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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission file number 1-13252

McKESSON CORPORATION

(415) 983-8300
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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McKESSON CORPORATION

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McKESSON CORPORATION

PART I. FINANCIAL INFORMATION

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

See Financial Notes.

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McKESSON CORPORATION

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

See Financial Notes.

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McKESSON CORPORATION

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

See Financial Notes.

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McKESSON CORPORATION

FINANCIAL NOTES
(Unaudited)

1.     Significant Accounting Policies

     Basis of Presentation. In our opinion, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial position as of December 31, 2003, and the results of operations for the quarter and nine months ended December 31, 2003 and 2002 and cash flows for the nine months ended December 31, 2003 and 2002.

     The results of operations for the quarter and nine months ended December 31, 2003 and 2002 are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes included in our 2003 consolidated financial statements previously filed with the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to the current period presentation.

     The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

     New Accounting Pronouncements. In January 2004, the Financial Accounting Standards Board (“FASB”) issued a Financial Staff Position (“FSP”) pertaining to Statement of Financial Accounting Standards (“SFAS”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP SFAS No. 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) until authoritative guidance on accounting for the federal subsidy is issued or until certain other events occur. Accordingly, the consolidated financial statements do not reflect the effect of the Act, if any. Authoritative guidance, when issued, could require the Company to change previously reported information.

     In December 2003, the FASB issued a revision to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This statement does not change the measurement or recognition aspects for pensions and other postretirement benefit plans, however it does revise employers’ disclosures to include more information about the plan assets, obligations to pay benefits and funding obligations. SFAS No. 132, as revised, is effective for our March 31, 2004 consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the definition of a liability as currently defined in FASB Concepts Statement No. 6, “Elements of Financial Statements,” as well as other planned revisions. This statement requires a financial instrument that embodies an obligation of an issuer to be classified as a liability. In addition, the statement establishes standards for the initial and subsequent measurement of these financial instruments and disclosure requirements. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and for all other matters, at the beginning of our second quarter of 2004. The adoption of this standard did not have a material impact on our consolidated financial statements.

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

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

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

     We implemented FIN No. 46 on a retroactive basis, in the third quarter of 2004. As a result of the implementation, the Company no longer consolidates its investment in the McKesson Financing Trust (the “Trust”) (see Financial Note 9) as the Company was not designated as the Trust’s primary beneficiary. In accordance with this accounting standard, the Company now recognizes the debentures issued to the Trust as long-term debt in its consolidated financial statements in lieu of the preferred securities that the Trust issued to third parties. Additionally, the consolidated financial statements include interest expense on the debentures and no longer report dividends on the preferred securities, net of tax. These changes increased the Company’s net debt to net capital ratio slightly but did not have a material impact on our consolidated financial statements, including diluted earnings per share (see Financial Note 3). We will adopt the remaining provisions of FIN No. 46(R), which are not anticipated to have a material impact on our consolidated financial statements, in the fourth quarter of 2004.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted the disclosure provisions of this standard, as discussed below under Employee Stock-Based Compensation. We are currently assessing the fair value approach under SFAS No. 123 and the transitional provisions of SFAS No. 148.

     In November 2002, the FASB reached a consensus regarding Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The guidance provided by EITF Issue No. 00-21 is effective for contracts entered into on or after July 1, 2003. The adoption of this statement did not have a material effect on our consolidated financial statements.

     In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting requirements for retirement obligations associated with tangible long-lived assets. In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements 4, 44, 64, Amendment to FASB Statement No. 13, and Technical Corrections as of April 2002.” SFAS No. 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS Nos. 143 and 145 were effective commencing April 1, 2003 and did not have a material impact on our consolidated financial statements.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

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

2.     Acquisitions and Divestiture

     In the second quarter of 2003, we acquired the outstanding stock of A.L.I. Technologies Inc. (“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.

     During the nine months ended December 31, 2003 and 2002, our Pharmaceutical Solutions and Information Solutions segments completed several smaller acquisitions. Pro forma results of operations have not been presented for these acquisitions, nor the acquisition of A.L.I., as the effects were not material to the condensed consolidated financial statements on either an individual or aggregate basis.

     On January 19, 2004, we entered into a merger agreement (the “Merger Agreement”) providing for our acquisition, subject to the satisfaction of customary closing conditions, of all of the issued and outstanding shares of Moore Medical Corp. (“MMC”), of New Britain, Connecticut, for $12 per share or a total of approximately $40 million. MMC is an internet-enabled, multi-channel marketer and distributor of medical-surgical and pharmaceutical products to non-hospital provider settings. On completion of the acquisition, financial results for MMC from the date of closing would be reflected as part of our Medical-Surgical Solutions segment. We have been advised that, on January 21, 2004, MMC received an indication of interest from a private investment firm in the form of a cash offer of $15 per share, subject to certain conditions, including completion of due diligence. Under the Merger Agreement, MMC has the right to terminate its agreement with us and accept a financially superior offer under certain circumstances. Accordingly, there can be no assurance that our proposed acquisition of MMC will be completed on the terms set forth in the Merger Agreement or at all.

     In September 2002, we sold the net assets of a marketing fulfillment business which was previously included in our Pharmaceutical Solutions segment. Net proceeds from the sale of this business were $4.5 million. The disposition resulted in an after-tax loss of $3.7 million or $0.01 per diluted share which was recorded in the second quarter of 2003. Financial results for this business have been presented as a discontinued operation.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

3.     Earnings Per Share

     Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is computed similarly except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

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

     For the quarters ended December 31, 2003 and 2002, 38.0 million and 48.7 million stock options were excluded from the computations of diluted net earnings per share as their exercise price was higher than the Company’s average stock price. For the nine months ended December 31, 2003 and 2002, the number of stock options excluded was 38.0 million and 33.8 million.

4.     Restructuring Activities

     We recorded net charges for restructuring activities of $1.3 million and $3.1 million during the quarter and nine months ended December 31, 2003. Third quarter and year-to-date net charges include $2.0 million for severance costs relating to a program to restructure our Medical-Surgical Solutions segment distribution center network to mitigate the impact of the loss of a large customer. Net restructuring charges for the nine months ended December 31, 2003 also include expenses associated with the consolidation of our Corporate enterprise-wide information network support departments and the closure of a distribution center in our Pharmaceutical Solutions segment. These charges were partially offset by reversals of accruals from prior year restructuring programs. Approximately 257 employees were provided termination notices as a result of our 2004 restructuring initiatives, of which 123 were terminated at December 31, 2003.

     During the quarter and nine months ended December 31, 2002, we recorded net reductions in restructuring accruals of $0.2 million and $7.2 million. Results for the nine months ended December 31, 2002 included $12.2 million in reversals of accruals as a result of a modification to our Medical-Surgical Solutions segment’s distribution center strategy, which was partially offset by $6.0 million of charges associated with the planned closure of a distribution center and additional facility closure costs for a prior year restructuring plan within our Pharmaceutical Solutions segment.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     The following table summarizes restructuring activities for the nine months ended December 31, 2003:

     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. Customer settlement allowances, which are included as a reduction of accounts receivable in the accompanying condensed consolidated balance sheets, decreased to $62.9 million at December 31, 2003 from $86.9 million at March 31, 2003. Reductions in the allowance were due to a reversal of $19.7 million of the allowance into operating expenses in the second quarter of 2004 due to favorable settlements and continued negotiations with affected customers, and $0.9 million and $3.4 million of cash and non-cash settlements. In addition, during the third quarter of 2003, we reversed $22.3 million of the allowance into operating expenses also due to favorable settlements and negotiations with affected customers. Total cash and non-cash settlements of $44.1 million and $86.2 million have been incurred since the inception of the restructuring plan. Although the timing and final outcome of remaining customer settlements cannot be determined, we believe that any additional liability and related expenditures will not have a material adverse effect on our financial position, results of operations or cash flows.

5.     Contract Losses

     During the third quarter of 2003, we recorded a contract loss provision of $51.0 million to recognize expected losses for certain multi-year contracts within our Information Solutions’ international business. Additionally, during the third quarter of 2004, we recorded an incremental $20.0 million loss provision. The contract losses are reflected in cost of sales in the accompanying condensed consolidated statement of operations. Changes in estimates to complete and revisions in overall profit estimates are recognized in the period in which they are determined. These provisions are subject to change as additional information is obtained and as the contracts progress toward completion.

6.     Income Taxes

     During the quarter ended December 31, 2003, we recorded a $7.9 million income tax benefit arising from settlements and adjustments with various taxing authorities. The nine months ended December 31, 2003 also reflects a $15.3 million income tax benefit relating to favorable tax settlements with the U.S. Internal Revenue Service. 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 (“HBOC”)) for the years ended December 31, 1997 and 1998.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

7.     Goodwill and Other Intangible Assets

     Changes in the carrying amount of goodwill for the nine months ended December 31, 2003 are as follows:

     Information regarding other intangibles is as follows:

     Amortization expense of other intangibles was $5.5 million and $15.2 million for the quarter and nine months ended December 31, 2003 and $4.7 million and $13.2 million for the comparable prior year periods. The weighted average remaining amortization periods for customer lists, technology, and trademarks and other intangible assets at December 31, 2003 were: 7.6 years, 4.5 years and 5.0 years. As of December 31, 2003, estimated future annual amortization expense for these assets is as follows: $20.0 million, $19.4 million, $14.3 million, $13.8 million and $10.2 million for 2004 through 2008, and $12.7 million thereafter. At December 31, 2003, there were $13.9 million of other intangibles not subject to amortization.

8.     Financing Activities

     In June 2003, we renewed our committed revolving receivables sale facility under substantially similar terms to those previously in place with the exception that the facility was increased by $150.0 million to $1.1 billion. The renewed facility expires in June 2004.

     In September 2003, we renegotiated our 364-day revolving credit agreement. With the exception that the facility was increased by $100.0 million to $650.0 million, the terms of the new agreement are substantially similar to those previously in place. The renewed facility expires in September 2004.

     At December 31, 2003, $217.6 million of short-term borrowings were outstanding. No amounts were outstanding or utilized under the revolving receivables sale facility at December 31, 2003 and March 31, 2003.

     In addition, during the quarter and nine months ended December 31, 2003, we sold customer lease receivables from our Pharmaceutical Solutions segment for cash proceeds of $7.0 million and $42.2 million. The sales of these receivables resulted in pre-tax gains of $0.5 million and $3.0 million. During the quarter and nine months ended December 31, 2002, we sold customer lease receivables from the same segment for cash proceeds of $117.9 million, which resulted in a pre-tax gain of $5.3 million. These gains are included in Other Income in the condensed consolidated statements of operations.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

9.     Long-Term Debt

     In February 1997, we issued 5% Convertible Junior Subordinated Debentures (the “Debentures”) in an aggregate principal amount of $206,186,000. The Debentures, which are included in long-term debt, mature on June 1, 2027, bear interest at an annual rate of 5%, payable quarterly, and are currently redeemable by us at 102.0% of the principal amount. The Debentures were purchased by the Trust, which is wholly owned by the Company, with proceeds from its issuance of four million shares of preferred securities to the public and 123,720 common securities to us. These preferred securities are convertible at the holder’s option into the Company’s common stock. The Debentures represent the sole assets of the Trust.

     Holders of the preferred securities are entitled to cumulative cash distributions at an annual rate of 5% of the liquidation amount of $50 per security. Each preferred security is convertible at the rate of 1.3418 shares of the Company’s common stock, subject to adjustment in certain circumstances. The preferred securities will be redeemed upon repayment of the Debentures and are callable by us on or after March 4, 2000, in whole or in part, initially at 103.5% of the liquidation preference per share, and thereafter at prices declining at 0.5% per annum to 100% of the liquidation preference on and after March 4, 2007 plus, in each case, accumulated, accrued and unpaid distributions, if any, to the redemption date.

     We have guaranteed, on a subordinated basis, distributions and other payments due on the preferred securities (the “Guarantee”). The Guarantee, when taken together with our obligations under the Debentures, and in the indenture pursuant to which the Debentures were issued, and our obligations under the Amended and Restated Declaration of Trust governing the subsidiary trust, provides a full and unconditional guarantee of amounts due on the preferred securities.

10.     Stockholders’ Equity

     In 2001, the Company’s Board of Directors approved a program to repurchase up to $250.0 million of the Company’s common stock in open market or private transactions. During the nine months ended December 31, 2003, we repurchased 3.9 million shares having an aggregate cost of $115.3 million, which effectively completes the 2001 program. On October 30, 2003, the Company’s Board of Directors approved a new program to repurchase up to $250.0 million of additional common stock of the Company. Repurchased shares will be used for general corporate purposes.

     Comprehensive income is as follows:

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

11.     Financial Guarantees and Warranties

     Financial Guarantees. We have agreements with certain of our customers’ financial institutions under which we have guaranteed the repurchase of inventory at a discount in the event these customers are unable to meet certain obligations to those financial institutions. Among other requirements, these inventories must be in resalable condition. We have also guaranteed loans, credit facilities and the payment of leases for some customers; and we are a secured lender for substantially all of these guarantees. Customer guarantees range from one to ten years and were primarily provided to facilitate financing for certain strategic customers. At December 31, 2003, the maximum amounts of inventory repurchase guarantees and other customer guarantees were approximately $167 million and $61 million of which a nominal amount had been accrued for these guarantees.

     During the second quarter of 2004, a Pharmaceutical Solutions customer announced its bankruptcy. Accordingly, we reviewed all amounts owed to us from this customer as well as financial guarantees provided to third parties in favor of this customer, and as a result, we increased our provision for doubtful accounts by $30.0 million.

     At December 31, 2003, we had commitments to provide $3.9 million of cash contributions and $9.8 million of other commitments to our equity-held investments, for which no amounts had been accrued. In addition, our banks and insurance companies have issued $65.6 million of standby letters of credit and surety bonds on our behalf in order to meet the security requirements for statutory licenses and permits, court and fiduciary obligations, and our workers’ compensation and automotive liability programs.

     Our software license agreements generally include certain provisions for indemnifying customers against liabilities if our software products infringe on a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnification agreements and have not accrued any liabilities related to such obligations.

     In conjunction with certain transactions, primarily divestitures, we may provide routine indemnification agreements (such as retention of previously existing environmental, tax and employee liabilities) whose terms vary in duration and often are not explicitly defined. Where appropriate, obligations for such indemnifications are recorded as liabilities. Because the amounts of these indemnification obligations often are not explicitly stated, the overall maximum amount of these commitments cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have historically not made significant payments as a result of these indemnification provisions.

     Warranties. In the normal course of business, we provide certain warranties and indemnification protection for our products and services. For example, we provide warranties that the pharmaceutical and medical-surgical products we distribute are in compliance with the Food, Drug and Cosmetic Act and other applicable laws and regulations. We have received the same warranties from our suppliers, who customarily are the manufacturers of the products. In addition, we have indemnity obligations to our customers for these products, which have also been provided to us from our suppliers, either through express agreement or by operation of law.

     We also provide warranties regarding the performance of software and automation products we sell. Our liability under these warranties is to bring the product into compliance with previously agreed upon specifications. For software products, this may result in additional project costs and are reflected in our estimates used for the percentage-of-completion method of accounting for software installation services within these contracts. In addition, most of our customers who purchase our software and automation products also purchase annual maintenance agreements. Revenue from these maintenance agreements is recognized on a straight-line basis over the contract period and the cost of servicing product warranties is charged to expense when claims become estimable. Accrued warranty costs were not material to the consolidated balance sheets.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

12.     Litigation

Accounting Litigation

     In our annual report on Form 10-K for the year ended March 31, 2003, and in our quarterly reports on Form 10-Q for the quarters ended June 30, 2003, and September 30, 2003, we reported on numerous legal proceedings including, but not limited to, those arising out of our announcement on April 28, 1999 regarding accounting improprieties at HBOC, now known as McKesson Information Solutions Inc. (the “Accounting Litigation”). Since the date of those reports the only significant developments in legal proceedings involving the Company were as follows:

     In the previously reported action captioned In re McKesson HBOC, Inc. Securities Litigation, (N.D. Cal. Case No. C-99-20743-RMW) (the “Consolidated Action”), the parties have agreed, subject to approval by the Court, that trial will commence on September 12, 2005 (subject to the parties’ right to seek a modification of the trial date). On November 21, 2003, lead plaintiff New York State Common Retirement Fund (“NYSCRF”) filed a renotice of its motion for class certification, and on January 16, 2004, we filed an opposition to that motion. The hearing on class certification is scheduled for March 12, 2004.

     Plaintiff’s claim for unpaid commissions was recently settled in the previously-reported action captioned Drake v. McKesson Corp., et. al., (Fulton County, Georgia No, 01VS026303A), and we expect those claims to be dismissed by the court in the near future. Plaintiff has agreed to withdraw his remaining claims and not to file a new action.

     In the previously-reported action, Ash, et. al. v. McCall, (Civil Action No. 17132), 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 for consideration of those motions has not yet been scheduled.

     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.

Other Litigation

     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 have moved to intervene in this action, and on January 22, 2004 that motion was granted by the Court. The Court has scheduled a February 9, 2004 hearing on the petition of AmerisourceBergen seeking to delay the commencement date of our contract with the VA for up to 90 days. The Court has provided in its scheduling order that a decision on the merits of the entire AmerisourceBergen bid protest will be rendered by March 31, 2004.

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McKESSON CORPORATION

FINANCIAL NOTES (Concluded)
(Unaudited)

13. Segment Information

     Our operating segments consist of Pharmaceutical Solutions, Medical-Surgical Solutions and Information Solutions. We evaluate the performance of our operating segments based on operating profit before interest expense and income taxes. Our Corporate segment includes expenses associated with Corporate functions and projects, and certain employee benefits. Corporate expenses are allocated to the operating segments to the extent that these items can be directly attributable to the segments.

     Financial information relating to our segments is as follows: