U.S. healthcare industry and regulatory environment;

§ competition;

§ the frequency or rate of branded drug price inflation and generic drug price . . .