SECURITIES AND EXCHANGE COMMISSION

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

For the fiscal year ended March 31, 2004

OR

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

Commission File Number 1-13252

McKesson Plaza
One Post Street, San Francisco, CA 94104
Telephone (415) 983-8300

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None.

     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 x   No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer. Yes x   No o

     The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, September 2003, was approximately $9.7 billion.

     Number of shares of common stock outstanding on May 31, 2004: 292,806,817

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on July 28, 2004 are incorporated by reference into Part III of this report.

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TABLE OF CONTENTS

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McKESSON CORPORATION

providers, and retail independent pharmacies.

     The U.S. Pharmaceutical Distribution business operates and serves over 30,000 locations through a network of 28 distribution centers, as well as a master distribution center and a repackaging facility, serving all 50 states. We invest in technology and other systems at all of our distribution centers to enhance safety, reliability and the best product availability for our customers. For example, in all of our distribution centers we use Acumax® Plus, a Smithsonian award-winning technology, which integrates and tracks all internal functions, such as receiving, put-away and order fulfillment. Acumax® Plus uses bar code technology, wrist-mounted computer hardware, and radio frequency signals to provide our customers with industry leading order quality and fulfillment at up to 99.9% accuracy. Closed Loop Distribution ^SM , which integrates portable Palm technology with Acumax® Plus to give customers complete ordering and inventory control, and Supply Management Online ^SM , an Internet-based ordering, purchasing, third-party reconciliation and account management system, help ensure that our customers have the right products at the right time for their facilities and patients.

     Our investment in operational performance also includes Six Sigma – an analytical methodology that emphasizes setting high quality objectives, collecting data, and analyzing results to a fine degree in order to improve processes to reduce costs and errors. Furthermore, we are implementing information systems to help achieve greater consistency and accuracy both internally and for our customers.

     The U.S. Pharmaceutical Distribution business’ major value-added offerings, by customer group, include the following:

Retail Chains (drug stores, food/drug combinations, mail order pharmacies, and mass merchandisers) – Business solutions that help chains increase revenues and profitability:

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Rx-Pak SM – Bulk repackaging leverages our purchasing power and supplier relationships, offers pharmaceuticals at reduced prices, helps increase inventory turns and reduces working capital investment;

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Central Fill – Improves pharmacy productivity and reduces costs by managing prescription refill volume remotely;

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Inventory Management Solutions – Reduces inventory carrying costs through forecasting integrated with automated replenishment technologies; and

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Re-Distribution Centers – Two large facilities which offer access to inventory for single source purchasing, including pharmaceuticals and biologicals.

Retail Independent Pharmacies – Marketing, merchandising, operational efficiencies and industry leadership that help pharmacists focus on patient care while improving profitability:

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Valu-Rite® and Health Mart® – Networks of independent pharmacies that leverage group branding and purchasing power;

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AccessHealth – Saves time and costs through comprehensive managed care and reconciliation assistance services;

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McKesson OneStop Generics SM – Helps pharmacies maximize their cost savings with a broad selection of rebate-eligible generic drugs, lower up-front pricing and one-stop shopping; and

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Pharma 360 – Profitability analysis tool that helps pharmacists measure and compare results with their local and national competitors.

Institutional Providers (hospitals and health systems, integrated delivery networks, clinics and other acute-care facilities, and long-term care providers) – Electronic ordering/purchasing and supply chain management systems that help improve efficiencies, save labor and improve capital:

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Fulfill-Rx TM – Streamlines pharmacy inventory replenishing, automates inventory re-ordering, and optimizes medication cabinet inventory to easily value the pharmacy’s total inventory investment;

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Asset Management – Comprehensive program designed to deliver improved inventory management controls; and

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Medication Management – Complete pharmacy management focused on improving patient outcomes by increasing drug safety, developing pharmacy staff, and streamlining administrative processes.

      International Pharmaceutical Distribution. Consists of McKesson Canada Corporation (formerly Medis Health and Pharmaceutical Services, Inc.), a wholly-owned subsidiary, the largest pharmaceutical distributor in Canada. We also have a 22% equity interest in Nadro, the leading pharmaceutical distributor in Mexico.

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      Automation. Manufactures and markets automated pharmacy and supply management systems and services to hospitals through its McKesson Automation Inc. unit and to retail pharmacies through its McKesson Automation Pharmacy Systems unit. Key products and services include:

McKesson Automation Inc.:

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ROBOT-Rx™ system, a robotic pharmacy dispensing and utilization tracking system that enables hospitals to lower pharmacy costs while significantly improving the accuracy of pharmaceutical dispensing;

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AcuDose-Rx™, a unit-based cabinet that automates the storage, dispensing and tracking of commonly used drugs in patient areas;

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Admin-Rx™, a system that records, automates, and streamlines drug administration and medication information requirements through bar code scanning at the patient’s bedside;

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Fulfill-Rx™, software that streamlines pharmacy inventory management and replenishment through connection with McKesson pharmaceutical distribution; and

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SupplyScan SM , a solution that tracks consumption of medical supplies through secure cabinetry and bar-code scanning at point-of-use.

McKesson Automation Pharmacy Systems:

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A wide range of pharmacy counting and weighing technologies including Baker Cells®, Baker Cassettes® and AccuMed™ powered by AutoLink™, modular counting and dispensing units, and the Baker Universal 2010™ and AccuCount™ , counting and weighing prescription scales;

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AutoScript III® and AccuScript™ – Robotic dispensing system designed for accuracy and throughput with new, modular, variable capacity design;

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Pharmacy 2000® – Productivity workflow software system that provides stand-alone reporting and prescription tracking value. It also drives automation systems in a logical task order to improve productivity throughout the prescription fulfillment process;

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Productivity Station™ – An easy-to-use interactive workstation system for customers desiring a compact, multi-tasking automation unit; and

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All APS technologies are designed for bar-coded accuracy, efficiency, productivity, reliability, speed and ease of use by the pharmacy staff.

      Medical Management. The following suite of services and software products is marketed to payors, employers and government organizations to help manage the cost and quality of care:

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Disease management programs to improve overall healthcare of a patient;

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Nurse triage services to direct patients to the appropriate level of care;

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Clinical and analytical software to support utilization, case and disease management workflow;

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Business intelligence tools for measuring, reporting and improving clinical and financial performance; and

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InterQual® Criteria for clinical decision support.

      Specialty Pharmaceutical Services. This business’ product-specific solutions are directed towards manufacturers, payors and physicians to enable delivery and administration of high-cost, often injectable, bio-pharmaceutical drugs used to treat patients with chronic disease. The business facilitates patient and provider access to specialty pharmaceuticals across multiple delivery channels (direct-to-physician wholesale, patient-direct specialty pharmacy dispensing, and access to retail pharmacy), provides clinical support and treatment compliance programs that help patients stay on complex therapies, and offers reimbursement, data collection and analysis services.

      ZEE® Medical. North America’s leading provider of first aid, safety, and training solutions, providing services to industrial and commercial customers. This business offers an extensive line of products and services aimed at maximizing headcount productivity and minimizing the liability and cost associated with workplace illnesses and injuries.

      Medical–Surgical Solutions

     Our Medical-Surgical Solutions segment provides medical-surgical supply distribution, equipment, logistics and related services to healthcare providers that include hospitals, physicians’ offices, surgery centers, extended care facilities, and homecare sites through a network of 35 distribution centers within the U.S. This segment is the nation’s third largest distributor of medical-surgical supplies to hospitals (acute care) and is the leading provider of supplies to the full range of alternate-site healthcare facilities, including physicians’ offices, clinics and surgery centers (primary care), long-term care facilities and homecare sites (extended care). Supply Management On-

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Line ^SM , an electronic ordering system, provides an advanced tool for ordering medical-surgical products over the Internet, and the segment’s Optipak® program allows physicians to customize ordering of supplies according to individual surgical procedure preferences.

      Information Solutions

     Our Information Solutions segment provides a comprehensive portfolio of software, support and services to help healthcare organizations improve patient safety, reduce the cost and variability of care, and better manage their resources and revenue stream. The segment markets its products and services to integrated delivery networks, hospitals, physician group practices, home health providers, managed care providers and payors. Approximately sixty percent of hospital-based integrated delivery networks in the U.S. use one or more products from this segment. The segment also sells its solutions internationally through subsidiaries and/or distribution agreements in Canada, the United Kingdom, Ireland, France, the Netherlands, Australia, New Zealand and Puerto Rico.

     The product portfolio for the Information Solutions segment is organized into three major solutions sets – clinical management, revenue cycle management and resource management – with a variety of subsets of these solutions designed to address specific healthcare business issues (e.g., physician access, medication safety, etc.). To ensure that organizations achieve the maximum value for their information technology investment, the Information Solutions segment also offers a wide range of services to support the implementation and use of solutions as well as assist with business and clinical re-design, process re-engineering and staffing (both information technology and back-office).

      Clinical management . The segment’s clinical solutions are designed to enable organizations to improve medication safety, accelerate physician utilization of healthcare information technology and reduce variability in healthcare quality and costs. The clinical management solution set, known as Horizon Clinicals ^TM , is built using architecture to facilitate integration and enable modular deployment of systems. It includes a clinical data repository, document imaging, medical imaging, real-time decision support, point-of-care nursing documentation, enterprise laboratory and pharmacy, an emergency department solution and an ambulatory medical record. Horizon Clinicals ^TM also includes solutions to facilitate physician access to patient information such as a Web-based physician portal and wireless devices that draw on information from the hospital’s information systems.

      Revenue cycle management . The segment’s revenue cycle solution is designed to reduce days in accounts receivable, prevent insurance claim denials, reduce costs and improve productivity for our customers. Examples of solutions include contract management, electronic claims processing and coding compliance checking. The segment’s hospital information systems also play a key role in revenue cycle management by working with these solutions to automate the operation of individual departments and their respective functions within the inpatient environment.

      Resource management . The segment’s resource management solutions consist of an integrated suite of applications that enhance an organization’s ability to forecast and optimize enterprise-wide use of resources (labor, supplies, equipment and facilities) associated with the delivery of care. These solutions help automate and link resource requirements to care protocols designed to increase profitability, enhance decision-making, and improve business processes.

     In addition to the product offerings described above, the segment offers a comprehensive range of services to help organizations derive greater value from, and enhance satisfaction and return on investment throughout the life of the solutions implemented. The range of services includes:

      Technology Services . The segment has worked with numerous healthcare organizations to support the smooth operation of their information systems by providing the technical infrastructure designed to maximize application accessibility, availability, security and performance.

      Professional Services . Professional services help customers achieve business results from their software investment. The segment offers a wide array of quality service options including consulting for business process improvement and re-design, as well as implementation, project management, technical, and education services relating to all products in the Information Solutions segment.

      Outsourcing Services . The segment helps organizations focus their resources where needed while the segment manages their information technology or revenue cycle operations through outsourcing. Outsourcing service options include managing hospital data processing operations, as well as strategic information systems planning and

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management, revenue cycle processes, payroll processing, business office administration, and major system conversions.

Acquisitions, Investments and Divestitures

     We have undertaken strategic initiatives in recent years designed to further focus on our core healthcare businesses and enhance our competitive position. These initiatives are detailed in Financial Notes 2 and 3 to the consolidated financial statements, “Acquisitions” and “Discontinued Operations and Other Divestitures,” appearing in this Annual Report on Form 10-K.

Competition

     In every area of healthcare distribution operations, our Pharmaceutical Solutions and Medical-Surgical Solutions segments face strong competition, both in price and service, from national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, and manufacturers engaged in direct distribution. In addition, these segments face competition from various other service providers and from pharmaceutical and other healthcare manufacturers (as well as other potential customers of the segments) which may from time to time decide to develop, for their own internal needs, supply management capabilities which are provided by the segments and other competing service providers. Price, quality of service, and, in some cases, convenience to the customer are generally the principal competitive elements in these segments.

     Our Information Solutions segment experiences substantial competition from many firms, including other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, hardware vendors and Internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage, and in scope and breadth of products and services offered.

Intellectual Property

     The principal trademarks and service marks of the Pharmaceutical Solutions and Medical-Surgical Solutions segments include: ECONOLINK®, VALU-RITE®, Valu-Rite/CareMax®, McKesson OneStop Generics ^SM , Health Mart®, ASK-A-NURSE®, Episode Profiler®, InterQual®, coSource®, ROBOT-Rx™, Autoscript™, Acumax® Plus, AcuDose-Rx™, AcuScan-Rx™, Admin-Rx™, Rx-Pak ^SM , Pak Plus-Rx™, SelfPace™, Baker Cells™, Baker Cassettes™, Baker Universal™, Autoscript™, Pharmacy 2000™, Productivity Station™, CRMS™, Patterns Profiler™, CareEnhance ^SM , Closed Loop Distribution ^SM , .com Pharmacy Solutions®, Fulfill-Rx™ , SupplyScan ^SM , Supply Management OnLine ^SM , Optipak®, Comets®, e-Comets™, MediNet™, OPTIMA®, and XVIII B Medi Mart®.

     The substantial majority of technical concepts and codes embodied in our Information Solutions segment’s computer programs and program documentation are not protected by patents or copyrights but constitute trade secrets that are proprietary to us. The principal trademarks and service marks for this segment are: HealthQuest®, Paragon®, Pathways 2000®, TRENDSTAR®, Horizon Clinicals™, HorizonWP®, Series 2000™, STAR 2000™ and PracticePoint®.

     We also own other registered and unregistered trademarks and service marks and similar rights used by our business segments. All of the principal trademarks and service marks are registered in the United States, or registrations have been applied for with respect to such marks, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. We believe we have taken all necessary steps to preserve the registration and duration of our trademarks and service marks, although no assurance can be given that we will be able to successfully enforce or protect our rights there under in the event that they are subject to third-party infringement claims. We do not, however, consider any particular patent, license, franchise or concession to be material to our business.

Other Information About the Business

      Customers . In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2004, sales to our largest customer, Rite Aid Corporation, and ten largest customers accounted for approximately 11% and 50% of our total consolidated revenues. At March 31, 2004, accounts receivable from Rite Aid

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Corporation and our ten largest customers were approximately 8% and 50% of total accounts receivable. The majority of these revenues and accounts receivable are included in our Pharmaceutical Solutions segment.

      Research and Development. Our research and development (“R&D”) expenditures primarily consist of our investment in software development held for sale. We expended $230.4 million, $203.2 million, and $183.7 million for R&D activities in 2004, 2003 and 2002, and of these amounts, we capitalized 25%, 26% and 26%. R&D expenditures are incurred by our Information Solutions segment and our Medical Management and Automation businesses. Our Information Solutions segment’s product development efforts apply computer technology and installation methodologies to specific information processing needs of hospitals. We believe a substantial and sustained commitment to such expenditures is important to the long-term success of this business. Additional information regarding our R&D activities is included in Financial Note 1 to the consolidated financial statements, “Significant Accounting Policies,” appearing in this Annual Report on Form 10-K.

      Environmental Legislation . We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in Item 3, “Legal Proceedings” of this Annual Report on Form 10-K. Other than any capital expenditures that may be required in connection with those legal matters, we do not anticipate making substantial capital expenditures either for environmental issues, or to comply with environmental laws and regulations in the future. The amount of our capital expenditures for environmental compliance was not material in 2004 and is not expected to be material in the next year.

      Employees . On March 31, 2004, we employed approximately 24,600 persons compared to 24,500 in 2003 and 24,000 in 2002.

      Financial Information About Foreign and Domestic Operations and Export Sales. Information as to foreign operations is included in Financial Notes 1 and 21 to the consolidated financial statements, “Significant Accounting Policies” and “Segments of Business,” appearing in this Annual Report on Form 10-K.

McKESSON CORPORATION

Common Retirement Fund as lead plaintiff (“Lead Plaintiff”) in the Consolidated Action and approved Lead Plaintiff’s choice of counsel.

     After the filing of three consolidated complaints and multiple motions by multiple defendants challenging the sufficiency of those complaints, the pleadings in the case have been set with respect to McKesson and HBOC (motions for reconsideration of prior dismissal orders issued by Judge Whyte have been filed by Arthur Andersen and Bear Stearns and remain pending). The operative complaint in the Consolidated Action is Lead Plaintiff’s Third Amended and Consolidated Class Action Complaint (“TAC”), filed on February 15, 2002. The TAC asserts claims against McKesson and HBOC under Sections 10(b) and 14(a) of the Exchange Act in connection with the events leading to McKesson’s announcements in April, May and July 1999, and names McKesson, HBOC, certain of McKesson’s or HBOC’s current or former officers or directors, Arthur Andersen and Bear Stearns as defendants. The Section 10(b) claim alleges that McKesson and HBOC intentionally misstated the financial statements of HBOC or McKesson during the class period. The Section 14(a) claim alleges that the Joint Proxy Statement/Prospectus issued in connection with a McKesson subsidiary and HBOC merger (the “Merger”) contained material misstatements or omissions and that McKesson was negligent in issuing the Joint Proxy Statement/Prospectus with those misstatements. The TAC seeks unspecified damages and attorneys’ fees.

     By order dated January 6, 2003, Judge Whyte dismissed with prejudice the claim against the Company under Section 10(b) of the Exchange Act to the extent that claim was based on McKesson’s conduct or statements prior to the January 12, 1999 merger transaction with HBOC, denied the Company’s motion to dismiss the claim against the Company under Section 14(a) of the Exchange Act, and ordered the Company to answer the TAC. Following the Court’s January 6, 2003 orders, the following claims remained against McKesson and HBOC: (i) a claim against HBOC under Section 10(b) of the Exchange Act; (ii) a claim against McKesson under Section 10(b) of the Exchange Act with respect to post-Merger conduct only; and (iii) a Section 14(a) claim against McKesson, as described in the Court’s January 6, 2003 order. The Company and HBOC filed answers to the TAC on March 7, 2003, denying that the Company or HBOC had violated Section 10(b) or Section 14(a) or that they had any liability to the alleged plaintiff class.

     On March 7, 2003, Lead Plaintiff filed a motion for class certification seeking to certify a class consisting of (i) all persons and entities who purchased or otherwise acquired publicly traded securities of HBOC during the period from January 20, 1997, through and including January 12, 1999, (ii) all persons and entities who purchased or otherwise acquired publicly traded securities or call options, or who sold put options, of McKesson during the period from October 18, 1998 through and including April 27, 1999, and (iii) all persons and entities who held McKesson common stock on November 27, 1998 and still held those shares on January 12, 1999. Lead Plaintiff seeks an order appointing three representatives of this proposed class: (i) the Lead Plaintiff; (ii) City of Miami Beach General Employees Retirement Trust; and (iii) an individual investor named Donald Chiert. The hearing on class certification was held on March 12, 2004. Judge Whyte has not yet ruled on the motion for class certification. McKesson and HBOC have commenced the production of documents in the Consolidated Action and, pursuant to pretrial orders, merits depositions have begun. A trial is scheduled to commence on September 12, 2005.

     On January 11, 2001, McKesson filed an action in the Court for the Northern District of California against the Lead Plaintiff in the Consolidated Action individually, and as a representative of a defendant class of former HBOC shareholders who exchanged HBOC shares for Company shares in the January 12, 1999 Merger, McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc. et al. (Case No. C01-20021 RMW) (the “Complaint and Counterclaim”). In the Complaint and Counterclaim, the Company alleged that the exchanged HBOC shares were artificially inflated due to undisclosed accounting improprieties, and that the exchange ratio therefore provided more shares to former HBOC shareholders than would have otherwise been the case. In this action, the Company sought to recover the “unjust enrichment” received by those HBOC shareholders who exchanged more than 20,000 HBOC shares in the Merger. The Company did not allege any wrongdoing by these shareholders. On January 9, 2002, Judge Whyte dismissed the Complaint and Counterclaim with prejudice. The Company appealed this ruling to the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”). On August 13, 2003, the Ninth Circuit affirmed Judge Whyte’s January 9, 2002, order dismissing the Complaint and Counterclaim.

     By order dated February 7, 2000, Judge Whyte coordinated with the Consolidated Action a class action alleging claims under ERISA, Chang v. McKesson HBOC, Inc. et al. (Case No. C-00-20030 RMW), and a shareholder derivative action that had been filed in the Northern District of California under the caption Cohen v. McCall et al. (Case No. C-99-20916 RMW) with the Consolidated Action. There has been no further significant activity in the Cohen action. By stipulated order dated April 30, 2003, no defendant or nominal defendant is required to respond to the complaint until notified by the plaintiff in writing with thirty days notice or upon further order of the Court. Recent developments in the Chang action are discussed below.

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     Several individual actions have also been filed in, or transferred to, the Northern District of California. On November 12, 1999, an individual shareholder action was filed in the Court for the Northern District of California under the caption Jacobs v. McKesson HBOC, Inc., et al. (C-99-21192 RMW). The Plaintiffs in Jacobs are former HBOC shareholders who acquired their HBOC shares pursuant to a registration statement issued by HBOC prior to the Merger, and then exchanged their HBOC shares for McKesson shares in the Merger. Plaintiffs in Jacobs assert claims under federal and state securities laws and a claim for common law fraud. Plaintiffs seek unspecified compensatory and punitive damages, and costs of suit, including attorneys’ fees. Judge Whyte’s December 22, 1999, order consolidated the Jacobs action with the Consolidated Action. With leave of the Court, the Jacobs plaintiffs amended their complaint, but the action remains stayed. On September 21, 2000 the plaintiffs in Jacobs v. McKesson HBOC, Inc. filed a new individual action entitled Jacobs v. HBO & Company (Case No. C-00-20974 RMW). The Jacobs complaint names only HBOC as a defendant and asserts claims under Sections 11 and 12(2) of the Securities Act, Section 10(b) of the Exchange Act and various state law causes of action. The complaint seeks unspecified compensatory and punitive damages, and costs of suit, including attorneys’ fees. This action has been assigned to Judge Whyte and consolidated with the Consolidated Action.

     On December 16, 1999, an individual action was filed in the Court for the Northern District of California under the caption Bea v. McKesson HBOC, Inc. et al . (Case No. C-00-20072 RMW). Plaintiffs in Bea filed an Amended Complaint on March 9, 2000. Plaintiffs in Bea allege that they acquired the Company’s common stock prior to the Merger and sold that stock after the April 1999 announcement at a loss. The Bea complaint asserts claims under the federal and state securities laws, and a claim for fraud. Plaintiffs seek (i) unspecified compensatory and punitive damages, and (ii) reasonable costs and expenses of suit, including attorneys’ fees. Bea is currently stayed and has been consolidated with the Consolidated Action.

     On January 7, 2000, an individual action was filed in the Court for the Northern District of California under the caption Cater v. McKesson Corporation et al. (Case No. C-00-20327 RMW). The plaintiff is Terry Cater, a former employee of the Company who alleges that his options and restricted stock were substantially devalued as a result of the Merger and the subsequent drop in the Company’s stock price. Plaintiff in Cater asserts claims under the federal securities laws as well as claims for breach of good faith and fair dealing, fraud and negligent misrepresentation. Plaintiff seeks (i) unspecified special damages in excess of $50,000, (ii) unspecified general damages, (iii) prejudgment interest and (iv) reasonable attorneys’ fees. The case has been assigned to Judge Whyte and the parties stipulated to a stay pending the outcome of the motions to dismiss in the Consolidated Action.

     On February 7, 2000, an action entitled Baker v. McKesson HBOC, Inc., et al. (Case No. CV 00-0188) was filed in the U.S. District Court for the Western District of Louisiana. The same plaintiffs then filed a virtually identical parallel action in Louisiana State Court, Rapides Parish, under the caption Baker v. McKesson HBOC, Inc., et al (filed as Case No. 199018; Case No. CV-00-0522 after removal to federal court). Plaintiffs, former shareholders of Automated Prescription Services, allege claims under the federal securities laws, and claims for breach of fiduciary duty, misrepresentation and detrimental reliance. The state court action was removed to federal court and the two Baker cases have been transferred to the Northern District of California and consolidated with the Consolidated Action.

     On June 17, 2003, plaintiffs in the Baker cases filed a Second Amended Complaint (“SAC”) against McKesson, HBOC, various current or former officers or directors of McKesson or HBOC, Arthur Andersen and Bear Stearns. The SAC asserts claims against McKesson and HBOC under Section 14(a) of the Exchange Act, for common law breach of fiduciary duty (McKesson only), misrepresentation, and detrimental reliance. The SAC seeks damages in an unspecified amount. By stipulation of the parties and order of the Court, the Baker action is stayed and the defendants are not currently required to respond to the SAC.

     On July 27, 2001, an action was filed in the Court for the Northern District of California captioned Pacha, et al. v. McKesson HBOC, Inc., et al. (Case No. C01-20713 PVT). The Pacha plaintiffs allege that they were individual stockholders of McKesson stock on November 27, 1998, and assert that McKesson and HBOC violated Section 14(a) of the Exchange Act, and that McKesson, aided by HBOC, breached its fiduciary duties to plaintiffs by issuing a joint proxy statement in connection with the Merger which allegedly contained false and misleading statements or omissions. Plaintiffs name as defendants McKesson, HBOC, certain current or former officers or directors of McKesson or HBOC, Bear Stearns and Arthur Andersen. The Pacha complaint seeks an award of compensatory and punitive damages in an unspecified amount and costs and expenses incurred in the action including reasonable attorneys’ fees. On November 13, 2001, Judge Whyte ordered Pacha consolidated with the Consolidated Action and stayed all further proceedings.

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      Hess v. McKesson HBOC, Inc. et al. , an action filed in state court in Arizona (Case No. C-20003862) on behalf of former shareholders of Ephrata Diamond Spring Water Company (“Ephrata”) who acquired McKesson shares in exchange for their Ephrata stock when McKesson acquired Ephrata in January 1999, was removed to federal court, transferred to the Northern District of California and consolidated with the Consolidated Action. Judge Whyte also stayed all further proceedings in Hess except for the filing of an amended complaint, which was filed on or about December 15, 2001 (the “Hess Amended Complaint”). The Hess Amended Complaint generally incorporates the allegations and claims asserted in the Consolidated Action and also includes various common law causes of action relating to McKesson’s acquisition of Ephrata. The Hess Amended Complaint seeks compensatory, punitive, general and special damages in an unspecified amount, rescission of the agreement with Ephrata, attorneys’ fees and costs. The Company is not currently required to respond to the Hess Amended Complaint.

     On June 28, 2001, the Chang plaintiffs filed an amended ERISA class action complaint against McKesson, HBOC, certain current or former officers or directors of McKesson or HBOC, and The Chase Manhattan Bank (“Chase”). The amended complaint in Chang generally alleged that the defendants breached their ERISA fiduciary duties in connection with administering the McKesson HBOC Profit Sharing Investment Plan (the “PSI Plan”) and the HBOC Profit Sharing and Savings Plan (the “HBOC Plan”). Plaintiffs in Chang are former employees of McKesson and participants in the PSI Plan, and purportedly seek relief under sections 404-405, 409 and 502 of ERISA on behalf of a class defined to include participants in the PSI Plan, including participants under the HBOC Plan, who maintained an account balance under the PSI Plan as of April 27, 1999, who had not received a distribution from the PSI Plan as of April 27, 1999, and who suffered losses as a result of the alleged breaches of duty.

     On February 7, 2002, a related ERISA class action was filed in the Court for the Northern District of California captioned Adams v. McKesson Information Solutions, Inc. et al. (Case No. C-02-06 85 JCS). Plaintiff in Adams filed a first amended complaint on March 15, 2002, against HBOC, McKesson, the HBO & Company Board of Directors, HBO & Company Profit Sharing and Savings Plan Administrative Committee, HBO & Company Profit Sharing and Savings Plan Investment Committee, McKesson HBOC, Inc. Profit Sharing Investment Plan (as a nominal defendant only), and certain current or former officers, directors or employees of McKesson or HBOC. Plaintiff alleges that he was a participant in the HBOC Plan and generally alleges that McKesson and HBOC breached their ERISA fiduciary duties to the HBOC Plan and its participants or engaged in transactions prohibited by ERISA. Plaintiff asserts his claims on behalf of a putative class defined to include all participants in the HBOC Plan and their beneficiaries for whose benefit the HBOC Plan acquired HBOC stock from March 31, 1996 to April 1, 1999. Plaintiff seeks (i) a judgment that McKesson and HBOC breached their fiduciary duties, (ii) an order requiring defendants to restore to the plan all losses caused by these purported breaches of fiduciary duty, and (iii) reasonable attorneys’ fees, costs and expenses.

     On June 3, 2002, Judge Whyte consolidated the Adams ERISA class action with the Chang ERISA class action. By order dated September 30, 2002 Judge Whyte dismissed the First Amended Complaint in the Chang action. Judge Whyte granted plaintiffs in Chang and Adams leave to file a consolidated and amended complaint under the caption In re McKesson HBOC, Inc. ERISA Litigation (Northern District of California No. C-02-0685 RMW) (the “ERISA Action”). On December 31, 2002, plaintiffs filed a consolidated amended complaint (the “CAC”) in the ERISA Action. The CAC generally alleges that McKesson and HBOC breached their fiduciary duties under ERISA, and that HBOC engaged in transactions prohibited by ERISA. Plaintiffs further allege that McKesson and HBOC are liable under principles of respondeat superior and agency for alleged breaches of fiduciary duties by other defendants. The CAC seeks to have the defendants restore to the HBOC Plan and McKesson Plan losses allegedly caused by their alleged breaches of fiduciary duty, equitable relief, attorneys’ fees, costs and expenses. On February 28, 2003, McKesson filed a motion to dismiss the CAC and HBOC filed motions to dismiss portions of the CAC. Judge Whyte has not yet issued a ruling on these motions.

      State Actions

     Twenty-four actions have also been filed in various state courts in California, Colorado, Delaware, Georgia, Louisiana and Pennsylvania (the “State Actions”). Like the Consolidated Action, the State Actions generally allege misconduct by McKesson or HBOC (and others) in connection with the events leading to McKesson’s decision to restate HBOC’s financial statements.

     Two of the State Actions are shareholder derivative actions: Ash, et al. v. McCall, et al. , (Case No. 17132), filed in the Delaware Chancery Court and Mitchell v. McCall et al. (Case. No. 304415), filed in California Superior Court, City and County of San Francisco. McKesson is named as a nominal defendant only as no relief is sought against it in these actions. Plaintiffs in Mitchell agreed to defer any action by the court on McKesson’s motions

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pending resolution of McKesson’s dismissal motion in Ash. On September 15, 2000, in the Ash case, the Court of Chancery dismissed all causes of action with leave to re-plead certain of the dismissed claims, and on January 22, 2001, the Ash plaintiffs filed a Third Amended Complaint. On October 30, 2003, the Court granted the plaintiffs leave to file a Fourth Amended Complaint and changed the caption of the case to Saito, et. al. v. McCall (Civil Action No. 17132). On December 15, 2003, the defendants filed motions to dismiss the Fourth Amended Complaint. A hearing has been scheduled for May 18, 2004, to consider the defendants’ motions to dismiss.

     Five of the State Actions are class actions. Three of these were filed in the Delaware Court of Chancery: Derdiger v. Tallman et al. (Civil Action No. 17276), Carroll v. McKesson HBOC, Inc. (Civil Action No. 17454) and Kelly v. McKesson HBOC, Inc. et al. (Civil Action No. 17282). Two additional actions were filed in the Delaware Superior Court: Edmondson v. McKesson HBOC, Inc. (Civil Action No. 99-951) and Caravetta v. McKesson HBOC, Inc. (Civil Action No. 00C-04-214 WTQ). The Carroll and Kelly actions have been voluntarily dismissed without prejudice. McKesson removed Edmondson to federal court in Delaware and filed a motion to dismiss, which was granted by the federal court on March 5, 2002. McKesson filed motions to stay the Derdiger and Caravetta actions in favor of proceedings in the federal Consolidated Action, which were granted. On December 20, 2001, the plaintiff in Derdiger moved to vacate the stay of that action. In a series of rulings dated September 9, 2002, October 11, 2002 and October 18, 2002, the court denied plaintiff’s motion to vacate the stay with respect to any class claims but granted plaintiff leave to proceed with his individual claims. Thereafter, the plaintiff filed a motion for partial summary judgment, and the former directors of Access Health, Inc., who are also defendants, filed a motion to dismiss the claims asserted against them. The parties have asked the court to defer consideration of those motions while they pursue settlement discussions. On August 4, 2003, the court issued an order dismissing the class action claims brought on behalf of persons other than the named plaintiff Howard Derdiger without prejudice in favor of the prior pending Consolidated Action pending in the U.S. District Court for the Northern District of California. The parties thereafter dismissed plaintiff Howard Derdiger’s individual claims with prejudice pursuant to a settlement.

     Several of the State Actions are individual actions which have been filed in various state courts. Five of these were filed in the California Superior Court, City and County of San Francisco: Yurick v. McKesson HBOC, Inc. et al. (Case No. 303857), The State of Oregon by and through the Oregon Public Employees Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 307619), Utah State Retirement Board v. McKesson HBOC, Inc. et al. (Case No. 311269), Minnesota State Board of Investment v. McKesson HBOC, Inc. et al. (Case No. 311747), and Merrill Lynch Fundamental Growth Fund et al. v. McKesson HBOC, Inc. et al. (Case No. CGC-02-405792). Oregon, Utah, and Minnesota and Merrill Lynch have been consolidated before the Honorable Donald S. Mitchell under the Oregon caption.

     In Yurick, the trial court sustained McKesson’s demurrer to the original complaint without leave to amend with respect to all causes of action except plaintiffs’ claims for common law fraud and negligent misrepresentation, which remain in the case. The complaint in Yurick seeks compensatory, general, special, punitive and consequential damages in an unspecified amount, prejudgment interest, costs and reasonable attorneys’ fees. On December 27, 2002, the Yurick action was assigned to Judge Mitchell, the presiding judge in the Oregon, Minnesota, Utah and Merrill Lynch actions.

     The Oregon, Utah and Minnesota actions referenced above are individual securities actions filed in the California Superior Court for the City and County of San Francisco by the out-of-state pension funds for each of those States and Colorado. On October 16, 2002, after motion practice to challenge the sufficiency of the complaints in Utah, Minnesota and Oregon, which resulted in the dismissal of a number of claims that had been asserted against McKesson and HBOC, and the consolidation of those actions under the caption The State of Oregon Public Employees Retirement Board v. McKesson HBOC, Inc. et al. (Master File No. 307619), plaintiffs in Oregon, Minnesota and Utah filed a consolidated and amended complaint (the “CAAC”) which consolidated the remaining claims in those actions. On October 11, 2002, plaintiffs in Merrill Lynch filed an amended complaint in the Merrill Lynch action.

     On March 13, 2003, Judge Mitchell overruled McKesson’s and HBOC’s demurrers to and motions to strike the CAAC in Oregon, Minnesota and Utah. On the same date, Judge Mitchell sustained in part and overruled in part McKesson’s and HBOC’s demurrers, and denied McKesson’s and HBOC’s motions to strike the amended complaint in Merrill Lynch. Following those orders, the following claims remain against McKesson and HBOC in the consolidated Oregon action: (i) under California law, for violation of California Corporations Code § 25000/25400, for violation of California Business and Professions Code § 17200 (against HBOC only), and for common law fraud and negligent misrepresentation, and (ii) under Georgia law, claims for conspiracy under Georgia’s RICO statute, and for common law fraud, negligent misrepresentation, conspiracy, and aiding and abetting. The CAAC seeks

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compensatory, general, punitive and special damages, pre-judgment interest, post-judgment interest and reasonable attorneys’ fees. Following the Court’s March 13, 2003, orders and the Court’s June 18, 2003, order granting the plaintiffs’ motion for reconsideration, the following claims remain against McKesson and HBOC in the Merrill Lynch action: (i) under California law, for violation of California Corporations Code § 25000/25400, for violation of California Business and Professions Code § 17200 (against HBOC only), and for common law fraud, negligent misrepresentation, conspiracy and aiding and abetting, (ii) under New Jersey law, for violation of New Jersey’s RICO statute and conspiracy to violate New Jersey’s RICO statute, and (iii) under Georgia law, for violation of Georgia’s securities laws and violation of Georgia’s RICO statutes.

     On June 27, 2003, plaintiffs in the Merrill Lynch action filed a Third Amended Complaint (the “TAAC”) against McKesson, HBOC, various current or former officers or directors of McKesson or HBOC, and Arthur Andersen. Like the prior complaints in the Merrill Lynch action, the TAAC generally alleges that the defendants are liable under various statutory and common law claims in connection with the events leading to McKesson’s announcements in April, May and July of 1999. The TAAC asserts claims against McKesson and HBOC under California Corporations Code § 25400(d)/25500, California Business and Profession Code § 17200 (HBOC only), common law fraud, negligent misrepresentation, conspiracy and aiding and abetting, New Jersey RICO (McKesson only), conspiracy to violate New Jersey RICO, Georgia’s securities laws, and conspiracy to violate Georgia RICO. The TAAC seeks an award of restitution, compensatory damages and treble damages in an unspecified amount, and costs and expenses of litigation, including reasonable attorneys’ and experts’ fees.

     On July 25, 2003, McKesson and HBOC answered the Consolidated Complaint in Oregon, Minnesota and Utah, generally denying the allegations and any liability to plaintiffs. Also on July 25, 2003, McKesson filed cross-claims against all plaintiffs named in the Consolidated Complaint, alleging that if such parties exchanged HBOC shares in the Merger that were artificially inflated, as alleged by those parties in the Consolidated Complaint, then the exchange ratio for the Merger provided more shares to plaintiffs than would have otherwise been the case, and more shares than was just. The Company’s cross-claims against the plaintiffs seek judgments requiring plaintiffs to disgorge to the Company any “unjust enrichment.” On January 9, 2004, the court heard arguments on plaintiffs’ motion to dismiss McKesson’s cross-claims. The court has not yet issued a ruling on that motion.

     On September 26, 2003 the Merrill Lynch Plaintiffs filed a Fourth Amended Complaint (the “FAC”). The FAC adds Bear Stearns, General Electric Capital Corporation, Inc. (“GECC”), Computer Associates International, Inc. (“CAI”), and WebMD Corp. (“WebMD”) as defendants. The claims against GECC allege that GECC aided and abetted the alleged fraud at HBOC, conspired to commit fraud and made negligent misrepresentations. On December 30, 2003, McKesson and HBOC answered the FAC, generally denying the allegations and any liability to plaintiffs. Judge Mitchell has scheduled a trial date of November 28, 2005, in the consolidated Oregon, Minnesota, Utah and Merrill Lynch actions.

     Several individual actions have been filed in various state courts outside of California. Several of these cases have been filed in Georgia state courts. On October 24, 2000, an action was filed in Georgia State Court, Fulton County, captioned Suffolk Partners Limited Partnership et al. v. McKesson HBOC, Inc. et al. (Case No. 00VS010469A). Plaintiffs in the Suffolk action allegedly purchased the Company’s common stock after the Merger but before the April 1999 announcement. Plaintiffs assert claims under Georgia’s securities and racketeering laws, and for common law fraud, negligent misrepresentation, conspiracy, and aiding and abetting. The Suffolk action names as defendants the Company, HBOC, and certain of the Company’s or HBOC’s current or former officers or directors, and Arthur Andersen. Like the Consolidated Action, the claims in the Suffolk action generally arise out of the January 12, 1999 Merger, and the Company’s announcement of the need to restate its financial statements. Plaintiffs seek (i) compensatory damages of approximately $22 million, as well as general, rescissory, special, punitive, exemplary, and with respect to certain causes of action, treble damages, and (ii) prejudgment and post-judgment interest and costs of suit, including reasonable attorneys’ and experts’ fees. The Company and HBOC separately answered the complaint on January 9, 2001. The Company and HBOC moved for an order staying the Suffolk action in favor of the Consolidated Action on January 10, 2001. On August 2, 2001, the Court granted the motions to stay. Subsequently, however, in May 2003, the Court lifted the stay and directed the parties to coordinate discovery with that in the Consolidated Action and several other actions. Following the lifting of the stay, all Defendants filed motions to dismiss on various grounds, all of which were denied, except as to Defendant Pulido, whom Plaintiffs voluntarily dismissed. Discovery is now proceeding in coordination with the Consolidated Action.

     On November 1, 2000, an action was filed in Georgia State Court, Fulton County, captioned Curran Partners, L.P. v. McKesson HBOC, Inc. et al. (Case No. 00 VS 010801). Plaintiff in the Curran action allegedly purchased the Company’s common stock after the Merger but before the April 1999 announcement. The claims in the Curran action are identical to the claims in the Suffolk action. Plaintiff seeks (i) compensatory damages of approximately

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$3 million, as well as general, rescissory, special, punitive, exemplary, and with respect to certain causes of action, treble damages, and (ii) prejudgment and post-judgment interest and costs of suit, including reasonable attorneys’ and experts’ fees. The Curran action names as defendants the Company, HBOC, and certain of the Company’s or HBOC’s current or former officers or directors, and Arthur Andersen. The Company and HBOC separately answered the Complaint on January 9, 2001. The Company and HBOC moved for an order staying the Curran action in favor of the Consolidated Action on January 10, 2001. The Court granted the motions to stay on August 22, 2001. However, in September 2003, the court lifted the stay and transferred the action to the judge presiding over the previously-reported action captioned Suffolk Partners L.P. et al v. McKesson HBOC, Inc. et al , (Georgia State Court, Fulton County No. 00VS010469A). Discovery is now proceeding in coordination with the Consolidated Action.

     On December 12, 2001, an action was filed in Georgia State Court, Fulton County, captioned Drake v. McKesson Corp., et al. (Case No. 01VS026303A). Plaintiff in Drake is a former HBOC employee seeking lost commissions as well as asserting claims under Georgia’s securities and racketeering laws, and various common law causes of action. Plaintiff seeks (i) approximately $300,000 in unpaid commissions, (ii) unspecified compensatory, consequential, actual, exemplary, and punitive damages, and (iii) prejudgment and post-judgment interest and costs of suit, including reasonable attorneys’ fees. The Drake action names as defendants the Company, HBOC, Albert Bergonzi and Jay Gilbertson. The parties entered into a Consent Order for Partial Stay on February 27, 2002, which stayed Plaintiff’s Georgia securities law, fraud and RICO claims. On March 4, 2002, McKesson and McKesson Information Solutions Inc. separately filed their answers. Following discovery, the case was settled and Plaintiff filed a dismissal with prejudice on March 5, 2004.

     Two similar Georgia actions have been consolidated for purposes of discovery and may be consolidated for purposes of trial. On January 31, 2002, an action was filed in Georgia Superior Court, Fulton County, under the caption Holcombe T. Green and HTG Corp. v. McKesson, Inc. et al. (Case No. 2002-CV-48407). Plaintiffs in the Green action are former HBOC shareholders. Plaintiff Holcombe Green was also a former officer, chairman and director of HBOC. On February 6, 2002, an action was filed in Georgia Superior Court, Fulton County, under the caption Hall Family Investments, L.P. v. McKesson, Inc. et al. (Case No. 2002-CV-48612). Plaintiff in the Hall action is a former HBOC shareholder. One of the limited partners of the Hall Plaintiff is Nancy Hall Green, the wife of Holcombe Green. The complaints in the Green and Hall actions are substantially identical. In each action, Plaintiffs asserted claims for common law fraud and fraudulent conveyance and named as defendants the Company, HBOC, Albert Bergonzi and Jay Gilbertson. In each action, plaintiffs seek compensatory damages in excess of $100 million, as well as unspecified general, special and punitive damages, and costs of suit, including attorneys’ fees. The Company and HBOC filed their respective answers and counterclaims on April 22, 2002. HBOC also filed a third party complaint against Holcombe Green for indemnification. The Company and HBOC also filed motions to stay and dismiss. The Court denied the motions to stay, and partially granted the motions to dismiss, dismissing Plaintiffs’ claims for fraudulent conveyance. Plaintiffs moved to dismiss the counterclaims filed by the Company and HBOC, and the Court denied those motions. Discovery is under way and will proceed for some time. The trial court granted Plaintiffs’ motion to compel the production of certain work product materials, and the Georgia Court of Appeals affirmed. The Company has filed a petition for discretionary review in the Georgia Supreme Court, and Plaintiffs have filed an opposition to that petition.

     On May 8, 2002, an action was filed in Georgia State Court, Fulton County, under the caption James Gilbert v. McKesson Corporation, et al. (Case No. 02VS032502C). Plaintiff, formerly the general counsel of HBOC, alleges he was a holder of options to purchase shares of the Company’s stock. The action names as defendants the Company, HBOC, Albert Bergonzi and Jay Gilbertson. Plaintiff seeks compensatory damages of approximately $2 million, as well as unspecified general, special and punitive damages, and costs of suit, including attorneys’ fees. On June 24, 2002, the Company and HBOC filed their respective answers, motions to stay, and motions to dismiss. On November 26, 2002, the court granted the motions to stay, and this case is stayed until final disposition of the Consolidated Action.

     The United States Attorney’s Office for the Northern District of California (“USAO”) and the SEC are conducting investigations into the matters leading to the restatement. On May 15, 2000, the USAO filed a one-count information against former HBOC officer, Dominick DeRosa, charging Mr. DeRosa with aiding and abetting securities fraud, and on May 15, 2000, Mr. DeRosa entered a guilty plea to that charge. On September 28, 2000, an indictment was unsealed in the Northern District of California against former HBOC officer, Jay P. Gilbertson, and former Company and HBOC officer, Albert J. Bergonzi, United States v. Bergonzi, et al. (Case No. CR-00-0505). On that same date, a civil complaint was filed by the SEC against Mr. Gilbertson, Mr. Bergonzi and Mr. DeRosa Securities and Exchange Commission v. Gilbertson, et al. (Case No. C-00-3570). Mr. DeRosa has settled with the SEC without admitting or denying the substantive allegations of the complaint. On January 10, 2001, the grand jury

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returned a superseding indictment in the Northern District of California against Messrs. Gilbertson and Bergonzi, United States v. Bergonzi, et al. (Case No. CR-00-0505), and on June 4, 2003, a second superseding indictment was unsealed which added new charges against Mr. Bergonzi and which also charged both former Chairman of the Board of HBOC and the Company, Charles W. McCall, and former HBOC General Counsel, Jay Lapine, with various securities law violations. Also on June 4, 2003, the USAO announced the filing of agreements with Messrs. Gilbertson, DeRosa and former HBOC Senior Vice President for Finance, Timothy Heyerdahl, to plead guilty to various securities law violations (Case Nos. CR-00-0505, CR-00-0213 and CR-01-0002, respectively). The USAO has informed the Company that it is not now nor has it ever been a subject or target of the USAO’s investigation.

     On September 27, 2001, the SEC filed securities fraud charges against six former HBOC officers and employees including Messrs. Heyerdahl and Lapine. Simultaneous with the filing of the Commission’s civil complaints, four of the six defendants settled the claims brought against them by, among other things, consenting, without admitting or denying the allegations of the complaints, to entry of permanent injunctions against all of the alleged violations, and agreed to pay civil penalties in various amounts. On June 4, 2003, the SEC filed a civil complaint against Mr. McCall for various securities law violations (Case No. C-03-2603). On January 3, 2002, the Company was notified in writing by the SEC that its investigation has been terminated as to the Company, and that no enforcement action has been recommended to the Commission.

     On April 24, 2003, Gilbertson entered into a written plea agreement with the USAO in which he pled guilty to conspiracy to commit securities fraud and making false statements in a document filed with the SEC. On October 16, 2003, Bergonzi entered into a written plea agreement with the USAO in which he pled guilty to securities fraud and conspiracy to commit securities fraud. On March 30, 2004, the USAO filed a three count indictment against former McKesson Executive Vice President and Chief Financial Officer, Richard H. Hawkins, charging him with conspiracy to commit securities and wire fraud, securities fraud, and making false statements to an accountant. On March 31, 2004, Mr. Hawkins pled not guilty to the charges.

     We do not believe it is feasible to predict or determine the outcome or resolution of the accounting litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against the Company or settlements that could require substantial payments by the Company, which could have a material adverse impact on McKesson’s financial position, results of operations and cash flows.

      II. Other Litigation and Claims

     In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, other pending and potential legal actions for product liability and other damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. These include:

      Product Liability Litigation and Other Claims

     Our subsidiary, McKesson Medical-Surgical Inc., is one of many defendants in approximately 24 cases in which plaintiffs claim they were injured due to exposure, over many years, to latex proteins in gloves manufactured by numerous manufacturers and distributed by a number of distributors, including McKesson Medical-Surgical Inc. Efforts to resolve tenders of defense to its suppliers are continuing and final agreements have been reached with two major suppliers. McKesson Medical Surgical Inc.’s insurers are providing some coverage for these cases, subject to applicable deductibles.

     We, along with more than 100 other companies, have been named in a lawsuit brought in 2000 by the Lemelson Medical, Educational & Research Foundation (the “Foundation”) alleging that we and our subsidiaries are infringing seven (7) U.S. patents relating to common bar code scanning technology and its use for the automated management and control of product inventory, warehousing, distribution and point-of-sale transactions. Due to the pendency of earlier litigation brought against the Foundation by the manufacturers of bar code devices attacking the validity of the patents at issue, the court stayed the suit against us until the conclusion of the earlier case, including any appeals that may be taken. The trial in this earlier case concluded in January 2003 and the court subsequently ruled that each of the patents at issue was invalid due to prosecutorial laches. An appeal by the Foundation to the Federal Circuit Court of Appeals is anticipated. While the suit against the Company was stayed, the U.S. Patent and Trademark Office granted petitions for reexamination of three of the seven patents asserted by the Foundation against the Company. The reexamination will determine, among other things, whether these patents have expired.

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Each of the remaining four patents in the action has already expired by its own terms, or by the Foundation disclaiming the remaining portion of the patent’s life.

     We, through our former McKesson Chemical Company division, are named in approximately 66 cases involving the alleged distribution of asbestos. These cases typically involve multiple plaintiffs claiming personal injuries and unspecified compensatory and punitive damages as a result of exposure to asbestos-containing materials. Pursuant to an indemnification agreement signed at the time of the 1986 sale of McKesson Chemical Company to what is now called Univar USA Inc. (“Univar”), we have tendered each of these actions to Univar. Univar is currently defending us but has raised questions concerning the extent of its obligations under the indemnification agreement. Discussions with Univar on that subject are ongoing. We have not paid or incurred any costs or expenses in connection with these actions to date; and we continue to look to Univar for defense and full indemnification of these claims. In addition, we believe that, if necessary, a portion of these claims would be covered by insurance.

     On January 21, 2004, AmerisourceBergen Drug Corporation (“AmerisourceBergen”) filed a bid protest and a request for injunctive relief, AmerisourceBergen Drug Corporation vs. U.S. Department of Veteran Affairs (Action No. 04-00063), in the United States Court of Federal Claims in connection with the December 31, 2003 award by the United States Department of Veteran Affairs (the “VA”) of Prime Vendor status to the Company for the supply of pharmaceutical products to the VA commencing April 1, 2004. We successfully moved to intervene in this action. On February 9, 2004, the parties stipulated and the Court ordered a delay in the commencement date of the VA contract to a date 45 days following the Court’s decision on the merits of the AmerisourceBergen protest. On March 31, 2004, the Court issued its decision rejecting AmerisourceBergen’s bid protest and ordering the dismissal of the complaint. Pursuant to the terms of the Court’s February 9 ^th order, the Company’s performance under the Prime Vendor contract commenced on May 10, 2004.

     The U.S. Attorney’s Office for the Southern District of Illinois (“USAOI”) is conducting an industry-wide civil and criminal investigation into the marketing, sale and Medicare reimbursement of enteral nutritional products (“Products”). The Products are sold by the extended care business conducted by our subsidiary, McKesson Medical-Surgical Minnesota Inc. (“Minnesota Supply”). The USAOI has indicated that the Company and two employees of Minnesota Supply are subjects of the investigation. In July of 2003, the USAOI announced indictments of the two employees on charges of mail fraud, conspiracy, and violation of the anti-kickback statute. The employees were subsequently placed on leave pending resolution of the charges. We continue to cooperate with the investigation.

     On May 4, 2004, a judgment was entered against the Company in Charlene Roby vs. McKesson HBOC, Inc. et al, ( Action No. CV01-573), pending in the Superior Court of Yolo County, California on claims by a former employee for wrongful termination, disability discrimination and harassment and against a Company employee defendant on the harassment claim only. The jury awarded plaintiff $3.5 million in compensatory damages against the Company and $0.5 million in compensatory damages against the individual employee. Punitive damages of $15.0 million were assessed against the Company. The Company will seek reduction or reversal of this judgment through post-trial motions, and through an appeal, if necessary. If these efforts are not successful, this judgment could have an adverse impact on our consolidated financial statements.

      Environmental Matters

     Primarily as a result of the operation of our former chemical businesses, which were fully divested by 1987, we are involved in various matters pursuant to environmental laws and regulations. We have received claims and demands from governmental agencies relating to investigative and remedial action purportedly required to address environmental conditions alleged to exist at six sites where we, or entities acquired by us, formerly conducted operations; and we, by administrative order or otherwise, have agreed to take certain actions at those sites, including soil and groundwater remediation. In addition, we were recently one of multiple recipients of a New Jersey Department of Environmental Protection Agency directive and a separate United States Environmental Protection Agency directive relating to potential natural resources damages (“NRD”) associated with one of these six sites. Although the Company’s potential allocation under either directive cannot be determined at this time, we have agreed to participate with a potentially responsible party (“PRP”) group in the funding of an NRD assessment, the costs of which are reflected in the aggregate estimates set forth below.

     Based on a determination by our environmental staff, in consultation with outside environmental specialists and counsel, the current estimate of reasonably possible remediation costs for these six sites is $12.9 million, net of approximately $2 million that third parties have agreed to pay in settlement or we expect, based either on

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agreements or nonrefundable contributions which are ongoing, to be contributed by third parties. The $12.9 million is expected to be paid out between April 2004 and March of 2028. Our liability for these environmental matters has been accrued in the accompanying consolidated balance sheets.

     In addition, we have been designated as a PRP under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended, the “Superfund” law or its state law equivalent) for environmental assessment and cleanup costs as the result of our alleged disposal of hazardous substances at 26 sites. With respect to each of these sites, numerous other PRPs have similarly been designated and, while the current state of the law potentially imposes joint and several liability upon PRPs, as a practical matter costs of these sites are typically shared with other PRPs. Our estimated liability at those 26 sites is approximately $2 million. The aggregate settlements and costs paid by us in Superfund matters to date have not been significant. The accompanying consolidated balance sheets include this environmental liability.

     The potential costs to us related to environmental matters are uncertain due to such factors as: the unknown magnitude of possible pollution and cleanup costs; the complexity and evolving nature of governmental laws and regulations and their interpretations; the timing, varying costs and effectiveness of alternative cleanup technologies; the determination of our liability in proportion to that of other PRPs; and the extent, if any, to which such costs are recoverable from insurance or other parties.

     While it is not possible to determine with certainty the ultimate outcome 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, except as otherwise noted, such litigation and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

      III. Contingency

     In 2002, we entered into a $500 million, ten year contract with the National Health Services Information Authority (“NHS”), an organization of the British government charged with the responsibility of delivering healthcare in England and Wales. The contract engages the Company to develop, implement and operate a human resources and payroll system at more than 600 NHS locations.

     To date, there have been delays to this contract which have caused increased costs and a decrease in the amount of time in which we can earn revenues. These delays have adversely impacted the contract’s projected profitability and no material revenue has yet been recognized on this contract. As of March 31, 2004, our consolidated balance sheet includes an investment of approximately $76 million in net assets, consisting of prepaid expenses, software and capital assets, net of cash received, related to this contract. While we believe it is likely that we can deliver and operate an acceptable system and recover our investment in this contract, we are currently negotiating with the NHS to amend certain key terms and conditions in the contract, and there is no certainty we will agree on an updated implementation plan. We expect this negotiation to be completed in the second half of calendar year 2004. However, the timing and the outcome of these negotiations is uncertain and failure to reach agreement on an updated implementation plan and amend certain key contract terms and conditions, and/or further delays in the implementation may result in losses that could be material. Even if we agree on amended contract terms and conditions and an updated implementation plan, it is possible that the terms of that agreement may result in the impairment of our net assets related to the contract as well as substantial penalties and charges, which could have a material adverse impact on our consolidated financial statements.

McKESSON CORPORATION

Executive Officers of the Registrant

     The following table sets forth information regarding the executive officers of the Company, including their principal occupations during the past five years. The number of years of service with the Company includes service with predecessor companies.

     There are no family relationships between any of the executive officers or directors of the Company. The executive officers are chosen annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are elected and have qualified, or until death, resignation or removal, whichever is sooner.

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McKESSON CORPORATION

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in the plan by employees of certain of the Company’s international and other subsidiaries. As to those employees, the ESPP does not so qualify. Currently, 11.1 million shares have been authorized for issuance under the ESPP.

     The ESPP is implemented through a continuous series of 24-month offerings beginning on the first trading day on or after each May 1 and November 1 (the “Offering Dates”) and ending on the last trading day of the month which is 24 months later (the “Offering Periods”) and six-month periods beginning on each May 1 and November 1 and ending on the following October 31 and April 30, during which contributions may be made toward the purchase of common stock under the plan (“Purchase Periods”).

     Each eligible employee may elect to authorize regular payroll deductions during the next succeeding Purchase Period, the amount of which may not exceed 15% of a participant’s compensation. At the end of each Purchase Period, the funds withheld by each participant will be used to purchase shares of the Company’s common stock. The purchase price of each share of the Company’s common stock will be the lesser of (i) 85% of the fair market value of such share on the first day of the Offering Period; or (ii) 85% of the fair market value of such share on the last day of the applicable Purchase Period. In general, the maximum number of shares of common stock that may be purchased by a participant for each Purchase Period is determined by dividing $12,500 by the fair market value of one share of common stock on the Offering Date.

     The following are descriptions of equity plans that have not been submitted for approval by the Company’s stockholders:

      1999 Stock Option and Restricted Stock Plan (the “Plan ”): The Plan was adopted by the Board of Directors in 1999. The Plan provides for the grant to eligible employees of 45.2 million shares in the form of nonqualified stock options, with or without SARs, restricted stock or restricted stock units. No executive officers or directors participate in this Plan.

     Options are granted at not less than fair market value and have a term of ten years. Options generally become exercisable in four equal annual installments beginning one year after the grant date, or after four years from the date of grant. Restricted stock granted under the Plan contains certain restrictions on transferability and may not be transferred until such restrictions lapse (generally two to four years). Grantees may elect to use stock to satisfy any withholding tax obligation upon the lapsing of restrictions on restricted stock awards.

      1998 Canadian Stock Incentive Plan (the “Canadian Plan”): The Canadian Plan was adopted by the Board of Directors in January 1998, following the Company’s acquisition of a Canadian company, to provide nonqualified stock options, with or without tandem SARs, to eligible employees of the Canadian company. The Canadian Plan has subsequently been amended to allow for the grant of stock options to employees of any of the Company’s Canadian subsidiaries. A total of 0.9 million shares have been authorized for issuance under the Canadian Plan. Options granted under the Canadian Plan are generally subject to the same terms and conditions as those granted under the 1999 Plan, discussed above, except that (i) options may be granted for less than the fair market value of the Company’s common stock on the date of grant, and (ii) all options will become immediately exercisable upon an employee’s disability or death and must be exercised within three years of such date.

      Stock Option Plans Adopted in January 1999 and August 1999 : On January 27, 1999 and August 25, 1999 the Board of Directors adopted certain stock option plans (the “January 1999 Plan” and the “August 1999 Plan”, or together the “Plans”) to provide stock options to purchase shares of the Company’s common stock to eligible employees of the Company pursuant to NYSE rules in effect at the time the Plans were established. A maximum of 5.8 million and 5.2 million shares of common stock were authorized for issuance under the January 1999 and August 1999 Plans. In each case the Plans state that: (i) under each of the Plans no single officer or director of the Company or any subsidiary could acquire more than 1% of the Company’s common stock outstanding at the time the Plans were adopted, and (ii) each of the Plans, together with all stock option or purchase plans, or any other arrangements pursuant to which officers or directors of the Company may acquire common stock (other than stock plans for which stockholder approval is not required under Section 312.03 of the NYSE Rules), does not authorize the issuance of more than 5% of the Company’s common stock outstanding at the time the Plans were adopted (collectively the “NYSE Limits”). Options were granted under each of the Plans to eligible employees of the Company. No further grants will be made from either of the Plans.

     Options granted under these plans are generally subject to the same terms and conditions as those granted under the 1994 and 1999 Plans.

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McKESSON CORPORATION

      1999 Executive Stock Purchase Plan (the “1999 SPP”): The 1999 SPP was adopted by the Board of Directors in February 1999. The 1999 SPP provided for the grant of rights to purchase a maximum of 0.7 million shares of common stock subject to the NYSE Limits. No further grants will be made from the 1999 SPP. Rights to purchase shares were granted under the 1999 SPP to eligible employees of the Company. The purchase price, to be paid in cash or using promissory notes, for the Company common stock subject to rights granted under the 1999 SPP was equal to the fair market value of the Company’s common stock on the date the right was exercised (which was the closing price of the Company’s common stock on the NYSE). Purchases were evidenced by written stock purchase agreements which provide for the payment of the purchase price by (i) payment in cash, or (ii) a promissory note payable on a repayment schedule determined by the Compensation Committee of the Board, or (iii) a combination of (i) and (ii).

      HBOC 1994 UK Sharesave Scheme (the “1994 Scheme”): In connection with the acquisition by the Company of HBO & Company (“HBOC”), we assumed the HBOC 1994 Scheme which is similar to the ESPP, under which 227,268 shares remain available for issuance. Employees and previous directors of HBOC and its subsidiaries, who are residents of the United Kingdom, are eligible to receive options under the 1994 Scheme. The exercise price of the stock covered by each option shall not be less than 85% of the fair market value of the Company’s common stock on the date the option is granted. Participants under the 1994 Scheme pay for options through monthly contributions, subject to minimum and maximum monthly limits.

McKESSON CORPORATION

(b)		Reports on Form 8-K
		The following report on Form 8-K was filed during the three months ended March 31, 2004:
		Form 8-K date of report January 22, 2004, relating to a press release announcing the Company’s preliminary financial results for its third quarter of 2004.
		The following reports on Form 8-K were filed during the period between April 1, 2004 and the date of this filing:
		Form 8-K date of report April 29, 2004 relating to a press release announcing the Company’s preliminary financial results for its fourth quarter and fiscal year ended March 31, 2004.
		Form 8-K date of report April 30, 2004 relating to recast condensed consolidated operating information by business segment for fiscal 2003 and fiscal 2004.
		Form 8-K date of report May 4, 2004 relating to an employment litigation verdict against the Company.

McKESSON CORPORATION

EXHIBIT INDEX

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

26

27

28

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INDEX TO CONSOLIDATED FINANCIAL INFORMATION

30

Footnotes to Five Year Highlights:

(1)		2001 and 2000 results include goodwill amortization. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we discontinued amortizing goodwill in 2002.
(2)		Based on year-end balances and sales or cost of sales for the last 90 days of the year. Days sales outstanding for customer receivables are adjusted to include accounts receivable sold.
(3)		Cash dividends declared and dividends per common share amounts do not reflect the effects of pooling of interests transactions prior to the adoption of Statement of Financial Accounting Standard No. 141, “Business Combinations,” in 2002.
(4)		Represents stockholders’ equity divided by year-end common shares outstanding.
(5)		Consists of total debt and stockholders’ equity.
(6)		Ratio is computed as total debt divided by capital employed.
(7)		Ratio is computed as total debt, net of cash, cash equivalents and marketable securities (“net debt”), divided by net debt and stockholders’ equity (“net capital employed”).
(8)		Represents a five-quarter average of stockholders’ equity.
(9)		Ratio is computed as net income (loss), divided by a five-quarter average of stockholders’ equity.

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FINANCIAL REVIEW

Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition

GENERAL

     Management’s discussion and analysis of results of operations and financial condition, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year.

     We conduct our business through three operating segments: Pharmaceutical Solutions, Medical-Surgical Solutions and Information Solutions. See Financial Note 1 to the accompanying consolidated financial statements, “Significant Accounting Policies,” for a description of these segments. In addition, in order to respond to changes in our business environment, in April 2004 the Company reorganized certain businesses within these operating segments. Our Financial Review is prepared based on operating segments in effect at March 31, 2004. Supplemental financial information regarding our operating segments under our new organizational structure is included under the caption “2005 Operating Segments” included in this Financial Review.

RESULTS OF OPERATIONS

      Overview:

     Revenues increased 22% to $69.5 billion in 2004 and 14% to $57.1 billion in 2003 primarily reflecting revenue growth in our Pharmaceutical Solutions segment which is attributable to market growth rates as well as new customers and/or expanded business with existing customers.

     Gross profit increased 5% to $3.2 billion and 11% to $3.1 billion in 2004 and 2003. As a percentage of revenues, gross margins declined 76 and 15 basis points in 2004 and 2003. Declines in our gross profit margins primarily reflect a higher proportion of our revenue being attributable to our Pharmaceutical Solutions segment, which has lower margins relative to our other segments and a decline in the Pharmaceutical Solutions segment’s margin in 2004. This segment’s gross profit margin was impacted by declines in the sell margin due to the competitive environment in which we operate as well as pressure on its buy side margin and by a higher proportion of sales to customers’ warehouses which have lower margins. In addition, gross profit in 2004 and 2003 was impacted by a number of significant items, which are discussed in further detail, including a $51.0 million provision for expected losses on five multi-year contracts in our Information Solutions segment’s international business in 2003.

     Operating expenses increased 4% to $2.3 billion and $2.2 billion in 2004 and 2003. As a percentage of revenues, operating expenses decreased 54 and 38 basis points in 2004 and 2003. Operating expenses as a percentage of revenues have declined over the last two years, mainly due to leveraging of our fixed cost infrastructure and productivity improvements in back-office and field operations as well as a higher proportion of sales to customers’ warehouses which have lower operating expense margins. Increases in operating expense dollars were primarily due to additional expenses incurred to support our sales volume growth. Operating expenses were also impacted by a number of significant items which are discussed in further detail, including a $66.4 million credit pertaining to the reversal of a portion of customer settlement reserves within our Information Solutions segment in 2004 and $39.8 million in restructuring charges primarily related to a restructuring plan initiated for our Medical-Surgical Solutions segment and restructuring activities in our Information Solutions segment in 2002.

     Income before income taxes increased 7% to $911.4 million and 41% to $851.4 million in 2004 and 2003, reflecting the above noted factors. On an operating segment basis, results for 2004 primarily reflect revenue growth

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FINANCIAL REVIEW (Continued)

and competitive pricing pressure in our Pharmaceutical Solutions segment, and improved operating profit in our Medical-Surgical Solutions and Information Solutions segments. Results for 2003 reflect revenue growth and operating margin expansion in our Pharmaceutical Solutions segment and improved operating profit in our Information Solutions segment.

     Net income increased 16% to $646.5 million in 2004 and 33% to $555.4 million in 2003. Diluted earnings per share increased 16% to $2.19 in 2004 and 31% to $1.88 in 2003. In addition to those factors discussed above, net income reflected a reduction in our effective income tax rates, as well as a $23.2 million tax benefit relating to favorable tax settlements and adjustments in 2004 and a $36.1 million tax benefit in 2002 relating to the sale of a business.

      Revenues:

     Revenues increased 22% in 2004 and 14% in 2003. The growth in revenues was primarily driven by the Pharmaceutical Solutions segment, which accounted for more than 90% of revenues. Revenues were not materially impacted by business acquisitions.

     The customer mix of our U.S. pharmaceutical distribution revenues was as follows:

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     Increases in U.S. Healthcare pharmaceutical distribution and services revenues for 2004, excluding sales to customers’ warehouses, primarily reflect market growth rates as well as new independent pharmacy, mail order and institutional customers in our pharmaceutical distribution business. Increases in these revenues for 2003 also reflect market growth rates as well as new retail and institutional customers in our pharmaceutical distribution business, new business that was previously direct or outside the distribution channel and growth in our automation, specialty pharmaceutical products, and pharmacy outsourcing services businesses. Market growth rates reflect growing drug utilization and price increases, which are offset in part by the increased use of lower priced generics.

     U.S. Healthcare sales to customers’ warehouses increased primarily as a result of several expanded agreements with existing customers in 2004, and also growth from existing customers in 2004 and 2003. Sales to customers’ warehouses represent large volume sales of pharmaceuticals primarily to a limited number of large self-warehousing customers whereby we order and subsequently deliver bulk products from the manufacturer to the customers’ warehouses through a central distribution facility. These sales provide a benefit to our customers in that they can use one source for both their direct store-to-store business and their warehouse business.

     Canadian pharmaceutical distribution revenues increased in 2004 reflecting market growth rates, new business from manufacturers who formerly engaged in direct distribution activities and favorable foreign exchange rates. On a constant currency basis, revenues from our Canadian operations would have increased approximately 14% compared to 2003. Revenues for 2003 also increased reflecting market growth rates, greater sales to existing customers, increased sales of product that previously went direct from manufacturers, and to a lesser extent, favorable foreign exchange rates.

     Medical-Surgical Solutions segment distribution revenues decreased nominally in 2004 and increased nominally in 2003. Increases in our primary and extended care sectors were either fully offset or almost fully offset by a decline in revenues in the acute care sector. The segment’s decline in its acute care business reflects the competitive environment in which it operates and the transition of the loss of the segment’s largest customer.

     Information Solutions segment revenues increased in 2004 primarily from services and hardware revenues. Revenues for 2004 reflect decreases in sales of non-clinical solutions and longer installation periods required for certain large complex clinical implementations, which have the effect of delaying revenue recognition. Revenues for 2003 increased reflecting the sale of new clinical products including those from Horizon Medical Imaging ^TM , which was the result of our July 2002 purchase of A.L.I. Technologies Inc. (“A.L.I.”).

      Gross Profit:

     Gross profit increased by 5% in 2004 and 11% in 2003. As a percentage of revenues, gross profit margin decreased 76 basis points in 2004 and 15 basis points in 2003. In 2004, gross profit margin decreased primarily reflecting a higher proportion of revenues attributable to our Pharmaceutical Solutions segment, which has lower margins relative to our other segments and a decline in the Pharmaceutical Solutions segment’s margin as discussed in more detail below. 2004 gross profit margin also reflects improvements in our Medical-Surgical Solutions segment as sales increased in alternate site markets which have higher margins and in our Information Solutions segment reflecting lower contract loss accruals during the year.

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		In 2004, gross margin for our Pharmaceutical Solutions segment was impacted by:
-		lower selling margins within our U.S. Pharmaceutical distribution business which reflect competitive pricing pressure. We have also been experiencing pressure on our buy side margin as the industry is evolving, including the ways in which distributors are being compensated by manufacturers. Certain types of vendor product incentives and sources of supply, such as certain inventory purchases on the secondary market, are not available at historical levels to the major distributors which has the impact of reducing gross margins. Much of this change results from the manufacturers’ desire to limit the amount of inventory in the channel. We have been actively working with manufacturers through restructured distribution agreements to ensure that we are appropriately compensated for the services we provide. In addition, the proportion of cash discounts to revenues increased reflecting a change in customer mix,
-		a higher proportion of revenues attributed to sales to customers’ warehouses within our U.S. pharmaceutical distribution business. As previously discussed, sales to customers’ warehouses represent bulk shipments which we purchase and bring in to our central distribution center and subsequently ship out in bulk to our customers’ warehouses. These revenues differ from our traditional direct store business in that we do not break the merchandise down; the merchandise comes in and goes out in the original bulk containers and we ship only to warehouse locations. We have significantly lower gross margin on these sales as we pass much of the efficiencies of this low cost-to-serve model on to the customer. These sales do, however, contribute to our gross profit dollars in that the volume allows us to earn incremental product sourcing profits. In addition, our cash flows benefit from these sales due to favorable timing between the customer payment to us and our payment to the supplier,
-		a LIFO charge of $27.9 million compared to a credit of $13.7 million in 2003. The 2004 charge was primarily attributed to a small number of pharmaceutical drugs which did not move to the generic category (i.e., the price did not decrease) until after year-end or are still pending,
-		a deferral of approximately $33 million in gross profit as the recognition of revenue was delayed due to contracting changes in our Automation business,
-		unfavorable adjustments from certain fixed-price contracts in this segment’s pharmacy outsourcing business,
-		partially offsetting the above decreases, the benefit of increased sales of generic drugs with higher margins, and
-		the receipt of $21.7 million cash proceeds representing our share of a settlement of an antitrust class action lawsuit brought against the manufacturer of a cardiac drug. In 2005, an additional cash settlement of $41.2 million has been received relating to an antitrust class action lawsuit involving another drug manufacturer. This additional settlement will be recorded in the first quarter of 2005.
		The decline in gross profit margin in 2003 primarily reflects:
-		a higher proportion of revenues attributable to our Pharmaceutical Solutions segment, which has lower margins relative to our other segments,
-		a decline in the Pharmaceutical Solutions segment’s gross margin reflecting a higher proportion of revenues attributable to sales to customers’ warehouses as well as a decrease in selling margin to customers in the U.S. Pharmaceutical distribution business. These decreases were partially offset by greater product sourcing profits on branded pharmaceuticals and the benefit of increased sales of generic drugs with higher margins. In addition, the segment benefited from the growth in higher margin products and services, and
-		a $51.0 million provision for expected losses on five multi-year contracts in our Information Solutions segment’s international business. Substantially all of these expected losses pertain to contracts that were entered into in 2001 or earlier. These contracts contain multiple-element deliverables, including customization of software. In addition, these contracts place significant reliance on third party vendors, as well as the customers.
		During the software development and implementation phases of these contracts, despite experiencing certain operational issues, we believed these contracts could be fully performed on a timely basis and remain profitable. In 2003, after experiencing numerous delays in product delivery and functionality, we conducted a reassessment of the contract delivery and project methodology, including assessment of our third party vendors’ ability to perform under these contracts. We determined that certain contract obligations, including software functionality, could not be met within existing contract cost estimates and delivery dates. Accordingly, we

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

		reassessed our estimate of the costs to fulfill our contract obligations and recorded a $51.0 million provision for the expected contract losses.
		Partially offsetting the above, this segment’s gross margin benefited from greater software revenues with higher margins.

     Our Pharmaceutical Solutions segment uses the last-in, first-out (“LIFO”) method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than do other accounting methods, thereby mitigating the effects of inflation and deflation on operating profit. The practice in the Pharmaceutical Solutions distribution businesses is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which prevents inventory losses. Price declines on many generic pharmaceutical products in this segment over the last few years have moderated the effects of inflation in other product categories, which resulted in minimal overall price changes in those fiscal years.

      Operating Expenses:

     Operating expenses increased 4% in 2004 and 2003. Excluding the items noted below, increases in operating expenses were primarily due to additional expenses incurred to support our sales volume growth.

Operating expenses included the following significant items:

2004

-		a $21.0 million charge for uncollected balances on loans made to former employees for the purchase of McKesson common stock primarily in February 1999, which was recorded in our Corporate expenses,
-		increase in operating expenses attributable to higher foreign currency exchange rates for our Canadian operations,
-		increases in pension expense of $14.6 million primarily for our U.S. defined benefit pension plans. In 2004 and 2003, we reduced the assumed long-term rate of asset return and the discount rate for our U.S. defined benefit pension plans to better reflect long-term expectations for the plans’ portfolios and rates for high-quality corporate long term bonds,
-		a $66.4 million credit pertaining to the reversal of a portion of customer settlement reserves within our Information Solutions segment. Information regarding this and other restructuring programs is included under the caption “Restructuring Activities,” included in this Financial Review,
-		a net decrease in bad debt expense of $14.1 million; however, bad debt expense varied greatly by operating segment which is also discussed below in further detail, and
-		$14.8 million of gains on the sales of three surplus properties, most of which was recorded in Corporate administrative expenses.

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FINANCIAL REVIEW (Continued)

2003

-

a $22.3 million credit for the reversal of a portion of customer settlement reserves within our Information Solutions segment.

2002

-		$39.8 million in restructuring charges primarily related to a restructuring plan initiated for our Medical-Surgical Solutions segment and restructuring activities in our Information Solutions segment, and
-		$22.0 million in pre-tax losses on the sales of three businesses.

     Operating expenses as a percentage of revenues, excluding the above noted items, have declined over the last two years, mainly due to the leveraging of our fixed cost infrastructure and productivity improvements in back-office and field operations as well as a higher proportion of sales to customers’ warehouses which have lower operating expense margins.

      Other Income and Gain (Loss) on Investments, net:

     Other income increased nominally in 2004 and by a larger amount in 2003. In 2004, other income decreased in our Pharmaceutical Solutions segment primarily reflecting decreases in equity income and gains on sales of investments whereas other income increased for Corporate primarily due to greater interest income. Other income increased in 2003 primarily due to gains on sales of venture investments within our Pharmaceutical Solutions segment and a decrease in Corporate other-than-temporary impairment losses on equity and joint venture investments.

      Segment Operating Profit and Corporate Expenses:

     Segment operating profit includes gross margin, net of operating expenses, other income and gain (loss) on investments for our three business segments. In addition to the significant items previously discussed, increases in segment operating profit dollars reflect revenue growth and increased operating profit in our Pharmaceutical

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Solutions segment, combined with improved operating profits in our Information Solutions segment and for 2004, improved operating profits in our Medical-Surgical Solutions segment.

     Operating profit as a percentage of revenues decreased in our Pharmaceutical Solutions segment in 2004 primarily reflecting the previously discussed decline in gross margins, and an additional $30.0 million bad debt provision for a customer bankruptcy. These decreases were offset in part by productivity improvements in operations, a $21.7 million cash settlement of an antitrust class action lawsuit brought against the manufacturer of a cardiac drug and lower restructuring charges. Operating profit as a percentage of revenues increased in 2003 reflecting productivity improvements in operations offset in part by a decline in gross margins. In addition, operating profit in 2003 benefited from $9.9 million of gains on sales of venture investments.

     Medical-Surgical Solutions segment’s operating profit as a percentage of revenues increased in 2004 primarily reflecting improvements in gross profit and a reduction in operating expenses. The reduction in operating expenses includes the removal of duplicate operating costs (discussed in more detail below), benefits from the segment’s 2003/2002 distribution center network consolidation plan, as well as other operational improvements including a significant decrease in bad debt expense. The segment is also anticipating completing its information systems consolidation plan in 2005 and anticipates continuing benefits from more efficient operations as a result of its consolidation plans.

     Operating profit as a percentage of revenues in 2003 for our Medical-Surgical Solutions segment approximated that of 2002. Starting in 2002, this segment experienced an increase in the competitive environment in which it operates and the commencement of a self-warehousing strategy by a major customer. These changes resulted in the initiation of the segment’s distribution center network consolidation plan which included $29.6 million of restructuring and related asset impairment charges. Results for 2003 and 2002 also include duplicate operating expenses associated with the segment’s restructuring activities and replacement of information systems. Additional operating expenses incurred include duplicate payroll, transportation and warehouse costs as the segment consolidated distribution centers. In 2003, operating profit benefited from $12.0 million in reversals of the prior year’s accrued restructuring charges as a result of a modification to the segment’s distribution center network consolidation plan. This benefit was partially offset by an increase in bad debt expense of approximately $11 million.

     Information Solutions segment’s operating profit as a percentage of revenues increased in 2004 and 2003. Operating profit for 2004 reflects a higher gross profit margin, $66.4 million of reversals of customer settlement reserves due to favorable settlements and negotiations, and better control of expenses. Operating profit for 2003 reflects improvements in gross profit offset by a $51.0 million provision for expected losses on five multi-year contracts within the segment’s international business, a $22.3 million credit for the reversal of a portion of customer settlement reserves and more efficient operations resulting from improved customer support activities and control of expenses. In 2002, this segment incurred $19.3 million of losses on sales of businesses and $12.0 million in restructuring and related asset impairment charges.

     Corporate expenses increased in 2004 and 2003. Expenses for 2004 reflect a $21.0 million charge for uncollected balances on loans made to former employees for the purchase of McKesson common stock primarily in February 1999, additional legal costs associated with our pending securities litigation, higher pension expense and severance costs associated with the restructuring of our enterprise-wide information network support departments. Partially offsetting these increases was approximately $13 million of gains on the sales of surplus properties. The increase in 2003 expenses was principally due to higher benefit and insurance costs and lower pension income, partially offset by lower venture investment impairment losses, lower expenses associated with the use of our accounts receivable sales facility and a decrease in expenses associated with an investment.

      Interest Expense: Interest expense decreased in 2004 primarily due to lower average borrowings, including the repayment of $125.0 million of 6.55% notes in November 2002. Interest expense increased nominally in 2003 primarily due to higher average borrowings including the issuance of $400.0 million 7.75% notes in January 2002 partially offset by the retirement of $175.0 million 6.875% notes in March 2002 and $125.0 million 6.55% notes in November 2002. In addition, we also utilized our accounts receivable sales facility more in 2003 compared to 2004 and 2002 in order to meet our financing needs. The costs associated with this facility are recorded in Corporate expenses.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

      Income Taxes: The Company’s effective tax rate was 29.1%, 34.0% and 29.9% in 2004, 2003 and 2002. In addition to the items noted below, fluctuations in the effective tax rate are primarily due to changes within state and foreign effective tax rates resulting from the Company’s business mix, including a higher proportion of income attributable to foreign countries that have lower income tax rates. In addition, our effective tax rate in 2004 also benefited from various state tax initiatives.

     In 2004, we recorded a $23.2 million tax benefit relating to favorable tax settlements and adjustments with the U.S. Internal Revenue Service and with various taxing authorities. A large portion of this benefit, which was not previously recognized by the Company, resulted from the filing of amended tax returns by our subsidiary, McKesson Information Solutions (formerly known as HBO & Company) for the years ended December 31, 1998 and 1997.

     In 2002, we sold three businesses for a pre-tax loss of $22.0 million and an after-tax gain of $22.0 million. For accounting purposes, the net assets of one of these businesses were written down in 2001 in connection with the restructuring of a former segment. The tax benefit could not be recognized until 2002 when the sale of the business was completed.

      Discontinued Operations: Net loss from discontinued operations was $6.7 million ($0.02 per diluted share) in 2003 and $3.2 million ($0.01 per diluted share) in 2002. Results from discontinued operations include those of a marketing fulfillment business which we sold in 2003 as well as adjustments made in 2003 relating to the 2000 divestiture of our Water Products business.

      Weighted Average Diluted Shares Outstanding: Diluted earnings per share were calculated based on an average number of shares outstanding of 298.6 million, 298.8 million and 298.1 million for 2004, 2003 and 2002.

International Operations

     International operations accounted for 6.7%, 6.3% and 6.0% of 2004, 2003 and 2002 of consolidated revenues. International operations are subject to certain risks, including currency fluctuations. We monitor our operations and adopt strategies responsive to changes in the economic and political environment in each of the countries in which we operate. Additional information regarding our international operations is also included in Financial Notes 4 and 21, “Contracts” and “Segments of Business” to the accompanying consolidated financial statements.

Restructuring Activities

     Net charges (credits) from restructuring activities over the last three years were as follows:

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

     In 2004, net charges for restructuring activities, excluding customer settlement reserve reversals, amounted to $3.8 million. These charges related to a number of smaller initiatives offset in part by adjustments to prior years’ restructuring reserves.

     In 2003, net credits for restructuring activities, excluding customer settlement reserve reversals, amounted to $4.8 million. These net credits primarily related to $12.0 million of reversals of severance and exit-related accruals pertaining to our re-evaluation of our 2002 Medical-Surgical Solutions segment distribution center network consolidation plan. The original consolidation plan included a net reduction of 20 distribution centers, from 51, compared to a net reduction of 14 under the revised plan. Net credits for 2003 also include $5.1 million of charges for additional facility closure costs associated with prior years’ restructuring plans in our Pharmaceutical Solutions segment.

     In 2002, net charges for restructuring activities of $39.8 million included severance charges of $19.8 million, exit-related charges of $19.5 million and asset impairment charges of $7.6 million primarily related to a plan to reduce the number of distribution centers in our Medical-Surgical Solutions segment, as well as restructuring activities in our Information Solutions segment. Partially offsetting these charges was a reversal of $7.1 million of prior years’ restructuring reserves due to a change in estimated costs to complete these activities.

     In addition to the above restructuring activities, we are still managing a 2001/2000 restructuring plan associated with customer settlements for the discontinuance of overlapping and nonstrategic products and other product development projects within our Information Solutions segment. In 2004 and 2003, we reversed $66.4 million and $22.3 million of accrued customer settlement reserves into operating profit due to favorable settlements and negotiations with affected customers. Total cash and non-cash settlements of $45.3 million and $95.0 million have been incurred since the inception of this restructuring plan. As of March 31, 2004, customer settlement reserves amounted to $6.2 million and we had substantially completed our negotiations with the affected customers. As a result, we do not anticipate additional significant increases to the allowance for customer settlements. However, as settlement negotiations with the remaining customers are finalized, additional adjustments to the reserve may be necessary.

     Refer to Financial Note 5, “Restructuring and Related Asset Impairments,” to the accompanying consolidated financial statements for further discussion regarding our restructuring activities.

Acquisitions

		We made the following acquisitions:
-		In April 2004, we acquired all of the issued and outstanding shares of Moore Medical Corp. (“MMC”), of New Britain, Connecticut, for $12 per share in cash or approximately $40 million in aggregate. MMC is an Internet-enabled, multi-channel marketer and distributor of medical-surgical and pharmaceutical products to non-hospital provider settings. Financial results for MMC will be reflected as part of our Medical-Surgical Solutions segment in 2005.
-		In the second quarter of 2003, we acquired the outstanding stock of A.L.I. for an aggregate cash purchase price of $347.0 million. A.L.I. provides digital medical imaging solutions which are designed to streamline access to diagnostic information, automate clinical workflow and eliminate the need for film purchase and storage. The acquisition of A.L.I. complemented our Horizon Clinicals™ offering by incorporating medical images into a computerized patient record. Approximately $328 million of A.L.I.’s purchase price was assigned to goodwill, none of which is deductible for tax purposes. The aggregate purchase price was financed through cash and short-term borrowings. The results of A.L.I.’s operations have been included in the consolidated financial statements within our Information Solutions segment since its acquisition date.
-		In February 2002, our Pharmaceutical Solutions segment acquired, for approximately $62 million in cash, the net assets of PMO, Inc., a national specialty pharmacy business (having previously done business as VitaRx), that provides mail order pharmaceutical prescription services to managed care patients.
-		In 2003, we purchased the remaining interest in an investment of our Pharmaceutical Solutions segment for approximately $32 million, retained a small portion of the business and subsequently sold the balance for

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

approximately $40 million, the proceeds of which consisted of an interest bearing ten-year note receivable, resulting in a nominal loss.

     During the last three years we also completed several smaller acquisitions and investments within our Pharmaceutical Solutions and Information Solutions segments. 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 aggregate basis. Refer to Financial Note 2, “Acquisitions,” to the accompanying consolidated financial statements for further discussions regarding these activities.

2005 Outlook

     Information regarding the Company’s 2005 outlook, including business risks and opportunities, is contained in our Form 8-K dated April 29, 2004. This Form 8-K should be read in conjunction with the sections “Factors Affecting Forward-looking Statements” and “Additional Factors That May Affect Future Results” included in this Financial Review.

2005 Operating Segments

     In April 2004, we reconfigured our operating segments to better align product development and selling efforts with the evolving needs of the healthcare market. As a result, commencing in the first quarter of 2005, we will report the following operating segments:

     The Pharmaceutical Solutions segment distributes ethical and proprietary drugs and health and beauty care products throughout North America. This segment also manufactures and sells automated pharmaceutical dispensing systems for retail pharmacies, medical management and pharmaceutical solutions for biotech and pharmaceutical manufacturers, patient and payor services, and consulting and outsourcing services to pharmacies. We have added the Clinical Auditing and Compliance business, which was previously included in our Information Solutions segment, to this segment’s expanded payor services business. This business sells software to payors for auditing professional claims.

     The Medical-Surgical Solutions segment distributes medical-surgical supplies and equipment and provides logistics and related services within the United States. This segment will now include Zee Medical, which was formerly reported in our Pharmaceutical Solutions segment. Zee Medical provides first aid and safety products and training services to corporate customers. The results of our April 2004 acquisition of MMC will also be reported in this segment.

     The Provider Technologies segment consists of the former Information Solutions segment plus the McKesson Inpatient Automation business, which was previously reported in our Pharmaceutical Solutions segment, and the Corporate Solutions group, which was previously managed by our Corporate group and whose expenses are currently allocated to the applicable business segments. This segment continues to deliver enterprise-wide patient care, clinical, financial, supply chain, managed care and strategic management software solutions as well as outsourcing and other services to healthcare organizations throughout North America, the United Kingdom and Europe. McKesson Inpatient Automation provides automation and robotics for the hospital market, and the Corporate Solutions group will continue to be responsible for the sales coordination of complex provider engagements that include strategic product and service solutions from multiple business units.

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