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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number 1-13252

McKESSON CORPORATION
(Exact name of Registrant as specified in its charter)

(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 [    ]

     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. Interim Financial Statements

     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 June 30, 2002, and the results of operations and cash flows for the quarters ended June 30, 2002 and 2001.

     The results of operations for the quarters ended June 30, 2002 and 2001 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 2002 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.

2. New Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 will become effective for 2004. We are evaluating what impact, if any, SFAS No. 143 may have on the consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” that replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS No. 144 requires that long-lived assets to be disposed of by sale, including those of discontinued operations, be measured at the lower of carrying amount or fair value less cost to sell. Discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet been incurred. Except for those provisions of this accounting standard whose implementation extends to the end of 2003, we have adopted SFAS No. 144 as of April 1, 2002. As the provisions were generally to be applied prospectively, the adoption did not have a material impact on our consolidated financial statements. In addition, the adoption of the remaining provisions is not expected to have a material impact on our consolidated financial statements.

     In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which replaces Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” SFAS No. 146 requires that liabilities associated with exit or disposal activities be recognized when they are incurred. Under EITF Issue No. 94-3, a liability for exit costs is recognized at the date of a commitment to an exit plan. SFAS No. 146 also requires that the liability be measured and recorded at fair value. Accordingly, the adoption of this standard may affect the timing of recognizing future restructuring costs as well as the amounts recognized. We will adopt the provisions of SFAS No. 146, for restructuring activities initiated after December 31, 2002.

3. Acquisitions, Investments and Divestitures

     On May 16, 2002, the Company and Quintiles Transnational Corporation formed a joint venture, Verispan, L.L.C. (“Verispan”). Verispan is a provider of patient-level data delivered in near real time as well as a supplier of other healthcare information. We have an approximate 46% equity interest in the joint venture. Contributions of $12.1 million to the joint venture consisted of $7.7 million in net assets from a Pharmaceutical Solutions segment business and $4.4 million in cash, and are subject to adjustment. We have also committed to provide additional aggregate cash contributions of $9.4 million and to purchase a total of $15.0 million in services from the joint venture through 2007. No gain or loss was recognized as a result of this transaction.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     On July 5, 2002, we completed our purchase of 98.1% of the outstanding stock of A.L.I. Technologies Inc. (“A.L.I.”), of Vancouver, British Columbia, Canada, by means of a cash tender offer. The purchase price of approximately $350 million (representing the cash tender offer less cash and equivalents purchased) was initially financed through excess cash and short-term debt. We are presently reviewing the valuation of the net assets acquired and we expect a substantial portion of the purchase price to be allocated to goodwill. In addition, we are currently in the process of acquiring the remaining 1.9% of outstanding shares of A.L.I. A.L.I. provides medical imaging solutions which are designed to streamline access to diagnostic information, automate clinical workflow and eliminate the need for film.

     During the quarter ended June 30, 2001, we sold two businesses from our Information Solutions segment. We recognized a net pre-tax loss of $18.4 million and an after-tax gain of the same amount. For accounting purposes, the net assets of one of these businesses were written down in 2001 in connection with the restructuring of a former business segment. The tax benefit could not be recognized until the first quarter of 2002, when the sale of the business was completed.

4. Special Charges (Credit)

     We incurred the following special charges (credit):

     Securities litigation costs: During the quarters ended June 30, 2002 and 2001, we incurred expenses of $0.1 million and $0.6 million, net of estimated insurance recoveries, in connection with the securities litigation arising out of the 1999 restatement of our historical consolidated financial statements (See Financial Note 12). The restatement was the result of improper accounting practices at HBO & Company (“HBOC”), which we acquired in a January 1999 pooling of interests transaction.

     Loss on investments, net: During the quarters ended June 30, 2002 and 2001, we recorded other-than-temporary impairment losses of $2.6 million and $2.3 million on equity and venture capital investments as a result of declines in the market values of these investments.

     Other: For the quarter ended June 30, 2002, other charges of $5.1 million represent severance costs for workforce reductions in our Pharmaceutical Solutions, Medical-Surgical Solutions and Corporate segments. For the quarter ended June 30, 2001, other charges of $3.2 million pertain to the write-off of purchased software in our Information Solutions segment.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     To reflect the items discussed above, these charges were recorded within the condensed consolidated statements of operations, as follows:

     Special charges by business segment are disclosed in Financial Note 13.

5. Restructuring and Related Asset Impairments

     We recorded net charges for restructuring activities of $3.5 million and related asset impairments of $1.0 million during the quarter ended June 30, 2002. Of these amounts, $2.5 million pertains to the announced closure of a Pharmaceutical Solutions segment distribution center and includes severance, exit costs and asset impairments. Approximately 65 employees were given termination notices as a result of this restructuring activity. Restructuring charges for the first quarter of 2003 also includes $2.0 million in additional facility closure costs, reflecting a change in estimated costs associated with a Pharmaceutical Solutions segment’s prior year restructuring activity.

     During the quarter ended June 30, 2001, we recorded a net reversal of prior years’ restructuring expenses of $0.9 million, primarily reflecting a change in estimated costs to complete those activities.

     In connection with 2003 and 2002 restructuring activities, approximately 985 employees, mainly in distribution, delivery and associated back-office functions, were given termination notices, and 30 distribution centers were to be closed and 8 were to be opened. As of June 30, 2002, 314 employees had been terminated, and 15 distribution centers were closed and 5 were opened. A large portion of these activities pertain to our Medical-Surgical segment; and we are currently re-evaluating our plans to restructure this segment’s distribution center network. The revised plan, which may require adjustments to previously recorded restructuring charges, should be completed in the second quarter of 2003 and fully implemented by early next fiscal year.

     The following table summarizes the activity related to restructuring liabilities for the quarter ending June 30, 2002:

     Accrued restructuring liabilities are included in other liabilities in the accompanying condensed consolidated balance sheets. The remaining balances at June 30, 2002 for the Pharmaceutical Solutions and Medical-Surgical Solutions segments relate primarily to the consolidation of certain distribution centers and includes severance, costs for preparing facilities for disposal, lease costs and property taxes required subsequent to termination of operations. Restructuring liabilities for the Information Solutions segment primarily represent accrued severance and contract liabilities. Corporate accrued severance primarily pertains to retirement costs. With the exception of the retirement costs, which are anticipated to be paid in 2005, substantially all other accrued restructuring amounts are anticipated to be paid by the end of 2003.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

     In addition to the above restructuring activities, we are still managing a 2001/2000 restructuring plan associated with customer settlements for our 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, were reduced by $1.7 million and $0.1 million in cash and non-cash settlements during the first quarter of 2003 to $131.6 million at June 30, 2002 from $133.4 million at March 31, 2002. Total cash and non-cash settlements of $31.9 million and $71.7 million have been incurred since the inception of the restructuring plan. While the timing of the final resolution of these settlements is uncertain, we believe that additional allowances, if any, will not have a material adverse effect on our financial position, results of operations or cash flows.

6. Goodwill and Other Intangible Assets

     Changes in the carrying amount of goodwill for the quarter ended June 30, 2002, are as follows:

     Information regarding other intangible assets is as follows:

     Amortization expense of other intangible assets was $3.9 million and $3.5 million for the quarters ended June 30, 2002 and 2001. As of June 30, 2002, estimated future annual amortization expense of other intangible assets is $15.4 million, $15.3 million, $15.5 million, $10.0 million and $9.9 million in the respective years 2003 through 2007.

7. Short-Term Borrowings and Hedging Activities

     We renewed our committed revolving receivables sale facility aggregating $850 million on June 14, 2002 under substantially similar terms to those previously in place.

     In order to hedge a portion of our fixed interest rate debt with variable interest rates, in April 2002, we entered into two interest rate swap agreements. The first agreement exchanges a fixed interest rate of 8.91% per annum to LIBOR plus 4.155%, on a notional amount of $100 million and matures in February 2005. The second agreement exchanges a fixed interest rate of 6.30% per annum to LIBOR plus 1.575%, on a notional amount of $150 million and matures in March 2005. These agreements are designated as fair value hedges and are intended to reduce our effective interest rate.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

8. Convertible Preferred Securities

     In February 1997, our wholly-owned subsidiary trust issued 4 million shares of preferred securities to the public and 123,720 common securities to us, which are convertible at the holder’s option into McKesson Corporation common stock. The proceeds of such issuances were invested by the trust in $206,186,000 aggregate principal amount of our 5% Convertible Junior Subordinated Debentures due 2027 (the “Debentures”). The Debentures represent the sole assets of the trust. The Debentures mature on June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are redeemable by us at 102.5% of the principal amount.

     Holders of the 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 McKesson Corporation common stock, subject to adjustment in certain circumstances. The preferred securities will be redeemed upon repayment of the Debentures and are callable by us at 102.5% of the liquidation amount.

     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.

     The Debentures and related trust investment in the Debentures have been eliminated in consolidation and the preferred securities reflected as outstanding in the accompanying consolidated financial statements.

9. Stockholders’ Equity

     On July 31, 2002, our stockholders approved an amendment to the Company’s Restated Certificate of Incorporation to increase authorized common stock from 400.0 million to 800.0 million shares. Also on that date, our stockholders approved an increase in common stock available for issuance under the Employee Stock Purchase Plan from 6.1 million to 11.1 million shares, and our Board of Directors approved an increase in common stock available for issuance in the form of nonqualified stock options under the broad-based 1999 Stock Option Plan and Restricted Stock Plan from 32.7 million (of which approximately 3 million remained available for issuance) to 45.2 million shares.

10. Comprehensive Income

     Comprehensive income is as follows:

11. 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 similar to basic earnings per share 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.

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

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

12. Litigation

     In our annual report on Form 10-K for the year ended March 31, 2002, we reported on numerous legal proceedings arising out of our announcement on April 28, 1999 regarding accounting improprieties at HBOC, now known as McKesson Information Solutions, Inc. Since that report:

     By order dated June 12, 2002, the Honorable Ronald M. Whyte of the Northern District of California granted McKesson’s request for the entry of final judgment in McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc. et al., (N.D. Cal. No. C01-20021 RMW). McKesson has appealed the District Court’s dismissal of this action to the United States Court of Appeals for the Ninth Circuit and its opening brief on that appeal is currently due on August 15, 2002.

     On June 3, 2002, Judge Whyte consolidated the previously reported Chang v. McKesson HBOC, Inc. et al., (N.D. Cal. No. C-00-20030 RMW), with the previously reported Adams v. McKesson Information Solutions, Inc., (N.D. Cal. No. C-02-0685 RMW).

     On June 19, 2002, the Honorable Donald S. Mitchell of the California Superior Court in San Francisco issued orders denying McKesson’s motions to strike, sustaining in part and denying in part McKesson’s and HBOC’s demurrers, and granting plaintiffs leave to amend all causes of action in the previously reported actions The State of Oregon, By and Through the Oregon Public Employees Retirement Board v. McKesson HBOC, Inc. et al., (S.F. Supr. Ct. No. 307619), Minnesota State Board of Investment v. McKesson HBOC, Inc. et al., (S.F. Supr. Ct No. 311747), and Utah State Board of Investment v. McKesson HBOC, Inc. et al., (S.F. Supr. Ct. No. 311269). Plaintiffs filed an amended complaint on August 1, 2002.

     On May 8, 2002, an action was filed in Georgia State Court, Fulton County, under the caption James Gilbert v. McKesson Corp., et al., (Case No. 02VS032502C). The plaintiff asserts claims for common law fraud, fraudulent conveyance and conversion in connection with certain Company stock options held by the plaintiff at the time of the April 28, 1999 announcement. The Gilbert action names as defendants the Company, HBOC, Albert Bergonzi and Jay Gilbertson. The plaintiff seeks compensatory damages of approximately $2 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 on June 24, 2002. The Company and HBOC also filed motions to Stay and to Dismiss.

     The previously reported Adler v. McKesson HBOC, Inc. et al., (No. 99-C-7980-3), which was pending in a Georgia state court and involved claims for common law fraud and fraudulent conveyance brought against

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McKESSON CORPORATION

FINANCIAL NOTES (Continued)
(Unaudited)

McKesson and HBOC by a former HBOC shareholder, has been settled and was dismissed with prejudice on July 17, 2002, and that resolution had no material impact on the Company.

     McKesson does 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.

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 segment.

     Financial information relating to our segments is as follows:

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McKESSON CORPORATION

FINANCIAL REVIEW
(Unaudited)

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

Financial Overview

     As reported under U.S. generally accepted accounting principles (“U.S. GAAP”), net income increased 11% to $117.3 million in the first quarter of 2003 compared to the same period a year ago, and diluted earnings per share increased $0.03 to $0.39. Revenues increased 17% to $13.6 billion for the first quarter of 2003 as compared to the first quarter of 2002. U.S. GAAP financial results include pre-tax special charges of $12.3 million and $23.6 million for the quarters ended June 30, 2002 and 2001. After income taxes, these charges amounted to a loss of $8.0 million or $0.03 per diluted share, and a credit of $15.1 million or $0.05 per diluted share for the first quarter of 2003 and 2002.

     We provide pro forma financial data, which excludes special charges and credits, as an alternative for understanding our results. We believe such discussion is the most informative representation of recurring and non-recurring, non-transactional-related operating results. These measures are not in accordance with, or an alternative for, U.S. GAAP and may be different from pro forma measures used by other companies.

     Pro forma net income and net income per diluted share increased 39% and 35% to $125.3 million and $0.42 in the first quarter of 2003, compared to the same period a year ago. The increase was driven by revenue growth and operating margin expansion in our Pharmaceutical Solutions segment, as well as an increase in the operating profit of our Information Solutions segment.

     The following discussion regarding our financial results excludes special charges. Special charges are discussed in detail commencing on page 17, which includes a reconciliation of pro forma financial results to those reported under U.S. GAAP.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)
(Unaudited)

Results of Operations

     Revenues: