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<SEC-DOCUMENT>0000950149-01-500834.txt : 20010604
<SEC-HEADER>0000950149-01-500834.hdr.sgml : 20010604
ACCESSION NUMBER: 0000950149-01-500834
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20010331
FILED AS OF DATE: 20010601

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: MCKESSON HBOC INC
CENTRAL INDEX KEY: 0000927653
STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122]
IRS NUMBER: 943207296
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331

FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-13252
FILM NUMBER: 1652258

BUSINESS ADDRESS:
STREET 1: ONE POST ST
STREET 2: MCKESSON PLAZA
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94104
BUSINESS PHONE: 4159838300

MAIL ADDRESS:
STREET 1: ONE POST ST
CITY: SAN FRANCISCO
STATE: CA
ZIP: 94104

FORMER COMPANY:
FORMER CONFORMED NAME: MCKESSON CORP
DATE OF NAME CHANGE: 19950209

FORMER COMPANY:
FORMER CONFORMED NAME: SP VENTURES INC
DATE OF NAME CHANGE: 19940728
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>f72121e10-k.txt
<DESCRIPTION>10-K
<TEXT>

<PAGE> 1

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K
------------------------

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

FOR THE FISCAL YEAR ENDED MARCH 31, 2001

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

COMMISSION FILE NUMBER 1-13252
------------------------

MCKESSON HBOC, INC.
A DELAWARE CORPORATION

I.R.S. EMPLOYER IDENTIFICATION NUMBER 94-3207296

MCKESSON HBOC PLAZA,
ONE POST STREET,
SAN FRANCISCO, CA 94104
TELEPHONE -- AREA CODE (415) 983-8300

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<S> <C>
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE, INC.
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE, INC.
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
</TABLE>

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 [ ]

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. [X]

Aggregate market value of voting stock held by nonaffiliates of the
Registrant at April 30, 2001: $8,783,293,063

Number of shares of common stock outstanding at April 30, 2001: 284,801,980

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on July 25, 2001 are incorporated by reference into Part
III of this report.

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<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
PART I
1. Business.................................................... 1
2. Properties.................................................. 7
3. Legal Proceedings........................................... 7
4. Submission of Matters to a Vote of Security Holders......... 13
Executive Officers of the Registrant........................ 14

PART II
5. Market for the Registrant's Common Stock and Related 15
Stockholder Matters.........................................
6. Selected Financial Data..................................... 15
7. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations...................................
7A. Quantitative and Qualitative Disclosures About Market 15
Risk........................................................
8. Financial Statements and Supplementary Data................. 15
9. Changes in and Disagreements with Accountants on Accounting 15
and Financial Disclosure....................................

PART III
10. Directors and Executive Officers of the Registrant.......... 16
11. Executive Compensation...................................... 16
12. Security Ownership of Certain Beneficial Owners and 16
Management..................................................
13. Certain Relationships and Related Transactions.............. 16

PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 16
8-K.........................................................
Signatures.................................................. 18
</TABLE>

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<PAGE> 3

PART I

ITEM 1. BUSINESS

GENERAL

McKesson HBOC, Inc. ("McKessonHBOC," the "Company" or the "Registrant"),
the world's largest health care service and technology company and a Fortune 35
corporation, delivers unique supply and information management solutions that
reduce costs and improve quality for its health care customers.

BUSINESS SEGMENTS

The Company is organized under two operating segments: Health Care Supply
Management and Health Care Information Technology. Within the United States and
Canada, the Health Care Supply Management segment is a leading wholesale
distributor of ethical and proprietary drugs, medical-surgical supplies and
health and beauty care products principally to chain and independent drug
stores, hospitals, alternate care sites, food stores and mass merchandisers. The
Health Care Information Technology segment delivers enterprise-wide patient
care, clinical, financial, managed care, payor and strategic management software
solutions, as well as networking technologies, electronic commerce, information
outsourcing and other services to health care organizations throughout the
United States and certain foreign countries.

The Company generated annual sales of $42.0 billion, $36.7 billion, and
$30.0 billion in fiscal years 2001, 2000, and 1999, respectively; approximately
$41.1 billion, 98%, $35.7 billion, 97%, and $28.7 billion, 96%, respectively, in
the Health Care Supply Management segment and approximately $0.9 billion, 2%,
$1.0 billion, 3% and $1.3 billion, 4%, respectively, in the Health Care
Information Technology segment.

Financial information about the Company's business segments for each of the
three years in the period ended March 31, 2001 is included in Financial Note 17
to the consolidated financial statements, "Segments of Business," appearing on
pages F-60 to F-62 of this Annual Report on Form 10-K.

HEALTH CARE SUPPLY MANAGEMENT

Products and Markets

Through its Health Care Supply Management segment, McKessonHBOC is a
leading distributor of ethical and proprietary drugs, medical-surgical supplies
and health and beauty care products and provider of services to the health care
industry in North America. The Company's Health Care Supply Management segment
consists of the Pharmaceutical Group, the Medical Group, the Automation Group,
the Medical Management Group, the Pharmaceutical Partners Group, Zee Medical and
MedManagement (collectively, the "Supply Management Business").

The Pharmaceutical Group supplies pharmaceuticals and health care related
products to three primary customer segments: retail chains (pharmacies, food
stores, and mass merchandisers), retail independent pharmacies and institutional
providers (including hospitals, alternate-site providers, and integrated health
networks) in all 50 states. These three customer categories represented
approximately 42.4%, 24.5%, and 33.1%, respectively, of the Pharmaceutical
Distribution Group's revenues in fiscal 2001. Operating under the trade names
EconoMost(R) and EconoLink(R) and a number of related service marks, the Company
promotes electronic order entry systems and a wide range of computerized
merchandising and asset management services for pharmaceutical retailers and
health care institutions. The Company has developed advanced marketing programs
and information services for retail pharmacies. These initiatives include the
Valu-Rite(R), Valu-Rite/CareMax(R) and Health Mart(R) retail networks, the
OmniLink(R) centralized pharmacy technology platform, which offers retail
network members connectivity with managed care organizations while promoting
compliance with managed care plans, and .com pharmacy solutions(SM), a service
initiative that allows independent pharmacies to set up their own websites for
selling OTC products and prescription refills to their customers. The Company's
nationwide network of distribution centers utilizes the Acumax(R) Plus warehouse
management system which provides real-time inventory statistics and tracks
products from the receiving dock to shipping through scanned bar code
information and radio frequency signals with accuracy levels above 99%

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to help ensure that the right product arrives at the right time and place for
both the Company's customers and their patients. The Company believes that its
financial strength, purchasing leverage, affiliation networks, nationwide
network of distribution centers, and advanced logistics and information
technologies provide competitive advantages to its pharmaceutical distribution
operations.

The Medical Group offers a full range of medical-surgical supplies,
equipment, logistics and related services across the continuum of health care
providers: hospitals, physicians' offices, long-term care, and homecare. The
Medical Group includes the operations of McKesson General Medical Corporation
("MGM"), RedLine Extended Care, Hawk Medical Supply and MedPath. The Medical
Group is the nation's third largest distributor of medical-surgical supplies to
hospitals (acute care) and a leading supplier of medical-surgical supplies to
the full-range of alternate-site health care facilities, including physicians
and clinics (primary care), long-term care and homecare sites. The Medical
Group's Supply Management On-Line provides an advanced way of ordering
medical-surgical products over the Internet and its Optipak program allows
physicians to customize ordering of supplies according to individual surgical
procedure preferences.

The Automation Group manufactures and markets automated pharmacy systems
and services to hospitals and retail pharmacies through its McKesson Automated
Healthcare ("MAH") and McKesson Automated Prescription Systems ("APS") units.
Key products of MAH include the ROBOT-Rx(TM) system, a robotic pharmacy
dispensing and utilization tracking system that enables hospitals to lower
pharmacy costs while significantly improving the accuracy of pharmaceutical
dispensing, AcuDose-Rx(TM) unit-based cabinets which automate the storage,
dispensing and tracking of commonly used drugs in patient areas, AcuScan-Rx(TM)
which records, automates, and streamlines drug administration and medication
information requirements through bar code scanning at the patient's bedside and
SupplyScan(SM), a point-of-use supply management system. APS manufactures a wide
range of pharmaceutical dispensing and productivity products including Baker
Cells(TM) and Baker Cassettes(TM), modular units that provide pharmacists with
quick and accurate counting capabilities combined with efficient space
management; Autoscript(TM), a robotic pharmacy dispensing system that enables
retail pharmacies to lower pharmacy costs through high volume dispensing while
improving accuracy through the use of bar code technology; and Pharmacy
2000(TM), an interactive workstation system which combines software and
automation to improve productivity throughout the pharmacy prescription sales
process.

The Medical Management Group brings together a comprehensive platform of
medical management services and tools to help payors and providers better manage
the cost and outcomes of medical care. The Medical Management Group delivers
complete solutions through five Care Enhance(SM) product and service families:
Care Enhance(SM) Services (telephonic nurse advice and disease management), Care
Enhance(SM) Clinical Management Software (disease, utilization and case
management software), Care Enhance(SM) Clinical Criteria (InterQual(R) clinical
appropriateness, level-of-care and clinically specific decision support
criteria), Care Enhance(SM) Resource Management Software (provider profiling,
analytic and HEDIS reporting software), and Care Enhance(SM) Access Center
Products (triage and referral management software).

The Pharmaceutical Partners Group combines the Company's pharmaceutical and
biotechnology services in a single group that is focused on helping
manufacturers meet their marketing goals. The Pharmaceutical Partners Group
provides sales, marketing and other services to pharmaceutical manufacturers and
biotechnology customers including distribution management and reimbursement
services, services in support of clinical trials and biomedical research, direct
mail and fulfillment services, decision support and data analysis, business
analytics, and integrated contract sales and marketing support services.

Zee Medical, Inc. ("Zee Medical") is the nation's leading provider of
first-aid and safety products, training and services. Zee Medical distributes
first-aid products and safety supplies and offers safety programs and materials
to assist industrial and commercial customers reduce their exposure to
escalating health care costs associated with on-the-job injuries and illnesses.

McKesson MedManagement, L.L.C. ("MedManagement") is a leading pharmacy
management, purchasing, consulting and information services company that
combines clinical expertise, financial management capabilities, operational
tools and technologies and experience to assist health care organizations
2
<PAGE> 5

optimize care and pharmaceutical resources. MedManagement provides customized
solutions that allow its customer to improve their pharmaceutical distribution,
automation and information technology capabilities and measure quality
improvement through proven clinical and operational metrics.

International operations of the Pharmaceutical Group business include Medis
Health and Pharmaceutical Services, Inc. ("Medis"), a wholly-owned subsidiary
and the largest pharmaceutical distributor in Canada; and the Company's 22%
equity interest in Nadro, S.A. de C.V., a leading pharmaceutical distributor in
Mexico.

Intellectual Property

The principal trademarks and service marks of the Health Care Supply
Management segment include: ECONOMOST(R), ECONOLINK(R), VALU-RITE(R),
Valu-Rite/CareMax(R), OmniLink(R), Health Mart(R), ASK-A-NURSE(R),
Credentialer(R), Episode Profiler(R), InterQual(R), America's Source for Health
Care Answers(R), coSource(R), ROBOT-Rx(TM), AcuDose-Rx(TM), AcuScan-Rx(TM), Pak
Plus-Rx(TM), SelfPace(TM), Baker Cells(TM), Baker Cassettes(TM), Baker
Universal(TM), Autoscript(TM), Pharmacy 2000(TM), CRMS(TM), Patterns
Profiler(TM), Care Enhance(SM), Closed Loop Distribution(SM), .com Pharmacy
Solutions(SM) and SupplyScan(SM). The Company also owns other registered and
unregistered trademarks and service marks and similar rights used by the Health
Care Supply Management segment. All of the principal marks are registered in the
United States or registration has been applied for with respect to such marks.
The United States federal registrations of these trademarks and service marks
have ten or twenty-year terms, depending on date of registration. All are
subject to unlimited renewals. The Company believes this business has taken all
necessary steps to preserve the registration and duration of its trademarks and
service marks, although no assurance can be given that it will be able to
successfully enforce or protect its rights thereunder in the event that they are
subject to third-party infringement claims. The Company does not consider any
particular patent, license, franchise or concession to be material to the
business of the Health Care Supply Management segment.

Competition

In every area of operations, the Company's distribution businesses 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 from manufacturers engaged in direct distribution.
The Health Care Supply Management segment faces competition from various other
service providers and from pharmaceutical and other health care manufacturers
(as well as other potential customers of the Health Care Supply Management
segment) which may from time to time decide to develop, for their own internal
needs, supply management capabilities which are provided by the Health Care
Supply Management segment and other competing service providers. Price, quality
of service, and, in some cases, convenience to the customer are generally the
principal competitive elements in the Health Care Supply Management segment.

HEALTH CARE INFORMATION TECHNOLOGY

Products and Markets

The Company's Health Care Information Technology segment provides patient
care, clinical, financial, supply chain, managed care and strategic management
software solutions for providers and payors in the health care industry. The
segment also provides a full complement of network communications technologies,
including wireless capabilities, as well as outsourcing services in which its
staff manages and operates data centers, information systems, organizations and
business offices of health care institutions of various sizes and structures. In
addition, the segment offers a wide range of care management and electronic
commerce services, including electronic medical claims and remittance advice
services, and statement processing.

The Health Care Information Technology segment markets its products and
services to integrated delivery networks, hospitals, physicians' offices, home
health providers, pharmacies, reference laboratories, managed care providers and
payors. The segment also sells its products and services internationally through
subsidiaries and/or distribution agreements in the United Kingdom, France, the
Netherlands, Canada, Ireland, Saudi Arabia, Kuwait, Australia, New Zealand and
Puerto Rico.

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<PAGE> 6

The Health Care Information Technology segment's product portfolio is
organized into eight components: acute-care or hospital information systems
("HIS"), infrastructure, clinical management, practice management, access
management, resource management, enterprise management and payor solutions.

Hospital Information Systems. HIS applications automate the operation of
individual departments and their respective functions within the in-patient
environment. The Company's HIS systems include applications for patient care,
laboratory, pharmacy, radiology and finance.

Infrastructure. Infrastructure components include local, wide area and
value-added networks, wireless technology, electronic data interchange (EDI)
capabilities, an interface manager and a data repository. Other infrastructure
applications include document imaging as well as an enterprise master person
index.

Clinical Management. The segment's point-of-care applications are designed
to allow physicians and other clinicians to document patient information,
establish and manage guidelines or standards of care, enter and manage orders,
and view all results and clinical information. The Clinical Management product
portfolio includes a clinical suite of products consisting of browser-based
software applications which may be purchased and used separately or collectively
to automate internal and external clinical communications including: multi-
laboratory order entry and result reporting, electronic prescribing within
formulary and medical guidelines, and advance task management and medical record
documentation including web-based dictation, transcription and attestation, most
of which are done via paper today.

Practice Management. Practice management applications provide a
comprehensive solution for medical groups and physician enterprises, whether
they are independent or part of an integrated health network. With business
office management as its cornerstone, the Company's practice management solution
also includes risk management and managed care capabilities, clinical systems
for managing patient care, and scheduling, as well as decision support, computer
telephony, data quality analysis and electronic commerce.

Access Management. Access management solutions include indexing
applications that organize the vast amounts of information collected about a
person throughout the enterprise, allowing patients to be tracked and
information about them to be accessed wherever they go for care as well as
scheduling systems that instantly register and schedule patients, and the
resources needed to serve them, anywhere in the enterprise.

Resource Management. Resource management applications including supply
chain and management decision-making help health care organizations better
manage people, facilities, supplies, services and equipment by integrating
materials management, accounts payable/general ledger, surgical services
management and staff scheduling functions.

Enterprise Management. Enterprise management applications focus on
providing managers with the clinical, financial and other information necessary
to contain costs while ensuring high-quality care, including utilization
management, accounts receivable management and managed care contracting and
member management applications.

Payor Solutions. Payor solutions support a range of health insurance and
managed care needs. Solutions include businesswide systems that automate all
financial and administrative operations, as well as clinically intelligent
solutions that monitor quality of care and support provider credentialing and
profiling, claims audit, care management, utilization and financial-based
analysis.

In addition to the segment's product offerings described above, the segment
also provides the following services:

Enterprise Services. Enterprise services include UNIX processing support,
remote system monitoring and single-point issue resolution. In addition, the
Health Care Information Technology segment's service path implementation
methodology provides a flexible suite of implementation services that can
include an enterprise project manager to assist in planning, installing and
supporting multiple Company products. Other service areas include education,
enterprise consulting, application-specific services, computer telephony and
care management services.

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Connect Technology Group. The Connect Technology Group provides network
installation and support, as well as a suite of information services that extend
local area networks outside of the hospital to include payors, vendors,
financial institutions and the Internet.

Outsourcing Services Group. The Health Care Information Technology segment
has been in the outsourcing business in the United States for more than 20 years
and also offers outsourcing services in the United Kingdom. Outsourcing services
include managing hospital data processing operations (traditionally known as
facilities management) as well as strategic management services in information
systems planning, receivables management, revenue cycle outsourcing, payroll
processing, business office administration and major system conversions.

Electronic Commerce Group. The Health Care Information Technology segment's
e-commerce capabilities in EDI service include claims processing, eligibility
verification and remittance advice as well as statement printing.

Research and Development

The Health Care Information Technology segment's product development effort
applies computer technology and installation methodologies to specific
information processing needs of hospitals. Management believes a substantial and
sustained commitment to such research and development ("R&D") is important to
the long-term success of the business.

Investment in software development includes both R&D expense as well as
capitalized software. The Health Care Information Technology segment expended
$152.5 million (16% of revenue) for R&D activities during fiscal 2001, compared
to $148.4 million (15% of revenue) and $145.8 million (11% of revenue) during
2000 and 1999, respectively. The Health Care Information Technology segment
capitalized 20%, 29% and 32% of its R&D expenditures in 2001, 2000 and 1999,
respectively.

Information regarding R&D is included in Financial Note 1 to the
consolidated financial statements, "Significant Accounting Policies," appearing
on pages F-35 to F-37 of this Annual Report on Form 10-K.

Intellectual Property

The substantial majority of technical concepts and codes embodied in the
Health Care Information Technology segment's computer programs and program
documentation are not protected by patents or copyrights but constitute trade
secrets that are proprietary to the Company. The principal trademarks and
service marks of the Health Care Information Technology segment are: AMISYS(R),
HealthQuest(R), Paragon(R), Pathways 2000(R), TRENDSTAR(R), Horizon WP(TM),
Series 2000(TM), Star 2000(TM), Connect 2000(SM), PracticePoint(SM). The Company
also owns other registered and unregistered trademarks and service marks and
similar rights used by the Health Care Information Technology segment. 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. The Company believes this business has
taken all necessary steps to preserve the registration and duration of its
trademarks and service marks, although no assurance can be given that it will be
able to successfully enforce or protect its rights thereunder in the event that
they are subject to third-party infringement claims. The Company does not
consider any particular patent, license, franchise or concession to be material
to the business of the Health Care Information Technology segment.

Competition

The Company's Health Care Information Technology 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 health care industry. Competition varies in size from small to large
companies, in geographical coverage, and in scope and breadth of products and
services offered.

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RECENT ACQUISITIONS, INVESTMENTS AND DISPOSITIONS

McKessonHBOC has undertaken numerous strategic initiatives in recent years
to further focus the Company on its core health care businesses and enhance its
competitive position. These include the following significant acquisitions and
dispositions:

Acquisitions and Investments

- In July 2000, the Company acquired MediVation, Inc., a provider of an
automated web-based system for physicians to communicate with patients
online, for approximately $24 million in cash, $14 million in Company
common stock and the assumption of $6 million of employee stock
incentives.

- In April 2000, the Company and three other health care product
distributors announced an agreement to form the New Health Exchange
(subsequently renamed "Health Nexis"). Health Nexis is an Internet-based
company focused on information systems and other technology solutions to
streamline communication, processing and management of product and
contract data across the health care supply chain. The Company accounts
for its 34% interest in Health Nexis under the equity method of
accounting. In fiscal 2001, the Company invested $10.8 million in Health
Nexis.

- In November 1999, the Company acquired Abaton.com, a provider of
internet-based clinical applications for use by physician practices,
pharmacy benefit managers, benefit payors, laboratories and pharmacies,
for approximately $95 million in cash and the assumption of $8 million of
employee stock incentives.

- In January 1999, McKesson Corporation ("McKesson") completed the
acquisition of HBO & Company ("HBOC"), a leading health care information
technology company, by exchanging 177 million shares of McKesson common
stock for all of the issued and outstanding shares of common stock of
HBOC. Each share of HBOC common stock was exchanged for 0.37 of a share
of McKesson common stock (the "Exchange Ratio"). McKesson was renamed
McKesson HBOC, Inc. The transaction was structured as a tax-free
reorganization and was accounted for as a pooling of interests.

- In December 1998, the Company acquired Access Health, Inc. ("Access"), a
provider of clinically based care management programs and health care
information services, for the equivalent, after application of the
Exchange Ratio, of approximately 12.7 million shares of Company common
stock.

- In November 1998, the Company acquired RedLine HealthCare Corporation
("RedLine"), a distributor of medical supplies and services to the
extended-care industry, including long-term care and home-care sites, for
approximately $233 million in cash.

- In October 1998, the Company acquired IMNET Systems, Inc. ("IMNET"), a
provider of electronic information and document management solutions for
the health care industry, for the equivalent, after application of the
Exchange Ratio, of approximately 3.6 million shares of Company common
stock and 0.6 million Company stock options.

Disposition

- In February 2000, the Company disposed of its last non-health care
business, its wholly-owned subsidiary McKesson Water Products Company,
for approximately $1.1 billion in cash.

OTHER INFORMATION ABOUT THE BUSINESS

Customers -- The Company's recent strategy has been to build relationships
with large customers that are achieving rapid growth. A significant portion of
the Company's increase in sales has been to a limited number of these large
customers. During the fiscal year ended March 31, 2001, sales to the Company's
ten largest customers accounted for approximately 57% of the Company's revenues;
sales to the largest customer, Rite Aid Corporation, represented approximately
16% of the Company's revenues.

Environmental Legislation -- The Company sold its chemical distribution
operations in fiscal 1987 and retained responsibility for certain environmental
obligations. Agreements with the Environmental Protection

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Agency and certain states may require environmental assessments and cleanups at
several closed sites. These matters are described further in "Item 3. Legal
Proceedings" on pages 7 to 13 of this report. Other than any capital
expenditures which may be required in connection with those matters, the Company
does not anticipate making substantial capital expenditures for environmental
control facilities or to comply with environmental laws and regulations in the
future. The amount of capital expenditures expended by the Company for
environmental compliance was not material in fiscal 2001 and is not expected to
be material in the next fiscal year.

Employees -- At March 31, 2001, the Company employed approximately 23,000
persons.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

Information as to foreign operations is included in Financial Note 17 to
the consolidated financial statements "Segments of Business," appearing on pages
F-60 to F-62 of this Annual Report on Form 10-K.

ITEM 2. PROPERTIES

Because of the nature of the Company's principal businesses, plant,
warehousing, office and other facilities are operated in widely dispersed
locations. The warehouses are typically owned or leased on a long-term basis.
The Company considers its operating properties to be in satisfactory condition
and adequate to meet its needs for the next several years without making capital
expenditures materially higher than historical levels. Information as to
material lease commitments is included in Financial Note 12 to the consolidated
financial statements, "Lease Obligations," appearing on page F-50 of this Annual
Report on Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

I. Accounting Litigation

Since the Company's announcements in April, May and July of 1999 that the
Company had determined that certain software sales transactions in its
Information Technology Business unit, formerly HBOC, were improperly recorded as
revenue and reversed, as of April 30, 2001, eighty-five lawsuits have been filed
against the Company, certain of the Company's or HBOC's current or former
officers or directors, and other defendants including, Bear Stearns & Co., Inc.
("Bear Stearns"), and Arthur Andersen LLP ("Arthur Andersen").

A. Federal Actions

Sixty-five of these actions have been filed in Federal Court (the "Federal
Actions"). Of these, fifty-nine were filed in the U.S. District Court for the
Northern District of California, one in the Northern District of Illinois (which
has been voluntarily dismissed without prejudice), one in the Northern District
of Georgia (which has been transferred to the Northern District of California),
one in the Eastern District of Pennsylvania (which has been transferred to the
Northern District of California), two in the Western District of Louisiana
(which have been transferred to the Northern District of California) and one in
the District of Arizona (which has been transferred to the Northern District of
California).

On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District
of California issued an order consolidating fifty-three of these actions into
one action entitled In RE McKesson HBOC, Inc. Securities Litigation (Case No.
C-99-20743 RMW) (the "Consolidated Action"), and by order dated December 22,
1999, appointed the New York State Common Retirement Fund as lead plaintiff
("Lead Plaintiff") and approved Lead Plaintiffs' choice of counsel. Judge
Whyte's November 2, 1999 order also provided that related cases transferred to
the Northern District of California shall be consolidated with the Consolidated
Action. Judge Whyte's December 22 order also consolidated an individual action,
Jacobs v. McKesson HBOC, Inc. et al. (C-99-21192 RMW), with the Consolidated
Action. On September 21, 2000, the plaintiffs in Jacobs filed an individual
action in the Northern District of California entitled Jacobs v. HBO & Company
(Case No. C-00-20974 RMW), which is to be consolidated with the Consolidated
Action and which purports to

7
<PAGE> 10

state claims under Sections 11 and 12(2) of the Securities Act of 1933
("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934
("Exchange Act") and various state law causes of action. By order dated February
7, 2000, Judge Whyte coordinated a class action alleging ERISA claims, 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 under the caption
Cohen v. McCall et. al. (Case No. C-99-20916 RMW) with the Consolidated Action.

Lead Plaintiff filed an Amended and Consolidated Class Action Complaint
(the "ACCAC") on February 25, 2000. The ACCAC generally alleged that defendants
violated the federal securities laws in connection with the events leading to
the Company's announcements in April, May and July, 1999. On September 28, 2000,
Judge Whyte dismissed all of the ACCAC claims against McKesson under Section 11
of the Securities Act with prejudice, dismissed a claim under Section 14(a) of
the Exchange Act with leave to amend and declined to dismiss a claim against
McKesson under Section 10(b) of the Exchange Act.

On November 14, 2000, Lead Plaintiff filed its Second Amended and
Consolidated Class Action Complaint ("SAC"). As with its ACCAC, Lead Plaintiff's
SAC generally alleges that the defendants named therein violated the federal
securities laws in connection with the events leading to the Company's
announcements in April, May and July, 1999. The SAC names the Company, HBOC,
certain current or former officers or directors of the Company or HBOC, Arthur
Andersen and Bear Stearns as defendants. The SAC purports to state claims
against the Company under Sections 10(b) and 14(a) of the Exchange Act.

On January 18, 2001, the Company filed a motion to dismiss the claim under
Section 14(a) of the Exchange Act in its entirety, and the claim under Section
10(b) of the Exchange Act to the extent it is based on the statements or conduct
of the Company prior to the Merger. HBOC also filed its own motion to dismiss
the claim based on Section 14(a) of the Exchange Act insofar as that claim is
asserted on behalf of McKesson shareholders. Those motions were heard on March
23, 2001, and Judge Whyte has not yet issued an order.

On January 11, 2001, the Company filed an action in the U.S. District 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
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 alleges 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 seeks to
recover the "unjust enrichment" received by those HBOC shareholders who
exchanged more than 20,000 HBOC shares in the Merger. The Company does not
allege any wrongdoing by these shareholders. Lead Plaintiff's motion to dismiss
the Complaint and Counterclaim was heard on March 23, 2001, and Judge Whyte has
not yet issued an order.

Two other individual actions, Bea v. McKesson HBOC, Inc. et al. (Case No.
C-0020072 RMV), and Cater v. McKesson Corporation et al. (Case No. C-00-20327
RMW), have also been filed in the Northern District of California. By
stipulation, Bea has been consolidated with the Consolidated Action and Cater
has been stayed pending resolution of the Company's motion to dismiss the
Consolidated Complaint. One other individual action, 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 Company moved to transfer Baker to the
Northern District of California, together with a parallel state court action,
Baker v. McKesson HBOC, Inc. et al. (filed as Case No. 199018; Case No.
CV-00-0522 after removal), which had been removed to federal court. Both of the
Baker cases have been transferred to the Northern District of California where
they have been consolidated with the Consolidated Action. An additional action,
Rosenberg v. McCall et al. (Case No. 1:99-CV-1447 JEC) was filed in the Northern
District of Georgia and subsequently transferred to the Northern District of
California, but that action names only two former officers and does not name the
Company. Finally, on July 24, 2000, an action captioned Hess v. McKesson HBOC,
Inc. et al. was 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. On August 24, 2000, the Company removed the
Hess action to the United States

8
<PAGE> 11

District Court for the District of Arizona, and on March 28, 2001, the District
Court in Arizona granted the Company's motion to transfer the case to the
Northern District of California.

B. State Actions

Twenty 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
the defendants in connection with the events leading to the Company's need to
restate its financial statements.

Two of the State Actions are 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. The Company moved to dismiss both of these actions and
to stay the Mitchell action in favor of the earlier filed Ash and Cohen
derivative actions. Plaintiffs in Mitchell agreed to defer any action by the
court on the Company's motions pending resolution of the Company's dismissal
motions in Ash. On September 15, 2000, the Ash court dismissed all causes of
action with leave to replead certain of the dismissed claims, and on January 22,
2001, the Ash plaintiffs filed a Third Amended Complaint which is presently the
subject of the Company's motions to dismiss.

Five of the State Actions are class actions. Three of these were filed in
Delaware Chancery Court: Derdiger v. Tallman et al. (Case No. 17276), Carroll v.
McKesson HBOC, Inc. (Case No. 17454), and Kelly v. McKesson HBOC, Inc., et al.
(Case No. 17282 NC). Two additional actions were filed in Delaware Superior
Court: Edmondson v. McKesson HBOC, Inc. (Case No. 99-951) and Caravetta v.
McKesson HBOC, Inc. (Case No. 00C-04-214 WTQ). The Carroll and Kelly actions
have been voluntarily dismissed without prejudice. The Company has removed
Edmondson to Federal Court in Delaware where plaintiffs have filed a motion to
remand, which is pending. The Company's motions to stay the Derdiger and
Caravetta actions in favor of proceedings in the federal Consolidated Action
have been granted.

Thirteen of the State Actions are individual actions which have been filed
in various state courts. Four 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), and
Minnesota State Board of Investment v. McKesson HBOC, Inc. et al. (Case No.
311747). In Yurick, the trial court sustained the Company's demurrer to the
original complaint without leave to amend with respect to all causes of action,
except the claims for common law fraud and negligent misrepresentation as to
which amendment was allowed. The Court also stayed Yurick pending the
commencement of discovery in the Consolidated Action, but allowed the filing of
an amended complaint. The Company's demurrer to that amended pleading was heard
on May 23, 2001 and no order has yet been issued. On May 23, 2001, the
California Court of Appeals affirmed the Yurick trial court's order dismissing
claims against certain of the individual defendants in the action without leave
to amend. 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 out-of-state pension funds. Plaintiffs in each of
those actions are in the process of filing amended complaints, and action on the
Company's motions seeking stays of those actions and demurrers to the prior
complaints has been suspended pending defendants' responses to those amended
pleadings.

9
<PAGE> 12

Court of Appeals has granted interlocutory review of an order issued in Adler
and the prior June, 2001, trial date has been vacated. Suffolk Partners Limited
Partnership et al. v. McKesson HBOC, Inc. et al. (Case No.00 VS 010469A) and
Curran Partners, L.P. v. McKesson HBOC, Inc. et al. (Case No. 00 VS-010801) are
related actions brought on behalf of individual shareholders and are based on
Georgia securities, racketeering and common law claims. The Company has moved to
stay both the Suffolk and Curran actions in favor of proceedings in the federal
Consolidated Action. Those motions have been heard by the Court and no order has
yet been issued.

Three individual state court cases have been filed outside of California.
Grant v. McKesson HBOC, Inc. (C.A. No. 99-03978) was filed on May 12, 1999 in
the Pennsylvania Court of Common Pleas, Chester County. The Grant case relates
to the Company's acquisition of Keystone/Ozone Pure Water Company ("Keystone").
Plaintiffs are former shareholders of Keystone who received McKesson shares in
exchange for their shares in Keystone pursuant to a merger agreement between
plaintiffs, McKesson and a McKesson subsidiary. On March 6, 2001, the Court
denied the Company's motion to stay and dismissed with prejudice all plaintiffs'
claims except for those based on breach of contract and negligent
misrepresentation. The Company answered the Grant complaint on March 26, 2001.
On September 28, 1999, an action was filed in Delaware Superior Court under the
caption Kelly v. McKesson HBOC, Inc. et al. (C.A. No. 99C-09-265 WCC).
Plaintiffs in Kelly are former shareholders of KWS&P/SFA, Inc., which merged
into the Company after the Merger. Plaintiffs assert claims under the federal
securities laws, as well as claims for breach of contract and breach of the duty
of good faith and fair dealing. The Company's motion to dismiss and plaintiffs'
motion for summary judgment remain pending before the Court. On October 19,
1999, an individual action was filed in Colorado District Court, Boulder County,
under the caption American Healthcare Fund II v. HBO & Company et al. (Case No.
00-CV-1762). Plaintiffs in American Healthcare are former shareholders of Access
Health, Inc., a company acquired by HBOC prior to the Merger, and assert claims
for breach of the merger contract and related claims. The Company has answered
an amended complaint and filed a counterclaim against the plaintiffs alleging
that, as HBOC shareholders exchanging HBOC shares for McKesson shares in the
Merger, plaintiffs were unjustly enriched. Discovery has commenced and trial is
currently set for September 10, 2001.

The previously reported investigations by the United States Attorney's
Office and the Securities and Exchange Commission are continuing. On May 15,
2000, the United States Attorney's Office 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 Securities and Exchange Commission 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 Securities Exchange
Commission without admitting or denying the substantive allegations of the
complaint. On January 10, 2001, the grand jury 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).

The Company 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 these 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 the
Company's financial position, results of operations and cash flows.

II. Other Litigation and Claims

10
<PAGE> 13

relating to governmental laws and regulations and other matters arising out of
the normal conduct of the Company's business. These include:

A. Antitrust Matters

The Company currently is a defendant in numerous civil antitrust actions
filed since 1993 in federal and state courts by retail pharmacies. The federal
cases have been coordinated for pretrial purposes in the United States District
Court in the Northern District of Illinois and are known as MDL 997. MDL 997
consists of a consolidated class action (the "Federal Class Action") as well as
approximately 109 additional actions brought by approximately 3,500 individual
retail, chain and supermarket pharmacies (the "Individual Actions"). There are
numerous other defendants in these actions including several pharmaceutical
manufacturers and several other wholesale distributors. These cases allege, in
essence, that the defendants have violated the Sherman Act by conspiring to fix
the prices of brand name pharmaceuticals sold to plaintiffs at artificially
high, and non-competitive levels, especially as compared with the prices charged
to mail order pharmacies, managed care organizations and other institutional
buyers. On January 19, 1999, the District Court entered its written opinion and
judgment granting defendants' motion for a judgment as a matter of law. On July
13, 1999, the Seventh Circuit affirmed the District Court's judgment as to the
dismissal of the claims against the wholesalers. The wholesalers' motion for
summary judgment in the Individual Actions has been granted. Plaintiffs have
appealed to the Seventh Circuit. Most of the individual cases brought by chain
stores have been settled.

State court antitrust cases against the Company are currently pending in
California and Mississippi. The state cases are based on essentially the same
facts alleged in the Federal Class Action and Individual Actions and assert
violations of state antitrust and/or unfair competition laws. The case in
Superior Court for the State of California, City and County of San Francisco is
referred to as Coordinated Special Proceeding, Pharmaceutical Cases I, II & III.
The case is trailing MDL 997. A case filed in Santa Clara County (Paradise
Drugs, et al. v. Abbott Laboratories, et al., Case No. CV793852) was coordinated
with the case pending in San Francisco. The case in Mississippi (Montgomery Drug
Co., et al. v. The Upjohn Co., et al.) is pending in the Chancery Court of
Prentiss County Mississippi. The Chancery Court has held that the case may not
be maintained as a class action.

In each of the cases, plaintiffs seek remedies in the form of injunctive
relief and unquantified monetary damages, attorneys' fees and costs. Plaintiffs
in the California cases also seek restitution. In addition, treble damages are
sought in the Federal Class Action, the Individual Actions and the California
case, and statutory penalties of $500 per violation are sought in the
Mississippi case. The Company has entered into a judgment sharing agreement with
certain pharmaceutical manufacturer defendants, which provides generally that
the Company (together with the other wholesale distributor defendants) will be
held harmless by such pharmaceutical manufacturer defendants and will be
indemnified against the costs of adverse judgments, if any, against the
wholesaler and manufacturers in these or similar actions, in excess of $1
million in the aggregate per wholesale distributor defendant.

B. FoxMeyer Litigation

In January 1997, the Company and twelve pharmaceutical manufacturers (the
"Manufacturer Defendants") were named as defendants in the matter of FoxMeyer
Health Corporation vs. McKesson, et al. (Case No. 97 00311) filed in the
District Court in Dallas County, Texas ("the Texas Action"). Plaintiff (the
parent corporation of FoxMeyer Drug Company and FoxMeyer Corporation,
collectively "FoxMeyer Corporation") has alleged that, among other things, the
Company (i) defrauded Plaintiff, (ii) competed unfairly and tortiously
interfered with FoxMeyer Corporation's business operations, and (iii) conspired
with the Manufacturer Defendants, all in order to destroy FoxMeyer Corporation's
business, restrain trade and monopolize the marketplace, and allow the Company
to purchase that business at a distressed price. Plaintiff seeks relief against
all defendants in the form of compensatory damages of at least $400 million,
punitive damages, attorneys' fees and costs. The Company answered the complaint,
denying the allegations and removed the case to federal bankruptcy court in
Dallas.

11
<PAGE> 14

In March 1997, the Company and the Manufacturer Defendants filed a
complaint in intervention against FoxMeyer Health (now known as Avatex
Corporation) in the action filed against Avatex by the FoxMeyer Unsecured
Creditors Committee in the United States Bankruptcy Court for the District of
Delaware. The complaint in intervention seeks declaratory relief and an order
enjoining Avatex from pursuing the Texas Action.

In November 1998, the Delaware court granted the Company's motion for
summary judgment as to the first three counts asserted in the Texas Action on
the ground of judicial estoppel. The Company filed a renewed motion for summary
judgment on the four remaining counts of Avatex's complaint in the Texas Action
which was denied without prejudice by the Delaware court on August 9, 1999. In
addition, the Company filed cross-claims against the Trustee and debtors seeking
the same relief as sought in the Company's complaint against Avatex. Based on
the order granting summary judgment as to the first three counts, the Texas
bankruptcy court dismissed those counts with prejudice and ordered the Texas
Action remanded to state court. On November 30, 1998, the Company and the other
Defendants filed a notice of appeal to the District Court from the remand ruling
as well as the August 1997 ruling denying defendants' motion to transfer the
Texas Action to Delaware. In addition, the Company has filed a counter-claim and
cross-claim against Avatex and Messrs. Estrin, Butler and Massman in the Texas
Action, asserting various claims of misrepresentation and breach of contract.
The District Court upheld the remand order and denied as moot the appeal from
the order denying transfer. A cross-appeal by Avatex from the order dismissing
the first three counts with prejudice failed, as the District Court affirmed the
Bankruptcy Court's dismissal by order dated March 28, 2001. The Company and
several of the other defendants appealed to the Court of Appeals the ruling
upholding the order denying transfer but subsequently moved to dismiss the
appeal with prejudice, which motion was granted and the appeal was dismissed on
October 4, 1999. As a result, the Texas Action is now pending in Texas state
court, and the parties presently are engaged in discovery on the merits of the
various claims asserted in the Texas Action.

C. Product Liability Litigation

The Company has been named as a defendant, or has received from customers
tenders of defense, in fifteen pending cases alleging injury due to the diet
drug combination of fenfluramine or dexfenfluramine and phentermine. All of the
cases are pending in the state courts of California, Nebraska and New Jersey.
The Company's tender of the cases to the manufacturers of the drugs has been
accepted and the manufacturer is paying for counsel and fully indemnifying the
Company for judgments or settlements arising from its distribution of the
manufacturer's products.

Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively the
"Subsidiaries") are two of the defendants in approximately ninety cases in which
plaintiffs claim that they were injured due to exposure, over many years, to the
latex proteins in gloves manufactured by numerous manufacturers and distributed
by a number of distributors, including the Subsidiaries. Efforts to resolve
tenders of defense to their suppliers are continuing and a tentative final
agreement has been reached with one major supplier. The Subsidiaries' insurers
are providing coverage for these cases, subject to the applicable deductibles.

There is one remaining state court class action in South Carolina filed
against MGM on behalf of all health care workers in that state who suffered
accidental needle sticks that exposed them to potentially contaminated bodily
fluids, arising from MGM's distribution of allegedly defective syringes. MGM's
suppliers of the syringes are also named defendants in this action. The tender
of all cases has been accepted by the two major suppliers. By this acceptance,
these suppliers are paying for separate distributors' counsel and have agreed to
fully indemnify the Company for any judgments in these cases arising from its
distribution of their products.

12
<PAGE> 15

which would be based upon a fraction of a percent of the Company's overall
revenues over the past ten years. Due to the pendency of earlier litigation
brought against the Foundation attacking the validity of the patents at issue,
the court has stayed the action until the conclusion of the earlier case. The
Company is assessing its potential exposure and evaluating the Foundations'
claim with the assistance of expert patent counsel, after which it will
determine an appropriate course of action.

D. Environmental Matters

Primarily as a result of the operation of its former chemical businesses,
which were divested in fiscal 1987, the Company is involved in various matters
pursuant to environmental laws and regulations:

The Company has received claims and demands from governmental agencies
relating to investigative and remedial action purportedly required to address
environmental conditions alleged to exist at five sites where the Company (or
entities acquired by the Company) formerly conducted operations; and the
Company, by administrative order or otherwise, has agreed to take certain
actions at those sites, including soil and groundwater remediation.

The current estimate (determined by the Company's environmental staff, in
consultation with outside environmental specialists and counsel) of the upper
limit of the Company's range of reasonably possible remediation costs for these
five sites is approximately $13 million, net of approximately $1.5 million which
third parties have agreed to pay in settlement or which the Company expects,
based either on agreements or nonrefundable contributions which are ongoing, to
be contributed by third parties. The $13 million is expected to be paid out
between April 2001 and March 2029 and is included in the Company's recorded
environmental liabilities at March 31, 2001.

In addition, the Company has been designated as a potentially responsible
party (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 the
Company's alleged disposal of hazardous substances at 21 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. The Company's estimated liability at those 21 PRP sites
is approximately $1.5 million. The aggregate settlements and costs paid by the
Company in Superfund matters to date has not been significant. The $1.5 million
is included in the Company's recorded environmental liabilities at March 31,
2001.

The potential costs to the Company related to environmental matters is
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 the
Company's liability in proportion to other PRPs; and the extent, if any, to
which such costs are recoverable from insurance or other parties.

Except as specifically stated above with respect to the litigation matters
summarized under "Accounting Litigation" (section I, above), management
believes, based on current knowledge and the advice of the Company's counsel,
that the outcome of the litigation and governmental proceedings discussed in
this Item 3 will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the three months ended March 31,
2001.

13
<PAGE> 16

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 (including McKesson).

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.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH REGISTRANT AND BUSINESS EXPERIENCE
---- --- ------------------------------------------------
<S> <C> <C>
Alan Seelenfreund.................... 64 Chairman of the Board since June 1999; Chairman of the
Board (1989 - January 1999) and Chief Executive Officer
(1989 - 1997). Service with the Company -- 26 years.
John H. Hammergren................... 42 President and Chief Executive Officer since April 1,
2001, Co-President and Co-Chief Executive Officer from
July 1999 to April 1, 2001 and a director since July
1999; Executive Vice President, President and Chief
Executive Officer of the Supply Management Business
(January - July 1999); Group President, McKesson Health
Systems (1997 - 1999) and Vice President of the Company
since 1996. Service with the Company -- 5 years.
William R. Graber.................... 58 Senior Vice President and Chief Financial Officer since
March 2000; Vice President and Chief Financial Officer,
The Mead Corporation (1993 - 1999). Service with the
Company -- 1 year, 3 months.
Paul C. Julian....................... 45 Senior Vice President since August 1999, and President
of Supply Management Business since March 2000; Group
President, McKesson General Medical (1997 - 2000);
Executive Vice President, McKesson Health Systems
(1996 - 1997); Group Vice President and Corporate
Officer, Owens & Minor (1994 - 1996). Service with the
Company -- 5 years.
Graham O. King....................... 61 Senior Vice President and President, Information
Technology Business since October 1999; Group President,
Outsourcing Services, HBOC (1998 - 1999); Chairman and
Chief Executive Officer, U.S. Servis, Inc.
(1994 - 1998). Service with the Company -- 2 years, 6
months.
Paul E. Kirincic..................... 50 Senior Vice President -- Human Resources since January
2001; Vice President, Human Resources, Consumer Health
Sector, Warner Lambert (1998 - 2001); Vice President,
Human Resources, Whirlpool Europe, Whirlpool Corporation
(1975 - 1998). Service with the Company 3 months.
Ivan D. Meyerson..................... 56 Corporate Secretary since April 1, 1999, and Senior Vice
President and General Counsel since January 1999; Vice
President and General Counsel (1987 - January 1999).
Service with the Company -- 23 years.
Carmine J. Villani................... 58 Senior Vice President and Chief Information Officer
since January 1999; Vice President and Chief Information
Officer (1997 - January 1999) and Vice President,
Information Management, McKesson Drug Company
(1994 - 1997). Service with the Company -- 9 years.
</TABLE>

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<PAGE> 17

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

(a) Market Information

The principal market on which the Company's common stock is traded is the
New York Stock Exchange. The Company's common stock is also traded on the
Pacific Exchange, Inc. High and low prices for the common stock by quarter are
included in Financial Note 19 to the consolidated financial statements,
"Quarterly Financial Information (Unaudited)," appearing on pages F-70 to F-72
of this Annual Report on Form 10-K.

(b) Holders

The number of record holders of the Company's common stock at March 31,
2001 was approximately 16,000.

Dividend information is included in Financial Note 19 to the consolidated
financial statements, "Quarterly Financial Information (Unaudited)," appearing
on pages F-70 to F-72 of this Annual Report on Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data is presented in the Five-Year Highlights on pages
F-2 to F-5 of this Annual Report on Form 10-K.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Management's discussion and analysis of the Company's financial condition
and results of operations is presented in the Financial Review on pages F-6 to
F-29 of this Annual Report on Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this item is included in the Financial Review on
page F-24 of this Annual Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and Supplementary Data appear on pages F-31 to F-72 of
this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

15
<PAGE> 18

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors of the Company is incorporated by
reference from the Company's 2001 Proxy Statement (the "Proxy Statement").
Certain information relating to Executive Officers of the Company appears on
page 14 of this Annual Report on Form 10-K. The information with respect to this
item required by Item 405 of Regulation S-K is incorporated herein by reference
from the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to this item is incorporated herein by reference
from the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to this item is incorporated herein by reference
from the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain transactions with management is
incorporated by reference from the Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

(a) Financial Statements, Financial Statement Schedule and Exhibits

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
(1) Consolidated Financial Statements and Independent Auditors'
Report: See "Index to Consolidated Financial Statements".... F-1
(2) Supplementary Consolidated Financial Statement
Schedule -- Valuation and Qualifying Accounts............... 19
Financial statements and schedules not included have been
omitted because of the absence of conditions under which
they are required or because the required information, where
material, is shown in the financial statements, financial
notes or supplementary financial information
(3) Exhibits:
Exhibits submitted with this Annual Report on Form 10-K as 20
filed with the SEC and those incorporated by reference to
other filings are listed on the Exhibit Index...............
</TABLE>

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the three months
ended March 31, 2001:

1. Form 8-K

Date of Report: January 11, 2001
Date Filed: January 11, 2001

Item 9. Regulation FD Disclosure

The Company announced it had filed an action against the New York
State Common Retirement Fund, Inc., individually, and as a
representative of a class of former HBO & Company ("HBOC")
shareholders who exchanged their HBOC shares for McKesson shares in
the 1999 acquisition of HBOC.

16
<PAGE> 19

2. Form 8-K

Date of Report: February 26, 2001
Date Filed: March 1, 2001

Item 5. Other Events

McKesson HBOC, Inc. (the "Company") announced that John H.
Hammergren, Co-President and Co-CEO of the Company, will become
President and CEO of the Company effective April 1, 2001. The Company
further announced the restructuring of its iMcKesson business unit.
David L. Mahoney, currently Co-CEO of the Company will leave the
Company and resign from its Board of Directors.

17
<PAGE> 20

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

MCKESSON HBOC, INC.

Dated: May 31, 2001 By /s/ WILLIAM R. GRABER
------------------------------------
William R. Graber
Senior Vice President and Chief
Financial Officer

PURSUANT ON BEHALF OF THE REGISTRANT AND TO THE REQUIREMENTS OF THE
SECURITIES ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED:

* *
- --------------------------------------------- ---------------------------------------------
John H. Hammergren M. Christine Jacobs,
President and Chief Executive Officer and Director
Director
(Principal Executive Officer)

* *
- --------------------------------------------- ---------------------------------------------
William R. Graber Martin M. Koffel,
Senior Vice President and Chief Financial Director
Officer
(Principal Financial Officer)

* *
- --------------------------------------------- ---------------------------------------------
Nigel A. Rees Gerald E. Mayo,
Vice President and Controller Director
(Principal Accounting Officer)

* *
- --------------------------------------------- ---------------------------------------------
Alfred C. Eckert III, James V. Napier,
Director Director

* *
- --------------------------------------------- ---------------------------------------------
Tully M. Friedman, David S. Pottruck,
Director Director

* *
- --------------------------------------------- ---------------------------------------------
Alton F. Irby III, Carl E. Reichardt,
Director Director

*
---------------------------------------------
Alan Seelenfreund,
Chairman of the Board

*
---------------------------------------------
Jane E. Shaw,
Director

Dated: May 31, 2001 /s/ IVAN D. MEYERSON
---------------------------------------------
Ivan D. Meyerson
*Attorney-in-Fact
</TABLE>

18
<PAGE> 21

SCHEDULE II

MCKESSON HBOC, INC.

SUPPLEMENTARY CONSOLIDATED FINANCIAL SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(IN MILLIONS)

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- ------------ ------------------------ ------------- ----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD(2)
----------- ------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
AMOUNTS DEDUCTED FROM ASSETS TO WHICH
THEY APPLY:
Year Ended March 31, 2001
Allowances for doubtful accounts...... $236.5 $239.6(3) $ 9.1 $(101.5) $383.7
Other allowances...................... 39.0 8.4 -- (10.8) 36.6
------ ------ ----- ------- ------
$275.5 $248.0 $ 9.1 $(112.3) $420.3
====== ====== ===== ======= ======
Year Ended March 31, 2000
Allowances for doubtful accounts...... $140.4 $216.8(4) $ -- $(120.7) $236.5
Other allowances...................... 40.8 0.5 -- (2.3) 39.0
------ ------ ----- ------- ------
$181.2 $217.3 $ -- $(123.0) $275.5
====== ====== ===== ======= ======
Year Ended March 31, 1999
Allowances for doubtful accounts...... $ 54.0 $ 87.2(5) $16.2 $ (17.0) $140.4
Other allowances...................... 29.8 11.1 -- (0.1) 40.8
------ ------ ----- ------- ------
$ 83.8 $ 98.3 $16.2 $ (17.1) $181.2
====== ====== ===== ======= ======
</TABLE>

- ---------------

<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
<S> <C> <C> <C> <C>
(1) Deductions:
Written off................................................. $108.7 $120.4 $ 17.1
Credited to other accounts.................................. 3.6 2.6 --
------ ------ ------
Total....................................................... $112.3 $123.0 $ 17.1
====== ====== ======
(2) Amounts shown as deductions from:
Current receivables......................................... $419.7 $274.9 $180.6
Other assets................................................ 0.6 0.6 0.6
------ ------ ------
Total....................................................... $420.3 $275.5 $181.2
====== ====== ======
</TABLE>

(3) Includes charges of $161.1 million for customer settlements (forgiveness of
accounts receivable, customer credits and refunds) resulting from software
and services issues associated with pre-July 1999 Health Care Information
Technology contracts.

(4) Includes charges of $68.5 million for a change in estimate of receivable
allowance requirements, $72.6 million for customer settlements (forgiveness
of accounts receivable, customer credits and refunds) associated with
discontinued product lines and $7.7 million for uncollectible unbilled
receivables primarily in the Health Care Information Technology segment.

(5) Includes charges of $70.0 million for Health Care Information segment bad
debts, disputed amounts and customer allowances.

19
<PAGE> 22

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of October 17, 1998,
by and among McKesson Corporation ("the Company"), McKesson
Merger Sub, Inc. ("Merger Sub") and HBO & Company ("HBOC")
(Exhibit 2.1(1)).
2.2 Amendment Agreement to Agreement and Plan of Merger, dated
as of November 9, 1998, by and among the Company, Merger Sub
and HBOC (Exhibit 2.2(1)).
2.3 Second Amendment Agreement to that certain Agreement and
Plan of Merger dated October 17, 1998, as amended by an
Amendment Agreement dated as of November 9, 1998 (Exhibit
2.1(2)).
3.1 Restated Certificate of Incorporation of the Company as
filed with the office of the Delaware Secretary of State on
July 30, 1998 (Exhibit 3.2(3)).
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of Registrant as filed with the office of the
Delaware Secretary of State on January 12, 1999 (Exhibit
4.3(4)).
3.3 Amended and Restated By-Laws of the Company dated as of
March 31, 2001.
4.1 Rights Agreement dated as of October 21, 1994 between the
Company and First Chicago Trust Company of New York, as
Rights Agent (the "Rights Agreement") (Exhibit 4.1(6)).
4.2 Amendment No. 1 to the Rights Agreement dated as of October
19, 1998 (Exhibit 99.1(7)).
4.3 Indenture, dated as of March 11, 1997, by and between the
Company, as Issuer, and The First National Bank of Chicago,
as Trustee (Exhibit 4.4(8)).
4.4 Amended and Restated Declaration of Trust of McKesson
Financing Trust, dated as of February 20, 1997, among the
Company, as Sponsor, The First National Bank of Chicago, as
Institutional Trustee, First Chicago Delaware, Inc., as
Delaware Trustee and William A. Armstrong, Ivan D. Meyerson
and Nancy A. Miller, as Regular Trustees (Exhibit 4.2(9)).
4.5 McKesson Corporation Preferred Securities Guarantee
Agreement, dated as of February 20, 1997, between the
Company, as Guarantor, and The First National Bank of
Chicago, as Preferred Guarantor (Exhibit 4.7(10)).
4.6 Registrant agrees to furnish to the Commission upon request
a copy of each instrument defining the rights of security
holders with respect to issues of long-term debt of the
Registrant, the authorized principal amount of which does
not exceed 10% of the total assets of the Registrant.
10.1 Employment Agreement, dated as of August 1, 1999, by and
between the Company and the Chairman of the Board(16).
10.2 Amended and Restated Employment Agreement, dated as of June
21, 1999, by and between the Company and its President and
Chief Executive Officer(16).
10.3 Form of Termination Agreement by and between the Company and
certain designated Corporate Officers (Exhibit 10.23(11)).
10.4 McKesson HBOC, Inc. 1994 Stock Option and Restricted Stock
Plan, as amended through January 27, 1999 (Exhibit
10.5(14)).
10.5 McKesson HBOC, Inc. 1997 Non-Employee Directors' Equity
Compensation and Deferral Plan, as amended through January
27, 1999 (Exhibit 10.6(14)).
10.6 McKesson HBOC, Inc. Supplemental PSIP (Exhibit 10.7(14)).
10.7 McKesson HBOC, Inc. Deferred Compensation Administration
Plan, amended as of January 27, 1999 (Exhibit 10.8(14)).
10.8 McKesson HBOC, Inc. Deferred Compensation Administration
Plan II, as amended effective January 27, 1999 (Exhibit
10.9(14)).
10.9 McKesson HBOC, Inc. 1994 Option Gain Deferral Plan, as
amended effective January 27, 1999 (Exhibit 10.10(14)).
10.10 McKesson HBOC, Inc. Directors' Deferred Compensation Plan,
as amended effective January 27, 1999 (Exhibit 10.11(14)).
10.11 McKesson HBOC, Inc. 1985 Executives' Elective Deferred
Compensation Plan, amended as of January 27, 1999 (Exhibit
10.12(14)).
</TABLE>

20
<PAGE> 23

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.12 McKesson HBOC, Inc. Management Deferred Compensation Plan,
amended as of January 27, 1999 (Exhibit 10.13(14)).
10.13 McKesson HBOC, Inc. 1984 Executive Benefit Retirement Plan,
as amended through January 27, 1999 (Exhibit 10.14(14)).
10.14 McKesson HBOC, Inc. 1988 Executive Survivor Benefits Plan,
as amended effective January 27, 1999 (Exhibit 10.15(14)).
10.15 McKesson HBOC, Inc. Executive Medical Plan Summary (Exhibit
10.16(14)).
10.16 McKesson HBOC, Inc. Severance Policy for Executive
Employees, as amended through January 27, 1999 (Exhibit
10.17(14)).
10.17 McKesson HBOC, Inc. Management Incentive Plan, as amended
through January 27, 1999 (Exhibit 10.18(14)).
10.18 McKesson HBOC, Inc. Long-Term Incentive Plan, as amended
through January 27, 1999 (Exhibit 10.19(14)).
10.19 McKesson HBOC, Inc. Stock Purchase Plan, as amended through
January 27, 1999 (Exhibit 10.20(14)).
10.20 McKesson HBOC, Inc. 1999 Executive Stock Purchase Plan
(Exhibit 99.1(12)).
10.21 Stock Purchase Agreement, dated as of January 10, 2000, by
and among the Company, Danone International Brands, Inc. and
Groupe Danone SA (Exhibit 99.1(15)).
10.22 Amendment No. 1 to January 10, 2000 Stock Purchase
Agreement, dated as of February 28, 2000 (Exhibit
10.23(16)).
10.23 First Amendment to October 22, 1999 Credit Agreement dated
as of October 10, 2000.
10.24 HBO & Company 1993 Stock Option Plan for Nonemployee
Directors (Exhibit 4(13)).
10.25 Amendment and Restated Employment Agreement, dated as of
June 21, 1999, by and between the Company and its former
Co-President and Co-Chief Executive Officer (Exhibit
10.26(16)).
10.26 Third Amendment to June 25, 1999 Receivables Purchase
Agreement dated as of June 16, 2000.
10.27 Statement of Terms and Conditions Applicable to Certain
Stock Options Granted on January 27, 1999 (Exhibit
10.28(14)).
10.28 Credit Agreement dated as of November 10, 1998 among the
Company, Medis Health and Pharmaceutical Services Inc., Bank
of America National Trust and Savings Association, as Agent,
Bank of America Canada, as Canadian Administrative Agent,
The Chase Manhattan Bank, as documentation agent, First
Union National Bank, as documentation agent, The First
National Bank of Chicago, as documentation agent, and the
other financial institutions party thereto (Exhibit
10.29(14)).
10.29 Stock Option Agreement, dated October 17, 1998, between
McKesson and HBOC (Exhibit 99.1(1)).
10.30 Stock Option Agreement, dated October 17, 1998, between HBOC
and McKesson (Exhibit 99.2(1)).
10.31 Credit Agreement dated as of October 22, 1999 among the
Company and the several financial institutions from time to
time party to the Agreement ("Banks"), The Chase Manhattan
Bank, First Union National Bank, Morgan Guaranty Trust
Company as documentation agents for Banks and Bank of
America N.A. as administrative agent for Banks (Exhibit
10.32(16)).
10.32 First Amendment to November 10, 1998 Credit Agreement, dated
as of June 28, 1999 (Exhibit 10.33(16)).
10.33 Second Amendment to November 10, 1998 Credit Agreement,
dated as of December 1, 1999 (Exhibit 10.34(16)).
10.34 Receivables Purchase Agreement dated as of June 25, 1999
among the Company, as servicer, CGSF Funding Corporation, as
seller, Preferred Receivables Funding Corporation, Falcon
Asset Securitization Corporation and Blue Ridge Asset
Funding Corporation, as conduits, The First National Bank of
Chicago and Wachovia Bank, N.A., as managing agents, the
several financial institutions from time to time party to
the Agreement, and The First National Bank of Chicago, as
collateral agent (Exhibit 10.35(16)).
</TABLE>

21
<PAGE> 24

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.35 First Amendment to June 25, 1999 Receivables Purchase
Agreement, dated as of September 29, 1999 (Exhibit
10.36(16)).
10.36 Second Amendment to June 25, 1999 Receivables Purchase
Agreement, dated as of December 6, 1999 (Exhibit 10.37(16)).
10.37 Statement of Terms and Conditions Applicable to certain
Stock Options granted on August 16, 1999 (Exhibit
10.38(16)).
10.38 Statement of Terms and Conditions Applicable to certain
Restricted Stock grants on January 31, 2000 (Exhibit
10.39(16)).
10.39 Syndicated Revolving Promissory Note dated as of May 28,
1999 among the Company, Bank of America National Trust and
Savings Association, as Agent, and the other noteholders'
signatures to the Note, Banc of America LLC as Sole Lead
Arranger (Exhibit 10.40(16)).
10.40 Employment Agreement, dated as of June 21, 1999 by and
between the Company and its Senior Vice President,
President, Information Technology Business (Exhibit
10.41(16)).
10.41 Employment Agreement, dated as of August 1, 1999 by and
between the Company and its Senior Vice President,
President, Supply Management Business (Exhibit 10.42(16)).
21 List of Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP.
24 Power of Attorney.
</TABLE>

- ---------------
Footnotes to Exhibit Index:

(1) Incorporated by reference to designated exhibit to Amendment No. 1 to
McKesson's Form S-4 Registration Statement No. 333-67299 filed on November
27, 1998.

(2) Incorporated by reference to designated exhibit to the Company's Current
Report on Form 8-K dated January 14, 1999.

(3) Incorporated by reference to designated exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.

(4) Incorporated by reference to designated exhibit to the Company's Form S-8
Registration Statement No. 333-70501 filed on January 12, 1999.

(5) Incorporated by reference to designated exhibit to the Company's Quarterly
Report on for 10-Q for the quarter ended June 30, 1999.

(6) Incorporated by reference to designated exhibit to Amendment No. 3 to the
Company's Registration Statement on Form 10 filed on October 27, 1994.

(7) Incorporated by reference to designated exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.

(8) Incorporated by reference to designated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.

(9) Incorporated by reference to designated exhibit to Amendment No. 1 to the
Company's Form S-3 Registration Statement No. 333-26433 filed on June 18,
1997.

(10) Incorporated by reference to designated exhibit to the Company's Form S-3
Registration Statement No. 333-26433 filed on May 2, 1997.

(11) Incorporated by reference to designated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995.

(12) Incorporated by reference to designated exhibit to the Company's Form S-8
Registration Statement No. 333-71917 filed on February 5, 1999.

(13) Incorporated by reference to designated exhibit to HBOC's Form S-8
Registration Statement No. 33-67300 filed on August 12, 1993.

22
<PAGE> 25

(14) Incorporated by reference to designated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.

(15) Incorporated by reference to designated exhibit to the Company's Current
Report on Form 8-K dated February 1, 2000.

(16) Incorporated by reference to designated exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2000.

23
<PAGE> 26

CONSOLIDATED FINANCIAL INFORMATION

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Five-Year Highlights........................................ F-2
Financial Review............................................ F-6
Independent Auditors' Report................................ F-30
Consolidated Financial Statements
Consolidated Statements of Operations for the years ended
March 31, 2001, 2000 and 1999.......................... F-31
Consolidated Balance Sheets as of March 31, 2001, 2000 and
1999................................................... F-32
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 2001, 2000 and 1999.............. F-33
Consolidated Statements of Cash Flows for the years ended
March 31, 2001, 2000 and 1999.......................... F-34
Financial Notes........................................... F-35
</TABLE>

F-1
<PAGE> 27

FIVE-YEAR HIGHLIGHTS

CONSOLIDATED OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997(1)
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues(2)......................... $42,010.0 $36,687.0 $29,970.9 $22,041.8 $16,559.3
Percent change.................... 14.5% 22.4% 36.0% 33.1% 23.2%
Gross profit(3)..................... 2,431.0 2,224.9 2,320.5 2,094.8 1,426.1
Percent of revenues............... 5.8% 6.1% 7.7% 9.5% 8.6%
Operating profit.................... 370.0(4) 322.4(5) 310.0(6) 579.8(7) 216.0(8)
Percent of revenues............... 0.9% 0.9% 1.0% 2.6% 1.3%
Interest expense-net of corporate
interest income................... 102.7 107.3 90.4 72.7 35.6
Income from continuing operations
before income taxes............... 15.8(4,9) 313.1(5,10) 168.2(6) 459.3(7) 135.0(8)
Income taxes........................ 52.3 122.3 101.4 177.9(11) 73.3
Effective tax rate.................. 331.0% 39.1% 60.3% 38.7% 54.3%
Dividends on preferred securities of
subsidiary trust, net of tax
benefit........................... 6.2 6.2 6.2 6.2 0.7
Income (loss) after taxes
Continuing operations............. (42.7)(4,9) 184.6(5,10) 60.6(6) 275.2(7,11) 61.0(8)
Discontinued operations........... (5.6)(12) 539.1(13) 24.3 29.4 151.1(14)
Net income (loss)................... (48.3) 723.7 84.9 304.6 212.1
Percent change.................... -- 752.4% (72.1)% 43.6% 94.4%
Average stockholders' equity........ 3,655.5 3,082.9 2,772.0 2,273.8 1,690.9
Return on equity(15).............. (1.3)% 23.5% 3.1% 13.4% 12.5%
Common dividends declared........... 68.3 67.5 84.9 62.0 52.1
Shares on which diluted earnings per
common share were based
Diluted........................... 283.1 281.3 275.2 282.1 265.2
Basic............................. 283.1 281.3 275.2 266.2 253.9
Diluted earnings (loss) per common
share(16)
Continuing operations............. $ (0.15) $ 0.66 $ 0.22 $ 1.00 $ 0.23
Discontinued operations........... (0.02) 1.91 0.09 0.10 0.57
Total...................... (0.17) 2.57 0.31 1.10 0.80
</TABLE>

- ---------------
(1) Includes the results of the FoxMeyer Corporation pharmaceutical
distribution business ("FoxMeyer") from the acquisition date of November 8,
1996 and of McKesson General Medical Corporation ("MGM") from the
acquisition date of February 21, 1997.

(2) Excludes other income.

(3) Revenues less cost of sales; fiscal 2000 and 1999 include $0.8 million and
$1.2 million, respectively, of Health Care Supply Management segment
charges for restructuring, asset impairments and other operating items
representing 0.002% and 0.004% of fiscal 2000 and 1999 revenues,
respectively.

(4) Includes Health Care Supply Management segment charges for asset
impairments, severance and facility closing costs of $28.9 million
(including $18.2 million for the restructure of the former iMcKesson
segment), partially offset by a $7.8 million gain of the liquidation of an
investment and Health Care Information Technology segment charges of $161.1
million for customer settlements and $134.5 million for asset impairments,
severance and exit-related costs primarily related to the restructure of
the former iMcKesson business, 0.8% of revenues in the aggregate, $239.4
million after-tax.

F-2
<PAGE> 28

(5) Includes Health Care Supply Management segment charges of $40.0 million for
asset impairments, accounts receivable reserves and customer settlements
primarily related to a prior year implementation of a contract system, and
$2.9 million in severance and exit-related charges primarily associated
with segment staff reductions, partially offset by income of $8.1 million
related to reductions in prior year restructuring accruals. Also includes
Health Care Information Technology segment charges of $239.8 million for
asset impairments, customer accounts receivable, severance and exit costs
primarily associated with product streamlining and reorganization, $61.8
million for accounts receivable and customer settlements, $1.5 million for
the write-off of purchased in-process technology, partially offset by
income of $7.0 million related to a reduction in prior year accruals for
acquisition-related activities, 0.9% of revenues in the aggregate, $198.7
million after-tax.

(6) Includes $214.3 million of Health Care Supply Management and $181.6 million
of Health Care Information Technology segment charges for transaction
costs, costs associated with employee benefits, primarily related to change
of control provisions, employee severance, asset impairment write-downs,
restructuring, integration and affiliation costs incurred, and system
installation costs associated primarily with acquisitions, 1.3% of revenues
in the aggregate, $285.8 million after-tax.

(7) Includes $16.7 million of Health Care Supply Management segment charges for
the terminated merger with AmeriSource Health Corporation ("AmeriSource")
and $44.1 million in costs associated primarily with the integration and
rationalization of acquisitions; and, $35.3 million of Health Care
Information Technology segment charges related to the acquisitions of
AMISYS Managed Care Systems, Inc. and Enterprise Systems, Inc., 0.4% of
revenues in the aggregate, $65.3 million after-tax.

(8) Includes Health Care Supply Management segment charges of $98.8 million for
restructuring, asset impairment and other operating items, $48.2 million
for the write-off of purchased in-process technology related to the
acquisition of Automated Healthcare, Inc., and $6.4 million related to the
merger of Access Health, Inc. and Informed Access Systems Inc. and Health
Care Information Technology segment charges of $68.1 million related to the
acquisition of CyCare Systems, Inc., Management Software, Inc. and GMIS
Inc., 1.3% of revenues in the aggregate, $156.9 million after-tax.

(9) In addition to the items discussed in Note 4 above, includes Corporate
segment charges of $33.9 million for asset impairments, severance and
facility closing costs related to the restructure of the iMcKesson
business, $105.2 million for asset impairments of investments and $2.5
million in legal fees incurred in connection with the Company's earlier
restatement of prior years' financial results and resulting pending
litigation. These items represent 0.3% of revenues in the aggregate, $86.3
million after-tax.

(10) In addition to items described in Note 5 above, includes Corporate segment
net gains of $259.2 from the exchange and subsequent sale and donation of
equity investments, partially offset by charges of $55.8 million for
accounting, legal and other costs incurred in connection with the Company's
earlier restatement of prior years' financial results and resulting pending
litigation, costs associated with former employees and other acquisition
related costs. These items represent 0.6% of revenues in the aggregate,
$118.3 million after-tax.

(11) Includes a $4.6 million tax settlement.

(12) Includes an after-tax loss reflecting an adjustment to the gain recorded on
the fiscal 2000 sale of McKesson Water Products Company ("Water Products
business").

(13) Includes after-tax income from the Water Products business of $24.4
million, an after-tax charge of $1.2 million for increases in environmental
costs for sites associated with the discontinued chemical operations and a
$515.9 million after-tax gain on sale of the Water Products business.

(14) Includes after-tax gain on sale of Armor All Products Corporation ("Armor
All") of $120.2 million.

(15) Based on net income.

(16) Dilutive securities are excluded in the computation of diluted earnings per
share in fiscal 2001, 2000, and 1999 due to their antidilutive effect.

F-3
<PAGE> 29

FIVE-YEAR HIGHLIGHTS

CONSOLIDATED FINANCIAL POSITION

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------------------
2001 2000 1999 1998 1997(1)
--------- --------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Customer receivables................. $ 3,298.8 $ 2,847.4 $2,290.0 $1,774.0 $1,452.6
Days of sales(2)................... 28.3 27.9 27.5 29.0 25.9
Inventories.......................... 5,116.4 4,149.3 3,522.5 2,603.1 2,271.1
Days of sales(2)................... 46.6 43.4 45.9 47.0 44.5
Drafts and accounts payable.......... 5,361.9 3,883.9 3,549.4 2,186.1 2,102.7
Days of sales(2)................... 48.8 40.6 46.3 39.5 41.2
Current assets....................... 9,164.0 7,965.5 6,452.8 5,318.1 4,571.7
Current liabilities.................. 6,549.7 5,121.8 4,744.8 3,083.8 3,031.9
Working capital...................... 2,614.3 2,843.7 1,708.0 2,234.3 1,539.8
Percent of revenues(2)............. 6.2% 7.8% 5.7% 10.1% 7.6%
Property, plant and equipment-net.... 595.3 555.4 529.6 448.6 372.2
Percent of revenues(3)............. 1.4% 1.5% 1.8% 2.0% 1.8%
Capital expenditures............... 158.9 145.1 199.2 166.4 91.4
Total assets......................... 11,529.9 10,372.9 9,020.0 7,291.8 6,413.4
Total debt(3)........................ 1,229.7 1,260.0 1,151.2 1,318.4 1,032.0
Convertible preferred securities..... 195.9 195.8 195.6 195.4 194.8
Stockholders' equity................. 3,492.9 3,565.8 2,881.8 2,561.7 2,081.8
Capital employed(4).................. 4,918.5 5,021.6 4,228.6 4,075.5 3,308.6
Ratio of net debt to net capital
employed(5)........................ 17.5% 14.8% 22.4% 18.8% 16.2%
Common shares outstanding at March
31................................. 284.0 283.4 280.6 271.0 259.0
Dividends per common share(6)........ 0.24 0.24 0.44 0.50 0.50
Book value per common share(7)....... 12.30 12.58 10.27 9.45 8.04
Market price
High............................... 37.00 69.25 96.25 61.75 34.13
Low................................ 16.00 18.19 52.25 31.50 20.56
At year end........................ 26.75 21.00 66.00 57.75 32.00
</TABLE>

- ---------------
(1) Includes the results of FoxMeyer from the acquisition date of November 8,
1996 and of MGM from the acquisition date of February 21, 1997.

(2) Based on year-end balances and sales or cost of sales assuming major
acquisitions occurred at beginning of year and a 360-day year.

(3) Total debt includes all interest-bearing debt and capitalized lease
obligations.

(4) Capital employed consists of total debt, convertible preferred securities of
subsidiary trust and stockholders' equity.

(5) Ratio computed as net debt (total debt less cash and cash equivalents and
marketable securities) to net capital employed (capital employed less cash
and cash equivalents and marketable securities).

(6) Dividends per common share amounts do not reflect the effects of poolings of
interest transactions.

(7) Stockholders' equity divided by year-end common shares outstanding.

F-4
<PAGE> 30

FIVE-YEAR HIGHLIGHTS--SUPPLEMENTAL DATA

CONSOLIDATED OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------------
2001 2000 1999 1998 1997(1)
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
EBIT(2,7).............................. $ 118.5 $ 420.4 $ 258.6 $ 532.0 $ 170.6
Percent of revenues.................... 0.3% 1.1% 0.9% 2.4% 1.0%
EBIT excluding unusual items(2,3,7).... 576.8 547.9 654.5 628.1 392.1
Percent of revenues.................... 1.4% 1.5% 2.2% 2.8% 2.4%
Amortization of intangibles............ 66.2 55.5 41.0 34.7 24.1
EBITA(4,7)............................. 184.7 475.9 299.6 566.7 194.7
Percent of revenues.................... 0.4% 1.3% 1.0% 2.6% 1.2%
EBITA excluding unusual items(3,4,7)... 643.0 603.4 695.5 662.8 416.2
Percent of revenues.................... 1.5% 1.6% 2.3% 3.0% 2.5%
Average committed capital(5)........... 3,565.8 3,420.2 3,026.8 2,230.7 1,520.3
Return on committed capital(6)......... 5.2% 15.4% 11.5% 27.8% 16.8%
Return on committed capital(6)
excluding unusual items(3)........... 18.0% 19.1% 24.9% 32.1% 31.8%
</TABLE>

- ---------------
(1) Includes the results of FoxMeyer from the acquisition date of November 8,
1996 and of MGM from the acquisition date of February 21, 1997.

(2) Income (loss) from continuing operations before interest expense-net of
corporate interest income, taxes and dividends on preferred securities of
subsidiary trust.

(3) Unusual items include those which management believes are either one-time
occurrences and/or events which are not related to normal, on-going
operations or represent charges that are in excess of normal/ historical
amounts. See Notes 3 to 11 on pages F-2 and F-3.

(4) Income (loss) from continuing operations before interest expense-net of
corporate interest income, income taxes and amortization of intangibles.

(5) Capital employed less cash and cash equivalents, marketable securities and
intangibles (including accounts associated with discontinued operations).

(6) Earnings (including income from discontinued operations) before interest
expense-net of corporate interest income, income taxes and amortization of
intangibles divided by average committed capital (capital employed less cash
and cash equivalents, marketable securities and intangibles).

(7) EBITA and EBIT are not intended to represent cash flow from operations, or
alternatives to net income, each as defined by accounting principles
generally accepted in the United States of America. In addition, the
measures of EBITA and EBIT presented herein may not be comparable to other
similarly titled measures used by other companies. The Company believes that
EBITA and EBIT are standard measures commonly reported and widely used by
analysts, investors and other interested parties operating in the Company's
industries. Accordingly, this information has been disclosed herein to
permit a more complete comparative analysis of the Company's operating
performance relative to other companies in similar industries.

F-5
<PAGE> 31

MCKESSON HBOC, INC.

FINANCIAL REVIEW

GENERAL

Management's discussion and analysis, referred to as the Financial Review,
is intended to assist in the understanding and assessment of significant changes
and trends related to the results of operations and financial position of
McKesson HBOC, Inc. ("McKesson HBOC" or the "Company"), together with its
subsidiaries. This discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and accompanying Financial
Notes.

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

In addition to historical information, management's discussion and analysis
includes certain forward-looking statements within the meaning of section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Some of
the forward-looking statements can be identified by use of forward-looking words
such as "believes", "expects", "anticipates", "may", "will", "should", "seeks",
"approximately", "intends", "plans", or "estimates", or the negative of these
words or other comparable terminology. The discussion of financial trends,
strategy, plans or intentions may also include forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected. These include, but are
not limited to, the factors discussed under "Additional Factors That May Affect
Future Results" of this "Financial Review."

These and other risks and uncertainties are described herein or in the
Company's other public documents. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

BUSINESS SEGMENTS

The Company conducts its operations through two operating business
segments: Health Care Supply Management and Health Care Information Technology.
The Health Care Supply Management segment includes the Company's U.S.
pharmaceutical, health care products and medical-surgical supplies distribution
businesses. U.S. Health Care Supply Management operations also include the
manufacture and sale of automated pharmaceutical dispensing systems for
hospitals and retail pharmacists, medical management services and tools to
payors and providers, marketing and other support services to pharmaceutical
manufacturers, consulting and outsourcing services to pharmacies, and
distribution of first-aid products to industrial and commercial customers. In
addition, Health Care Supply Management includes the Company's international
distribution operations (including operations in Canada and an equity interest
in a Mexican distribution business). The Health Care Information Technology
segment delivers enterprise-wide patient care, clinical, financial, supply
chain, managed care and strategic management software solutions, as well as
networking technologies, including wireless capabilities, electronic commerce,
outsourcing and other services to health care organizations throughout the U.S.
and certain foreign countries.

ACQUISITIONS

Fiscal Year 2001 Acquisitions and Investments

In April 2000, the Company and three other health care product distributors
announced an agreement to form the New Health Exchange (subsequently renamed
"Health Nexis"). Health Nexis is an Internet-based company focused on
information systems and other technology solutions to streamline communication,
processing and management of product and contract data across the health care
supply chain. The Company accounts for its 34% interest in Health Nexis under
the equity method of accounting. In fiscal 2001, the

F-6
<PAGE> 32
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

Company invested $10.8 million in Health Nexis and recorded equity in the losses
of Health Nexis of $5.0 million.

In July 2000, the Company completed the acquisition of MediVation, Inc., a
provider of an automated web-based system for physicians to communicate with
patients online, for approximately $24 million in cash, $14 million in Company
common stock and the assumption of $6 million of employee stock incentives. A
charge of $2.1 million was recorded in the second quarter to write off the
portion of the purchase price allocated to in-process technology for which
technological feasibility had not been established as of the acquisition date
and for which there were no alternative uses. The Company received an
independent valuation that utilized a discounted cash flow methodology by
product line to assist in valuing in-process and existing technologies as of the
acquisition date. In connection with the restructure of the Company's former
iMcKesson business in February, 2001 and based on the utilization of a
discounted cash flow methodology, the Company recorded an impairment loss for
the unamortized goodwill and intangibles balance as of March 31, 2001.

In fiscal 2001, the Company also completed a number of smaller acquisitions
in the Health Care Supply Management and Health Care Information Technology
segments.

Fiscal Year 2000 Acquisitions

In November 1999, the Company acquired Abaton.com, a provider of
internet-based clinical applications for use by physician practices, pharmacy
benefit managers, benefit payors, laboratories and pharmacies, for approximately
$95 million in cash and the assumption of approximately $8 million of employee
stock incentives. A charge of $1.5 million was recorded to write off the portion
of the purchase price of Abaton.com allocated to in-process technology for which
technological feasibility had not been established as of the acquisition date
and for which there were no alternative uses. The Company received an
independent valuation that utilized a discounted cash flow methodology by
product line to assist in valuing in-process and existing technologies as of the
acquisition date. In connection with the restructure of the Company's former
iMcKesson business in February, 2001 and based on the utilization of a current
discounted cash flow methodology, the Company recorded an impairment loss for
the unamortized goodwill and intangibles balance as of March 31, 2001.

In fiscal 2000, the Company also made several smaller acquisitions and
investments in the Health Care Supply Management and Health Care Information
Technology segments.

Fiscal Year 1999 Acquisitions

On January 12, 1999, McKesson Corporation ("McKesson"), completed the
acquisition of HBO & Company ("HBOC"), a leading health care information
technology company, by exchanging 177 million shares of McKesson common stock
for all of the issued and outstanding shares of common stock of HBOC. Each share
of HBOC common stock was exchanged for 0.37 of a share of McKesson common stock
(the "Exchange Ratio"). McKesson was renamed McKesson HBOC, Inc. The transaction
was structured as a tax-free reorganization and was accounted for as a pooling
of interests.

In addition, the Company completed several acquisitions in fiscal 1999 in
the Health Care Supply Management and Health Care Information Technology
segments that were accounted for under the pooling of interests method as
follows:

In August 1998, the Company acquired Hawk Medical Supply, Inc., a
distributor of medical-surgical supplies, for approximately 2 million shares of
Company common stock.

F-7
<PAGE> 33
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

Also, in August 1998, the Company acquired J. Knipper and Company, a
provider of direct mail, fulfillment and sales support services, including
sample distribution to physician and pharmaceutical company sales
representatives, for approximately 300,000 shares of Company common stock.

In September 1998, the Company acquired Automated Prescription Systems,
Inc., a manufacturer of automated prescription filling and dispensing systems,
for approximately 1.4 million shares of Company common stock.

In October 1998, the Company acquired US Servis, Inc., a professional
management company that provides outsourcing services for physician delivery
systems and hospital business offices, for the equivalent, after application of
the Exchange Ratio, of approximately 700,000 shares of Company common stock.

Also in October 1998, the Company completed the acquisition of IMNET
Systems, Inc., a provider of electronic information and document management
solutions for the health care industry, for the equivalent of approximately 3.6
million shares of Company common stock and 0.6 million Company stock options.

In December 1998, the Company acquired Access Health, Inc., a provider of
clinically based care management programs and health care information services,
for the equivalent of approximately 12.7 million shares of Company common stock

In fiscal 1999, the Company completed the acquisitions of the following
companies in its Health Care Supply Management segment, each accounted for under
the purchase method of accounting:

In September 1998, the Company acquired MedManagement, a pharmacy
management, purchasing, consulting and information services company, for
approximately $38 million in cash. The acquisition was funded with short-term
borrowings. The excess of the purchase price over the fair value of the net
assets acquired of $41 million is being amortized on a straight-line basis over
20 years.

In November 1998, the Company acquired RedLine Health Care Corporation
("RedLine") a distributor of medical supplies and services to the extended-care
industry, including long-term-care and home-care sites for approximately $233
million in cash. The acquisition was funded with short-term borrowings. The
excess of the purchase price over the fair value of the net assets acquired of
$149 million is being amortized on a straight-line basis over 40 years.

DIVESTITURE

In February 2000, the Company sold its wholly-owned subsidiary, McKesson
Water Products Company for approximately $1.1 billion and recognized an
after-tax gain of $515.9 million. The Water Products business has been
classified as a discontinued operation for all periods presented.

F-8
<PAGE> 34
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

FINANCIAL RESULTS

The results of continuing operations include the following:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
------- --------- ------- --------- ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Income from Continuing Operations
Before unusual items and dividends on
convertible preferred securities of
subsidiary trust.................... $ 474.1 $ 289.2 $ 440.6 $ 271.2 $ 564.1 $ 352.6
Dividends on convertible preferred
securities of subsidiary trust...... -- (6.2) -- (6.2) -- (6.2)
------- ------- ------- ------- ------- -------
Before unusual items................... 474.1 283.0 440.6 265.0 564.1 346.4
Unusual items by segment
Health Care Supply Management.......... (21.1) (12.9) (34.8) (20.8) (214.3) (133.3)
Health Care Information Technology..... (295.6) (226.5) (296.1) (177.9) (181.6) (152.5)
Corporate.............................. (141.6) (86.3) 203.4 118.3 -- --
------- ------- ------- ------- ------- -------
Income (Loss) from Continuing
Operations............................. $ 15.8 $ (42.7) $ 313.1 $ 184.6 $ 168.2 $ 60.6
======= ======= ======= ======= ======= =======
</TABLE>

Fiscal 2001

Fiscal 2001 after-tax income from continuing operations before unusual
items was $283.0 million, a 7% increase over the prior year's income from
continuing operations of $265.0 million. Fiscal 2001 results reflect revenue and
operating margin growth in the Health Care Supply Management segment partially
offset by declines in revenues and operating profits in the Health Care
Information Technology segment.

Fiscal 2000

Fiscal 2000 after-tax income from continuing operations before unusual
items was $265.0 million, a 23% decline from the prior year's income from
continuing operations before unusual items of $346.4 million. Fiscal 2000
results reflect revenue and operating profit declines in the Health Care
Information Technology segment, modest operating profit growth in the Health
Care Supply Management segment, and higher financing costs to support revenue
growth in the Health Care Supply Management segment.

Fiscal 1999

Fiscal 1999 after-tax income from continuing operations before unusual
items was $346.4 million, a 3% increase over the prior year's income from
continuing operations before unusual items of $335.9 million. Fiscal 1999
results reflect revenue and operating margin growth and the positive impact of
acquisitions in the Health Care Supply Management segment offset, in part, by a
decline in Health Care Information Technology segment operating results.

UNUSUAL ITEMS

In fiscal 2001, the Company incurred charges for asset impairments,
severance and exit costs primarily associated with the restructure of the
Company's former iMcKesson business segment. In fiscal 2001 and 2000, the
Company incurred charges associated with product streamlining and reorganization
in its Health Care Information Technology segment including, provision for
customer settlements in 2001, and asset impairments, customer settlements and
severance in 2000. In both years, the Company recorded gains and losses for
certain equity investments and costs incurred in connection with the
Investigation (as defined

F-9
<PAGE> 35
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

below), the restatement of historical (pre-acquisition) consolidated financial
statements and the resulting pending securities litigation. In fiscal 2000 and
1999, the Company incurred charges for acquisition-related activities including
transaction costs, employee benefit costs, severance, as well as costs for
consolidation of facilities and administrative processes and certain operating
charges.

For the purposes of discussing the results of operations, the items
described above are referred to as "unusual items" in the Financial Review. The
results of operations excluding "unusual items" are not intended to represent
income from operations, or alternatives to net income, each as defined by
accounting principles generally accepted in the United States of America. In
addition, the charges included as "unusual items" presented herein may not be
comparable to other similarly titled measures used by other companies.
Management believes, however, that the discussion of the results of operations
excluding such unusual items is the most informative representation of
recurring, non-transactional operating results. Management believes that these
items either represent one-time occurrences and/or events which are not related
to normal, ongoing operations or represent charges that are in excess of
normal/historical operating amounts.

The unusual items in fiscal 2001, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
2001 2000 1999
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Restatement-related costs incurred...................... $ 2.5 $ 18.9
Net losses (gains) on the exchange and sale of equity
investments........................................... 97.8 (259.2)
Transaction costs....................................... $ 79.6
Costs associated with the terminated merger transaction
with AmeriSource Health Corporation................... 5.0
Costs associated with employee benefits, primarily
related to change in control provisions............... 88.7
Restructuring, asset impairments and customer
settlements........................................... 319.3 228.5 108.4
Employee severance...................................... 36.6 4.2 31.9
Other merger-related costs.............................. 2.1 (0.4) 13.8
Costs associated with former employees.................. 23.8
Acquisition-related integration costs incurred.......... 32.3
Other operating items:
Accounts receivable allowances........................ 68.5
Contract system costs................................. 31.5 36.2
Other................................................. 11.7
------ ------- ------
Total pre-tax................................. $458.3 $ 127.5 $395.9
====== ======= ======
Total after-tax............................... $325.7 $ 80.4 $285.8
====== ======= ======
</TABLE>

FISCAL 2001 UNUSUAL ITEMS

In fiscal 2001, the Company recorded net pre-tax charges for unusual items
totaling $458.3 million including $21.1 million in the Health Care Supply
Management segment, $295.6 million in the Health Care Information Technology
segment and $141.6 million in the Corporate segment. Following is a description
of these items in fiscal 2001:

Restatement-Related Costs Incurred

In April 1999, following the January 1999 acquisition of HBOC, the Company
discovered improper accounting practices at HBOC. In July 1999, the Audit
Committee of the Company's Board of Directors

F-10
<PAGE> 36
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

completed an investigation into such matters (the "Investigation"), which
resulted in the previously reported restatement of the Company's historical
consolidated financial statements related to HBOC (pre-acquisition) in fiscal
1999, 1998 and 1997. In fiscal 2001, the Company incurred legal fees totaling
$2.5 million, in connection with the pending securities litigation arising out
of the restatement.

(Gain) Loss on Investments

The Company recorded an other than temporary impairment loss of $105.6
million on its WebMD warrants and other equity and venture capital investments
as a result of significant declines in the market values of these investments.
The Company also recorded a $7.8 million gain on the liquidation of another
investment.

Restructuring, Asset Impairments and Customer Settlements

In May 2000, the Company announced the formation of a new business unit,
iMcKesson, to focus on healthcare applications using the Internet and other
emerging technologies. iMcKesson included selected net assets from the former
e-Health, Health Care Supply Management and Health Care Information Technology
segments and fiscal 2001 acquisitions of strategic investments and businesses.

In February 2001, the Company announced the restructuring of the iMcKesson
business unit by moving responsibility for iMcKesson's medical management
business to the Health Care Supply Management segment and the physician services
business to the Health Care Information Technology segment. In connection with
the assessment of these businesses, management shut down certain iMcKesson
operations. The Company wrote down goodwill and intangibles totaling $116.2
million arising from the acquisitions of Abaton.com and MediVation, Inc., based
upon an updated analysis of discounted cash flows. The Company also recorded
$29.8 million in non-cash asset impairments including $23.1 million for the
write-down of equity investments whose market values had significantly declined,
$5.2 million in capitalized software costs and $1.5 million in other fixed
assets. In addition, the Company recorded $9.1 million in exit-related costs
including $6.0 million for non-cancelable services directly related to
discontinued products, $1.5 million for estimated claims resulting from the
abandonment of products no longer core to its business and $1.6 million in other
exit-related costs.

In the second quarter of fiscal 2001, the Company reviewed the operations
and cost structure of its medical management business resulting in the planned
closure of a call center and a workforce reduction and recorded $0.2 million in
charges for exit-related activities.

In the third quarter of fiscal 2001, the Company closed a pharmaceutical
distribution center and recorded $0.7 million in asset impairments and $0.5
million in charges for exit-related activities.

The Company also reduced prior year reserves for exit-related activities by
$1.3 million.

In addition, the Company's Health Care Information Technology segment
recorded a $161.1 million charge for customer settlements (forgiveness of
accounts receivable, customer credits and refunds) associated with pre-July 1999
software contracts. These customer settlements generally relate to product
replacements as well as requirements for certain customers to upgrade hardware
and software to accommodate new product releases.

F-11
<PAGE> 37
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

Severance

The Company recorded severance costs totaling $29.0 million related to the
restructure of the former iMcKesson business, $1.0 million in the Health Care
Supply Management segment, $3.3 million in the Health Care Information
Technology segment and $24.7 million in the Corporate segment. The severance
charges relate to the termination of approximately 220 employees, primarily in
sales, service and administration functions.

The Company also recorded severance costs totaling $8.5 million in the
aggregate related to workforce reductions in the Health Care Supply Management
segment associated with the closure of a pharmaceutical distribution center,
closure of a medical management call center, consolidation of medical-surgical
customer service centers, closures of facilities in the pharmaceutical services
business and staff reductions in the pharmaceutical management business. The
fiscal 2001 severance charges relate to the termination of approximately 360
employees, primarily in sales, service, administration and distribution center
functions. In addition, the Company reduced prior year severance reserves by
$0.9 million.

In connection with the severance charges described above, $3.2 million was
a non-cash charge, severance of $2.4 million was paid in fiscal 2001, $12.4
million will be paid in fiscal 2002 and the balance of $19.5 million, primarily
pension benefits, will be paid in fiscal 2003 and thereafter.

As a result of the previously discussed restructuring activities, future
operating results and cash flows will be impacted. Development and support
activities for certain discontinued products associated with the former
iMcKesson business will be phased out within twelve months. Although future
revenues associated with the discontinued products will be reduced or
eliminated, the Company does not anticipate they will materially impact the
company's future operating results or cash flows. The Company anticipates that
goodwill amortization expense will be approximately $20 million lower in fiscal
2002 as a result of the Abaton.com and MediVation, Inc. goodwill and intangibles
write downs. In addition, the Company anticipates reduced product development
expenses as a result of terminating certain product licensing agreements and
gradual reductions in payroll expenses and occupancy costs as the former
iMcKesson operations wind down. Closure of the medical management call center is
not anticipated to significantly impact future revenues (customers will be
serviced out of the remaining call centers) but payroll cost savings are
anticipated. Closure of the pharmaceutical distribution center, pharmaceutical
services facilities and consolidations of the medical-surgical customer service
centers are not expected to have a material impact on the Company's fiscal 2002
operating results.

Other Merger-Related Items

The Company recorded a charge of $2.1 million in the Information Technology
segment to write off the portion of the purchase price of MediVation, Inc.
allocated to purchased in-process technology for which feasibility had not been
established as of the acquisition date.

FISCAL 2000 UNUSUAL ITEMS

In fiscal 2000, the Company recorded net pre-tax charges for unusual items
totaling $127.5 million including $34.8 million in the Health Care Supply
Management segment, $296.1 million in the Health Care Information Technology
segment, and $203.4 million income in Corporate. Following is a description of
these items in fiscal 2000:

Restatement-Related Costs Incurred

In fiscal 2000, the Company incurred costs in connection with the
previously discussed Investigation, the restatement of the historical
consolidated financial statements and the resulting pending litigation, and
recorded charges of $18.9 million for accounting and legal fees and other costs.
F-12
<PAGE> 38
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

Net Gains on the Exchange and Sale of Equity Investments

The Company recorded gains on the exchange of the Company's WebMD common
shares and warrants for Healtheon/WebMD (subsequently renamed WebMD) common
shares and warrants that were recognized upon the November 11, 1999 merger of
the two companies. Subsequently in fiscal 2000, the Company donated 250,000
WebMD shares to the McKesson HBOC Foundation and sold the remaining common
shares. As a result of these transactions, the Company recognized gains related
to the investment in WebMD of $248.7 million of which $155.3 million was
realized. The remaining gain of $93.4 million which resulted from the November
11, 1999 exchange of warrants, had not been realized as of March 31, 2000. The
estimated fair value of the warrants declined from $93.4 million as of November
11, 1999 to $32.3 million as of March 31, 2000, resulting in an unrealized loss
of $61.1 million. In fiscal 2001, the estimated fair value of the warrants
declined further and the Company recognized a loss (see Fiscal 2001 Unusual
Items). In addition, other equity investments were sold during the year at a
gain of $20.3 million, and a $9.8 million charge was recorded to reflect the
donation of the WebMD shares to the McKesson HBOC Foundation.

Restructuring, Asset Impairments and Customer Settlements

In the fourth quarter of fiscal 2000, the Company completed an assessment
of the Health Care Information Technology's business and product portfolio. This
resulted in the decision to reorganize the business and to discontinue
overlapping or nonstrategic product offerings. The Company recorded asset
impairments of $232.5 million. These included charges to write off $49.1 million
of capitalized product development costs, $39.3 million of purchased software
and $50.7 million of goodwill associated with discontinued product lines based
upon an analysis of discounted cash flows. In addition, a $74.1 million reserve
was recorded for customer settlements attributable to the discontinued product
lines. The Company also recorded a $9.4 million loss on the disposition of a
non-core foreign operation, a $7.7 million charge for uncollectible unbilled
receivables and a $2.2 million charge for obsolete equipment associated with the
discontinued products. Substantially all of these charges were non-cash asset
write-offs except for the customer settlements.

In addition, a charge of $0.6 million was recorded for costs to prepare
facilities for disposal, lease costs and property taxes required subsequent to
termination of operations and other exit-related activities.

In the fourth quarter of fiscal 2000, the Company reviewed the operations
and cost structure of the Health Care Supply Management's medical-surgical
business. This resulted in the planned closure of a sales office and a workforce
reduction. The Company recorded $0.6 million in charges for exit-related
activities. Also in fiscal 2000, the Company reassessed prior years'
restructuring plans resulting in the decision to retain one of the six
pharmaceutical distribution centers identified for closure in fiscal 1999 and to
reduce the number of medical-surgical distribution center closures. In addition,
the Company announced and completed the closure of one additional pharmaceutical
distribution center in fiscal 2000. The Company recorded income of $6.9 million
as a result of reducing prior year accruals for exit-related costs, offset in
part, by additional asset impairments of $1.5 million. The Company also recorded
asset impairments for its medical-management business of $0.2 million for
obsolete equipment associated with discontinued products.

Severance

In fiscal 2000, the Company completed the closures of three pharmaceutical
distribution centers, including the additional distribution center mentioned
above. In addition, the realignment of the sales organization was completed and
certain back office functions were eliminated. This resulted in the termination
of approximately 200 employees and the payment of $3.6 million in severance.
Also, the Company completed the closures of three medical-surgical distribution
centers and paid $1.0 million in severance to approximately 100 employees who
were terminated in fiscal 1999 and 2000. The Company plans to continue these
closure activities throughout fiscal 2002.
F-13
<PAGE> 39
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

The Company recorded severance costs totaling $6.2 million in the aggregate
related to workforce reductions in the Health Care Information Technology
segment associated with product streamlining and reorganization and in the
Health Care Supply Management segment associated with distribution facility
consolidations. This charge was offset, in part, by a $2.0 million reduction in
prior year severance reserves. The fiscal 2000 severance charges relate to the
termination of approximately 500 employees, primarily in product development and
support, administration and distribution center functions. In fiscal 2001, the
Company paid severance of $4.9 million and reduced previously recorded reserves
by $0.9 million. The remaining balance will be paid in fiscal 2002.

Other Merger-Related Items

The Company recorded a charge of $1.5 million to write off the portion of
the purchase price of Abaton.com allocated to purchased in-process technology
for which feasibility had not been established as of the acquisition date. The
Company also recorded a $1.3 million charge for the impairment of a note
receivable from a former stockholder of an acquired company and reversed $6.9
million of accruals booked in prior years for estimated merger-related costs.

Corporate and other includes a charge of $3.7 million related to additional
costs incurred and paid associated with the acquisition of HBOC.

Costs Associated With Former Employees

In fiscal 2000, the Company recorded charges of $23.8 million for severance
and benefit costs resulting from changes in executive management made in the
first quarter. The charges were based on the terms of employment contracts in
place with these executives. $2.8 million was paid in fiscal 2000 and $2.1
million was paid in fiscal 2001. The Company estimates that $3.7 million will be
paid in fiscal 2002 and the balance, primarily pension benefits, will be paid
thereafter.

Other Operating Items

Other operating items include charges of $61.8 million in the Health Care
Information Technology segment for accounts receivable and customer settlements,
a $1.1 million non-cash charge for the write-off of internal-use computer
software that was abandoned and a $1.2 million charge related to the settlement
of a software patent infringement claim that was paid during the year.

The Health Care Supply Management segment recorded a charge of $31.5
million for asset impairments and receivables related primarily to a prior year
implementation of a contract system, and a $6.7 million charge for customer
accounts receivable in the medical management business.

Corporate includes non-cash charges of $7.7 million for impairment of notes
receivable from former employees and $1.7 million for costs associated with
employee-retention following the announcement of the Investigation.

FISCAL 1999 UNUSUAL ITEMS

In fiscal 1999, the Company recorded pre-tax charges for unusual items of
$214.3 million in the Health Care Supply Management segment and $181.6 million
in the Health Care Information Technology segment, $395.9 million in the
aggregate. Following is a description of these items in fiscal 1999:

Transaction Costs

Total unusual items include $84.6 million of transaction costs incurred in
connection with the acquisitions described above, primarily consisting of
professional fees such as investment banking, legal and accounting fees. This
amount includes $6.6 million of transaction costs related to terminated
transactions of which

F-14
<PAGE> 40
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

$5.0 million related to the terminated merger with AmeriSource Health
Corporation. Approximately $83.6 million was paid in fiscal 1999, with a balance
of $1.0 million paid in fiscal 2000.

Employee Benefits

The Company incurred $88.7 million of employee benefit costs related to
acquisitions, including $39.0 million for restricted stock and stock
appreciation rights subject to change of control provisions, $37.0 million of
long-term incentive and phantom stock awards subject to change of control
provisions, $8.7 million of signing and retention bonuses, and $4.0 million of
retirement and employee benefit plan costs. Of these amounts, $36.3 million were
non-cash charges, primarily related to restricted stock, $44.1 million was paid
in fiscal 1999, $1.6 million was paid in fiscal 2000 and $3.5 million was paid
in fiscal 2001.

Restructuring and Asset Impairments

In fiscal 1999, the Health Care Supply Management segment identified six
distribution centers for closure, of which one distribution center was shut down
by March 31, 1999. The Company recorded a charge of $25.5 million related to
closures of the distribution centers. Of this charge, $21.7 million was required
to reduce the carrying value of facility assets to their estimated fair value
less disposal costs, and $3.8 million was related to computer hardware and
software which will no longer be used at such facilities. Fair value was
determined based on sales of similar assets, appraisals, and/or other estimates
such as discounting of estimated future cash flows. Considerable management
judgment is necessary to estimate fair values; accordingly, actual results could
vary significantly from such estimates. Also related to such closures, a charge
of $17.2 million was recorded for exit-related costs. These primarily consist of
costs to prepare facilities for disposal, lease costs and property taxes
required subsequent to termination of operations, as well as the write-off of
costs related to duplicate assets from acquired companies that do not have
future use by the Company. Of the above charges, $25.5 million were non-cash
asset write-offs. $3.9 million was paid in fiscal 1999, $2.6 million was paid in
fiscal 2000, and $2.9 million was paid in fiscal 2001. Also, in connection with
the previously discussed reassessment of this restructuring plan, the Company
reduced previously recorded exit-related reserves by $6.9 million in fiscal 2000
and by $1.3 million in fiscal 2001, and recorded charges of $1.5 million for
additional asset impairments in fiscal 2000.

The Health Care Supply Management segment also wrote off $23.5 million of
computer hardware and software which was abandoned as the result of an
acquisition during the year.

In connection with acquisitions in the medical management business, the
Company terminated royalty agreements at a cost of $12.0 million because
products subject to minimum royalty payments to third parties were replaced with
acquired products. In addition, the Company recorded charges of $4.3 million
primarily for the write-off of capitalized software costs.

In connection with acquisitions made by the Health Care Information
Technology segment and its acquisition by McKesson, duplicate facilities,
products and internal systems were identified for elimination, resulting in
charges of $5.9 million, relating principally to the write-off of capitalized
costs and lease termination costs. In addition, following the HBOC Transaction,
the Company evaluated the performance of a foreign business and elected to shut
down its facility. Charges of $11.6 million were recorded, principally related
to the write-down of goodwill to fair value based on estimated discounted cash
flows. Revenues and net operating income for this foreign business were not
significant in fiscal 1999. Certain investments became impaired during fiscal
1999 and were written down by $4.3 million to their net realizable values based
primarily on estimated discounted cash flows, and other reserves of $4.1 million
were recorded to cover customer and other claims arising out of the
acquisitions. Substantially all of the above charges were non-cash asset
write-offs.

F-15
<PAGE> 41
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

Severance

Severance costs totaled $31.9 million (net of a $3.0 million reversal of
previously recorded severance obligations which were determined to be in
excess), resulting from the consolidation of acquired company operating and
corporate functions, the consolidation of existing U.S. Health Care
pharmaceutical distribution centers, and other employee terminations. The
severance charges relate to the termination of approximately 1,550 employees,
primarily in distribution centers, administration and product functions. The
Company paid severance of $12.1 million in fiscal 1999, $14.9 million in fiscal
2000 and reduced previously recorded reserves by $2.0 million in fiscal 2000.
Severance of $3.2 million was paid in 2001 and the remaining severance will be
paid in fiscal 2002 and thereafter.

Other Merger-related Costs

The Health Care Information Technology segment incurred costs totaling
$13.8 million in fiscal 1999 due to an acquired company which had receivables
outstanding from HBOC competitors that became uncollectible and were written off
after the HBOC Transaction.

Acquisition-related Integration Costs

Acquisition-related integration costs of $32.3 million consist of $1.9
million incurred for salaries and benefits of integration and affiliation team
members of the Company and $30.4 million of other direct costs associated with
the integration and rationalization of recent acquisitions in the Health Care
Supply Management and Health Care Information Technology segments.

Other Operating Items

Other operating items of $36.2 million consist of losses resulting from the
implementation of a contract administration system and expenses incurred for
corrective actions associated with that system.

RESULTS OF OPERATIONS

The discussion of the financial results that follows focuses on the results
of continuing operations excluding unusual items, as management believes such
discussion is the most informative representation of recurring,
non-transactional related operating results.

F-16
<PAGE> 42
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

HEALTH CARE SUPPLY MANAGEMENT

The following table identifies significant performance indicators of the
Health Care Supply Management segment:

<TABLE>
<CAPTION>
2001 2000 1999
------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues
Excluding Sales to customers' warehouses
Pharmaceutical distribution and services
U.S. Health Care..................................... $24,853 $21,994 $17,612
International........................................ 2,645 2,220 1,946
------- ------- -------
Total pharmaceutical.............................. 27,498 24,214 19,558
Medical-Surgical distribution and services............. 2,849 2,706 2,292
------- ------- -------
Subtotal.......................................... 30,347 26,920 21,850
Sales to customers' warehouses............................ 10,730 8,746 6,813
------- ------- -------
Total............................................. $41,077 $35,666 $28,663
======= ======= =======
Revenue growth
Excluding sales to customers' warehouses
Pharmaceutical distribution and services
U.S. Health Care..................................... 13% 25% 21%
International........................................ 19 14 20
Total pharmaceutical................................. 14 24 21
Medical-Surgical distribution and services............. 5 18 22
Total excluding sales to customers' warehouse........ 13 23 21
Total................................................ 15 24 38
Operating profit............................................ $ 686.2 $ 571.3 $ 574.1
Percentage change......................................... 20% (0.5)% 37%
Gross profit margin(1)...................................... 6.7 7.0 7.6
Operating expense margin(1)................................. 4.4 4.9 5.0
Operating profit as a percent of revenues(1)................ 2.3 2.1 2.6
Depreciation................................................ $ 76.3 $ 72.1 $ 60.2
Amortization of intangibles................................. 32.1 31.1 25.1
Capital expenditures........................................ 90.9 99.0 105.0
Capital employed at year-end
Committed capital(2)
Operating working capital(3)........................... $ 3,282 $ 3,328 $ 2,661
Other -- net........................................... 225 208 66
------- ------- -------
Total............................................. 3,507 3,536 2,727
Intangibles............................................... 997 1,017 1,028
------- ------- -------
Total............................................. $ 4,504 $ 4,553 $ 3,755
======= ======= =======
Returns
Committed capital(4)...................................... 19.6% 16.3% 19.9%
Total capital employed(5)................................. 14.6 13.8 15.6
</TABLE>

F-17
<PAGE> 43
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

- ---------------
(1) Excluding sales to customers' warehouses and other income.

(2) Capital employed less cash and cash equivalents, marketable securities and
goodwill and other intangibles.

(3) Receivables and inventories net of related payables.

(4) Operating profit before amortization of intangibles divided by average
committed capital.

(5) Operating profit divided by average capital employed.

Over the most recent three fiscal years, the Health Care Supply Management
business has experienced internal revenue growth and growth as a result of
acquisitions. Revenue growth in this segment, excluding sales to customers'
warehouses, is as follows:

<TABLE>
<CAPTION>
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Pharmaceutical Distribution and Services
Existing businesses....................................... 13.6% 23.5% 20.1%
Acquisitions.............................................. -- 0.3 0.5
---- ---- ----
Total............................................. 13.6% 23.8% 20.6%
==== ==== ====
Medical-Surgical Supply Distribution and Services
Existing businesses....................................... 5.3% 6.6% 14.4%
Acquisitions.............................................. -- 11.5 7.6
---- ---- ----
Total............................................. 5.3% 18.1% 22.0%
==== ==== ====
</TABLE>

Internal growth in Health Care Supply Management is due primarily to
increased sales volume to the retail chain and institutional customer segments.
Sales to retail customers have benefited from the Company's service offerings
and programs that focus on broad product selection, service levels, inventory
carrying cost reductions, connectivity and automation technologies. Growth with
institutional customers has benefited from the focus on reducing both product
cost and internal labor and logistics costs for the customers. Services
available include pharmaceutical distribution, medical-surgical supply
distribution, pharmaceutical dispensing automation, pharmacy outsourcing and
utilization reviews. These retail chain and institutional capabilities have
resulted in the implementation of significant long-term contracts with major
customers.

<TABLE>
<CAPTION>
2001 2000 1999
----- ----- -----
<S> <C> <C> <C>
Customer Mix -- Pharmaceutical Distribution Revenues(1)
Independents.............................................. 24.5% 25.5% 28.7%
Retail Chains............................................. 42.4 42.4 38.5
Institutions.............................................. 33.1 32.1 32.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

- ---------------
(1) Excluding sales to customer warehouses.

Sales to customers' warehouses are large volume sales of pharmaceuticals to
major self-warehousing drugstore chains whereby the Company acts as an
intermediary in the order and subsequent delivery of products directly from the
manufacturer to the customers' warehouses. The growth in sales to customers'
warehouses in fiscal 2001 was due to the addition of a significant retail chain
customer and to growth from existing customers. The growth in fiscal 2000 and
1999 was primarily the result of two significant contracts with retail chains
which also provided new direct store sales growth.

The operating profit margin increased in fiscal 2001, reflecting margin
expansion in the U.S. pharmaceutical distribution and services business due to
gross margin initiatives and productivity improvements in both back-office and
field operations and in the Canadian pharmaceutical business reflecting new
customers, sales

F-18
<PAGE> 44
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

growth and operational efficiencies. This impact was partially offset by a
decline in the medical management business reflecting the loss of a number of
services customers and reduced profits from the Company's 22% interest in Nadro,
a Mexican pharmaceutical distribution business. The operating profit margin
declined in fiscal 2000 from 1999 due to a decline in the gross profit margin
reflecting the competitive environment, a shift in the mix of pharmaceutical
distribution revenues to a higher proportion of chain business and somewhat
lower procurement profits as a percentage of revenues in the current year.
Procurement profits benefited in fiscal 1999 from price increases on inventory
expansion associated with new customer agreements. The decline in the gross
profit margin was offset, in part, by a lower operating expense ratio reflecting
continuing productivity improvements. The improvement in the operating expense
ratio was achieved despite higher expenses for receivable and transaction
processing related charges. Fiscal 1999 operating margins reflect higher margin
businesses resulting from acquisitions in pharmaceutical services for
manufacturers, retail and institutional automation and medical-surgical supply
distribution. In addition, expanded profitability from product procurement,
warehouse automation and efficiency improvements, and fixed cost leverage from
volume growth contributed to the margin expansion.

The Health Care Supply Management 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 reflect replacement cost than other accounting
methods, thereby mitigating the effects of inflation and deflation on operating
profit. The practice in the Health Care Supply Management distribution
businesses is to pass published price changes from suppliers on to customers.
Manufacturers generally provide the Company with price protection, which
prevents inventory losses. Price declines on many generic pharmaceutical
products in this segment in each of the fiscal years ended March 31, 2001, 2000
and 1999 have moderated the effects of inflation in other product categories,
which resulted in minimal overall price changes in those fiscal years.

Fiscal 2001, 2000 and 1999 capital expenditures include new systems
upgrades to distribution facilities and facility consolidations in the
pharmaceutical and medical-surgical businesses and growth in the automation and
services businesses.

The Health Care Supply Management segment requires a substantial investment
in operating working capital (customer receivables and inventories net of
related trade payables). Operating working capital is susceptible to large
variations during the year as a result of inventory purchase patterns and
seasonal demands. Inventory purchase activity is a function of sales activity,
new customer build-up requirements and the desired level of investment
inventory. Operating working capital at March 31, 2001 was flat relative to
2000. An increase in receivables, reflecting sales growth, and inventories was
offset by a significant increase in vendor payables reflecting purchases made
late in the fiscal year and the timing of vendor payments. No accounts
receivable were sold at March 31, 2001 and 2000. Operating working capital was
significantly higher at March 31, 2000 compared to 1999. The working capital
increase primarily reflects increases in receivables and net financial
inventories (inventories net of accounts and drafts payable) resulting from
sales growth, the absence of accounts receivable sales at March 31, 2000
compared to $400.0 million of sales at March 31, 1999 and the timing of vendor
payments.

F-19
<PAGE> 45
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

HEALTH CARE INFORMATION TECHNOLOGY

Significant performance indicators of the Health Care Information
Technology segment are as follows:

<TABLE>
<CAPTION>
2001 2000 1999
----- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues
Software.................................................. $ 134 $ 144 $ 268
Services.................................................. 712 782 832
----- ------ ------
Subtotal............................................... 846 926 1,100
Hardware.................................................. 84 92 208
----- ------ ------
Total revenues.................................... $ 930 $1,018 $1,308
===== ====== ======
Revenue growth (decline)
Software.................................................. (7)% (46)% (23)%
Services.................................................. (9) (6) 23
Subtotal............................................... (9) (16) 8
Hardware.................................................. (8) (56) (3)
Total............................................. (9) (22) 6
Operating profit............................................ $ 0.5 $ 82.0 $131.8
Percent change............................................ (99)% (38)% (49)%
Gross profit margin......................................... 42.4 40.3 41.8
Operating expense margin.................................... 42.3 32.3 31.7
Operating profit as a percent of revenues................... 0.1 8.1 10.1
Depreciation................................................ $36.1 $ 41.0 $ 38.0
Amortization of intangibles................................. 34.2 24.4 15.9
Amortization of capitalized software held for sale.......... 25.9 28.3 25.9
Capital expenditures........................................ 26.5 43.3 71.4
Capital employed
Committed capital(1)...................................... $ 198 $ 259 $ 234
Intangibles............................................... 80 182 187
----- ------ ------
Total............................................. $ 278 $ 441 $ 421
===== ====== ======
Returns
Committed capital(2)...................................... 21.8% 35.1% 70.2%
Total capital employed(3)................................. 0.1 14.8 15.4
</TABLE>

- ---------------
(1) Capital employed less cash and cash equivalents, marketable securities and
goodwill and other intangibles.

(2) Operating profit before amortization of intangibles divided by average
committed capital.

(3) Operating profit divided by average capital employed.

Health Care Information Technology revenues declined 9% to $0.9 billion in
fiscal 2001 and 22% to $1.0 billion in fiscal 2000. In fiscal 2001, certain
contracts were entered into which the Company is accounting for under the
percentage of completion method, which extends the recognition of revenue over a
period of time. Services revenues declined, reflecting the lagging impact of
reduced prior period software sales on implementation services revenues. The
decline in fiscal 2000 revenues was attributable to the overall industry-wide
slowdown in sales of health care information technology software and hardware
products resulting from delays in purchasing decisions that are attributed both
to Year 2000 issues and a general weakness in demand for healthcare software.
Services revenues associated with software implementation also declined for the
same

F-20
<PAGE> 46
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

reasons. Also contributing to the decline was the impact to the business caused
by the investigation into improper accounting practices and resulting senior
management changes made early in the year. In addition, the terms of certain
contracts for software and implementation services executed late in the fiscal
year resulted in such contracts being accounted for under the percentage of
completion accounting method. Revenues increased 6% to $1.3 billion in fiscal
1999. The fiscal 1999 decline in software revenues of 23% reflects a general
industry-wide slowdown in sales of health care information technology products
and changes in accounting due to the adoption of Statement of Position 97-2,
"Software Revenue Recognition", effective April 1, 1998. In addition, during
fiscal 1999, the Health Care Information Technology segment experienced delays
in current and potential customers' purchasing decisions with respect to its
enterprise solutions. Management believes such delays were due to Year 2000
issues, technological innovations, increased competition, greater requirement
for integration of products and general market conditions in the computer
software industry.

Hardware is sold as an accommodation to customers and at a significantly
lower operating margin than software and services. Fiscal 2001, 2000 and 1999
revenues from the sale of hardware reflect the lower level of software sales,
general price declines for hardware and a shift to less costly Microsoft Windows
NT(TM) platforms.

Health Care Information Technology segment operating profit before unusual
items declined 99% to $0.5 million in fiscal 2001, and 38% to $82.0 million in
fiscal 2000. The decline in fiscal 2001 reflects the extended software revenue
recognition cycle under the percentage of completion accounting method, lower
service and hardware revenues, and an increased level of expenses to enhance
customer support and future product introduction. The decline in fiscal 2000
reflects the previously discussed decline in overall sales and a lower mix of
higher-margin software sales in fiscal 2000 compared to 2001 and 1999 (14% in
fiscal 2000 as compared to 20% in fiscal 1999, as a percentage of total Health
Care Information Technology revenues). The fiscal 2000 operating profit includes
an increased level of expenses to enhance customer support and future product
introductions. Fiscal 1999 results included a bad debt provision of $70 million
and a termination fee associated with a telecommunications contract. The bad
debt provision reflects, in part, inadequate staffing of and focus on
receivables collections during a portion of fiscal 1999, implementation issues
associated with certain products and contingencies associated with contract
disputes.

Fiscal 1999 capital expenditures reflect the acquisition and construction
of the segment's new corporate office building in Georgia.

The return on committed capital and total capital employed in fiscal 2001
and 2000 reflect the previously discussed decline in operating profit.

INTERNATIONAL OPERATIONS

International operations accounted for 6.6%, 6.4% and 6.9%, and 4.2%, 8.7%
and 6.6%, of fiscal 2001, 2000 and 1999 consolidated revenues and operating
profits before unusual items, respectively, and 5.6%, 5.8% and 5.5% of
consolidated assets at March 31, 2001, 2000 and 1999, respectively.
International operations are subject to certain opportunities and risks,
including currency fluctuations. The Company monitors its operations and adopts
strategies responsive to changes in the economic and political environment in
each of the countries in which it operates.

CONSOLIDATED WORKING CAPITAL

Operating working capital (receivables and inventories net of related
payables) as a percent of revenues was 7.6%, 9.0% and 8.4% at March 31, 2001,
2000 and 1999, respectively. Excluding the impact of receivable sales, operating
working capital as a percent of revenues was 7.6%, 9.0% and 9.7% at March 31,
2001, 2000

F-21
<PAGE> 47
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

and 1999, respectively. The calculation is based on year-end balances and
assumes major purchase acquisitions occurred at the beginning of the year.

The improvement in the operating working capital ratio in fiscal 2001 is
due to an increase in days sales outstanding in payables reflecting purchases
made later in the year and the timing of vendor payments. The improvement in the
ratio in 2000 (excluding the impact of receivable sales) is due to a reduction
in year-end days sales outstanding in both customer receivables and inventory,
reflecting working capital initiatives. In fiscal 2000, this improvement was
offset, in part, by lower days sales outstanding in payables at March 31, 2000
compared to March 31, 1999.

CASH FLOW AND LIQUIDITY

Cash and cash equivalents and marketable securities (primarily U.S.
Treasury securities with maturities of one year or less) were $446 million, $606
million and $262 million at March 31, 2001, 2000 and 1999, respectively.

The increase in cash and cash equivalents and marketable securities in 2000
reflects proceeds from the February 2000 sale of the Water Products business and
a private placement of term debt (see "Other Financing Activities" below).

Marketable securities balances include $4 million, $17 million and $23
million at March 31, 2001, 2000 and 1999, respectively, from the fiscal 1997
sale of Armor All, which securities are restricted and held in trust as exchange
property in connection with the Company's exchangeable debentures.

CASH FLOWS FROM OPERATIONS AVAILABLE FOR CAPITAL EXPENDITURES

The following table summarizes the excess (deficit) of cash flow from
operations over capital expenditures:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
2001 2000 1999
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Net cash provided (used) by continuing operations:
Income (loss) from continuing operations(1).............. $ (43) $ 185 $ 61
Depreciation............................................. 116 116 104
Amortization of intangibles.............................. 66 55 41
Amortization of capitalized software..................... 65 51 36
Other non-cash charges(1)................................ 513 382 361
Working capital changes.................................. (357) (689) (445)
----- ----- -----
Total before receivables sales and capital
expenditures................................... 360 100 158
Receivable sales......................................... -- (400) 100
Capital expenditures..................................... (159) (145) (199)
----- ----- -----
Excess (Deficit)................................. $ 201 $(445) $ 59
===== ===== =====
</TABLE>

- ---------------
(1) Includes previously discussed "Unusual Items".

Cash flows from continuing operations reflect the cash earnings of the
Company's continuing businesses and the effects of the changes in working
capital. The working capital increase in fiscal 2001 primarily reflects the
timing of vendor payments in the Health Care Supply Management segment partially
offset by the payment of income taxes on the gain on sale of the Water Products
business that was sold in late fiscal 2000. The working capital increase in
fiscal 2000 primarily reflects the timing of vendor payments in the prior year
and increases in receivables and inventories associated with sales growth in the
Health Care Supply

F-22
<PAGE> 48
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

Management segment that were offset, in part, by improvements in days sales
outstanding in both customer receivables and inventories resulting from working
capital initiatives. The March 31, 1999 payables balance was approximately $400
million higher than expected based on the historical relationship of payables to
sales. The increase in working capital requirements in fiscal 2000 reflects the
restoration of payables to a more normalized level. Adjusting for the impact of
the payables fluctuation, net cash provided (used) by continuing operations
before receivable sales and capital expenditures would have been approximately
$500 million and $(242) million in fiscal 2000 and 1999, respectively. The
working capital increase in fiscal 1999 primarily reflects increases in
receivables and inventories resulting from sales growth in all operating
segments offset, in part, by the higher payables balance due to the timing of
vendor payments in the Health Care Supply Management segment.

Fiscal 1999 capital expenditures reflect the acquisition and construction
of the Health Care Information Technology segment's new headquarters office
building.

OTHER FINANCING ACTIVITIES

In July 2000, the Company announced a program to repurchase from time to
time up to $250 million of the Company's shares of common stock in open market
or private transactions. In fiscal 2001, the Company repurchased 2.2 million
shares under this program for $66 million.

In October 2000, the Company renewed its 364-day revolving credit agreement
which allows for borrowings up to $825 million under terms substantially similar
to those previously in place, except that a 364-day term out option was
reinstated.

In February 2000, the Company completed the sale of its wholly-owned
subsidiary McKesson Water Products Company to Groupe Danone for $1.1 billion in
cash, which enabled the Company to reduce short-term borrowings and add to its
cash and marketable securities.

Also in February 2000, the Company completed a private placement of $335
million in term debt, the proceeds of which were used to retire term debt
maturing in March 2000 and for other general corporate purposes. $100 million of
the debt matures on February 28, 2005, $20 million matures on February 28, 2007
and $215 million is due on February 28, 2010.

In May 1998, the Company's Employee Stock Ownership Plan purchased
approximately 1.3 million shares of newly issued Company common stock from the
Company at a market value of $78.125 per share.

CREDIT RESOURCES

The Company currently has $1.225 billion of available credit under
committed revolving credit lines: a $400 million five-year facility expiring in
fiscal 2004 and an $825 million facility expiring on October 9, 2001. These
revolving credit facilities are primarily intended to support commercial paper
borrowings. The Company also has available a committed revolving receivables
sale facility aggregating $850 million. The Company anticipates that this
facility will be renewed prior to its termination date of June 15, 2001. At
March 31, 2001, the Company had no commercial paper or revolving credit
borrowings outstanding and its committed receivables sale facility was fully
available.

The Company's senior debt credit ratings from S&P, Fitch, and Moody's are
currently BBB, BBB and Baa2, respectively, and its commercial paper ratings are
currently A-2, F-2, and P-2, respectively. The Company's ratings are on negative
credit outlook.

Management believes that the Company has adequate access to credit sources
to meet its funding requirements. Funds necessary for future debt maturities and
other cash requirements of the Company are expected to be met by existing cash
balances, cash flow from operations, existing credit sources or other capital
market transactions.
F-23
<PAGE> 49
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

MARKET RISK

The Company's major risk exposure is changing interest rates, primarily in
the United States. The Company manages interest rates through the use of a
combination of fixed and floating rate debt. Interest rate swaps may be used to
adjust interest rate exposures when appropriate, based upon market conditions.
These contracts are entered into with major financial institutions thereby
minimizing the risk of credit loss.

If interest rates on existing variable-rate debt were to change 50 basis
points, the Company believes that its results from operations and cash flows
would not be materially affected.

The Company conducts business in Canada, Mexico, France, the Netherlands,
Ireland, Saudi Arabia, Kuwait, Australia, New Zealand and the United Kingdom,
and is subject to foreign currency exchange risk on cash flows related to sales,
expenses, financing and investment transactions. If exchange rates on such
currencies were to fluctuate 10%, the Company believes that its results from
operations and cash flows would not be materially affected. Aggregate foreign
exchange translation gains and losses included in operations, comprehensive
income and in equity are discussed in Financial Note 1 on pages F-35 to F-37 of
the accompanying consolidated financial statements.

CAPITALIZATION

The Company's capitalization was as follows:

<TABLE>
<CAPTION>
MARCH 31,
--------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Short-term borrowings.................................... $ -- $ -- $ 17
Term debt................................................ 1,223 1,232 1,097
Exchangeable debt........................................ 7 28 37
------ ------ ------
Total debt..................................... 1,230 1,260 1,151
Convertible preferred securities of subsidiary trust..... 196 196 196
Stockholders' equity..................................... 3,493 3,566 2,882
------ ------ ------
Total capitalization........................... $4,919 $5,022 $4,229
====== ====== ======
Debt-to-capital ratio.................................... 25.0% 25.1% 27.2%
Net debt-to-net capital ratio(1)......................... 17.5% 14.8% 22.4%
Average interest rates during year
Total debt..................................... 7.4% 6.4% 6.3%
Short-term borrowings.......................... 6.6 5.6 5.6
Other debt..................................... 7.5 6.9 6.7
</TABLE>

- ---------------
(1) Ratio computed as net debt (total debt less cash and cash equivalents and
marketable securities) to net capital employed (capital employed less cash
and cash equivalents and marketable securities).

The increase in the net debt-to-capital ratio at March 31, 2001 primarily
reflects the increase in net debt to fund internal growth. The decline in the
net debt-to-capital ratio at March 31, 2000 primarily reflects the February 2000
proceeds from the sale of the Water Products business.

At March 31, 2001, the Company had an $850 million committed receivables
sales facility which was fully available. The Company's accounts receivable
sales program accommodated the sale by the Company in March 1999 of $400.0
million, of undivided interests in the Company's trade accounts receivable. The
program qualifies for sale treatment under Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" and under SFAS No. 140, "Accounting
For Transfers and Servicing Financial Assets and Extinguishments of Liabili-

F-24
<PAGE> 50
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

ties" which replaces SFAS No. 125 effective in the Company's fiscal year 2002.
The sales were recorded at the estimated fair values of the receivables sold,
reflecting discounts for the time value of money based on U.S. commercial paper
rates and estimated loss provisions.

Average diluted shares were 292.9 million in fiscal 2001, 289.6 million in
fiscal 2000 and 289.8 million in fiscal 1999. The increase in the average
diluted shares in fiscal 2001 is due to an increase in the effect of dilutive
securities resulting from the increase in the Company's stock price, and an
increase in common shares outstanding. Common stock outstanding increased to
284.0 million at March 31, 2001, 283.4 million at March 31, 2000, 280.6 million
at March 31, 1999, due primarily to the issuance of common stock under employee
benefit plans and in fiscal 2001 by the acquisition of MediVation, Inc.,
partially offset by the 2.2 million shares repurchased as part of the previously
discussed $250 million share repurchase program.

ENVIRONMENTAL MATTERS

The Company's continuing operations do not require ongoing material
expenditures to comply with federal, state and local environmental laws and
regulations. However, in connection with the disposition of its chemical
operations in fiscal 1987, the Company retained responsibility for certain
environmental obligations. In addition, the Company is a party to a number of
proceedings brought under the Comprehensive Environmental Response, Compensation
and Liability Act (commonly known as "Superfund"), and other federal and state
environmental statutes primarily involving sites associated with the operation
of the Company's former chemical distribution businesses. In fiscal 2000, a $2.0
million increase to the liability for these environmental matters was recorded
within discontinued operations. There were no adjustments made to the reserves
in fiscal 2001 and 1999. Management does not believe that changes in the
remediation cost estimates in future periods, or the ultimate resolution of the
Company's environmental matter, will have a material impact on the Company's
consolidated financial position or results of operations. See Financial Note 18,
"Other Commitments and Contingent Liabilities" on pages F-62 to F-69 of the
accompanying consolidated financial statements.

INCOME TAXES

The tax rate on income from continuing operations (excluding unusual items)
was 39.0% in fiscal 2001, 38.5% in fiscal 2000 and 37.5% in fiscal 1999. The
increase in the effective rate from fiscal 1999 to 2001 primarily reflects the
impact of non-deductible goodwill amortization associated with purchase
acquisitions made late in fiscal 1999 and in fiscal 2000 and 2001.

NEW ACCOUNTING PRONOUNCEMENTS

See Financial Note 1 "Significant Accounting Policies" on pages F-35 to
F-37 of the accompanying consolidated financial statements.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

The following additional factors may affect the Company's future results:

ADVERSE RESOLUTION OF PENDING LITIGATION REGARDING THE RESTATEMENT OF THE
COMPANY'S HISTORICAL FINANCIAL STATEMENTS MAY CAUSE IT TO INCUR MATERIAL LOSSES.

Subsequent to the Company's April 28, 1999 restatement of financial results
announcement, and as of April 30, 2001, 85 lawsuits have been filed against the
Company, certain of the Company's or HBOC's current or former officers or
directors, and other defendants (see Financial Note 18, "Other Commitments and
Contingent Liabilities" on pages F-62 to F-69 of the accompanying consolidated
financial statements.) In addition, the United States Attorney's Office for the
Northern District of California and the San Francisco

F-25
<PAGE> 51
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

District Office of the SEC have also commenced investigations in connection with
the matters relating to the restatement of previously reported amounts.

The Company does not believe it is feasible to predict or determine the
outcome or resolution of these proceedings, or to estimate the amount of, or
potential range of, loss with respect to these 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 cause it to incur material losses.

THE RESTATEMENT OF THE COMPANY'S EARNINGS MAY NEGATIVELY IMPACT THE MANAGEMENT
OF THE COMPANY'S BUSINESS.

The effect of the pending litigation and government investigations could
impair the Company's ability to attract and retain quality employees and
managers.

CHANGES IN THE UNITED STATES HEALTHCARE ENVIRONMENT COULD HAVE A MATERIAL
NEGATIVE IMPACT ON THE COMPANY'S REVENUES.

The Company's products and services are intended to function within the
structure of the healthcare financing and reimbursement system currently being
used in the United States. In recent years, the healthcare industry has changed
significantly in an effort to reduce costs. These changes include increased use
of managed care, cuts in Medicare reimbursement levels, consolidation of
pharmaceutical and medical-surgical supply distributors, and the development of
large, sophisticated purchasing groups. The Company expects the healthcare
industry to continue to change significantly in the future. Some of these
changes, such as a reduction in governmental support of healthcare services or
adverse changes in legislation or regulations governing the privacy of patient
information, or the delivery or pricing of pharmaceuticals and healthcare
services or mandated benefits, may cause healthcare industry participants to
greatly reduce the amount of the Company's products and services they purchase
or the price they are willing to pay for the Company's products and services.
Changes in pharmaceutical manufacturers' pricing or distribution policies could
also significantly reduce the Company's income. Due to the diverse range of
health care supply management and health care information technology products
and services the Company offers, such changes may adversely impact the Company
while not affecting some of the Company's competitors that offer a more narrow
range of products and services.

SUBSTANTIAL DEFAULTS IN PAYMENT OR A MATERIAL REDUCTION IN PURCHASES OF THE
COMPANY'S PRODUCTS BY LARGE CUSTOMERS COULD HAVE A SIGNIFICANT NEGATIVE IMPACT
ON THE COMPANY'S FINANCIAL CONDITION, RESULTS OF OPERATIONS AND LIQUIDITY.

The Company's recent strategy has been to build relationships with a
limited number of large customers that are achieving rapid growth. During the
fiscal year ended March 31, 2001, sales to the Company's ten largest customers
accounted for approximately 57% of the Company's total revenues. Sales to the
Company's largest customer, Rite Aid Corporation, represented approximately 16%
of the Company's fiscal 2001 revenues. As a result, the Company's sales and
credit concentration have significantly increased. Any defaults in payment or a
material reduction in purchases from the Company by these large customers could
have a significant negative impact on the Company's financial condition, results
of operations and liquidity.

THE ABILITY OF THE HEALTH CARE INFORMATION TECHNOLOGY BUSINESS TO ATTRACT AND
RETAIN CUSTOMERS DUE TO CHALLENGES IN INTEGRATING SOFTWARE PRODUCTS AND
TECHNOLOGICAL ADVANCES MAY SIGNIFICANTLY REDUCE THE COMPANY'S REVENUES.

The Company's Health Care Information Technology business delivers
enterprise-wide patient care, clinical, financial, managed care, payor and
strategic management software solutions, as well as networking
F-26
<PAGE> 52
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

technologies, electronic commerce, outsourcing and other services to health care
organizations throughout the United States and certain foreign countries.
Challenges in integrating software products used by the Health Care Information
Technology business with those of its customers could impair the Company's
ability to attract and retain customers and may reduce its revenues or increase
its expenses.

Future advances in the health care information systems industry could lead
to new technologies, products or services that are competitive with the products
and services offered by the Health Care Information Technology business. Such
technological advances could also lower the cost of such products and services
or otherwise result in competitive pricing pressure. The success of the Health
Care Information Technology business will depend, in part, on its ability to be
responsive to technological developments, pricing pressures and changing
business models. To remain competitive in the evolving health care information
systems marketplace, the Health Care Information Technology business must
develop new products on a timely basis. The failure to develop competitive
products and to introduce new products on a timely basis could curtail the
ability of the Health Care Information Technology business to attract and retain
customers and thereby significantly reduce the Company's net income.

PROPRIETARY TECHNOLOGY PROTECTIONS MAY NOT BE ADEQUATE AND PROPRIETARY RIGHTS
MAY INFRINGE ON RIGHTS OF THIRD PARTIES.

The Company relies on a combination of trade secret, patent, copyright and
trademark laws, nondisclosure and other contractual provisions and technical
measures to protect its proprietary rights in its products. There can be no
assurance that these protections will be adequate or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. Although the Company
believes that its products and other proprietary rights do not infringe upon the
proprietary rights of third parties, from time to time third parties have
asserted infringement claims against the Company and there can be no assurance
that third parties will not assert infringement claims against the Company in
the future. Additionally, the Company may find it necessary to initiate
litigation to protect the Company's trade secrets, to enforce its patent,
copyright and trademark rights, and to determine the scope and validity of the
proprietary rights of others. These types of litigation can be costly and time
consuming. These litigation expenses or any damage payments resulting from
adverse determinations of third party claims could be significant and result in
material losses to the Company.

POTENTIAL PRODUCT LIABILITY CLAIMS ARISING FROM HEALTH CARE INFORMATION
TECHNOLOGY BUSINESS PRODUCTS COULD RESULT IN MATERIAL LOSSES TO THE COMPANY.

The Company provides products that assist clinical decision-making and
relate to patient medical histories and treatment plans. If these products fail
to provide accurate and timely information, customers could assert liability
claims against the Company. Litigation with respect to liability claims,
regardless of the outcome, could result in substantial cost to the Company,
divert management's attention from operations and decrease market acceptance of
the Company's products. The Company attempts to limit by contract its liability
for damages from negligence, errors or mistakes. Despite this precaution, the
limitations of liability set forth in the contracts may not be enforceable or
may not otherwise protect the Company from liability for damages. The Company
maintains general liability insurance coverage, including coverage for errors
and omissions. However, this coverage may not continue to be available on
acceptable terms or may not be available in sufficient amounts to cover one or
more large claims against the Company. In addition, the insurer might disclaim
coverage as to any future claim.

F-27
<PAGE> 53
MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONTINUED)

SYSTEM ERRORS AND WARRANTIES IN HEALTH CARE INFORMATION TECHNOLOGY BUSINESS
PRODUCTS COULD CAUSE UNFORESEEN LIABILITIES.

The Company's Health Care Information Technology business' systems are very
complex. As with complex systems offered by others, the Company's systems may
contain errors, especially when first introduced. The Health Care Information
Technology business' systems are intended to provide information for health care
providers in providing patient care. Therefore, users of its products have a
greater sensitivity to system errors than the market for software products
generally. Failure of a client's system to perform in accordance with its
documentation could constitute a breach of warranty and could require the
Company to incur additional expense in order to make the system comply with the
documentation. If such failure is not timely remedied, it could constitute a
material breach under a contract allowing the client to cancel the contract,
obtain refunds of amounts previously paid or assert claims for significant
damages.

POTENTIAL REGULATION BY THE U.S. FOOD AND DRUG ADMINISTRATION ("FDA") OF
INFORMATION TECHNOLOGY PRODUCTS AS MEDICAL DEVICES COULD IMPOSE INCREASED COSTS,
DELAY THE INTRODUCTION OF NEW PRODUCTS AND HURT THE COMPANY'S BUSINESS.

The FDA is likely to become increasingly active in regulating computer
software intended for use in the health care setting. The FDA has increasingly
focused on the regulation of computer products and computer-assisted products as
medical devices under the federal Food, Drug and Cosmetic Act. If the FDA
chooses to regulate any of the Company's products as medical devices, it can
impose extensive requirements upon the Company. If the Company fails to comply
with the applicable requirements, the FDA could respond by imposing fines,
injunctions or civil penalties, requiring recalls or product corrections,
suspending production, refusing to grant pre-market clearance or approval of
products, withdrawing clearances and approvals and initiating criminal
prosecution. Any final FDA policy governing computer products, once issued, may
increase the cost and time to market of new or existing products or may prevent
the Company from marketing its products.

NEW AND POTENTIAL FEDERAL REGULATIONS RELATING TO PATIENT CONFIDENTIALITY COULD
DEPRESS THE DEMAND FOR INFORMATION TECHNOLOGY PRODUCTS AND IMPOSE SIGNIFICANT
PRODUCT REDESIGN COSTS ON THE COMPANY.

State and federal laws regulate the confidentiality of patient records and
the circumstances under which those records may be released. These regulations
govern both the disclosure and use of confidential patient medical record
information and may require the users of such information to implement specified
security measures. Regulations governing electronic health data transmissions
are evolving rapidly and are often unclear and difficult to apply.

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
requires national standards for some types of electronic health information
transactions and the data elements used in those transactions, standards to
ensure the integrity and confidentiality of health information and national
health data privacy legislation or regulations. In December 2000, final health
data privacy regulations were published which will require health care
organizations to be in compliance by April, 2003. These regulations restrict the
use and disclosure of personally identifiable health information without the
prior informed consent of the patient.

Evolving HIPAA-Related laws or regulations could restrict the ability of
the Company's customers to obtain, use or disseminate patient information. This
could adversely affect demand for the Company's products and force product
re-design in order to meet the requirements of any new regulations and protect
the privacy and integrity of patient data. The Company may need to expend
significant capital, research and development and other resources to modify its
products to address these evolving data security and privacy issues.

F-28
<PAGE> 54

MCKESSON HBOC, INC.

FINANCIAL REVIEW (CONCLUDED)

THE COMPANY'S BUSINESS COULD BE HINDERED IF IT IS UNABLE TO COMPLETE AND
INTEGRATE ACQUISITIONS SUCCESSFULLY.

An element of the Company's business is to pursue strategic acquisitions
that either expand or complement its business. The Company routinely reviews
such potential acquisition opportunities and has historically engaged in
numerous acquisitions. Integration of acquisitions involves a number of special
risks. Such risks include:

- the diversion of management's attention to the assimilation of the
operations of businesses the Company has acquired;

- difficulties in the integration of operations and systems and the
realization of potential operating synergies;

- difficulties in the integration of any acquired companies operating in a
different sector of the health care industry;

- delays or difficulties in opening and operating larger distribution
centers in a larger and more complex distribution network;

- the assimilation and retention of the personnel of the acquired
companies;

- challenges in retaining the customers of the combined businesses; and

- potential adverse effects on operating results.

If the Company is unable to successfully complete and integrate strategic
acquisitions in a timely manner, its business and the Company's growth
strategies could be negatively affected.

THE COMPANY'S ISSUANCE OF EQUITY TO FINANCE ACQUISITIONS COULD HAVE A POTENTIAL
DILUTIVE EFFECT ON ITS STOCK.

The Company anticipates that it will finance acquisitions, at least partly
by incurring debt or by the issuance of additional securities. The use of equity
financing, rather than debt, for acquisitions would dilute the ownership of the
Company's then current stockholders.

F-29
<PAGE> 55

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors of
McKesson HBOC, Inc:

We have audited the accompanying consolidated balance sheets of McKesson
HBOC, Inc. and subsidiaries (the "Company") as of March 31, 2001, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. Our audits also included the supplementary
consolidated financial statement schedule listed in Item 14(a). These
consolidated financial statements and supplementary consolidated financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and supplementary consolidated financial statement schedule based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at March 31, 2001, 2000 and 1999, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, based
on our audits, such supplementary consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

As discussed in Financial Note 18 to the consolidated financial statements,
the Company is involved in certain shareholder litigation related to HBOC.

DELOITTE & TOUCHE LLP

San Francisco, California
April 30, 2001

F-30
<PAGE> 56

MCKESSON HBOC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.................................................. $42,010.0 $36,687.0 $29,970.9
--------- --------- ---------
Costs and Expenses
Cost of sales........................................... 39,579.0 34,462.1 27,650.4
Selling................................................. 372.4 356.2 444.9
Distribution............................................ 509.2 460.7 503.9
Research and development................................ 147.5 112.6 114.7
Administrative.......................................... 1,193.9 1,184.4 1,028.6
Interest................................................ 111.6 114.2 118.0
--------- --------- ---------
Total........................................... 41,913.6 36,690.2 29,860.5
--------- --------- ---------
Operating Income (Loss)................................... 96.4 (3.2) 110.4
Gain (Loss) on Investments................................ (120.9) 269.1 --
Other Income, Net......................................... 40.3 47.2 57.8
--------- --------- ---------
Income from Continuing Operations Before Income Taxes and
Dividends on Preferred Securities of Subsidiary Trust... 15.8 313.1 168.2
Income Taxes.............................................. 52.3 122.3 101.4
--------- --------- ---------
Income (Loss) from Continuing Operations Before Dividends
on Preferred Securities of Subsidiary Trust............. (36.5) 190.8 66.8
Dividends on Preferred Securities of Subsidiary Trust, Net
of Tax Benefit of $4.0, $4.0 and $4.1................... (6.2) (6.2) (6.2)
--------- --------- ---------

Income (Loss) After Taxes
Continuing operations................................... (42.7) 184.6 60.6
Discontinued operations................................. (5.6) 23.2 24.3
Discontinued operations -- Gain on sale of McKesson
Water Products Company............................... -- 515.9 --
--------- --------- ---------
Net Income (Loss)......................................... $ (48.3) $ 723.7 $ 84.9
========= ========= =========

Earnings (Loss) Per Common Share
Basic and Diluted
Continuing operations................................... $ (0.15) $ 0.66 $ 0.22
Discontinued operations................................. (0.02) 0.08 0.09
Discontinued operations -- Gain on sale of McKesson
Water Products Company............................... -- 1.83 --
--------- --------- ---------
Total........................................... $ (0.17) $ 2.57 $ 0.31
========= ========= =========
Shares on Which Earnings Per Common Share Were Based Basic
and Diluted............................................. 283.1 281.3 275.2
</TABLE>

See Financial Notes.
F-31
<PAGE> 57

MCKESSON HBOC, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
2001 2000 1999
--------- --------- --------
(IN MILLIONS, EXCEPT PAR VALUE)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 433.7 $ 548.9 $ 233.7
Marketable securities available for sale.................... 11.9 57.0 28.2
Receivables................................................. 3,443.4 3,034.5 2,552.0
Inventories................................................. 5,116.4 4,149.3 3,522.5
Prepaid expenses............................................ 158.6 175.8 116.4
--------- --------- --------
Total current assets............................... 9,164.0 7,965.5 6,452.8
--------- --------- --------
Property, plant and equipment, net.......................... 595.3 555.4 529.6
Capitalized software........................................ 103.7 92.2 106.9
Notes receivable............................................ 131.3 100.9 73.0
Goodwill and other intangibles.............................. 1,064.4 1,185.6 1,200.6
Net assets of discontinued operations....................... -- -- 179.4
Other assets................................................ 471.2 473.3 477.7
--------- --------- --------
Total assets....................................... $11,529.9 $10,372.9 $9,020.0
========= ========= ========

LIABILITIES
Drafts payable.............................................. $ 758.6 $ 205.6 $ 417.7
Accounts payable -- trade................................... 4,603.3 3,678.3 3,131.7
Deferred revenue............................................ 378.5 368.7 408.6
Short-term borrowings....................................... -- -- 16.7
Current portion of long-term debt........................... 194.1 16.2 195.3
Salaries and wages.......................................... 142.2 115.5 93.0
Taxes....................................................... 79.8 354.8 90.8
Interest and dividends...................................... 31.0 33.9 34.7
Other....................................................... 362.2 348.8 356.3
--------- --------- --------
Total current liabilities.......................... 6,549.7 5,121.8 4,744.8
--------- --------- --------
Postretirement obligations and other noncurrent
liabilities............................................... 255.8 245.7 258.6
Long-term debt.............................................. 1,035.6 1,243.8 939.2
McKessonHBOC-obligated mandatorily redeemable preferred
securities of subsidiary grantor trust whose sole assets
are junior subordinated debentures of McKessonHBOC........ 195.9 195.8 195.6
Other Commitments and Contingent Liabilities (Note 18)...... -- -- --

STOCKHOLDERS' EQUITY
Common stock (400.0 shares authorized, 286.3, 283.9 and
281.1 issued as of March 31, 2001, 2000 and 1999,
respectively; par value of $.01).......................... 2.9 2.8 2.8
Additional paid-in capital.................................. 1,828.7 1,791.1 1,725.7
Other capital............................................... (108.4) (126.1) (107.7)
Retained earnings........................................... 2,006.6 2,122.3 1,465.0
Accumulated other comprehensive losses...................... (75.0) (97.1) (57.7)
ESOP notes and guarantees................................... (89.0) (99.9) (115.5)
Treasury shares, at cost.................................... (72.9) (27.3) (30.8)
--------- --------- --------
Stockholders' equity............................... 3,492.9 3,565.8 2,881.8
--------- --------- --------
Total liabilities and stockholders' equity......... $11,529.9 $10,372.9 $9,020.0
========= ========= ========
</TABLE>

See Financial Notes.
F-32
<PAGE> 58

MCKESSON HBOC, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(SHARES IN THOUSANDS, DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
TREASURY
COMMON ACCUMULATED ESOP ---------------
STOCK ADDITIONAL OTHER NOTES
---------------- PAID-IN OTHER RETAINED COMPREHENSIVE AND COMMON
SHARES AMOUNT CAPITAL CAPITAL EARNINGS LOSSES GUARANTEES SHARES AMOUNT
------- ------ ---------- ------- -------- ------------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, MARCH 31, 1998........ 271,162 $2.7 $1,330.9 $ (59.1) $1,462.5 $(54.9) $(115.6) (179) $ (4.8)
Issuance of shares under
employee plans................. 7,454 0.1 288.3 (48.6) (360) (26.0)
Employee Stock Ownership Plan
(ESOP) note payments........... 0.1
Translation adjustment.......... (2.5)
Additional minimum pension
liability, net of tax of
$0.2........................... (0.3)
Net income...................... 84.9
Sale of shares to ESOP.......... 1,346 105.2
Other........................... 1,161 1.3 2.5
Cash dividends declared (Note
14)............................ (84.9)
------- ---- -------- ------- -------- ------ ------- ------ ------
BALANCES, MARCH 31, 1999........ 281,123 2.8 1,725.7 (107.7) 1,465.0 (57.7) (115.5) (539) (30.8)
Issuance of shares under
employee plans................. 2,745 61.4 (18.4) (92) (3.0)
ESOP note payments.............. 15.6
Translation adjustment.......... (3.7)
Additional minimum pension
liability, net of tax of
$(0.1)......................... 0.3
Net income...................... 723.7
Acquisition of Abaton.com....... 8.1
Unrealized loss on investments,
net of tax of $23.8............ (36.0)
Other........................... (4.1) 1.1 116 6.5
Cash dividends declared, $0.24
per common share............... (67.5)
------- ---- -------- ------- -------- ------ ------- ------ ------
BALANCES, MARCH 31, 2000........ 283,868 2.8 1,791.1 (126.1) 2,122.3 (97.1) (99.9) (515) (27.3)
Issuance of shares under
employee plans................. 1,811 0.1 17.6 17.7 429 20.0
ESOP note payments.............. 10.9
Translation adjustment.......... (15.4)
Additional minimum pension
liability, net of tax of
$(0.8)......................... 1.1
Net loss........................ (48.3)
Acquisition of MediVation.com... 625 20.0
Unrealized gain on investments,
net of tax of $(23.3).......... 36.4
Repurchase of shares............ (2,235) (65.6)
Other........................... 0.9
Cash dividends declared, $0.24
per common share............... (68.3)
------- ---- -------- ------- -------- ------ ------- ------ ------
BALANCES, MARCH 31, 2001........ 286,304 $2.9 $1,828.7 $(108.4) $2,006.6 $(75.0) $ (89.0) (2,321) $(72.9)
======= ==== ======== ======= ======== ====== ======= ====== ======

COMPREHENSIVE
STOCKHOLDERS' INCOME
EQUITY (LOSS)
-------------------- -------------
<S> <C> <C>
BALANCES, MARCH 31, 1998........ $2,561.7
Issuance of shares under
employee plans................. 213.8
Employee Stock Ownership Plan
(ESOP) note payments........... 0.1
Translation adjustment.......... (2.5) $ (2.5)
Additional minimum pension
liability, net of tax of
$0.2........................... (0.3) (0.3)
Net income...................... 84.9 84.9
Sale of shares to ESOP.......... 105.2
Other........................... 3.8
Cash dividends declared (Note
14)............................ (84.9)
-------- ------
BALANCES, MARCH 31, 1999........ 2,881.8 $ 82.1
======
Issuance of shares under
employee plans................. 40.0
ESOP note payments.............. 15.6
Translation adjustment.......... (3.7) $ (3.7)
Additional minimum pension
liability, net of tax of
$(0.1)......................... 0.3 0.3
Net income...................... 723.7 723.7
Acquisition of Abaton.com....... 8.1
Unrealized loss on investments,
net of tax of $23.8............ (36.0) (36.0)
Other........................... 3.5
Cash dividends declared, $0.24
per common share............... (67.5)
-------- ------
BALANCES, MARCH 31, 2000........ 3,565.8 $684.3
======
Issuance of shares under
employee plans................. 55.4
ESOP note payments.............. 10.9
Translation adjustment.......... (15.4) $(15.4)
Additional minimum pension
liability, net of tax of
$(0.8)......................... 1.1 1.1
Net loss........................ (48.3) (48.3)
Acquisition of MediVation.com... 20.0
Unrealized gain on investments,
net of tax of $(23.3).......... 36.4 36.4
Repurchase of shares............ (65.6)
Other........................... 0.9
Cash dividends declared, $0.24
per common share............... (68.3)
-------- ------
BALANCES, MARCH 31, 2001........ $3,492.9 $(26.2)
======== ======
</TABLE>

See Financial Notes.
F-33
<PAGE> 59

MCKESSON HBOC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------
2001 2000 1999
-------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations.................... $ (42.7) $ 184.6 $ 60.6
Adjustments to reconcile to net cash provided (used) by
operating activities:
Depreciation.............................................. 115.6 116.3 103.9
Amortization.............................................. 130.5 106.3 76.7
Provision for bad debts................................... 239.6 216.8 87.2
Deferred taxes on income.................................. (21.4) 26.5 (33.0)
Other noncash............................................. 295.1 138.4 307.2
-------- --------- --------
Total.............................................. 716.7 788.9 602.6
-------- --------- --------
Effects of changes in:
Receivables............................................... (624.3) (753.0) (685.3)
Inventories............................................... (985.0) (629.8) (894.2)
Accounts and drafts payable............................... 1,500.7 296.1 1,268.6
Deferred revenue.......................................... 13.0 14.0 126.5
Taxes..................................................... (297.3) 25.8 (55.8)
Other..................................................... 36.0 (42.4) (104.7)
-------- --------- --------
Total.............................................. (356.9) (1,089.3) (344.9)
-------- --------- --------
Net cash provided (used) by continuing
operations....................................... 359.8 (300.4) 257.7
Discontinued operations..................................... (6.7) (13.1) (23.6)
-------- --------- --------
Net cash provided (used) by operating activities... 353.1 (313.5) 234.1
-------- --------- --------
INVESTING ACTIVITIES
Maturities of marketable securities, net.................... 13.9 1.7 90.0
Property acquisitions....................................... (158.9) (145.1) (199.2)
Properties sold............................................. 11.6 14.9 22.3
Proceeds from sales of subsidiaries and investments......... -- 1,077.9 --
Notes receivable issuances, net............................. (30.9) (36.9) (32.9)
Acquisitions of businesses, less cash and short-term
investments acquired...................................... (51.9) (128.9) (277.8)
Other....................................................... (126.6) (231.3) (189.6)
-------- --------- --------
Net cash provided (used) by investing activities... (342.8) 552.3 (587.2)
-------- --------- --------
FINANCING ACTIVITIES
Proceeds from issuance of debt.............................. 9.3 335.0 82.7
Repayment of debt........................................... (42.1) (222.9) (189.5)
Dividends paid on convertible preferred securities.......... (10.0) (10.0) (10.0)
Capital stock transactions:
Issuances................................................. 38.6 26.2 224.9
Repurchases............................................... (65.6) -- --
ESOP note payments........................................ 10.9 15.6 0.1
Dividends paid............................................ (68.3) (67.5) (84.9)
Other....................................................... 1.7 -- (0.9)
-------- --------- --------
Net cash provided (used) by financing activities... (125.5) 76.4 22.4
-------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ (115.2) 315.2 (330.7)
Cash and Cash Equivalents at beginning of year.............. 548.9 233.7 564.4
-------- --------- --------
Cash and Cash Equivalents at end of year.................... $ 433.7 $ 548.9 $ 233.7
======== ========= ========
</TABLE>

See Financial Notes.
F-34
<PAGE> 60

MCKESSON HBOC, INC.

FINANCIAL NOTES

1. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of McKesson HBOC, Inc. ("McKesson
HBOC" or the "Company") include the financial statements of all majority-owned
companies, except those classified as discontinued operations. All significant
intercompany transactions and balances have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year presentation.

The Company is organized under two operating segments, Health Care Supply
Management and Health Care Information Technology. Within the United States and
Canada, the Health Care Supply Management segment is a leading wholesale
distributor of ethical and proprietary drugs, medical-surgical supplies and
health and beauty care products principally to chain and independent drug
stores, hospitals, alternate care sites, food stores and mass merchandisers.
Health Care Supply Management operations also include the manufacture and sale
of automated pharmaceutical dispensing systems for hospitals and retail
pharmacists, medical management services and tools for payors and providers,
marketing and other support services to pharmaceutical manufacturers, consulting
and outsourcing services to pharmacies, and distribution of first-aid products
to industrial and commercial customers. The Health Care Information Technology
segment delivers enterprise-wide patient care, clinical, financial, supply
chain, managed care, payor and strategic management software solutions, as well
as networking technologies, including wireless capabilities, electronic
commerce, outsourcing and other services to health care organizations throughout
the United States and certain foreign countries.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Cash and Cash Equivalents include all highly liquid debt instruments
purchased with a maturity of three months or less at the date of acquisition.

Marketable Securities Available for Sale are carried at fair value and the
net unrealized gains and losses, net of the related tax effect, computed in
marking these securities to market have been reported within stockholders'
equity. The investments mature on various dates through fiscal 2002.

Inventories are stated at the lower of cost or market. Inventories of the
Health Care Supply segment consist of merchandise held for resale with the
majority of the cost of domestic inventories determined on the last-in first-out
("LIFO") method and international inventories stated at average cost. Health
Care Information Technology segment inventories consist of computer hardware
with cost determined either by the specific identification or first-in,
first-out ("FIFO") method.

Property, Plant and Equipment is stated at cost and depreciated on the
straight-line method at rates designed to distribute the cost of properties over
estimated service lives ranging from one to 50 years.

Capitalized Software primarily includes development costs of Health Care
Information Technology software products once the project has reached the point
of technological feasibility. Management monitors the net realizable value of
all software development investments to ensure that the investment will be
recovered through future sales. Completed projects are amortized after reaching
the point of general availability using the straight-line method based on an
estimated useful life of three years.

The Company capitalized software development costs of $39.3 million, $54.5
million and $56.3 million in fiscal 2001, 2000 and 1999, respectively.
Amortization of capitalized software held for sale totaled $31.8 million, $32.2
million and $25.9 million in 2001, 2000, and 1999, respectively. Royalty fees of
$17.9 million, $18.2 million and $39.0 million, were expensed in 2001, 2000 and
1999, respectively, for software provided by third-party business partners.
F-35
<PAGE> 61
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

Goodwill and Other Intangibles are amortized on a straight-line basis over
periods estimated to be benefited, generally 3 to 40 years. Accumulated
amortization balances netted against goodwill and other intangibles were $218.7
million, $178.7 million and $172.3 million at March 31, 2001, 2000 and 1999,
respectively.

Long-lived Assets. The Company periodically assesses the recoverability of
the cost of its long-lived assets, including goodwill. Measurement of impairment
losses for long-lived assets, including goodwill, that the Company expects to
hold and use is based on estimated fair values of the assets. Estimates of fair
values are based on quoted market prices, when available, the results of
valuation techniques utilizing discounted cash flows (using the lowest level of
identifiable cash flows) or fundamental analysis. Long-lived assets to be
disposed of, either by sale or abandonment, are reported at the lower of
carrying amount or fair value less costs to sell.

Insurance Programs. Under the Company's insurance programs, coverage is
obtained for catastrophic exposures as well as those risks required to be
insured by law or contract. It is the policy of the Company to retain a
significant portion of certain losses related primarily to workers'
compensation, physical loss to property, business interruption resulting from
such loss, and comprehensive general, product, and vehicle liability. Provisions
for losses expected under these programs are recorded based upon the Company's
estimates of the aggregate liability for claims incurred. Such estimates utilize
certain actuarial assumptions followed in the insurance industry.

Revenue Recognition. Revenues of the Health Care Supply Management segment
are recognized when products are shipped or services are provided to customers.
Included in these revenues are large volume sales of pharmaceuticals to major
self-warehousing drugstore chains whereby the Company acts as an intermediary in
the order and subsequent delivery of products directly from the manufacturer to
the customers' warehouses. These sales totaled $10.7 billion in 2001, $8.7
billion in 2000 and $6.8 billion in 1999.

Revenues of the Health Care Information Technology segment are generated
primarily by licensing software systems (consisting of software, hardware and
maintenance support), and providing outsourcing and professional services.
Software systems are marketed under information systems agreements as well as
service agreements. Perpetual software arrangements are recognized at the time
of delivery or under the percentage of completion contract method in accordance
with Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" and
SOP 81-1 "Accounting for Performance of Construction-Type and Certain
Product-Type Contracts," based on the terms and conditions in the contract.
Changes in estimates to complete and revisions in overall profit estimates on
percentage of completion contracts are recognized in the period in which they
are determined. Hardware is generally recognized upon delivery. Multi-year
software license agreements are recognized ratably over the term of the
agreement. Implementation fees are recognized as the work is performed or under
the percentage of completion contract method. Maintenance and support agreements
are marketed under annual or multiyear agreements and are recognized ratably
over the period covered by the agreements. Remote processing services are
recognized monthly as the work is performed. Outsourcing services are recognized
as the work is performed.

The Company also offers its products on an application service provider
("ASP") basis, making available Company software functionality on a remote
processing basis from the Company's data centers. The data centers provide
system and administrative support as well as processing services. Revenue on
products sold on an ASP basis is recognized on a monthly basis over the term of
the contract.

In December 1999, the SEC released Staff Accounting Bulletin No. 101 ("SAB
101"), which provides the staff's views on applying generally accepted
accounting principles to selected revenue recognition issues. During the quarter
ended December 31, 2000, the Company adopted SAB 101, which did not materially
impact the Company's consolidated financial position, results of operations or
cash flows.

F-36
<PAGE> 62
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

Other Income, net includes interest income of $29.1 million, $21.7 million
and $37.8 million and the Company's share in the net income (loss) from
investments accounted for under the equity method of accounting of $5.9 million,
$18.2 million and $14.6 million in fiscal 2001, 2000 and 1999, respectively.

Income Taxes. The Company accounts for income taxes under the liability
method, which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.

Foreign Currency Translation. Assets and liabilities of the Company's
foreign affiliates are translated at current exchange rates, while revenue and
expenses are translated at average rates prevailing during the year. Translation
adjustments related to the Company's foreign operations are reported as a
component of stockholders' equity.

Derivative Financial Instruments. The Company's policy generally is to use
financial derivatives only to manage exposure to fluctuations in interest and
foreign currency exchange rates. The Company has entered into interest rate and
currency swap agreements to hedge certain interest and currency rate risks which
are accounted for using the settlement basis of accounting. Premiums paid on
interest rate and currency swap agreements are deferred and amortized to
interest expense over the life of the underlying hedged instrument, or
immediately if the underlying hedged instrument is settled. No gains or losses
are recorded for movements in the swaps' values during the terms of the
respective agreements. The interest rate swaps were terminated in February 2000.
(See Financial Note 10).

Employee Stock Options. The Company uses the intrinsic value method to
account for stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees".

New Accounting Pronouncements. In 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as "derivatives") and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair value. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" which defers the effective date of SFAS No. 133 until
the Company's fiscal year 2002. The FASB further amended SFAS No. 133 to address
implementation issues by issuing SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133", in June 2000. The Company completed the inventory of
potential derivative instruments and adopted SFAS No. 133 as of April 1, 2001.
The adoption of this accounting standard did not materially impact the
consolidated financial statements.

In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires entities that have securitized
financial assets to provide specific disclosures. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The adoption of this accounting standard did not
materially impact the consolidated financial statements.

F-37
<PAGE> 63
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

2. ACQUISITIONS, INVESTMENTS AND DIVESTITURES

Fiscal 2001 Acquisitions and Investments:

In July 2000, the Company acquired MediVation, Inc., a provider of an
automated web-based system for physicians to communicate with patients online,
for approximately $24 million in cash, $14 million in Company common stock and
the assumption of $6 million of employee stock incentives. A charge of $2.1
million was recorded to write off the portion of the purchase price allocated to
in-process technology for which technological feasibility had not been
established as of the acquisition date and for which there were no alternative
uses. The Company received an independent valuation that utilized a discounted
cash flow methodology by product line to assist in valuing in-process and
existing technologies as of the acquisition date. In connection with the
restructure of the Company's former iMcKesson business in February, 2001 and
based on the utilization of a discounted cash flow methodology, the Company
recorded an impairment loss for the unamortized goodwill and intangibles balance
as of March 31, 2001.

In fiscal 2001, the Company also completed a number of smaller acquisitions
including two medical-surgical distributors, nine distributors of first-aid
products, a medical management business and an information technology business.
The aggregate cost of these acquisitions, accounted for as purchases, totaled
approximately $28.1 million. The aggregate excess of purchase price over the
fair value of net assets acquired of $23.5 million is being amortized on a
straight-line basis over periods ranging from 3 to 20 years. The results of
operations of the acquired businesses have been included in the consolidated
financial statements since their respective acquisition dates.

Fiscal 2000 Acquisitions:

On November 2, 1999, the Company completed the acquisition of Abaton.com, a
provider of internet-based clinical applications for use by physician practices,
pharmacy benefit managers, benefit payors, laboratories and pharmacies, for
approximately $95 million in cash and the assumption of approximately $8 million
of employee stock incentives. A charge of $1.5 million was recorded to write off
the portion of the purchase price of Abaton.com allocated to in-process
technology for which technological feasibility had not been established as of
the acquisition date and for which there were no alternative uses. The Company
received an independent valuation that utilized a discounted cash flow
methodology by product line to assist in valuing in-process and existing
technologies as of the acquisition date. Goodwill and other intangibles related
to the acquisition amounted to $101 million. In connection with the restructure
of the Company's former iMcKesson business in February, 2001 and based on the
utilization of a discounted cash flow methodology, the Company recorded an
impairment loss for the unamortized goodwill and intangibles balance as of March
31, 2001.

In fiscal 2000, the Company also made a number of smaller acquisitions
including eight distributors of first-aid products, a provider of systems that
adjudicate third party prescription claims and three health care information
technology businesses. The aggregate cost of these acquisitions, accounted for
as purchases, totaled approximately $34.1 million. The aggregate excess of the
purchase price over the fair value of net assets acquired of $34.9 million is
being amortized on a straight-line basis over periods ranging from 6 to

F-38
<PAGE> 64
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

20 years. The results of operations of the acquired businesses have been
included in the consolidated financial statements since their respective
acquisition dates.

Fiscal 1999 Acquisitions:

HBOC Acquisition

On January 12, 1999, McKesson Corporation ("McKesson") completed the
acquisition of HBO & Company ("HBOC"), a leading health care information
technology company, by exchanging 177 million shares of McKesson common stock
for all of the issued and outstanding shares of common stock of HBOC. Each share
of HBOC stock was exchanged for 0.37 of a share of McKesson common stock (the
"Exchange Ratio"). McKesson was renamed McKesson HBOC, Inc. The transaction was
structured as a tax-free reorganization and was accounted for as a pooling of
interests.

In April 1999, the Company discovered improper accounting practices at
HBOC. In July, 1999, the Audit Committee of the Company's Board of Directors
completed an investigation into such matters which resulted in the previously
reported restatement of the Company's historical consolidated financial
statements related to HBOC (pre-acquisition) in fiscal 1999, 1998 and 1997. In
fiscal 2000, the Company incurred costs in connection with the investigation and
the resulting restatement of the historical consolidated financial statements,
and pending litigation (see Financial Note 18) and recorded charges of $18.9
million for accounting and legal fees and other costs.

Other Poolings of Interests

In addition to the HBOC acquisition, the following acquisitions were
accounted for under the pooling of interests method:

In August 1998, the Company acquired Hawk Medical Supply, Inc., a
distributor of medical-surgical supplies primarily to the primary care sector,
for approximately 2 million shares of Company common stock.

Also in August 1998, the Company acquired J. Knipper and Company, a
provider of direct mail, fulfillment and sales support services, including
sample distribution to physician and pharmaceutical company sales
representatives, for approximately 300,000 shares of Company common stock.

In October 1998, the Company completed the acquisition of IMNET Systems,
Inc., a provider of electronic information and document management solutions for
the health care industry, for the equivalent, after application of the Exchange
Ratio, of approximately 3.6 million shares of Company common stock and 0.6
million Company stock options.

In December 1998, the Company acquired Access Health, Inc., a provider of
clinically based care management programs and health care information services,
for the equivalent, after application of the Exchange Ratio, of approximately
12.7 million shares of Company common stock.

In connection with the fiscal 1999 acquisitions discussed above, the
Company incurred transaction costs, primarily consisting of professional fees
such as investment banking, legal and accounting fees of $84.6 million,
including $6.6 million of transaction costs associated with various terminated
transactions which had been explored by the Company. In addition, the Company
incurred acquisition-related employee benefit costs

F-39
<PAGE> 65
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

of $88.7 million, primarily related to benefits received by employees in
connection with change of control provisions, signing and retention bonuses and
retirement and employee benefits.

Purchase Transactions

The following fiscal 1999 acquisitions were accounted for under the
purchase method and the results of operations of the acquired businesses have
been included in the consolidated financial statements since their respective
acquisition dates:

In September 1998, the Company acquired MedManagement LLC, a pharmacy
management, purchasing, consulting and information services company, for
approximately $38 million in cash. The acquisition was funded with debt. The
excess of the purchase price over the fair value of the net assets acquired of
$41 million is being amortized on a straight-line basis over 20 years.

In November 1998, the Company acquired RedLine HealthCare Corporation
("RedLine"), a distributor of medical supplies and services to the extended-care
industry, including long-term-care and home-care sites for approximately $233
million in cash. The acquisition was funded with debt. The valuation of the
RedLine net assets acquired included the recognition of liabilities totaling
$5.8 million related to closures of duplicate facilities, and involuntary
termination and relocation benefits. The excess of the purchase price over the
fair value of the net assets acquired of $149 million is being amortized on a
straight-line basis over 40 years.

In fiscal 1999, the Company also made a number of smaller acquisitions
including six distributors of first-aid products. The aggregate cost of these
acquisitions, accounted for as purchases, totaled approximately $35 million.

Divestiture

On February 29, 2000, the Company sold its wholly-owned subsidiary,
McKesson Water Products Company (the "Water Products business") to Groupe Danone
for approximately $1.1 billion in cash and recognized an after-tax gain of
$515.9 million. The taxes related to this transaction were accrued in fiscal
2000 and paid in fiscal 2001. All of the net assets and results of operations of
the Water Products business have been classified as discontinued operations and
all prior years restated accordingly.

3. GAIN (LOSS) ON INVESTMENTS

In November 1999, the Company received 4.5 million shares of WebMD
Corporation common stock and 8.4 million warrants to purchase WebMD Corporation
common stock in exchange for its shares and warrants of WebMD, Inc. as a result
of the November 11, 1999 merger between Healtheon Corporation and WebMD, Inc.
The Company recorded gains on the exchange of the common stock based on the
November 11, 1999 closing market price and on the warrants at fair value using
the Black-Scholes valuation method.

In December 1999, the Company donated 250,000 shares of WebMD common stock
to the McKesson HBOC Foundation and sold 2.0 million WebMD common shares. As a
result of these events, the Company recognized gains related to the investment
in WebMD of $242.8 million. In addition, other equity investments were sold in
December 1999 at a gain of $20.3 million, and a $9.8 million charge was recorded
in administrative expense to reflect the donation of the WebMD common stock to
the McKesson HBOC Foundation. In January 2000, the Company recognized a gain of
$5.9 million on the sale of its remaining investment in WebMD common shares.

The estimated fair value of the WebMD warrants declined to $0.3 million as
of March 31, 2001. As a result of the continued decline in the value, the
Company recorded an other than temporary impairment loss on this investment of
$93.1 million during the fiscal year. The Company also recorded an impairment
loss of

F-40
<PAGE> 66
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

$35.6 million based upon its review of other equity and venture capital
investments during the fiscal year. The impairment losses were partially offset
by a gain of $7.8 million on the liquidation of another investment.

4. RESTRUCTURING AND ASSET IMPAIRMENTS

In fiscal 2001, 2000 and 1999, the Company recorded charges and adjustments
for restructuring and asset impairments of $355.9 million, $232.7 million and
$140.3 million, respectively. The major components of the charges are as
follows:

<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Write-down of assets..................................... $309.2 $234.2 $ 91.2
Other exit-related costs................................. 10.1 (5.7) 17.2
Severance................................................ 36.6 4.2 31.9
------ ------ ------
$355.9 $232.7 $140.3
====== ====== ======
</TABLE>

A summary of the activity for severance and exit-related accruals from
March 31, 1998 to March 31, 2001, by operating segment, follows:

<TABLE>
<CAPTION>
HEALTH CARE HEALTH CARE
SUPPLY MANAGEMENT INFORMATION TECHNOLOGY CORPORATE
------------------------ ------------------------ ------------------------
SEVERANCE EXIT-RELATED SEVERANCE EXIT-RELATED SEVERANCE EXIT-RELATED TOTAL
--------- ------------ --------- ------------ --------- ------------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1998........ $ 9.6 $ 5.7 $ 0.5 $ 1.1 $ -- $ -- $ 16.9
Fiscal 1999 Charges............ 22.3 17.2 12.6 -- -- -- 52.1
Adjustments.................... (3.0) -- -- -- -- -- (3.0)
Severance paid during the
year......................... (12.1) -- (7.1) -- -- -- (19.2)
Costs paid during the year..... -- (3.9) -- (0.5) -- -- (4.4)
------ ----- ----- ----- ----- ---- ------
BALANCE, MARCH 31, 1999........ 16.8 19.0 6.0 0.6 -- -- 42.4
Fiscal 2000 Charges............ 2.3 0.6 3.9 0.6 -- -- 7.4
Adjustments.................... (1.2) (6.9) (0.8) -- -- -- (8.9)
Severance paid during the
year......................... (10.7) -- (4.2) -- -- -- (14.9)
Costs paid during the year..... -- (2.6) -- (0.5) -- -- (3.1)
------ ----- ----- ----- ----- ---- ------
BALANCE, MARCH 31, 2000........ 7.2 10.1 4.9 0.7 -- -- 22.9
Fiscal 2001 Charges............ 9.5 2.6 3.3 8.5 24.7 0.3 48.9
Adjustments.................... (0.9) (1.3) -- -- -- (2.2)
Severance paid during the
year......................... (5.8) -- (4.7) -- -- -- (10.5)
Costs paid during the year..... -- (3.9) -- (0.2) -- -- (4.1)
------ ----- ----- ----- ----- ---- ------
BALANCE, MARCH 31, 2001........ $ 10.0 $ 7.5 $ 3.5 $ 9.0 $24.7 $0.3 $ 55.0
====== ===== ===== ===== ===== ==== ======
</TABLE>

The remaining balances at March 31, 2001 relate primarily to charges
recorded in fiscal 2001 and 1999. The reserves for exit-related items consist
primarily of remaining contract obligations and costs for preparing facilities
for disposal, lease costs and property taxes required subsequent to termination
of operations.

F-41
<PAGE> 67
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

A description of the restructuring and asset impairment charges in fiscal
2001, 2000 and 1999, by segment, follows:

Fiscal 2001

HEALTH CARE SUPPLY MANAGEMENT

In May 2000, the Company announced the formation of a new business unit,
iMcKesson to focus on healthcare applications using the Internet and other
emerging technologies. iMcKesson included selected assets from the former
e-Health, Health Care Supply Management and Health Care Information Technology
segments and acquisitions of strategic investments and businesses.

In connection with an assessment of these businesses, management decided to
discontinue a product line and close an office in the United Kingdom. Asset
impairment charges totaling $16.9 million were recorded, including $15.9 million
for certain strategic investments held by the medical management business that
became impaired during the year and $1.0 million primarily for capitalized
software. A severance charge of $1.0 million was recorded related to the
termination of approximately 70 employees primarily in customer service and
administrative functions which will be paid in fiscal 2002. In addition, the
Company recorded exit-related costs of $0.3 million and paid $0.2 million for
contract termination fees and lease obligations remaining subsequent to
termination of operations.

Also during fiscal 2001, the Company announced its plans to close a call
center. The Company recorded severance charges of $2.1 million related to the
termination of approximately 114 employees, primarily in customer service
functions, and exit-related costs of $0.2 million. During the year, severance of
$1.6 million was paid to approximately 95 of those employees and the remainder
will be paid in fiscal 2002.

In addition, the Company closed a Health Care Supply Management
pharmaceutical distribution center. In connection with this closure, the Company
recorded charges of $0.7 million in asset impairments, $0.5 million for
severance relating to the termination of 54 employees and $0.5 million for
facility closing costs. The Company paid $0.4 million to 43 of those employees
and $0.5 million of facility closing costs. The Company also recorded a
severance charge of $0.5 million relating to the termination of 25 employees in
the Health Care Supply Management pharmacy management business and paid $0.4
million to 20 of those employees.

In the fourth quarter of fiscal 2001, the Company reviewed the operations
and cost structure of its pharmaceutical services business resulting in the
planned closures of two offices. The Company recorded $1.4 million in asset
impairments, $2.5 million in severance charges and $1.6 million in exit-related
costs. The severance charge relates to the termination of approximately 50
employees in customer service and administrative functions and will be paid in
fiscal 2002. The exit-related costs are associated primarily with lease
obligations remaining subsequent to the termination of operations. The Company
also announced the consolidation of customer service centers in the
medical-surgical business and a workforce reduction. This resulted in the
planned termination of approximately 120 employees in customer service
functions. The Company recorded severance charges of $2.9 million, of which $1.8
million will be paid in fiscal 2002, $0.6 million will be paid in fiscal 2003
and $0.5 million will be paid in fiscal 2004. The Company also reduced prior
year severance reserves that were determined to be in excess by $0.9 million.

In conjunction with restructuring plans provided for in prior fiscal years,
during fiscal 2001, the Company closed two other pharmaceutical distribution
centers, eight medical-surgical distribution centers and one medical-surgical
sales office in the Health Care Supply Management segment. This resulted in the
payment of

F-42
<PAGE> 68
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

$1.5 million in severance to approximately 80 terminated pharmaceutical
distribution center and administrative employees. Also, the Company paid $1.8
million in severance to approximately 220 employees that were terminated in the
medical-surgical business. In addition, the Company paid $3.2 million for costs
incurred in connection with the distribution center closures and associated real
estate property taxes, rents, utility and other costs for facilities subsequent
to termination of operations in the Health Care Supply Management segment and
reversed previously recorded exit-related reserves of $1.3 million. The Company
plans to continue the previously announced distribution center closures,
back-office reductions and workforce reductions in the Health Care Supply
Management segment throughout fiscal 2002.

HEALTH CARE INFORMATION TECHNOLOGY

In connection with the restructure of the former iMcKesson business, the
Company discontinued certain physician services product offerings. This resulted
in the recording of impairment charges totaling $120.2 million including $116.2
million for the write-off of goodwill and intangibles from the acquisitions of
Abaton.com and MediVation. In addition, capitalized software costs of $2.9
million and fixed assets of $1.1 that are no longer going to be used were
written off. Severance charges of $3.3 million relating to the termination of
approximately 140 employees in development, customer service and administrative
functions, was also recorded. Also, charges totaling $8.5 million for remaining
contract obligations and lease liabilities continuing subsequent to termination
of business was recorded.

In addition, the Company's Health Care Information Technology segment
revised estimates for software and services issues associated with pre-July 1999
software contracts and recorded an additional $161.1 million charge for
estimated customer settlements (forgiveness of accounts receivable, customer
credits and refunds). These customer settlements generally relate to product
replacements as well as requirements for certain customers to upgrade computer
hardware and software to accommodate new product releases.

In the Health Care Information Technology segment, severance of $4.7
million was paid to approximately 240 employees that were terminated in fiscal
1999 and 2000 but have severance agreements that provide for payments through
fiscal 2002. In addition, $0.2 million in exit-related costs was paid related to
closed facilities in the Health Care Information Technology segment.

CORPORATE

In connection with the previously discussed restructure of iMcKesson, the
Company recorded asset impairment charges totaling $8.9 million. These charges
include $7.2 million for investments that were impaired based upon declining
market values and $1.7 million for the write-off of internal systems and fixed
assets that will no longer be utilized. The Company also recorded severance
charges of $24.7 million associated with the closure of iMcKesson's headquarters
function. The severance charge relates to the termination of 8 employees in
administrative functions, including the former CEO of iMcKesson. In addition,
the Company recorded $0.3 million in exit-related costs associated with the shut
down of iMcKesson's headquarters function.

To reflect the charges discussed above, the Company recorded charges of
$1.7 million in distribution expense and $2.1 million in research and
development expense and $329.6 million in administrative expense and a $0.6
million reduction in selling expense. In addition, investment impairment charges
of $23.1 million have been recorded in gain (loss) on investments.

Fiscal 2000

HEALTH CARE SUPPLY MANAGEMENT

F-43
<PAGE> 69
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

office and a workforce reduction. The Company recorded a $0.6 million charge for
exit-related costs and a severance charge of $2.3 million relating to the
termination of approximately 200 employees primarily in warehouse,
administrative and sales functions. During fiscal 2001, severance of $1.2
million was paid to approximately 160 employees under salary continuance
agreements. The remaining severance will be paid in fiscal 2002.

The Company also recorded a $0.2 million charge for obsolete equipment
associated with certain discontinued products in the medical management
business.

In addition, the Company reassessed prior years' restructuring plans
resulting in the decision to retain one of the six pharmaceutical distribution
centers identified for closure in fiscal 1999, and to reduce the number of
medical-surgical distribution center closures. The Company also announced and
completed the closure of one additional pharmaceutical distribution center in
fiscal 2000. The Company recorded $6.9 million and $1.2 million for net
reductions of prior year-reserves for exit-related activities and severance,
respectively, and charges of $1.5 million for additional asset impairments
associated with closed distribution centers ($0.7 million for receivables and
$0.8 million for inventories).

In fiscal 2000, the Company completed the closures of three pharmaceutical
distribution centers, including the additional distribution center mentioned
above. In addition, the realignment of the sales organization was completed and
certain back office functions were eliminated. This resulted in the termination
of approximately 200 employees and the payment of $3.6 million in severance. The
Company also completed the closures of three medical-surgical distribution
centers and paid $1.0 million in severance to approximately 100 employees who
were terminated in fiscal 1999 and 2000. In addition, the Company paid $2.6
million in costs incurred in connection with the distribution center closures
and also real estate property taxes, rents, utility and other costs for the
facilities subsequent to termination of operations. The Company plans to
continue these closure activities throughout fiscal 2002.

HEALTH CARE INFORMATION TECHNOLOGY

In the fourth quarter of fiscal 2000, the Company completed an assessment
of the Health Care Information Technology's business and product portfolio. This
resulted in the decision to reorganize the business and to discontinue
overlapping or non-strategic product offerings. The Company recorded charges of
$232.5 million for asset impairments. These included charges to write off $49.1
million of capitalized software development costs, $39.3 million of purchased
software and $50.7 million of goodwill associated with the discontinued product
lines. In addition, a $74.1 million reserve was recorded for customer
settlements attributable to the discontinued product lines. The Company also
recorded a $9.4 million loss on the disposition of a non-core foreign operation,
and a $7.7 million charge for uncollectible unbilled receivables and $2.2
million charge for obsolete equipment associated with the discontinued products.
Substantially all of the charges were non-cash asset write-offs except for the
customer settlements. In addition, a charge of $0.6 million was recorded for
costs to prepare facilities for disposal, lease costs and property taxes
required subsequent to termination of operations and other exit-related
activities. In fiscal 2000, the Company paid $0.5 million in rent costs for
office space abandoned in prior years.

The Company also recorded a $3.9 million severance charge related to the
product streamlining and reorganization. The fiscal 2000 charge relates to
approximately 300 employees, primarily in product development and support and
administrative functions who were terminated at the end of fiscal 2000.
Substantially all of the severance was paid in fiscal 2001. In addition, the
Company reduced prior-year severance reserves by $0.8 million, in this segment.

F-44
<PAGE> 70
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

To reflect the items discussed above, charges of $0.8 million have been
recorded in cost of sales and $234.8 million have been recorded in
administrative expenses. In addition, the Company recorded $0.3 million and $2.6
million as reductions to selling expenses and distribution expenses,
respectively.

Fiscal 1999

HEALTH CARE SUPPLY MANAGEMENT

In fiscal 1999, the Company identified six distribution centers for closure
of which one distribution center was shut down by March 31, 1999. The Company
recorded a charge of $25.5 million related to such closures. Of this charge,
$21.7 million was required to reduce the carrying value of facility assets to
their estimated fair value less disposal costs, and $3.8 million was related to
computer hardware and software which will no longer be used at such facilities.
Fair value was determined based on sales of similar assets, appraisals, and/or
other estimates such as discounting of estimated future cash flows. Also related
to such closures, a charge of $17.2 million was recorded for other exit-related
costs. These primarily consist of costs to prepare facilities for disposal,
lease costs and property taxes required subsequent to termination of operations,
as well as the write-off of costs related to duplicate assets which do not have
future use by the Company. Of the above charges, $25.5 million were non-cash
asset write-offs. Also, in connection with the previously discussed reassessment
of this plan in fiscal 2000, the Company reduced exit-related reserves by $6.9
million, offset in part by additional asset impairments of $1.5 million.

As part of this plan, the Company recorded a severance charge of $13.3
million for workforce reductions. The severance charge relates to the
termination of approximately 1,000 employees, primarily in distribution centers
and associated back-office functions. Severance of $2.7 million was paid during
fiscal 1999 in connection with the termination of approximately 100 distribution
center employees and $4.6 million was paid in fiscal 2000 to approximately 300
employees, primarily in distribution centers, sales and associated back-office
functions. In fiscal 2001, $2.1 million was paid to approximately 150 employees
primarily in distribution centers and associated back-office functions. In
addition, $1.2 million in severance reserves, primarily associated with a
reduction in estimated terminations of approximately 100 employees, was recorded
as a reduction of expenses in fiscal 2000, as a result of the previously
discussed reassessment of this restructuring plan. The Company also wrote off
$23.5 million (non-cash) of computer hardware and software which were abandoned
as the result of an acquisition during the year.

In connection with acquisitions in the medical management business, plans
for integration of the companies, workforce reductions and consolidation of
facilities were completed. The Company recorded charges of $6.0 million (net of
a $3.0 million reversal of severance obligations which were determined to be in
excess) for severance related to the termination of 230 employees primarily in
customer service, development and administrative functions. Severance of $2.8
million was paid in fiscal 1999, $6.1 million was paid in fiscal 2000 and $0.1
million was paid in fiscal 2001. In addition, the Company recorded charges of
$12.0 million associated with the termination of royalty agreements because
products subject to minimum royalty payments to third parties were replaced with
acquired products and $4.3 million primarily for the write-off of capitalized
software costs.

HEALTH CARE INFORMATION TECHNOLOGY

In fiscal 1999, the Health Care Information Technology segment completed
several acquisitions. In connection with these acquisitions, and the merger of
HBOC with McKesson, plans were approved by management to consolidate facilities,
reduce workforce and eliminate duplicate products and internal systems.

In order to effect these plans, the Company identified workforce
reductions, including both acquired company and Company personnel, and recorded
severance costs of $12.6 million. The severance charge relates to the
termination of approximately 320 employees, primarily in development and
administrative functions. Severance of $6.6 million, $4.2 million and $1.0
million was paid during fiscal 1999, 2000 and 2001,

F-45
<PAGE> 71
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

respectively, primarily under salary continuance arrangements. Also, $0.8
million of excess severance reserves were reversed in fiscal 2000.

In addition, duplicate facilities, products and internal systems were
identified for elimination, resulting in charges of $5.9 million, relating
principally to the write-off of capitalized costs and lease termination costs.
In addition, following the HBOC Acquisition, the Company evaluated the
performance of a foreign business and elected to shut down its facility. Charges
of $11.6 million were recorded, principally related to the write-off of goodwill
to fair value based on discounted cash flows. Revenues and net operating income
for this foreign business were not significant in fiscal 1999. Certain
investments became impaired during fiscal 1999 and were written down by $4.3
million to their net realizable values based primarily on discounted cash flows,
and other reserves of $4.1 million were recorded to cover customer and other
claims arising out of the acquisitions. Substantially all of the above charges
were non-cash asset write-offs.

The charges discussed above have been recorded in cost of sales, selling,
distribution and administrative expenses. During fiscal 1999, there were no
significant changes in estimates or recharacterizations of amounts from
restructuring reserves recorded in prior years, except for the $3.0 million
reversal described above.

5. OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Trade receivables subject the Company to a concentration of credit risk
with customers in the retail and institutional sectors. A significant proportion
of the Company's increase in sales has been to a limited number of large
customers. Consequently, the Company's credit concentration has increased.
Accordingly, any defaults in payment by these large customers could have a
significant negative impact on the Company's financial condition, results of
operations and liquidity. At March 31, 2001, receivables from the Company's ten
largest customers accounted for approximately 41% of total customer accounts
receivable. Fiscal 2001 sales to, and March 31, 2001 receivables from, the
Company's largest customer, Rite Aid Corporation, represented approximately 16%
of consolidated sales and 10% of consolidated customer accounts receivable,
respectively. Receivables from the Company's second largest customer represented
approximately 11% of consolidated customer accounts receivable. No other
customers represented greater than 10% of consolidated sales or customer
accounts receivable.

At March 31, 2001, the Company had an $850 million committed receivables
sales facility which was fully available. The Company's accounts receivable
sales program accommodated the sale by the Company in March, 1999 of $400.0
million of undivided interests in the Company's trade accounts receivable. The
program qualifies for sale treatment under SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
and under SFAS No. 140, "Accounting For Transfers and Servicing Financial Assets
and Extinguishments of Liabilities which replaces SFAS No. 125 effective in the
Company's fiscal year 2002. The sales were recorded at the estimated fair values
of the receivables sold, reflecting discounts for the time value of money based
on U.S. commercial paper rates and estimated loss provisions.

The Company's Canadian subsidiary, Medis, has agreements with certain of
its customers' financial institutions under which Medis has guaranteed the
repurchase of certain inventory at a discount in the event the customers are
unable to meet certain obligations to the financial institutions. Medis has also
agreed to guarantee credit facilities for certain customers and the payment of a
major customer's leases. The amounts related to these guarantees were
approximately $22.8 million for credit facilities and $7.6 million for lease
obligations at March 31, 2001.

The Company's U.S. pharmaceutical distribution business has entered into
agreements to provide loans to certain customers, some of which are on a
revolving basis. As of March 31, 2001, a total of $94.2 million of these
commitments remained outstanding and were reflected as other receivables and
notes receivable on the

F-46
<PAGE> 72
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

consolidated balance sheet. Under the terms of the loans, the Company has a
security interest in the assets of the customers. In addition, the Company has
agreed to guarantee customer loans of $36.6 million.

6. RECEIVABLES

<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Customer accounts.................................... $3,298.8 $2,847.4 $2,290.0
Other................................................ 564.3 462.0 442.6
-------- -------- --------
Total........................................... 3,863.1 3,309.4 2,732.6
Allowances........................................... (419.7) (274.9) (180.6)
-------- -------- --------
Net............................................. $3,443.4 $3,034.5 $2,552.0
======== ======== ========
</TABLE>

The allowances are for uncollectible accounts, discounts, returns, refunds,
customer settlements and other adjustments.

7. INVENTORIES

The LIFO method was used to value approximately 90%, 87% and 86% of the
inventories at March 31, 2001, 2000 and 1999, respectively. Inventories before
the LIFO cost adjustment, which approximates replacement cost, were $5,358.4
million, $4,397.2 million and $3,762.5 million at March 31, 2001, 2000 and 1999,
respectively.

8. PROPERTY, PLANT AND EQUIPMENT, NET

<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Land................................................. $ 33.8 $ 34.5 $ 37.0
Building, machinery and equipment.................... 1,225.2 1,115.1 1,029.1
-------- -------- --------
Total property, plant and equipment............. 1,259.0 1,149.6 1,066.1
Accumulated depreciation............................. (663.7) (594.2) (536.5)
-------- -------- --------
Property, plant and equipment, net.............. $ 595.3 $ 555.4 $ 529.6
======== ======== ========
</TABLE>

9. DISCONTINUED OPERATIONS

The net assets (liabilities) of discontinued operations were as follows:

<TABLE>
<CAPTION>
MARCH 31,
------------------------
2001 2000 1999
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Total assets............................................... $ 0.9 $ 0.9 $242.6
Total liabilities.......................................... (1.3) (2.4) (63.2)
----- ----- ------
Net assets (liabilities).............................. $(0.4) $(1.5) $179.4
===== ===== ======
</TABLE>

At March 31, 2001 and 2000, the net liabilities of discontinued operations
are included in other current liabilities. Assets consist primarily of land held
for sale and investments in affiliates. Liabilities consist primarily of other
accrued liabilities.

F-47
<PAGE> 73
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

At March 31, 1999, assets of discontinued operations consist primarily of
receivables, inventory, property, plant and equipment and goodwill of the Water
Products business. Liabilities of discontinued operations consist primarily of
accounts payable and other accrued liabilities of the Water Products business.

Results of discontinued operations were as follows:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------
2001 2000 1999
----- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues.................................................. $ -- $366.3 $355.1
===== ====== ======
Discontinued operations before income taxes............... $(9.2) $ 38.3 $ 40.1
Income taxes.............................................. 3.6 (15.1) (15.8)
----- ------ ------
Discontinued operations................................. (5.6) 23.2 24.3
Gain on sale of Water Products business, net of tax of
$333.9.................................................. -- 515.9 --
----- ------ ------
Total........................................... $(5.6) $539.1 $ 24.3
===== ====== ======
</TABLE>

Discontinued operations in fiscal 2000 and 1999 include the operations of
the Water Products business.

10. LONG-TERM DEBT

<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
ESOP related debt.................................... $ 88.9 $ 99.9 $ 115.5
4.50% Exchangeable subordinated debentures due March,
2004............................................... 6.5 28.1 37.3
8.91% Series A Senior Notes due February, 2005....... 100.0 100.0 --
8.95% Series B Senior Notes due February, 2007....... 20.0 20.0 --
9.13% Series C Senior Notes due February, 2010....... 215.0 215.0 --
6.60% Notes due March, 2000.......................... -- -- 175.0
6.875% Notes due March, 2002......................... 175.0 175.0 175.0
6.55% Notes due November, 2002....................... 125.0 125.0 125.0
6.30% Notes due March, 2005.......................... 150.0 150.0 150.0
6.40% Notes due March, 2008.......................... 150.0 150.0 150.0
7.65% Debentures due March, 2027..................... 175.0 175.0 175.0
5.375% IDRBs due through December, 2011.............. 5.5 9.0 9.0
Capital lease obligations (averaging 8.5%)........... 16.0 9.9 19.0
Other, 7.0% to 10.0%, due through March, 2008........ 2.8 3.1 3.7
-------- -------- --------
Total Debt................................. 1,229.7 1,260.0 1,134.5
Less current portion................................. 194.1 16.2 195.3
-------- -------- --------
Total Long-Term Debt....................... $1,035.6 $1,243.8 $ 939.2
======== ======== ========
</TABLE>

The Company has a revolving credit agreement with several domestic and
international banks whereby the banks commit $400 million borrowing availability
at the reference rate (8% at March 31, 2001) or money market-based rates. The
agreement expires in fiscal 2004. The Company has an additional $825 million
available for general purposes under a facility with a duration of 364 days or
less which is due to expire on October 9, 2001. At March 31, 2001, the Company
had $1.225 billion of unused borrowing capacity under these agreements, which
are used primarily to support commercial paper borrowings. In addition, the
Company has an $850 million committed receivables sales facility, which was
fully available as of March 31, 2001. The Company anticipates that this facility
will be renewed prior to its termination date of June 15, 2001.
F-48
<PAGE> 74
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

In fiscal 2000, the Company issued fixed-rate debt totaling $335.0 million.
The 8.91% Series A notes mature on February 28, 2005, the 8.95% Series B notes
mature on February 28, 2007 and the 9.13% Series C notes mature on February 28,
2010. Interest only is payable semiannually.

Total interest payments were $114.5 million, $115.0 million and $117.8
million in fiscal 2001, 2000 and 1999, respectively.

ESOP related debt (see Note 16) is payable to banks and insurance
companies, bears interest at rates ranging from 8.6% fixed rate to approximately
89% of LIBOR or LIBOR +0.4% and is due in semi-annual and annual installments
through 2009.

In connection with the 4.5% exchangeable subordinated debentures, the March
31, 2001 marketable securities balance included $4.0 million held in trust as
exchange property for the exchangeable subordinated debentures. Through March
31, 2001, the Company had repurchased $173.5 million of the exchangeable
subordinated debentures.

In fiscal 1998, the Company entered into two interest rate swap agreements,
each with a notional principal amount of $150 million. The swaps were scheduled
to mature in 2005 and 2008 and swap fixed interest payments of 6.30% and 6.40%,
respectively, for floating interest payments based on a LIBOR index. These swaps
included an imbedded interest rate cap of 7%. In February 2001, the Company paid
$8.2 million to terminate the swaps. The termination fee is being amortized on
the straight-line method over the remaining life of the underlying debt.

In fiscal 1998, a subsidiary of the Company entered into a currency swap
agreement to convert the $125 million proceeds from the issuance of senior notes
to $173 million Canadian currency, which was used to pay down short-term
borrowings of the Company's Canadian subsidiary, Medis. This swap matures on
November 1, 2002.

Certain debt agreements require the Company to maintain certain financial
ratios, including a limitation that the Company's total debt not exceed 56.5% of
total capitalization (total debt plus equity). At March 31, 2001, the Company
was in compliance with its capitalization covenant and other financial
covenants.

Aggregate annual payments on long-term debt and capitalized lease
obligations (see Financial Note 12) for the years ending March 31 are:

<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
--------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C>
2002.................................................. $ 187.6 $ 6.5 $ 194.1
2003.................................................. 138.0 5.8 143.8
2004.................................................. 14.1 2.9 17.0
2005.................................................. 259.6 0.1 259.7
2006.................................................. 7.9 -- 7.9
Thereafter............................................ 606.5 0.7 607.2
-------- ----- --------
Total....................................... $1,213.7 $16.0 $1,229.7
======== ===== ========
</TABLE>

11. CONVERTIBLE PREFERRED SECURITIES

In February 1997, a wholly-owned subsidiary trust of the Company issued 4
million shares of preferred securities to the public and 123,720 common
securities to the Company, which are convertible at the holder's option into
McKesson HBOC common stock. The proceeds of such issuances were invested by the
trust in $206,186,000 aggregate principal amount of the Company's 5% Convertible
Junior Subordinated Debentures due 2027 (the "Debentures"). The Debentures
represent the sole assets of the trust. The Debentures mature

F-49
<PAGE> 75
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

on June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are
redeemable by the Company at 103.0% 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 HBOC
common stock, subject to adjustment in certain circumstances. The preferred
securities will be redeemed upon repayment of the Debentures and are callable by
the Company at 103.0% of the liquidation amount.

The Company has guaranteed, on a subordinated basis, distributions and
other payments due on the preferred securities (the "Guarantee"). The Guarantee,
when taken together with the Company's obligations under the Debentures, and in
the indenture pursuant to which the Debentures were issued, and the Company's
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.

12. LEASE OBLIGATIONS

The Company leases facilities and equipment under both capital and
operating leases. Net assets held under capital leases included in property,
plant and equipment were $13.7 million, $9.1 million and $4.4 million at March
31, 2001, 2000 and 1999, respectively. Amortization of capital leases is
included in depreciation expense.

As of March 31, 2001, future minimum lease payments and sublease rentals in
years ending March 31 are:

<TABLE>
<CAPTION>
NON- NON-
CANCELABLE CANCELABLE
OPERATING SUBLEASE CAPITAL
LEASES RENTALS LEASES
---------- ---------- -------
(IN MILLIONS)
<S> <C> <C> <C>
2002....................................................... $ 83.3 $ 4.9 $ 7.3
2003....................................................... 72.0 3.4 6.3
2004....................................................... 56.9 1.5 3.1
2005....................................................... 46.8 1.0 0.2
2006....................................................... 40.1 0.4 0.1
Thereafter................................................. 84.3 0.7 1.0
------ ----- -----
Total minimum lease payments..................... $383.4 $11.9 18.0
====== =====
Less amounts representing interest......................... 2.0
-----
Present value of minimum lease payments.......... $16.0
=====
</TABLE>

Rental expense was $108.7 million, $108.3 million and $110.0 million in
fiscal 2001, 2000 and 1999, respectively.

Most real property leases contain renewal options and provisions requiring
the Company to pay property taxes and operating expenses in excess of base
period amounts.

F-50
<PAGE> 76
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

At March 31, 2001, 2000 and 1999, the carrying amounts of cash and cash
equivalents, marketable securities, receivables, drafts payable, accounts
payable -- trade and other liabilities approximate their estimated fair values
because of the short maturity of these financial instruments. The estimated fair
values of the Company's remaining financial instruments, as determined under
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", were as
follows:

<TABLE>
<CAPTION>
2001 2000 1999
-------------------- -------------------- --------------------
ESTIMATED ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- --------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt, including current
portion............................. $1,229.7 $1,231.1 $1,260.0 $1,180.9 $1,134.5 $1,145.8
Interest rate swaps -- unrealized
gain/(loss)......................... -- -- -- (11.0) -- 3.7
Foreign currency rate swap............ -- 17.5 -- 5.6 -- 12.6
</TABLE>

The estimated fair values of these instruments were determined based on
quoted market prices or market comparables.

The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of March 31, 2001, 2000
or 1999 or that will be realized in the future.

14. STOCKHOLDERS' EQUITY

Before giving effect to the acquisitions accounted for as poolings of
interests (see "Acquisitions, Investments and Divestitures" Financial Note 2),
McKesson declared dividends of $0.435 per share and HBOC declared dividends of
$0.04 per share, in fiscal year 1999.

At March 31, 2001, 2000, and 1999, the Company was authorized to issue
100,000,000 shares of series preferred stock ($.01 par value) of which none were
outstanding and 400,000,000 shares of common stock ($.01 par value) of which
approximately 283,983,000 shares, 283,353,000 shares and 280,584,000 shares,
respectively, were outstanding net of treasury stock.

In October 1994, the Company's Board of Directors declared a dividend of
one right (a "Right") for each then outstanding share of common stock and
authorized the issuance of one Right for each share subsequently issued to
purchase, upon the occurrence of certain specified triggering events, a unit
consisting of one hundredth of a share of Series A Junior Participating
Preferred Stock. Triggering events include, without limitation, the acquisition
by another entity of 15% or more of the Company's common stock without the prior
approval of the Company's Board. The Rights have certain anti-takeover effects
and will cause substantial dilution to the ownership interest of a person or
group that attempts to acquire the Company on terms not approved by the Board.
The Rights expire in 2004 unless redeemed earlier by the Board. As a result of
the two-for-one stock split in fiscal 1998, each share of common stock now has
attached to it one-half of a Right.

F-51
<PAGE> 77
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

The following is the calculation of the basic and diluted per-share
computations for income (loss) from continuing operations:

<TABLE>
<CAPTION>
INCOME
(LOSS) SHARES PER SHARE
------- ------- ----------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
For the year ended March 31, 2001
Basic and Diluted EPS
Loss from continuing operations........................ $(42.7) 283.1(1) $(0.15)
====== ===== ======
For the year ended March 31, 2000
Basic and Diluted EPS
Income from continuing operations...................... $184.6 281.3(1) $ 0.66
====== ===== ======
For the year ended March 31, 1999
Basic and Diluted EPS
Income from continuing operations...................... $ 60.6 275.2(1) $ 0.22
====== ===== ======
</TABLE>

- ---------------
(1) The diluted share base for fiscal years 2001, 2000 and 1999 excludes 4.1
million shares, 2.9 million shares and 8.9 million shares related to options
to purchase common stock, respectively, 5.4 million shares related to trust
convertible preferred securities in fiscal 2001, 2000 and 1999, and 0.4
million shares and 0.3 million shares related to restricted stock in fiscal
2001 and 1999. Additionally, the income available to common stockholders
excludes dividends on convertible preferred securities of $6.2 million in
fiscal 2001, 2000 and 1999. These amounts are excluded due to their
antidilutive effect.

The Company has six stock option plans as of March 31, 2001. The Company
has granted options to employees and non-employee directors of the Company as
well as restricted stock awards to employees. The Company has also assumed
approximately 35 option plans in connection with acquisitions. No new options
are granted from these acquired companies' plans. Under the active plans, the
Company was authorized to grant up to 77.2 million shares as of March 31, 2001.

Options are generally granted for the purchase of shares of common stock at
an exercise price not less than market value on the date of grant. Under the
1998 Canadian Stock Incentive Plan, the Company granted options at below market
value to purchase 20,000 shares, 5,000 shares and 15,000 shares in fiscal 2001,
2000 and 1999, respectively. Most option grants under the 1997 Non-Employee
Director's Equity compensation and Deferral Plan vest immediately. Other options
generally vest over four years and all options expire ten years after the grant
date.

F-52
<PAGE> 78
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

The following is a summary of options outstanding at March 31, 2001:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED- NUMBER
NUMBER OF AVERAGE WEIGHTED- OF OPTIONS WEIGHTED-
OPTIONS REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT YEAR EXERCISE
EXERCISE PRICES AT YEAR END LIFE PRICE END PRICE
--------------- ----------- ----------- --------- ----------- ---------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$ 0.01 to $ 13.67 3,549,559 2.8 $ 6.43 3,449,241 $ 6.60
$ 13.68 to $ 27.35 13,814,005 7.9 21.40 4,859,252 21.80
$ 27.36 to $ 41.02 24,983,432 8.3 30.46 5,037,046 31.51
$ 41.03 to $ 54.70 2,530,834 6.1 47.73 2,400,459 47.86
$ 54.71 to $ 68.37 1,009,659 6.7 58.51 905,904 57.74
$ 68.38 to $ 82.05 13,577,457 7.6 72.95 7,720,628 72.92
$ 82.06 to $ 95.72 519,350 6.7 90.73 517,574 90.76
$ 95.73 to $109.39 1,341 5.5 101.12 1,341 101.12
$109.40 to $123.07 373,334 7.2 113.50 373,334 113.50
$123.08 to $136.74 373,334 7.2 136.74 373,334 136.74
---------- ----------
60,732,305 7.6 39.36 25,638,113 45.17
========== ==========
</TABLE>

Expiration dates range from April 1, 2001 to March 28, 2011.

As a result of the change of control of McKesson at the time of the HBOC
Transaction on January 12, 1999, most options granted by McKesson which were
outstanding on that date vested.

The following is a summary of changes in the options for the stock option
plans:

<TABLE>
<CAPTION>
2001 2000 1999
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year............... 56,275,715 $42.24 39,472,342 $55.11 24,156,651 $31.34
Granted.............. 11,599,389 28.50 24,650,681 25.68 21,286,922 75.10
Exercised............ (1,149,465) 13.11 (1,212,262) 14.92 (3,762,649) 23.79
Canceled............. (5,993,334) 50.42 (6,635,046) 63.23 (2,208,582) 41.21
---------- ---------- ----------
Outstanding at year
end................ 60,732,305 39.36 56,275,715 42.24 39,472,342 55.11
========== ========== ==========
</TABLE>

Pursuant to SFAS No. 123, the Company has elected to account for its
stock-based compensation plans under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no compensation cost
has been recognized in the consolidated financial statements for the stock
option plans, except an insignificant amount related to the two Canadian grants
noted above. Had compensation cost for the stock option plan been recognized
based on the fair value at the grant dates for awards under those plans,
consistent with the provision of SFAS No. 123, net income (loss) and earnings
(loss) per share would have been as indicated in the table below. Since pro
forma compensation cost relates to all periods over which the awards vest, the
initial impact on pro forma income (loss) from continuing operations may not be

F-53
<PAGE> 79
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

representative of compensation cost in subsequent years, when the effect of
amortization of multiple awards would be reflected.

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
2001 2000 1999
--------- -------- -------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Income(loss) from continuing operations
As reported............................................ $ (42.7) $184.6 $60.6
Pro forma.............................................. (179.4) 82.2 (6.7)
Earnings (loss) per common share -- basic and diluted
As reported............................................ $ (0.15) $ 0.66 $0.22
Pro forma.............................................. (0.63) 0.29 (0.02)
</TABLE>

Fair values of the options were estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
2001 2000 1999
---- ---- ----
<S> <C> <C> <C>
Expected stock price volatility............................ 48.5% 46.0% 32.4%
Expected dividend yield.................................... 0.75% 1.50% 1.42%
Risk-free interest rate.................................... 4.7% 6.1% 4.8%
Expected life (in years)................................... 5.0 5.0 5.0
</TABLE>

The weighted average grant date fair values of the options granted during
2001, 2000 and 1999 were $13.17, $11.33 and $24.06 per share, respectively.

Other Capital included in stockholders' equity, includes notes receivable
from certain of the Company's current or former officers and senior managers
totaling $90.7 million, $94.5 million and $99.0 million at March 31, 2001, 2000
and 1999, respectively, related to purchases of Company common stock. Such notes
were issued for amounts equal to the market value of the stock on the date of
the purchase and are full recourse to the borrower. As of March 31, 2001, the
value of the underlying stock collateral was $44.7 million. The notes bear
interest at rates ranging from 4.7% to 8.0% and are due at various dates through
February 2005.

15. INCOME TAXES

The provision for income taxes related to continuing operations consists of
the following:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
CURRENT
Federal.................................................. $ 52.4 $ 62.9 $112.8
State and local.......................................... 8.2 19.8 12.8
Foreign.................................................. 13.1 13.1 8.8
------ ------ ------
Total current.................................. 73.7 95.8 134.4
------ ------ ------
DEFERRED
Federal.................................................. (16.2) 30.5 (24.2)
State and local.......................................... (6.9) (5.7) (7.6)
Foreign.................................................. 1.7 1.7 (1.2)
------ ------ ------
Total deferred................................. (21.4) 26.5 (33.0)
------ ------ ------
Total provision................................ $ 52.3 $122.3 $101.4
====== ====== ======
</TABLE>

F-54
<PAGE> 80
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

Foreign pre-tax earnings were $30.8 million, $40.5 million and $24.6
million in fiscal 2001, 2000 and 1999, respectively.

The principal items accounting for the difference in income taxes on income
from continuing operations before income taxes computed at the Federal statutory
income tax rate and income taxes are as follows:

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Income taxes at Federal statutory rate................... $ 5.5 $109.6 $ 58.9
State and local income taxes net of federal tax
benefit................................................ 0.9 14.5 11.9
Nondeductible acquisition costs.......................... -- -- 34.8
Nondeductible amortization............................... 57.0 9.3 10.9
Nondeductible meals and entertainment.................... 1.6 1.7 2.0
Nondeductible life insurance policy interest............. 0.8 -- --
Nontaxable income -- life insurance...................... (2.5) (2.8) (2.9)
Tax settlements.......................................... (12.9) -- (8.6)
Dividends paid deduction -- ESOP allocated shares........ (0.5) (0.5) (1.0)
Tax-advantaged debt issuance............................. (2.5) (2.5) (2.5)
Foreign tax (benefit).................................... 4.0 0.7 (1.0)
Dividends received from foreign investment............... 1.4 1.2 1.0
Foreign tax credit....................................... (0.6) -- --
Other -- net............................................. 0.1 (8.9) (2.1)
------ ------ ------
Income taxes................................... $ 52.3 $122.3 $101.4
====== ====== ======
</TABLE>

Income tax payments were $330.5 million, $121.6 million and $175.8 million
in fiscal 2001, 2000 and 1999, respectively.

At March 31, 2001, the Company had $51.1 million in cumulative
undistributed earnings of certain foreign subsidiaries. The Company's earnings
from these foreign subsidiaries are considered to be indefinitely reinvested
and, accordingly, no provision for federal and state income taxes has been made
for these earnings. These earnings could become subject to income tax if they
were remitted to the Company as dividends or if a deemed distribution occurs.
Determination of the amount of the unrecognized deferred tax liability on these
undistributed earnings is not practicable; however, the Company believes that
U.S. foreign tax credits would largely eliminate any U.S. tax and offset any
foreign withholding tax.

F-55
<PAGE> 81
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

As of March 31, the deferred tax balances consisted of the following:

<TABLE>
<CAPTION>
2001 2000 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Receivable allowances....................................... $ 159.3 $ 104.1 $ 63.6
Deferred revenue............................................ 40.2 39.9 65.1
Customer related allowances................................. 25.9 76.2 17.2
Compensation and benefit-related accruals................... 96.4 38.8 46.6
Costs associated with duplicate facility closures and
workforce reductions related to acquired businesses....... -- 15.9 7.5
Tax benefit on unrealized loss.............................. -- 23.8 --
Other....................................................... 28.0 21.8 36.1
------- ------- -------
Current................................................... 349.8 320.5 236.1
------- ------- -------
Nondeductible accruals for:
Postretirement and postemployment plans................... 24.0 87.7 66.5
Deferred compensation..................................... 39.2 36.9 33.5
Costs associated with facility closures, surplus
properties and asset write-downs....................... 15.4 4.5 10.0
Intangibles................................................. 67.2 84.8 65.5
Investment valuation........................................ 39.6 0.6 0.7
Loss and credit carryforwards............................... 6.9 7.1 67.0
Other....................................................... 2.8 11.3 16.6
------- ------- -------
Noncurrent................................................ 195.1 232.9 259.8
------- ------- -------
Total............................................. $ 544.9 $ 553.4 $ 495.9
======= ======= =======
LIABILITIES
Basis differences for inventory valuation................... $(251.0) $(208.0) $(192.3)
Other....................................................... (10.6) (0.6) (1.2)
------- ------- -------
Current................................................... (261.6) (208.6) (193.5)
------- ------- -------
Accelerated depreciation.................................... (34.3) (8.3) (22.9)
Systems development costs................................... (93.6) (88.7) (83.6)
Retirement plan............................................. (28.8) (30.3) (17.3)
Other....................................................... (4.2) (11.0) (8.9)
------- ------- -------
Noncurrent................................................ (160.9) (138.3) (132.7)
------- ------- -------
Total............................................. $(422.5) $(346.9) $(326.2)
======= ======= =======
Total net current -- included in prepaid
expenses........................................ $ 88.2 $ 111.9 $ 42.6
======= ======= =======
Total net noncurrent -- included in other
assets.......................................... $ 34.2 $ 94.6 $ 127.1
======= ======= =======
</TABLE>

16. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

Pension Plans

Prior to December 31, 1996, substantially all full-time employees of
McKesson were covered under either the Company-sponsored defined benefit
retirement plan or by bargaining unit sponsored multi-employer plans. On
December 31, 1996, the Company amended the Company-sponsored defined benefit
plan to freeze all plan benefits based on each employee's plan compensation and
creditable service accrued to that date. Accordingly, employees joining the
Company after December 31, 1996, and employees of companies acquired after
December 31, 1996, are not eligible for coverage under the Company-sponsored
defined benefit retirement

F-56
<PAGE> 82
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

plan. The benefits for such Company-sponsored plans are based primarily on age
of employees at date of retirement, years of service and employees' pay during
the five years prior to retirement. On January 1, 1997, the Company amended the
ESOP to provide future additional benefits in place of a portion of those
benefits previously provided by the pension plan.

The following tables provide a reconciliation of the changes in the
Company-sponsored defined benefit retirement plan and executive supplemental
retirement plans:

<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligation at beginning of year................ $317.7 $349.4 $312.0
Service cost........................................... 1.6 2.0 0.7
Interest cost.......................................... 23.8 24.2 21.7
Amendments............................................. 10.6 5.4 15.0
Acquisitions........................................... -- -- 17.8
Actuarial losses (gains)............................... 8.3 (27.8) 11.0
Benefit payments....................................... (32.0) (35.5) (28.8)
------ ------ ------
Benefit obligation at end of year...................... $330.0 $317.7 $349.4
====== ====== ======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year......... $395.3 $310.9 $294.0
Actual return on plan assets........................... 12.9 110.0 42.5
Employer contributions................................. 4.9 9.9 5.3
Expenses paid.......................................... (4.9) -- (2.1)
Benefits paid.......................................... (32.0) (35.5) (28.8)
------ ------ ------
Fair value of plan assets at end of year............... $376.2 $395.3 $310.9
====== ====== ======
FUNDED STATUS:
Funded status at end of year........................... $ 46.2 $ 77.6 $(38.5)
Unrecognized net actuarial (gain) loss................. (25.0) (66.0) 30.1
Unrecognized prior service cost........................ 6.8 6.1 1.2
Unrecognized prior service cost-plan amendments........ -- -- 23.0
------ ------ ------
Prepaid benefit cost................................... $ 28.0 $ 17.7 $ 15.8
====== ====== ======
</TABLE>

The following table provides the amounts recognized in the Company's
consolidated balance sheet:

<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Prepaid benefit cost..................................... $ 70.7 $ 48.2 $ 38.5
Accrued benefit cost..................................... (42.8) (30.5) (22.7)
Intangible asset......................................... 6.8 6.0 24.2
Minimum pension liability-net of tax of $5.3, $6.1, and
$6.2................................................... (8.2) (9.3) (9.6)
------ ------ ------
Net amount recognized.................................... $ 26.5 $ 14.4 $ 30.4
====== ====== ======
</TABLE>

F-57
<PAGE> 83
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

The following table provides components of the net periodic pension expense
(income) for the Company sponsored defined benefit retirement plan and executive
supplemental retirement plans:

<TABLE>
<CAPTION>
2001 2000 1999
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year.......... $ 1.6 $ 2.0 $ 0.7
Interest cost on projected benefit obligation............ 23.9 24.2 21.7
Return on assets......................................... (37.4) (29.3) (27.6)
Amortization of unrecognized loss and prior service
costs.................................................. (3.3) 2.7 1.1
Amortization of unrecognized net transition asset........ -- -- (0.3)
Immediate recognition of pension cost(1)................. 9.1 8.3 --
------ ------ ------
Net pension expense (income)........................... $ (6.1) $ 7.9 $ (4.4)
====== ====== ======
</TABLE>

- ---------------
(1) Primarily associated with changes in executive management, based on the
terms of employment contracts.

Assets of the plans are measured on a calendar year basis.

The projected unit credit method is utilized for measuring net periodic
pension cost over the employees' service life. Costs are funded based on the
recommendations of independent actuaries. The projected benefit obligations for
Company-sponsored plans were determined using discount rates of 7.5% at December
31, 2000, 7.75% at December 31, 1999 and 7% at December 31, 1998 and an assumed
increase in future compensation levels of 4.0% for all periods presented. The
expected long-term rate of return on assets used to determine pension expense
was 9.75% for all periods.

The assets of the plan consist primarily of listed common stocks and bonds
for which fair value is determined based on quoted market prices.

Profit-Sharing Investment Plan

Retirement benefits for employees not covered by collective bargaining
arrangements include a supplementary contributory profit sharing investment plan
("PSIP"). The leveraged ESOP portion of the PSIP has purchased an aggregate of
24.3 million shares of common stock since inception. These purchases have been
financed by 10 to 20-year loans from or guaranteed by the Company. The Company's
related receivables from the ESOP have been classified as a reduction of
stockholders' equity. The loans will be repaid by the ESOP from common dividends
on shares not yet allocated to participants, interest earnings on cash balances
not yet allocated to participants, common dividends on certain allocated shares
and future Company cash contributions. The ESOP loan maturities and rates are
identical to the terms of related Company borrowings (see Financial Note 10).

After-tax ESOP expense, including interest expense on ESOP debt, was $10.5
million, $12.4 million and $1.4 million, in fiscal 2001, 2000 and 1999,
respectively. The higher ESOP expense in fiscal 2001 and 2000 was required to
maintain a desired level of benefits provided to employees despite a decline in
the stock price. Additional tax benefits received on dividends paid on
unallocated shares of $0.9 million, $1.1 million and $2.2 million in fiscal
2001, 2000 and 1999, respectively, have been credited directly to retained
earnings in accordance with SFAS No. 109. Contribution expense for the PSIP in
fiscal 2001, 2000 and 1999 was all ESOP related and is reflected in the amounts
above. Approximately 1.5 million, 2.6 million and 0.6 million common shares were
allocated to plan participants in fiscal 2001, 2000 and 1999, respectively.

Through March 31, 2001, 16.2 million common shares have been allocated to
plan participants. At March 31, 2001, 8.1 million common shares in the ESOP
Trust had not been allocated to plan participants.

F-58
<PAGE> 84
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

Health Care and Life Insurance

In addition to providing pension benefits, the Company provides health care
and life insurance benefits for certain retired employees. The Company's policy
is to fund these benefits as claims are paid. In 1989, the Company implemented
an ESOP to provide funds at retirement that could be used for medical costs or
health care coverage.

Expenses for postretirement health care and life insurance benefits
consisted of the following:

<TABLE>
<CAPTION>
2001 2000 1999
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 0.7 $ 1.1 $ 0.9
Interest cost on projected benefit obligation............... 9.1 8.1 8.4
Amortization of unrecognized gain and prior service costs... (0.9) (0.9) (0.9)
Recognized actuarial loss (gain)............................ 4.0 (0.3) (4.0)
Settlement gain............................................. -- -- (4.0)
----- ----- -----
Total............................................. $12.9 $ 8.0 $ 0.4
===== ===== =====
</TABLE>

The following table presents a reconciliation of the postretirement health
care and life insurance benefits obligation at March 31:

<TABLE>
<CAPTION>
2001 2000 1999
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year............. $ 123.0 $ 120.7 $ 120.2
Service cost........................................ 0.7 1.1 0.9
Interest cost....................................... 9.1 8.1 8.4
Actuarial loss...................................... 14.5 5.4 7.5
Settlement.......................................... -- -- (4.0)
Benefits paid....................................... (14.0) (12.3) (12.3)
------- ------- -------
Benefit obligation at end of year................... $ 133.3 $ 123.0 $ 120.7
======= ======= =======
FUNDED STATUS
Funded status at end of year........................ $(133.3) $(123.0) $(120.7)
Unrecognized actuarial loss......................... 20.6 10.0 4.4
Unrecognized prior service cost..................... (6.1) (7.0) (8.0)
------- ------- -------
Accrued post-retirement benefit obligation.......... $(118.8) $(120.0) $(124.3)
======= ======= =======
</TABLE>

The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation was 5.0% for all periods presented. The health
care cost trend rate assumption has a significant effect on the amounts
reported. Increasing the trend rate by one percentage point would increase the
accumulated postretirement health care and life insurance obligation as of March
31, 2001 by $7.7 million and the related fiscal 2001 aggregate service and
interest costs by $0.7 million. Decreasing the trend rate by one percentage
point would reduce the accumulated postretirement health care and life insurance
obligation as of March 31, 2001 by $7.3 million and the related fiscal 2001
aggregate service and interest cost by $0.6 million. The discount rates used in
determining the accumulated postretirement benefit obligation were 7.5%, 7.75%
and 7% at March 31, 2001, 2000 and 1999, respectively.

The Company has an employee discount stock purchase plan for eligible
employees. Under the plan, participants may authorize payroll deductions of up
to 15% of their total cash compensation to purchase the Company's common stock
at a 15% discount. The plan has 24-month offering periods with purchases made

F-59
<PAGE> 85
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

every 6 months. Purchases are made at the lesser of the closing stock price on
the first day of the offering period or each purchase date.

17. SEGMENTS OF BUSINESS

The Company's operating segments include Health Care Supply Management and
Health Care Information Technology. In evaluating financial performance,
management focuses on operating profit as a segment's measure of profit or loss.
Operating profit is income before interest expense, corporate interest income,
taxes on income, and allocation of certain corporate revenues and expenses. The
Company's Corporate segment is included in the presentation of reportable
segment information since certain revenues and expenses of this division are not
allocated separately to the operating segments.

The Health Care Supply Management segment includes the Company's U.S.
pharmaceutical, health care products and medical-surgical supplies distribution
businesses. U.S. Health Care Supply Management operations also include the
manufacture and sale of automated pharmaceutical dispensing systems for
hospitals and retail pharmacies, medical management services and tools to payors
and providers, marketing and other support services to pharmaceutical
manufacturers, consulting and outsourcing services to pharmacies, and
distribution of first-aid products to industrial and commercial customers.
Health Care Supply Management also includes the Company's international
distribution operations (including Canada and an equity interest in a Mexican
pharmaceutical distribution business).

The Health Care Information Technology segment delivers enterprise-wide
patient care, clinical, financial, supply chain, managed care, payor and
strategic management software solutions, as well as networking technologies,
including wireless capabilities, electronic commerce, outsourcing and other
services to health care organizations throughout the U.S. and certain foreign
countries.

The Corporate segment includes expenses associated with corporate functions
and projects, certain employee benefits, the investment in Health Nexis and an
inter-segment elimination in fiscal 1999.

During fiscal 2001, the Company announced the formation of a new business
segment, iMcKesson, to focus on healthcare applications using the Internet and
other emerging technologies. iMcKesson included selected net assets from the
former e-Health, Health Care Supply Management and Health Care Information
Technology segments and fiscal 2001 acquisitions of strategic investments and
businesses. Subsequently, in February 2001, the Company announced the
restructuring of the iMcKesson business unit by moving responsibility for
iMcKesson's medical management business to the Health Care Supply Management
segment and the physician services business to the Health Care Information
Technology segment.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.

F-60
<PAGE> 86
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

Financial information relating to the Company's reportable operating
segments as of and for the years ended March 31, is presented below:

<TABLE>
<CAPTION>
2001 2000 1999
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Health Care Supply Management............................. $41,077.3 $35,666.5 $28,662.8
Health Care Information Technology........................ 930.4 1,018.4 1,308.2
Corporate................................................. 2.3 2.1 (0.1)(1)
--------- --------- ---------
Total........................................... $42,010.0 $36,687.0 $29,970.9
========= ========= =========
OPERATING PROFIT
Health Care Supply Management(2).......................... $ 665.1 $ 536.5 $ 359.8
Health Care Information Technology........................ (295.1) (214.1) (49.8)
--------- --------- ---------
Total........................................... 370.0 322.4 310.0
Interest -- net(3)........................................ (102.7) (107.3) (90.4)
Corporate................................................. (251.5) 98.0 (51.4)
--------- --------- ---------
Income from continuing operations before taxes on income
and dividends on preferred securities of subsidiary
trust................................................ $ 15.8 $ 313.1 $ 168.2
========= ========= =========
SEGMENT ASSETS -- AT YEAR-END
Health Care Supply Management............................. $10,067.4 $ 8,644.8 $ 7,052.8
Health Care Information Technology........................ 558.9 778.8 1,040.4
--------- --------- ---------
Total........................................... 10,626.3 9,423.6 8,093.2
Corporate
Cash, cash equivalents and marketable securities........ 445.6 605.9 261.9
Other................................................... 458.0 343.4 664.9
--------- --------- ---------
Total........................................... $11,529.9 $10,372.9 $ 9,020.0
========= ========= =========
DEPRECIATION AND AMORTIZATION(4)
Health Care Supply Management............................. $ 139.5 $ 117.4 $ 90.0
Health Care Information Technology........................ 101.7 101.1 84.8
Corporate................................................. 4.9 4.1 5.8
--------- --------- ---------
Total........................................... $ 246.1 $ 222.6 $ 180.6
========= ========= =========
EXPENDITURES FOR LONG-LIVED ASSETS
Health Care Supply Management............................. $ 90.9 $ 99.0 $ 105.0
Health Care Information Technology........................ 26.5 43.3 71.4
Corporate................................................. 41.5 2.8 22.8
--------- --------- ---------
Total........................................... $ 158.9 $ 145.1 $ 199.2
========= ========= =========
REVENUES BY PRODUCTS AND SERVICES
Health Care Supply Management
Pharmaceutical Distribution and Services................ $38,227.8 $32,960.4 $26,371.3
Medical-Surgical Distribution and Services.............. 2,849.5 2,706.1 2,291.5
Health Care Information Technology
Software................................................ 133.6 144.0 267.7
Services................................................ 712.2 782.0 832.0
Hardware................................................ 84.6 92.4 208.5
Corporate................................................. 2.3 2.1 (0.1)(1)
--------- --------- ---------
Total........................................... $42,010.0 $36,687.0 $29,970.9
========= ========= =========
</TABLE>

F-61
<PAGE> 87
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

- ---------------
(1) Net of $3.0 million inter-segment elimination related to a Health Care
Information Technology segment software sale to the Health Care Supply
Management segment for use in that segment's consulting and outsourcing
business.

(2) Includes $5.9 million, $16.9 million and $13.3 million of net pre-tax
earnings from equity investments in fiscal 2001, 2000 and 1999,
respectively.

(3) Interest expense is shown net of corporate interest income.

(4) Includes amortization of intangibles, capitalized software held for sale and
capitalized software for internal use.

Revenues, operating profit and long-lived assets by geographic areas:

<TABLE>
<CAPTION>
2001 2000 1999
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
United States..................................... $39,244.1 $34,324.1 $27,908.4
International(1).................................. 2,765.9 2,362.9 2,062.5
--------- --------- ---------
Total................................... $42,010.0 $36,687.0 $29,970.9
========= ========= =========
OPERATING PROFIT
United States..................................... $ 341.4 $ 274.8 $ 269.2
International(1).................................. 28.6 47.6 40.8
--------- --------- ---------
Total................................... $ 370.0 $ 322.4 $ 310.0
========= ========= =========
LONG-LIVED ASSETS, AT YEAR END
United States..................................... $ 559.0 $ 515.6 $ 491.1
International(1).................................. 36.3 39.8 38.5
--------- --------- ---------
Total................................... $ 595.3 $ 555.4 $ 529.6
========= ========= =========
</TABLE>

- ---------------
(1) International primarily represents a wholly-owned subsidiary which
distributes pharmaceuticals in Canada, an equity investment in a
pharmaceutical distributor in Mexico, and an information technology
businesses in the United Kingdom and Europe.

18. OTHER COMMITMENTS AND CONTINGENT LIABILITIES

I. Accounting Litigation

Since the Company's announcements in April, May and July of 1999 that the
Company had determined that certain software sales transactions in its
Information Technology Business Unit, formerly HBOC, were improperly recorded as
revenue and reversed, as of April 30, 2001, eighty-five lawsuits have been filed
against the Company, certain of the Company's or HBOC's current or former
officers or directors, and other defendants including, Bear Stearns & Co., Inc.
("Bear Stearns"), and Arthur Andersen LLP ("Arthur Andersen").

A. Federal Actions

F-62
<PAGE> 88
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

of Louisiana (which have been transferred to the Northern District of
California) and one in the District of Arizona (which has been transferred to
the Northern District of California).

On November 2, 1999, the Honorable Ronald M. Whyte of the Northern District
of California issued an order consolidating fifty-three of these actions into
one action entitled In re McKesson HBOC, Inc. Securities Litigation (Case No.
C-99-20743 RMW) (the "Consolidated Action"), and by order dated December 22,
1999, appointed the New York State Common Retirement Fund as lead plaintiff
("Lead Plaintiff") and approved Lead Plaintiffs' choice of counsel. Judge
Whyte's November 2, 1999 order also provided that related cases transferred to
the Northern District of California shall be consolidated with the Consolidated
Action. Judge Whyte's December 22 order also consolidated an individual action,
Jacobs v. McKesson HBOC, Inc. et al. (C-99-21192 RMW), with the Consolidated
Action. On September 21, 2000, the plaintiffs in Jacobs filed an individual
action in the Northern District of California entitled Jacobs v. HBO & Company
(Case No. C-00-20974 RMW), which is to be consolidated with the Consolidated
Action and which purports to state claims under Sections 11 and 12(2) of the
Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities
Exchange Act of 1934 ("Exchange Act") and various state law causes of action. By
order dated February 7, 2000, Judge Whyte coordinated a class action alleging
ERISA claims, 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
under the caption Cohen v. McCall et. al. (Case No. C-99-20916 RMW) with the
Consolidated Action.

F-63
<PAGE> 89
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

B. State Actions

F-64
<PAGE> 90
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

law fraud and negligent misrepresentation as to which amendment was allowed. The
Court also stayed Yurick pending the commencement of discovery in the
Consolidated Action, but allowed the filing of an amended complaint. The
Company's demurrer to that amended pleading was heard on May 23, 2001 and no
order has yet been issued. On May 23, 2001, the California Court of Appeals
affirmed the Yurick trial court's order dismissing claims against certain of the
individual defendants in the action without leave to amend. 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
out-of-state pension funds. Plaintiffs in each of those actions are in the
process of filing amended complaints, and action on the Company's motions
seeking stays of those actions and demurrers to the prior complaints has been
suspended pending defendants' responses to those amended pleadings.

Ten individual actions have been filed in various state courts outside of
California. Five of these cases have been filed in Georgia state courts: Moulton
v. McKesson HBOC, Inc. et al. (Case No. 98-13176-9), involving a former HBOC
employee's claim for unpaid commissions, claims under Georgia's securities and
racketeering laws, as well as various common law causes of action, has been
settled and dismissed with prejudice. Powell v. McKesson HBOC, Inc. et al. (Case
No. 1999CV-15443), involving a former HBOC employee's claims for unpaid
commissions, claims under Georgia's securities and racketeering laws, as well as
various common law causes of action, was dismissed by plaintiff and refiled as
Case No. 2000-CV-27864 and the Company's motions to dismiss or stay that action
are presently pending. In Adler v. McKesson HBOC, Inc. (Case No. 99-C-7980-3), a
former HBOC shareholder asserts a claim for common law fraud. The Georgia Court
of Appeals has granted interlocutory review of an order issued in Adler and the
prior June, 2001, trial date has been vacated. Suffolk Partners Limited
Partnership et al. v. McKesson HBOC, Inc. et al. (Case No.00 VS 010469A) and
Curran Partners, L.P. v. McKesson HBOC, Inc. et al. (Case No. 00 VS-010801) are
related actions brought on behalf of individual shareholders and are based on
Georgia securities, racketeering and common law claims. The Company has moved to
stay both the Suffolk and Curran actions in favor of proceedings in the federal
Consolidated Action. Those motions have been heard by the Court and no order has
yet been issued.

FINANCIAL NOTES (CONTINUED)

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 Securities and Exchange Commission
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 Securities Exchange Commission without admitting or denying the
substantive allegations of the complaint. On January 10, 2001, the grand jury
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).

II. Other Litigation and Claims:

In addition to commitments and obligations in the ordinary course of
business, the Company is 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 the Company's business. These include:

A. Antitrust Matters

F-66
<PAGE> 92
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

Chancery Court of Prentiss County Mississippi. The Chancery Court has held that
the case may not be maintained as a class action.

B. FoxMeyer Litigation

F-67
<PAGE> 93
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

now pending in Texas state court, and the parties presently are engaged in
discovery on the merits of the various claims asserted in the Texas Action.

C. Product Liability Litigation

The Company, along with 134 other companies, has been named in a lawsuit
brought by the Lemelson Medical, Educational & Research Foundation ("the
Foundation") alleging that the Company and its 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. The Foundation seeks to enter into
a license agreement with the Company, the lump sum fee for which would be based
upon a fraction of a percent of the Company's overall revenues over the past ten
years. Due to the pendency of earlier litigation brought against the Foundation
attacking the validity of the patents at issue, the court has stayed the action
until the conclusion of the earlier case. The Company is assessing its potential
exposure and evaluating the Foundations' claim with the assistance of expert
patent counsel, after which it will determine an appropriate course of action.

D. Environmental Matters

FINANCIAL NOTES (CONTINUED)

nonrefundable contributions which are ongoing, to be contributed by third
parties. The $13 million is expected to be paid out between April 2001 and March
2029 and is included in the Company's recorded environmental liabilities at
March 31, 2001.

Except as specifically stated above with respect to the litigation matters
summarized in "Accounting Litigation" (section I, above), management believes,
based on current knowledge and the advice of the Company's counsel, that the
outcome of the litigation and governmental proceedings discussed above will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.

F-69
<PAGE> 95
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- --------- --------- ---------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 2001
Revenues.................................. $9,717.6 $9,865.5 $11,017.8 $11,409.1 $42,010.0
Gross profit.............................. 566.9 571.4 601.7 691.0 2,431.0
Income (loss) after taxes
Continuing operations................... 63.6 61.9(1) 7.3(2) (175.5)(3) (42.7)
Discontinued operations................. -- -- (5.6) -- (5.6)
-------- -------- --------- --------- ---------
Total............................ $ 63.6 $ 61.9 $ 1.7 $ (175.5) $ (48.3)
======== ======== ========= ========= =========
Earnings (loss) per common share
Diluted
Continuing operations................. $ 0.22 $ 0.22 $ 0.03 $ (0.62) $ (0.15)
Discontinued operations............... -- -- (0.02) -- (0.02)
-------- -------- --------- --------- ---------
Total............................ $ 0.22 $ 0.22 $ 0.01 $ (0.62) $ (0.17)
======== ======== ========= ========= =========
Basic
Continuing operations................. $ 0.23 $ 0.22 $ 0.03 $ (0.62) $ (0.15)
Discontinued operations............... -- -- (0.02) -- (0.02)
-------- -------- --------- --------- ---------
Total............................ $ 0.23 $ 0.22 $ 0.01 $ (0.62) $ (0.17)
======== ======== ========= ========= =========
Cash dividends per common share......... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
======== ======== ========= ========= =========
Market prices per common share
High.................................. $ 22.63 $ 31.44 $ 37.00 $ 35.91 $ 37.00
Low................................... 16.00 20.69 23.88 23.40 16.00
FISCAL 2000
Revenues.................................. $8,590.0 $8,928.7 $ 9,876.9 $ 9,291.4 $36,687.0
Gross profit.............................. 556.4 546.7 538.0 583.8 2,224.9
Income (loss) after taxes
Continuing operations................... 62.9(4) 49.3(5) 160.6(6) (88.2)(7) 184.6
Discontinued operations................. 7.2 10.0 6.2 (0.2) 23.2
Discontinued operations -- Gain on sale
of McKesson Water Products Company.... -- -- -- 515.9 515.9
-------- -------- --------- --------- ---------
Total............................ $ 70.1 $ 59.3 $ 166.8 $ 427.5 $ 723.7
======== ======== ========= ========= =========
Earnings (loss) per common share
Diluted
Continuing operations................. $ 0.22 $ 0.18 $ 0.56 $ (0.31) $ 0.66
Discontinued operations............... 0.03 0.03 0.02 -- 0.08
Discontinued operations -- Gain on
sale of McKesson Water Products
Company............................. -- -- -- 1.83 1.83
-------- -------- --------- --------- ---------
Total............................ $ 0.25 $ 0.21 $ 0.58 $ 1.52 $ 2.57
======== ======== ========= ========= =========
Basic
Continuing operations................. $ 0.22 $ 0.18 $ 0.57 $ (0.31) $ 0.66
Discontinued operations............... 0.03 0.03 0.02 -- 0.08
Discontinued operations -- Gain on
sale of McKesson Water Products
Company............................. -- -- -- 1.83 1.83
-------- -------- --------- --------- ---------
Total............................ $ 0.25 $ 0.21 $ 0.59 $ 1.52 $ 2.57
======== ======== ========= ========= =========
Cash dividends per common share......... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
======== ======== ========= ========= =========
Market prices per common share
High.................................. $ 69.25 $ 34.94 $ 28.81 $ 28.06 $ 69.25
Low................................... 30.75 27.19 18.56 18.19 18.19
</TABLE>

F-70
<PAGE> 96
MCKESSON HBOC, INC.

FINANCIAL NOTES (CONTINUED)

- ---------------
(1) Includes pre-tax charges of $0.5 million for severance associated with staff
reductions in the pharmacy management business, and $0.7 million for legal
costs incurred in connection with the pending litigation resulting from the
restatement of prior years' financial statements. Also includes a pre-tax
gain of $7.8 million on the liquidation of an investment, a charge of $2.1
million for write-off of in-process technology related to the July 2000
acquisition of MediVation, Inc. and $2.3 million for severance and facility
closing costs associated with staff reductions in the medical management
business. These items aggregate to $0.5 million in after-tax income.

(2) Includes pre-tax charges of $0.7 million for asset impairments, $0.5 million
for severance and $0.5 million for facility closing costs associated with
the closure of a pharmaceutical distribution center. Also includes charges
of $98.9 million for impairments of certain equity investments and $1.1
million for legal costs incurred in connection with the pending securities
litigation. These costs aggregate to $62.0 million, after-tax.

(3) Includes pre-tax charges of $6.2 million related to closure of facilities in
the pharmaceutical services business and consolidation of customer service
centers, staff reductions and adjustments to prior year restructuring
reserves in the medical/surgical business. Also includes charges related to
the restructuring of the former iMcKesson business, including the write-off
of goodwill and intangibles totaling $116.2 million, asset impairments of
$29.8 million, severance of $29.0 million and exit costs of $9.1 million. In
addition, includes charges for reserves of $161.1 million for Information
Technology estimated customer settlements (forgiveness of accounts
receivable, customer credits and refunds), a $6.7 million loss on
investments and a $0.7 million charge for legal costs incurred in connection
with the pending securities litigation. The costs aggregate to $264.2
million after-tax.

(4) Includes pre-tax charges of $6.3 million incurred in the quarter in
connection with the restatement of prior years' financial results and
resulting litigation. Also includes $18.5 million in severance and benefit
costs resulting from the change in executive management and $1.7 million in
retention benefits incurred in the quarter, $16.3 million in the aggregate
after-tax.

(5) Includes pre-tax charges of $8.7 million incurred in connection with the
restatement of prior years' financial statements and resulting litigation,
$12.1 million in severance and other costs associated with former employees
and $2.9 million in acquisition-related costs, $14.6 million in the
aggregate after-tax.

(6) Includes pre-tax charges for asset impairments, accounts receivable reserves
and customer settlements in the Health Care Supply Management segment
totaling $37.0 million related primarily to a prior year implementation of a
contract system, partially offset by a $5.7 million reduction in prior year
restructuring reserves. Also includes charges of $61.8 million for a change
in estimate of the Health Care Information Technology segment's requirements
for accounts receivable reserves and $1.5 million for the write-off of
purchased in-process technology related to the Company's November 1999
acquisition of Abaton.com, partially offset by a $2.7 million reduction in
prior year accruals for acquisition-related activities. In addition,
includes net gains of $253.3 million primarily from the exchange and
subsequent sale of equity investments. These gains are offset in part, by
charges of $2.4 million for accounting and legal fees and other costs
incurred in connection with the Company's earlier restatement of prior
years' financial results and resulting litigation and $0.7 million in
acquisition-related costs. These aggregate to $100.1 million in after-tax
income.

F-71
<PAGE> 97

MCKESSON HBOC, INC.
FINANCIAL NOTES (CONCLUDED)

(7) Includes pre-tax charges totaling $239.8 million for Health Care Information
Technology segment charges for asset impairments, customer accounts
receivable and severance primarily associated with product streamlining and
reorganization. These charges are offset in part, by a $4.3 million
reduction in prior year accruals for acquisition-related activities. In
addition, includes pre-tax charges of $1.5 million for asset impairments in
the Health Care Supply Management segment related primarily to a prior year
implementation of a contract system. Also includes a pre-tax charge of $2.9
million for severance and exit-related charges primarily associated with
segment staff reductions and a $0.9 million reduction in prior year
restructuring reserves. Also includes Corporate segment pre-tax net gains on
the sale of equity investments of $5.9 million, partially offset by charges
of $2.5 million for accounting and legal fees and other costs incurred in
connection with the Company's earlier restatement of prior years' financial
results and resulting litigation, costs associated with former employees and
other acquisition-related costs. These items total $149.6 million,
after-tax.

(8) After-tax amounts associated with the items discussed in Notes 1-7 above
amounted to $(325.7) million, $(1.15) per share, and $(80.4) million,
$(0.29) per share, in fiscal 2001 and 2000, respectively.

F-72
<PAGE> 98

DIRECTORS AND OFFICERS

<TABLE>
<S> <C>
BOARD OF DIRECTORS CORPORATE OFFICERS
Alan Seelenfreund Alan Seelenfreund
Chairman of the Board Chairman of the Board
John H. Hammergren John H. Hammergren
President and Chief Executive Officer, President and Chief Executive
McKesson HBOC, Inc. Officer
Alfred C. Eckert III William A. Armstrong
Chairman and Chief Executive Officer, Senior Vice President,
GSC Partners Administration
Tully M. Friedman William R. Graber
Chairman and Chief Executive Officer, Senior Vice President and
Friedman Fleischer & Lowe, LLC. Chief Financial Officer
Alton F. Irby III Paul C. Julian
Chairman, Senior Vice President and
Cobalt Media Group President,
M. Christine Jacobs Supply Management Business
Chairman, President and Chief Executive Graham O. King
Officer, Senior Vice President and
Theragenics Corporation President,
Martin M. Koffel Information Technology Business
Chairman and Chief Executive Officer, Paul E. Kirincic
URS Corporation Senior Vice President,
Gerald E. Mayo Human Resources
Chairman, Retired, Nicholas A. Loiacono
Midland Financial Services, Inc. Vice President and Treasurer
James V. Napier Ivan D. Meyerson
Chairman, Retired Senior Vice President,
Scientific-Atlanta, Inc. General Counsel and Secretary
David S. Pottruck Nigel A. Rees
President, Co-Chief Executive Officer and Vice President and Controller
Chief Operating Officer
The Charles Schwab Corporation Carmine J. Villani
Senior Vice President and
Carl E. Reichardt Chief Information Officer
Chairman, Retired
Wells Fargo & Company Heidi E. Yodowitz
Senior Vice President and
Jane E. Shaw Chief Financial Officer,
Chairman and Chief Executive Officer, Supply Management Business
Aerogen, Inc.
</TABLE>
<PAGE> 99

CORPORATE INFORMATION

COMMON STOCK

McKesson HBOC, Inc. common stock is listed on the New York Stock Exchange
and the Pacific Exchange (ticker symbol MCK) and is quoted in the daily stock
tables carried by most newspapers.

STOCKHOLDER INFORMATION

First Chicago Trust Co. of New York, a division of EquiServe, P.O. Box
2500, Jersey City, N.J. 07303 acts as transfer agent, registrar, dividend-paying
agent and dividend reinvestment plan agent for McKesson HBOC, Inc., stock and
maintains all registered stockholder records for the Company. For information
about McKesson HBOC, Inc. stock or to request replacement of lost dividend
checks, stock certificates or 1099's, stockholders may call First Chicago's
telephone response center at (800) 756-8200, weekdays 8:30 a.m. to 7:00 p.m.,
ET. For the hearing impaired call TDD: (201) 222-4955. First Chicago also has a
Web site: http://www.equiserve.com -- that stockholders may use 24 hours a day
to request account information.

DIVIDENDS AND DIVIDEND REINVESTMENT PLAN

Dividends are generally paid on the first business day of January, April,
July and October to stockholders of record on the first day of the preceding
month. You may have your dividend check deposited directly into your checking or
savings account. For more information, or to request an enrollment form, call
First Chicago at (800) 756-8200, Monday through Friday, 8:00 a.m. - 10:00 p.m.,
ET, or Saturday, 8:00 a.m. - 3:30 p.m., ET. McKesson HBOC, Inc. Dividend
Reinvestment Plan offers stockholders the opportunity to reinvest dividends in
common stock and to purchase additional common stock without paying brokerage
commissions or other service fees, and to have their stock certificates held in
safekeeping. For more information, or to request an enrollment form, call First
Chicago's telephone response center at (800) 414-6280.

ANNUAL MEETING

The Company's Annual Meeting of Stockholders will be held at 10:00 a.m.,
PDT, on Wednesday July 25, 2001, at the Fairmont Hotel, 950 Mason Street, San
Francisco, California.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.3
<SEQUENCE>2
<FILENAME>f72121ex3-3.txt
<DESCRIPTION>EXHIBIT 3.3
<TEXT>

<PAGE> 1
EXHIBIT 3.3

RESTATED

BY-LAWS

MCKESSON HBOC, INC.

A DELAWARE CORPORATION

AS AMENDED THROUGH MARCH 31, 2001

================================================================================

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I OFFICES........................................................1
Section 1 REGISTERED OFFICE..............................................1
Section 2 OTHER OFFICES..................................................1

ARTICLE II STOCKHOLDERS' MEETINGS.........................................1
Section 1 PLACE OF MEETINGS..............................................1
Section 2 ANNUAL MEETINGS................................................1
Section 3 SPECIAL MEETINGS...............................................1
Section 4 NOTICE OF MEETINGS.............................................2
Section 5 QUORUM.........................................................2
Section 6 VOTING RIGHTS..................................................3
Section 7 VOTING PROCEDURES AND INSPECTORS OF ELECTIONS..................3
Section 8 LIST OF STOCKHOLDERS...........................................4
Section 9 STOCKHOLDER PROPOSALS AT ANNUAL MEETINGS.......................4
Section 10 NOMINATIONS OF PERSONS FOR ELECTION TO THE
BOARD OF DIRECTORS...........................................5

ARTICLE III DIRECTORS......................................................6
Section 1 GENERAL POWERS.................................................6
Section 2 NUMBER AND TERM OF OFFICE; REMOVAL.............................6
Section 3 ELECTION OF DIRECTORS..........................................7
Section 4 VACANCIES......................................................7
Section 5 RESIGNATIONS...................................................7
Section 6 ANNUAL MEETINGS................................................7
Section 7 REGULAR MEETINGS...............................................7
Section 8 SPECIAL MEETINGS; NOTICE.......................................7
Section 9 QUORUM AND MANNER OF ACTING....................................8
Section 10 CONSENT IN WRITING.............................................8
Section 11 COMMITTEES.....................................................8
Section 12 TELEPHONE MEETINGS.............................................9
Section 13 COMPENSATION...................................................9
Section 14 INTERESTED DIRECTORS...........................................9
Section 15 DIRECTORS ELECTED BY SPECIAL CLASS OR SERIES..................10

ARTICLE IV OFFICERS......................................................10
Section 1 DESIGNATION OF OFFICERS.......................................10
Section 2 TERM OF OFFICE; RESIGNATION; REMOVAL..........................10
Section 3 VACANCIES.....................................................10
Section 4 AUTHORITY OF OFFICERS.........................................11
Section 5 DIVISIONAL TITLES.............................................11
Section 6 SALARIES......................................................11

ARTICLE V EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES
OWNED BY THE CORPORATION....................................11
Section 1 EXECUTION OF INSTRUMENTS......................................11
Section 2 VOTING OF SECURITIES OWNED BY THE CORPORATION.................11
</TABLE>

<PAGE> 3

<TABLE>
<S> <C>
ARTICLE VI SHARES OF STOCK AND OTHER SECURITIES..........................12
Section 1 FORM AND EXECUTION OF CERTIFICATES............................12
Section 2 LOST CERTIFICATES.............................................12
Section 3 TRANSFERS.....................................................12
Section 4 FIXING RECORD DATES...........................................12
Section 5 REGISTERED STOCKHOLDERS.......................................13
Section 6 REGULATIONS...................................................13
Section 7 OTHER SECURITIES OF THE CORPORATION...........................13

ARTICLE VII CORPORATE SEAL................................................14

ARTICLE VIII INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES
AND AGENTS..................................................14
Section 1 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER
THAN THOSE BY OR IN THE RIGHT OF THE CORPORATION...........14
Section 2 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY
OR IN THE RIGHT OF THE CORPORATION .........................14
Section 3 AUTHORIZATION OF INDEMNIFICATION .............................15
Section 4 GOOD FAITH DEFINED ...........................................15
Section 5 INDEMNIFICATION BY A COURT ...................................15
Section 6 EXPENSES PAYABLE IN ADVANCE ..................................15
Section 7 NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT
OF EXPENSES ................................................16
Section 8 INSURANCE.....................................................16
Section 9 CERTAIN DEFINITIONS...........................................16
Section 10 SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES ......16
Section 11 LIMITATION ON INDEMNIFICATION ................................17
Section 12 INDEMNIFICATION OF EMPLOYEES AND AGENTS.......................17
Section 13 EFFECT OF AMENDMENT ..........................................17
Section 14 AUTHORITY TO ENTER INTO INDEMNIFICATION AGREEMENTS ...........17

ARTICLE IX NOTICES.......................................................17

ARTICLE X AMENDMENTS....................................................18
</TABLE>

<PAGE> 4

RESTATED

BY-LAWS

MCKESSON HBOC, INC.

A DELAWARE CORPORATION

ARTICLE I

OFFICES

SECTION 1. REGISTERED OFFICE. The address of the registered office of McKesson
HBOC, Inc. (the "Corporation") within the State of Delaware is 1013 Centre Road,
City of Wilmington 19805-1297, County of New Castle. The name of the registered
agent of the Corporation at such address is The Prentice-Hall Corporation
System, Inc.

SECTION 2. OTHER OFFICES. The Corporation shall also have and maintain an office
or principal place of business at One Post Street, San Francisco, California and
may also have offices at such other places, both within and without the State of
Delaware, as the Board of Directors may from time to time determine or the
business of the Corporation may require.

ARTICLE II

STOCKHOLDERS' MEETINGS

SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders of the Corporation
shall be held at such place, either within or without the State of Delaware, as
may be designated from time to time by the Board of Directors, or, if not so
designated, then at the office of the Corporation required to be maintained
pursuant to Section 2 of ARTICLE I hereof.

SECTION 2. ANNUAL MEETINGS. The annual meetings of stockholders of the
Corporation for the purpose of election of directors and for such other business
as may lawfully come before it, shall be held on such date and at such time as
may be designated from time to time by the Board of Directors, or, if not so
designated, then at 10:00 a.m. on the last Wednesday in July in each year if not
a legal holiday, and, if a legal holiday, at the same hour and place on the next
succeeding day not a holiday.

SECTION 3. SPECIAL MEETINGS. Special Meetings of the stockholders of the
Corporation may be called, for any purpose or purposes, by the Chairman of the
Board or the President or the Board of Directors at any time. Stockholders may
not call Special Meetings of the stockholders of the Corporation.

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SECTION 4. NOTICE OF MEETINGS.

(a) Except as otherwise provided by law or the Certificate of Incorporation,
written notice of each meeting of stockholders, specifying the place, date and
hour and purpose or purposes of the meeting, shall be given not less than 10 nor
more than 60 days before the date of the meeting to each stockholder entitled to
vote thereat, directed to his address as it appears upon the books of the
Corporation; except that where the matter to be acted on is a merger or
consolidation of the Corporation or a sale, lease or exchange of all or
substantially all of its assets, such notice shall be given not less than 20 nor
more than 60 days prior to such meeting.

(b) If at any meeting action is proposed to be taken which, if taken, would
entitle stockholders fulfilling the requirements of Section 262(d) of the
Delaware General Corporation Law to an appraisal of the fair value of their
shares, the notice of such meeting shall contain a statement of that purpose and
to that effect and shall be accompanied by a copy of that statutory section.

(c) When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken unless the adjournment is for more
than thirty days, or unless after the adjournment a new record date is fixed for
the adjourned meeting, in which event a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.

(d) Notice of the time, place and purpose of any meeting of stockholders may be
waived in writing, either before or after such meeting, and to the extent
permitted by law, will be waived by any stockholder by his attendance thereat,
in person or by proxy. Any stockholder so waiving notice of such meeting shall
be bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.

(e) Unless and until voted, every proxy shall be revocable at the pleasure of
the person who executed it or of his legal representatives or assigns, except in
those cases where an irrevocable proxy permitted by statute has been given.

SECTION 5. QUORUM. At all meetings of stockholders, except where otherwise
provided by law, the Certificate of Incorporation, or these By-Laws, the
presence, in person or by proxy duly authorized, of the holders of a majority of
the outstanding shares of stock entitled to vote shall constitute a quorum for
the transaction of business. Shares, the voting of which at said meeting has
been enjoined, or which for any reason cannot be lawfully voted at such meeting,
shall not be counted to determine a quorum at said meeting.

In the absence of a quorum any meeting of stockholders may be adjourned, from
time to time, by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. At such
adjourned meeting at which a quorum is present or represented any business may
be transacted which might have been transacted at the original meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these By-Laws,
all action taken by the holders of a majority of the voting power represented at
any meeting at which a quorum is present shall be valid and binding upon the
Corporation.

In the event that at any meeting at which the holders of more than one class or
series of the Corporation's capital stock are entitled to vote as a class, a
quorum of any such class or series is lacking, the holders of any class or
series represented by a quorum may proceed with the transaction of the business
to be

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transacted by that class or series, and if such business is the election of
directors, the director whose successors shall not have been elected shall
continue in office until their successors shall have been duly elected and shall
have qualified.

SECTION 6. VOTING RIGHTS.

(a) Except as otherwise provided by law, only persons in whose names shares
entitled to vote stand on the stock records of the Corporation on the record
date for determining the stockholders entitled to vote at said meeting shall be
entitled to vote at such meeting. Shares standing in the names of two or more
persons shall be voted or represented in accordance with the determination of
the majority of such persons, or, if only one of such persons is present in
person or represented by proxy, such person shall have the right to vote such
shares and such shares shall be deemed to be represented for the purpose of
determining a quorum.

(b) Every person entitled to vote or execute consents shall have the right to do
so either in person or by an agent or agents authorized by a written proxy
executed by such person or his duly authorized agent, which proxy shall be filed
with the Secretary of the Corporation at or before the meeting at which it is to
be used. Said proxy so appointed need not be a stockholder. No proxy shall be
voted on after three years from its date unless the proxy provides for a longer
period.

(c) Without limiting the manner in which a stockholder may authorize another
person or persons to act for him as proxy pursuant to subsection (b) of this
Section, the following shall constitute a valid means by which a stockholder may
grant such authority:

(1) A stockholder may execute a writing authorizing another person or
persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing
such writing or causing his or her signature to be affixed to such writing
by any reasonable means including, but not limited to, by facsimile
signature.

(2) A stockholder may authorize another person or persons to act for him
as proxy by transmitting or authorizing the transmission of a telegram,
cablegram, or other means of electronic transmission to the person who
will be the holder of the proxy or to a proxy solicitation firm, proxy
support service organization or like agent duly authorized by the person
who will be the holder of the proxy to receive such transmission, provided
that any such telegram, cablegram or other means of electronic
transmission must either set forth or be submitted with information from
which it can be determined that the telegram, cablegram or other
electronic transmission was authorized by the stockholder. If it is
determined that such telegrams, cablegrams or other electronic
transmissions are valid, the inspectors or, if there are no inspectors,
such other persons making that determination shall specify the information
upon which they relied.

(d) Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission created pursuant to subsection (c) of this Section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile telecommunication or other reproduction shall
be a complete reproduction of the entire original writing or transmission.

SECTION 7. VOTING PROCEDURES AND INSPECTORS OF ELECTIONS.

(a) The Corporation shall, in advance of any meeting of stockholders, appoint
one or more inspectors to act at the meeting and make a written report thereof.
The Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is

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<PAGE> 7

able to act at a meeting of stockholders, the person presiding at the meeting
shall appoint one or more inspectors to act at the meeting. Each inspector,
before entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability.

(b) The inspectors shall (i) ascertain the number of shares outstanding and the
voting power of each, (ii) determine the shares represented at a meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors, and (v) certify their
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors.

(c) The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
the meeting. No ballot, proxies or votes, nor any revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery upon application by a stockholder shall determine
otherwise.

(d) In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted with those proxies, any information provided in accordance with
Section 212(c)(2) of the Delaware General Corporation Law, ballots and the
regular books and records of the Corporation, except that the inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by the record owner to cast or more votes than the stockholder holds
of record. If the inspectors consider other reliable information for the limited
purpose permitted herein, the inspectors at the time they make their
certification pursuant to subsection (b)(v) of this Section shall specify the
precise information considered by them including the person or persons from whom
they obtained the information, when the information was obtained, the means by
which the information was obtained and the basis for the inspectors' belief that
such information is accurate and reliable.

(e) The provisions of this Section 7 shall not apply to any annual meeting of
stockholders held prior to the annual meeting of stockholders to be held in
1995.

SECTION 8. LIST OF STOCKHOLDERS. The officer who has charge of the stock ledger
of the Corporation shall prepare and make, at least 10 days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at said
meeting, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held and
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where said meeting is to be held, and the list shall be
produced and kept at the time and place of meeting during the whole time
thereof, and may be inspected by any stockholder who is present.

SECTION 9. STOCKHOLDER PROPOSALS AT ANNUAL MEETINGS. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors, otherwise properly
brought before the meeting by or at the direction of the Board of Directors or
otherwise properly

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<PAGE> 8

brought before the meeting by a stockholder of the Corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 9 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section 9. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice to the
Secretary must be delivered to or mailed and received at the principal executive
offices of the Corporation, not less than 90 days nor more than 120 days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder in order to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure of
the date of the annual meeting was made, whichever first occurs. A stockholder's
notice to the Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting, (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of the stockholder proposing such business, (iii) the class or series and number
of shares of capital stock of the Corporation which are owned beneficially or of
record by the stockholder, (iv) a description of all arrangements or
understandings between the stockholder and any other person or persons
(including their names) in connection with the proposal of such business by the
stockholder and any material interest of the stockholder in such business, and
(v) a representation that the stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.

Notwithstanding anything in the By-Laws to the contrary, no business shall be
conducted at the annual meeting except in accordance with the procedures set
forth in this Section 9, provided, however, that nothing in this Section 9 shall
be deemed to preclude discussion by any stockholder of any business properly
brought before the annual meeting in accordance with said procedure.

The Chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 9, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.

SECTION 10. NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS. In
addition to any other applicable requirements, only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors, by any nominating committee or person appointed by the
Board of Directors or by any stockholder of the Corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 10 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section 10. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice to the Secretary must be delivered to or mailed and
received at the principal executive offices of the Corporation not less than 90
days nor more than 120 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that in the event
that the annual meeting is called for a date that is not within 30 days before
or after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs. Such stockholder's notice shall set forth (a)

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<PAGE> 9

as to each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by the person and (iv) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Section 14 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder; and (b) as to the stockholder giving the notice, (i) the name and
record address of the stockholder, (ii) the class or series and number of shares
of capital stock of the Corporation which are owned beneficially or of record by
the stockholder, (iii) a description of all arrangements or understandings
between the stockholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nomination(s) are to be
made by the stockholder, (iv) a representation that such stockholder intends to
appear in person or by proxy at the meeting to nominate the persons named in
such notice and (v) any other information relating to the stockholder that would
be required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for the election of directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee being named as a nominee and to serve as a director if
elected. The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a director of the Corporation.
No person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth herein. These provisions
shall not apply to nomination of any persons entitled to be separately elected
by holders of preferred stock.

The Chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.

ARTICLE III

DIRECTORS

SECTION 1. GENERAL POWERS. The property, affairs and business of the Corporation
shall be managed under the direction of its Board of Directors, which may
exercise all of the powers of the Corporation, except such as are by law or by
the Certificate of Incorporation or by these By-Laws expressly conferred upon or
reserved to the stockholders.

SECTION 2. NUMBER AND TERM OF OFFICE; REMOVAL. The number of directors of the
Corporation shall be fixed from time to time by these By-Laws but in no event
shall be less than three (3). Until these By-Laws are further amended, the
number of directors shall be twelve (12). The directors shall be divided into
three classes. Each such class shall consist, as nearly as may be possible, of
one-third of the total number of directors, and any remaining directors shall be
included within such group or groups as the Board of Directors shall designate.
At the initial annual meeting of stockholders in 1994, a class of directors
shall be elected for a one-year term, a class of directors for a two-year term
and a class of directors for a three-year term. At each succeeding annual
meeting of stockholders, beginning in 1995, successors to the class of directors
whose term expires at that annual meeting shall be elected for a three-year
term. If the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible, but in no case shall a decrease in the number
of directors shorten the term of any incumbent director. A director may be
removed from office for cause only and, subject to such removal, death,
resignation,

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retirement or disqualification, shall hold office until the annual meeting for
the year in which his term expires and until his successor shall be elected and
qualify. No alteration, amendment or repeal of these By-Laws shall be effective
to shorten the term of any director holding office at the time of such
alteration, amendment or repeal, to permit any such director to be removed
without cause, or to increase the number of directors in any class or in the
aggregate from that existing at the time of such alteration, amendment or repeal
until the expiration of the terms of office of all directors then holding
office, unless such alteration, amendment or repeal has been approved by either
the holders of all shares of stock entitled to vote thereon or by a vote of a
majority of the entire Board of Directors. The provisions of this Section 2
shall not apply to directors governed by Section 15 of this ARTICLE III.

SECTION 3. ELECTION OF DIRECTORS. At each meeting of the stockholders for the
election of directors, the directors to be elected at such meeting shall be
elected by a plurality of votes given at such election.

SECTION 4. VACANCIES. Any vacancy occurring in the Board of Directors for any
cause other than by reason of an increase in the number of directors may be
filled by a majority of the remaining members of the Board of Directors,
although such majority is less than a quorum, or by the stockholders. Any
vacancy occurring by reason of an increase in the number of directors may be
filled by action of a majority of the entire Board of Directors or by the
stockholders. A director elected by the Board of Directors to fill a vacancy
shall be elected to hold office until the expiration of the term for which he
was elected and until his successor shall have been elected and shall have
qualified. A director elected by the stockholders to fill a vacancy shall be
elected to hold office until the expiration of the term for which he was elected
and until his successor shall have been elected and shall have qualified. The
provisions of this Section 4 shall not apply to directors governed by Section 15
of this ARTICLE III.

SECTION 5. RESIGNATIONS. A director may resign at any time by giving written
notice to the Board of Directors or to the Secretary. Such resignation shall
take effect at the time specified therein and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.

SECTION 6. ANNUAL MEETINGS. The Board of Directors, as constituted following the
vote of stockholders at any meeting of the stockholders for the election of
directors, may hold its first meeting for the purpose of organization and the
transaction of business, if a quorum be present, immediately after such meeting
and at the same place, and notice of such meeting need not be given. Such first
meeting may be held at any other time and place specified in a notice given as
hereinafter provided for special meetings of the Board of Directors or in a
consent and waiver of notice thereof signed by all the directors.

SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such places and times as may be fixed from time to time
by resolution of the Board.

SECTION 8. SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors
may be called at any time by the Chairman of the Board or the President and
shall be called by the Secretary upon the written request of any three directors
and each special meeting shall be held at such place and time as shall be
specified in the notice thereof. At least twenty-four (24) hours' notice of each
such special meeting shall be given to each director personally or sent to him
addressed to his residence or usual place

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of business by telephone, telegram or facsimile transmission, or at least 120
hours' notice of each such special meeting shall be given to each director by
letter sent to him addressed as aforesaid or on such shorter notice and by such
means as the person or persons calling such meeting may deem reasonably
necessary or appropriate in light of the circumstances. Any notice by letter or
telegram shall be deemed to be given when deposited in the United States mail so
addressed or when duly deposited at an appropriate office for transmission by
telegram, as the case may be. Such notice need not state the business to be
transacted at or the purpose or purposes of such special meeting. No notice of
any such special meeting of the Board of Directors need be given to any director
who attends in person or who, in writing executed and filed with the records of
the meeting, either before or after the holding thereof, waives such notice. No
notice need be given of an adjourned meeting of the Board of Directors.

SECTION 9. QUORUM AND MANNER OF ACTING. A majority of the total number of
directors, but in no event less than two directors, shall constitute a quorum
for the transaction of business at any annual, regular or special meeting of the
Board of Directors. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, the act of a majority of the directors
present at any meeting, at which a quorum is present, shall be the act of the
Board of Directors. In the absence of a quorum, a majority of the directors
present may adjourn the meeting from time to time until a quorum be had.

SECTION 10. CONSENT IN WRITING. Any action required or permitted to be taken at
any meeting of the Board of Directors or any committee thereof may be taken
without a meeting, if a written consent to such action is signed by all members
of the Board or of such committee, as the case may be, and such written consent
is filed with the minutes of proceedings of the Board or such committee.

SECTION 11. COMMITTEES.

(a) Executive Committee. The Board of Directors may, by resolution passed by a
majority of a quorum of the Board, appoint an Executive Committee of not less
than three members, each of whom shall be a director. The Executive Committee,
to the extent permitted by law, shall have and may exercise when the Board of
Directors is not in session all powers of the Board in the management of the
business and affairs of the Corporation, including, without limitation, the
power and authority to declare a dividend or to authorize the issuance of stock,
except such Committee shall not have the power or authority (i) to approve,
adopt, or recommend to stockholders any action or matter required by the
Delaware General Corporation Law to be submitted for stockholder approval; or
(ii) to adopt, amend, or repeal any By-Law of the Corporation.

(b) Other Committees. The Board of Directors may, by resolution passed by a
majority of a quorum of the Board, from time to time appoint such other
committees as may be permitted by law. Such other committees appointed by the
Board of Directors shall have such powers and perform such duties as may be
prescribed by the resolution or resolutions creating such committee, but in no
event shall any such committee have the powers denied to the Executive Committee
in these By-Laws.

(c) Term. The members of all committees of the Board of Directors shall serve a
term coexistent with that of the Board of Directors which shall have appointed
such committee. The Board, subject to the provisions of subsections (a) or (b)
of this Section 11, may at any time increase or decrease the number of members
of a committee or terminate the existence of a committee; provided, that no
committee shall consist of less than one member. The membership of a committee
member shall terminate on the date of his death or voluntary resignation, but
the Board may at any time for any reason remove any individual

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committee member and the Board may fill any committee vacancy created by death,
resignation, removal or increase in the number of members of the committee. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee, and, in addition, in the absence or disqualification of any
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.

(d) Meetings. Unless the Board of Directors shall otherwise provide, regular
meetings of the Executive Committee or any other committee appointed pursuant to
this Section 11 shall be held at such times and places as are determined by the
Board of Directors, or by any such committee, and when notice thereof has been
given to each member of such committee, no further notice of such regular
meetings need be given thereafter; special meetings of any such committee may be
held at the principal office of the Corporation required to be maintained
pursuant to Section 2 of ARTICLE I hereof; or at any place which has been
designated from time to time by resolution of such committee or by written
consent of all members thereof, and may be called by any director who is a
member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time after the meeting
and will be waived by any director by attendance thereat. A majority of the
authorized number of members of any such committee shall constitute a quorum for
the transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.

SECTION 12. TELEPHONE MEETINGS. The Board of Directors or any committee thereof
may participate in a meeting by means of a conference telephone or similar
communications equipment if all members of the Board or of such committee, as
the case may be, participating in the meeting can hear each other at the same
time. Participation in a meeting by these means shall constitute presence in
person at the meeting.

SECTION 13. COMPENSATION. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors and/or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

SECTION 14. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or committee, and the Board of Directors or
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.

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SECTION 15. DIRECTORS ELECTED BY SPECIAL CLASS OR SERIES. To the extent that any
holders of any class or series of stock other than Common Stock issued by the
Corporation shall have the separate right, voting as a class or series, to elect
directors, the directors elected by such class or series shall be deemed to
constitute an additional class of directors and shall have a term of office for
one year or such other period as may be designated by the provisions of such
class or series providing such separate voting right to the holders of such
class or series of stock, and any such class of directors shall be in addition
to the classes referred to in Section 2 of this ARTICLE III. Any directors so
elected shall be subject to removal in such manner as may be provided by law or
by the Certificate of Incorporation of this Corporation. The provisions of
Sections 2 and 4 of this ARTICLE III do not apply to directors governed by this
Section 15.

ARTICLE IV

OFFICERS

SECTION 1. DESIGNATION OF OFFICERS. The officers of the Corporation, who shall
be chosen by the Board of Directors at its first meeting after each annual
meeting of stockholders, shall be a Chairman of the Board, a President, one or
more Vice Presidents, a Treasurer, a Secretary and a Controller. The Board of
Directors from time to time may choose such other officers as it shall deem
appropriate. Any one person may hold any number of offices of the Corporation at
any one time unless specifically prohibited therefrom by law. The Chairman of
the Board and the President shall be chosen from among the directors; the other
officers need not be directors.

SECTION 2. TERM OF OFFICE; RESIGNATION; REMOVAL. The term of office of each
officer shall be until the first meeting of the Board of Directors following the
next annual meeting of stockholders and until his successor is elected and shall
have qualified, or until his death, resignation or removal, whichever is sooner.
Any officer may resign at any time by giving written notice to the Board of
Directors or to the Secretary. Such resignation shall take effect at the time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective. Any officer may be
removed at any time either with or without cause by the Board of Directors.
Notwithstanding anything in these By-Laws to the contrary, for a period of one
year following January 12, 1999, the requisite vote or approval of the Board of
Directors necessary to terminate or replace, or fill a vacancy in respect of,
Charles W. McCall as Chairman of the Board or Mark A. Pulido as President and
Chief Executive Officer shall be no less than seventy-five percent (75%) of the
members of the Board of Directors.

SECTION 3. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause, may be filled for the unexpired
portion of the term by the Board of Directors.

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SECTION 4. AUTHORITY OF OFFICERS. Subject to the power of the Board of Directors
in its discretion to change and redefine the duties of the officers of the
Corporation by resolution in such manner as it may from time to time determine,
the duties of the officers of the Corporation shall be as follows:

(a) Chairman of the Board. The Chairman of the Board shall preside at meetings
of the stockholders and the Board of Directors. Subject to the direction of the
Board of Directors, he shall generally manage the affairs of the Board and
perform such other duties as are assigned by the Board.

(b) President. The President shall be the Chief Executive Officer of the
Corporation, and shall execute all the powers and perform all the duties usual
to such office. Subject to the direction of the Board of Directors, he shall
have the responsibility for the general management of the affairs of the
Corporation. The President shall perform such other duties as may be prescribed
or assigned to him from time to time by the Board of Directors.

(c) Other Officers. The other officers of the Corporation shall have such powers
and shall perform such duties as generally pertain to their respective offices,
as well as such powers and duties as the Board of Directors, the Executive
Committee or the Chief Executive Officer may prescribe.

SECTION 5. DIVISIONAL TITLES. Any one of the Chief Executive Officer, President,
or Vice President Human Resources and Administration (each one an "Appointing
Person"), may from time to time confer upon any employee of a division of the
Corporation the title of President, Vice President, Treasurer or Secretary of
such division or any other divisional title or titles deemed appropriate. Any
such titles so conferred may be discontinued and withdrawn at any time by any
one Appointing Person. Any employee of a division designated by such a
divisional title shall have the powers and duties with respect to such division
as shall be prescribed by the Appointing Person. The conferring, withdrawal or
discontinuance of divisional titles shall be in writing and shall be filed with
the Secretary of the Corporation.

SECTION 6. SALARIES. The salaries and other compensation of the principal
officers of the Corporation shall be fixed from time to time by the Board of
Directors.

ARTICLE V

EXECUTION OF CORPORATE INSTRUMENTS
AND VOTING OF SECURITIES OWNED BY THE CORPORATION

SECTION 1. EXECUTION OF INSTRUMENTS. The Board of Directors may in its
discretion determine the method and designate the signatory officer or officers
or other person or persons, to execute any corporate instrument or document, or
to sign the corporate name without limitation, except where otherwise provided
by law, and such execution or signature shall be binding upon the Corporation.
All checks and drafts drawn on banks or other depositories on funds to the
credit of the Corporation or in special accounts of the Corporation, shall be
signed by such person or persons as the Treasurer or such other person
designated by the Board of Directors for that purpose shall authorize so to do.

SECTION 2. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other
securities of other corporations and business entities owned or held by the
Corporation for itself, or for other parties in any capacity, shall be voted,
and all proxies with respect thereto shall be executed, by the person authorized
to do so by resolution of the Board of Directors.

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ARTICLE VI

SHARES OF STOCK AND OTHER SECURITIES

SECTION 1. FORM AND EXECUTION OF CERTIFICATES. Certificates for the shares of
stock of the Corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by, the Chairman of the Board (if there be such an officer
appointed), or by the President or any Vice President and by the Treasurer or
Assistant Treasurer or the Secretary or Assistant Secretary, certifying the
number of shares owned by him in the Corporation. Any or all of the signatures
on the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.

SECTION 2. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
indemnify the Corporation in such manner as it shall require and/or to give the
Corporation a surety bond in such form and amount as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost or destroyed.

SECTION 3. TRANSFERS. Transfers of record of shares of stock of the Corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a certificate or
certificates for a like number of shares, properly endorsed.

SECTION 4. FIXING RECORD DATES. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change,

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conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than 60 nor less than 10 days before the date of such meeting, nor more
than 60 days prior to any other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is expressed; (3) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.

SECTION 5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.

SECTION 6. REGULATIONS. The Board of Directors may make such rules and
regulations as it may deem expedient concerning the issue, transfer and
registration of certificates for shares of the stock and other securities of the
Corporation, and may appoint transfer agents and registrars of any class of
stock or other securities of the Corporation.

SECTION 7. OTHER SECURITIES OF THE CORPORATION. All bonds, debentures and other
corporate securities of the Corporation, other than stock certificates, may be
signed by the Chairman of the Board (if there be such an officer appointed), or
the President or any Vice President or such other person as may be authorized by
the Board of Directors and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided,
however, that where any such bond, debenture or other corporate security shall
be authenticated by the manual signature of a trustee under an indenture
pursuant to which such bond, debenture or other corporate security shall be
issued, the signature of the persons signing and attesting the corporate seal on
such bond, debenture or other corporate security may be the imprinted facsimile
of the signatures of such persons. Interest coupons appertaining to any such
bond, debenture or other corporate security, authenticated by a trustee as
aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the
Corporation, or such other person as may be authorized by the Board of
Directors, or bear imprinted thereon the facsimile signature of such person. In
case any officer who shall have signed or attested any bond, debenture or other
corporate security or whose facsimile signature shall appear thereon shall have
ceased to be such officer before the bond, debenture or other corporate security
so signed or attested shall have been delivered, such bond, debenture or other
corporate security nevertheless may be adopted by the Corporation and issued and
delivered as though the person who signed the same or whose facsimile signature
shall have been used thereon had not ceased to be such officer of the
Corporation.

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ARTICLE VII

CORPORATE SEAL

The corporate seal shall consist of a die bearing the name of the
Corporation and the state and date of its incorporation. Said seal may be used
by causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.

ARTICLE VIII

INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS

SECTION 1. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE
BY OR IN THE RIGHT OF THE CORPORATION. Subject to Section 3 of this ARTICLE
VIII, the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director or officer of the Corporation, or is or was a
director or officer of the Corporation serving at the request of the Corporation
as a director or officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. The right to
indemnification conferred in this ARTICLE VIII shall be a contract right.

SECTION 2. POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE
RIGHT OF THE CORPORATION. Subject to Section 3 of this ARTICLE VIII, the
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director or officer of the Corporation, or is or was a
director or officer of the Corporation serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation; except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.

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SECTION 3. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under this
ARTICLE VIII (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 1 or Section 2 of this
ARTICLE VIII, as the case may be. Such determination shall be made (i) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. To the extent, however, that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith, without
the necessity of authorization in the specific case.

SECTION 4. GOOD FAITH DEFINED. For purposes of any determination under Section 3
of this ARTICLE VIII, a person shall be deemed to have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, or, with respect to any criminal action or proceeding, to
have had no reasonable cause to believe his conduct was unlawful, if his action
is based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him by the officers of the Corporation
or another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 4 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this Section 4 shall not
be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth in
Sections 1 or 2 of this ARTICLE VIII, as the case may be.

SECTION 5. INDEMNIFICATION BY A COURT. Notwithstanding any contrary
determination in the specific case under Section 3 of this ARTICLE VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under Sections
1 and 2 of this ARTICLE VIII. The basis of such indemnification by a court shall
be a determination by such court that indemnification of the director or officer
is proper in the circumstances because he has met the applicable standards of
conduct set forth in Sections 1 or 2 of this ARTICLE VIII, as the case may be.
Neither a contrary determination in the specific case under Section 3 of this
ARTICLE VIII nor the absence of any determination thereunder shall be a defense
to such application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.

SECTION 6. EXPENSES PAYABLE IN ADVANCE. Expenses incurred by a director or
officer in defending or investigating a threatened or pending action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this ARTICLE VIII.

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SECTION 7. NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
indemnification and advancement of expenses provided by or granted pursuant to
this ARTICLE VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any By-Law, agreement, contract, vote of stockholders or disinterested directors
or pursuant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that indemnification of the persons specified in Sections 1 and 2 of
this ARTICLE VIII shall be made to the fullest extent permitted by law. The
provisions of this ARTICLE VIII shall not be deemed to preclude the
indemnification of any person who is not specified in Sections 1 or 2 of this
ARTICLE VIII but whom the Corporation has the power or obligation to indemnify
under the provisions of the General Corporation Law of the State of Delaware, or
otherwise.

SECTION 8. INSURANCE. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Corporation, or
is or was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power or the obligation to indemnify him against such liability
under the provisions of this ARTICLE VIII.

SECTION 9. CERTAIN DEFINITIONS. For purposes of this ARTICLE VIII, references to
"the Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers, so that any
person who is or was a director or officer of such constituent corporation, or
is or was a director or officer of such constituent corporation serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this ARTICLE VIII with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued. For purposes of this ARTICLE VIII, references
to "fines" shall include any excise taxes assessed on a person with respect to
an employee benefit plan; and references to "serving at the request of the
Corporation" shall include any service as a director, officer, employee or agent
of the Corporation which imposes duties on, or involves services by, such
director or officer with respect to an employee benefit plan, its participants
or beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this ARTICLE
VIII.

SECTION 10. SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this ARTICLE VIII shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person.

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SECTION 11. LIMITATION ON INDEMNIFICATION. Notwithstanding anything contained in
this ARTICLE VIII to the contrary, except for proceedings to enforce rights to
indemnification (which shall be governed by Section 5 hereof), the Corporation
shall not be obligated to indemnify any director or officer in connection with a
proceeding (or part thereof) initiated by such person unless such proceeding (or
part thereof) was authorized or consented to by the Board of Directors of the
Corporation.

SECTION 12. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation may, to the
extent authorized from time to time by the Board of Directors, provide rights to
indemnification and to the advancement of expenses to employees and agents of
the Corporation similar to those conferred in this ARTICLE VIII to directors and
officers of the Corporation.

SECTION 13. EFFECT OF AMENDMENT. Any amendment, repeal or modification of this
ARTICLE VIII shall not (a) adversely affect any right or protection of any
director or officer existing at the time of such amendment, repeal or
modification, or (b) apply to the indemnification of any such person for
liability, expense, or loss stemming from actions or omissions occurring prior
to such amendment, repeal, or modification.

SECTION 14. AUTHORITY TO ENTER INTO INDEMNIFICATION AGREEMENTS. The Corporation
may enter into indemnification agreements with the directors and officers of the
Corporation, including, without limitation, any indemnification agreement in
substantially the form set forth in Exhibit 1 attached to these By-Laws.

ARTICLE IX

NOTICES

Whenever, under any provisions of these By-Laws, notice is required to be given
to any stockholder, the same shall be given in writing, timely and duly
deposited in the United States Mail, postage prepaid, and addressed to his last
known post office address as shown by the stock record of the Corporation or its
transfer agent. Any notice required to be given to any director may be given by
any of the methods stated in Section 8 of ARTICLE III hereof, except that such
notice other than one which is delivered personally, shall be sent to such
address or (in the case of facsimile telecommunication) facsimile telephone
number as such director shall have disclosed in writing to the Secretary of the
Corporation, or, in the absence of such filing, to the last known post office
address of such director. If no address of a stockholder or director be known,
such notice may be sent to the office of the Corporation required to be
maintained pursuant to Section 2 of ARTICLE I hereof. An affidavit of mailing,
executed by a duly authorized and competent employee of the Corporation or its
transfer agent appointed with respect to the class of stock affected, specifying
the name and address or the names and addresses of the stockholder or
stockholders, director or directors, to whom any such notice or notices was or
were given, and the time and method of giving the same, shall be conclusive
evidence of the statements therein contained. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of mailing and
all notices given by telegram or other means of electronic transmission shall be
deemed to have been given as at the sending time recorded by the telegraph
company or other electronic transmission equipment operator transmitting the
same. It shall not be necessary that the same method of giving be employed in
respect of all directors, but one permissible method may be employed in respect
of any one or more, and any other permissible method or methods may be employed
in respect of any other or others. The period or limitation of time within which
any stockholder may exercise any option or right, or enjoy any privilege or
benefit, or be required to act, or within which any director may exercise any
power or right, or enjoy any privilege, pursuant to any notice sent him in the
manner above provided, shall not be

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<PAGE> 21

affected or extended in any manner by the failure of such a stockholder or such
director to receive such notice. Whenever any notice is required to be given
under the provisions of this statutes or of the Certificate of Incorporation, or
of these By-Laws, a waiver thereof in writing signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Whenever notice is required to be given, under any
provision of law or of the Certificate of Incorporation or By-Laws of the
Corporation, to any person with whom communication is unlawful, the giving of
such notice to such person shall not be required and there shall be no duty to
apply to any governmental authority or agency for a license or permit to give
such notice to such person. Any action or meeting which shall be taken or held
without notice to any such person with whom communication is unlawful shall have
the same force and effect as if such notice had been duly given. In the event
that the action taken by the Corporation is such as to require the filing of a
certificate under any provision of the Delaware General Corporation Law, the
certificate shall state, if such is the fact and if notice is required, that
notice was given to all persons entitled to receive notice except such persons
with whom communication is unlawful.

ARTICLE X

AMENDMENTS

The Board of Directors is expressly authorized to adopt, alter and repeal the
By-Laws of the Corporation in whole or in part at any regular or special meeting
of the Board of Directors, by vote of a majority of the entire Board of
Directors. Except where ARTICLE V of the Certificate of Incorporation of the
Corporation requires a higher vote, the By-Laws may also be adopted, altered or
repealed in whole or in part at any annual or special meeting of the
stockholders by the affirmative vote of three fourths of the shares of the
Corporation outstanding and entitled to vote thereon.

CERTIFICATE OF SECRETARY

The undersigned, Senior Vice President, General Counsel and Secretary of
McKesson HBOC, Inc., a Delaware corporation, hereby certifies that the foregoing
is a full, true and correct copy of the By-Laws of said Corporation, with all
amendments to date of this Certificate.

WITNESS the signature of the undersigned and the seal of the Corporation this
31st day of March, 2001.

/s/ Ivan D. Meyerson
------------------------------------------
Ivan D. Meyerson
Senior Vice President, General Counsel and
Secretary

18
<PAGE> 22

EXHIBIT 1

INDEMNIFICATION AGREEMENT

AGREEMENT, effective as of ______, 19__, between McKesson HBOC, Inc., a Delaware
corporation (the "Company"), and ______________ (the "Indemnitee").

WHEREAS, it is essential to the Company to retain and attract as directors and
officers the most capable persons available.

WHEREAS, Indemnitee is a director/officer of the Company;

WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors of public companies
in today's environment;

WHEREAS, the Certificate of Incorporation and the By-laws of the Company require
the Company to indemnify and advance expenses to its directors to the fullest
extent permitted by law and the Indemnitee has been serving and continues to
serve as a director or officer of the Company in part in reliance on such
Certificate of Incorporation and By-laws;

WHEREAS, in recognition of Indemnitee's need for substantial protection against
personal liability in order to enhance Indemnitee's continued service to the
Company in an effective manner and Indemnitee's reliance on the aforesaid
Certificate of Incorporation and By-laws, and in part to provide Indemnitee with
specific contractual assurance that the protection promised by such Certificate
of Incorporation and By-laws will be available to Indemnitee (regardless of,
among other things, any amendment to or revocation of such Certificate of
Incorporation and By-laws or any change in the composition of the Company's
Board of Directors or acquisition transaction relating to the Company), and in
order to induce Indemnitee to continue to provide services to the Company as a
director or officer thereof, the Company wishes to provide in this Agreement for
the indemnification of and the advancing of expenses to Indemnitee to the
fullest extent (whether partial or complete) permitted by law and as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies.

NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to
serve the Company directly or, at its request, with another enterprise, and
intending to be legally bound hereby, the parties hereto agree as follows:

1. CERTAIN DEFINITIONS.

(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more of
the total voting power represented by the Company's then outstanding Voting
Securities, or (ii) during any period of two consecutive years, individuals who
at the beginning of such period constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election

1
<PAGE> 23

was previously so approved, cease for any reason to constitute a majority
thereof, or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one transaction or a series of
transactions) of all or substantially all of the Company's assets.

(b) Expense: include attorneys' fees and all other costs, expenses and
obligations paid or incurred in connection with investigating, defending, being
a witness in or participating in (including on appeal), or preparing to defend,
be a witness in or participate in any Proceeding relating to any Indemnifiable
Event.

(c) Indemnifiable Event: any event or occurrence that takes place either
prior to or after the execution of this Agreement, related to the fact that
Indemnitee is or was a director or an officer of the Company, or while a
director or officer is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise, or
by reason of anything done or not done by Indemnitee in any such capacity.

(d) Potential Change in Control: shall be deemed to have occurred if (i)
the Company enters into an agreement or arrangement, the consummation of which
would result in the occurrence of Change in Control; (ii) any person (including
the Company) publicly announces an intention to take or to consider taking
actions which if consummated would constitute Change in Control; (iii) any
person, other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
who is or becomes the beneficial owner, directly or indirectly, of securities of
the Company representing 10% or more of the combined voting power of the
Company's then outstanding Voting Securities, increases his beneficial ownership
of such securities by 5% or more over the percentage so owned by such person on
the date hereof; or (iv) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.

(e) Proceeding: any threatened, pending or completed action, suit or
proceeding, or any inquiry, hearing or investigation, whether conducted by the
Company or any other party, that Indemnitee in good faith believes might lead to
the institution of any such action, suit or proceeding, whether civil, criminal,
administrative, investigative or other.

(f) Reviewing Party: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person or
body appointed by the Board (including the special, independent counsel referred
to in Section 3) who is not a party to the particular Proceeding with respect to
which Indemnitee is seeking indemnification.

(g) Voting Securities: any securities of the Company which vote
generally in the election of directors.

2
<PAGE> 24

2. AGREEMENT TO INDEMNIFY.

(a) In the event Indemnitee was, is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Proceeding by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law, as soon as practicable but in any event no later than
thirty days after written demand is presented to the Company, against any and
all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Proceeding and any federal, state, local or
foreign taxes imposed on the Indemnitee as a result of the actual or deemed
receipt of any payments under this Agreement (including the creation of the
Trust). Notwithstanding anything in this Agreement to the contrary and except as
provided in Section 5, prior to a Change in Control Indemnitee shall not be
entitled to indemnification pursuant to this Agreement in connection with any
Proceeding initiated by Indemnitee against the Company or any director or
officer of the Company unless the Company has joined in or consented to the
initiation of such Proceeding. If so requested by Indemnitee, the Company shall
advance (within ten business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance").

(b) Notwithstanding the foregoing, (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing Party
shall not have determined (in a written opinion, in any case in which the
special, independent counsel referred to in Section 3 hereof is involved) that
Indemnitee would not be permitted to be indemnified under applicable law, and
(ii) the obligation of the Company to make an Expense Advance pursuant to
Section 2(a) shall be subject to the condition that, if, when and to the extent
that the Reviewing Party determines that Indemnitee would not be permitted to be
so indemnified under applicable law, the Company shall be entitled to be
reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all
such amounts theretofore paid; provided, however, that if Indemnitee has
commenced legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to
reimburse the Company for Expense Advances shall be unsecured and no interest
shall be charged thereon. If there has not been a Change in Control the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
special, independent counsel referred to in Section 3 hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation in any court in the States of California or Delaware having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, and the Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party otherwise shall be conclusive and binding on the Company and
Indemnitee.

3. CHANGE IN CONTROL. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or under applicable law or
the Company's Certificate of Incorporation

3
<PAGE> 25

or By-Laws now or hereafter in effect relating to indemnification for
Indemnifiable Events, the Company shall seek legal advice only from special,
independent counsel selected by Indemnitee and approved by the Company (which
approval shall not be unreasonably withheld), and who has not otherwise
performed services for the Company or the Indemnitee (other than in connection
with such matters) within the last five years. Such independent counsel shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's rights
under this Agreement. Such counsel, among other things, shall render its written
opinion to the Company and Indemnitee as to whether and to what extent the
Indemnitee would be permitted to be indemnified under applicable law. The
Company agrees to pay the reasonable fees of the special, independent counsel
referred to above and to indemnify fully such counsel against any and all
expenses (including attorneys' fees), claims, liabilities and damages arising
out of or relating to this Agreement or the engagement of special, independent
counsel pursuant hereto.

4. ESTABLISHMENT OF TRUST. In the event of a Potential Change in Control,
the Company shall, upon written request by Indemnitee, create a Trust for the
benefit of the Indemnitee and from time to time upon written request of
Indemnitee shall fund such Trust in an amount sufficient to satisfy any and all
Expenses reasonably anticipated at the time of each such request to be incurred
in connection with investigating, preparing for and defending any Proceeding
relating to an Indemnifiable event, and any and all judgments, fines, penalties
and settlement amounts of any and all Proceedings relating to an Indemnifiable
Event from time to time actually paid or claimed, reasonably anticipated or
proposed to be paid. The amount or amounts to be deposited in the Trust pursuant
to the foregoing funding obligation shall be determined by the Reviewing Party,
in any case in which the special, independent counsel referred to above is
involved. The terms of the Trust shall provide that upon a Change in Control (i)
the Trust shall not be revoked or the principal thereof invaded, without the
written consent of the Indemnitee, (ii) the Trustee shall advance, within ten
business days of a request by the Indemnitee, any and all Expenses to the
Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under the
circumstances under which the Indemnitee would be required to reimburse the
Company under Section 2(b) of this Agreement), (iii) the Trust shall continue to
be funded by the Company in accordance with the funding obligation set forth
above, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for
which the Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in such Trust shall revert
to the Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that the Indemnitee has been fully
indemnified under the terms of this Agreement. The Trustee shall be chosen by
the Indemnitee. Nothing in this Section 4 shall relieve the Company of any of
its obligations under this Agreement. All income earned on the assets held in
the Trust shall be reported as income by the Company for federal, state, local
and foreign tax purposes.

5. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING THIS AGREEMENT. The
Company shall indemnify Indemnitee against any and all expenses (including
attorneys' fees), and, if requested by Indemnitee, shall (within ten business
days of such request) advance such expenses to Indemnitee, which are incurred by
Indemnitee in connection with any claim asserted against or action brought by
Indemnitee for (i) indemnification or advance payment of Expenses by the Company
under this Agreement or any other agreement or under applicable law or the
Company's Certificate of Incorporation or By-laws now or hereafter in effect
relating to indemnification for Indemnifiable Events and/or (ii) recovery under
any directors' and officers' liability insurance policies maintained by the
Company, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance expense payment or insurance recovery,
as the case may be.

4
<PAGE> 26

6. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a
Proceeding but not, however, for all of the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion thereof to which
Indemnitee is entitled. Moreover, notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any or all Proceedings relating in whole or in part to
an Indemnifiable Event or in defense of any issue or matter therein, including
dismissal without prejudice, Indemnitee shall be indemnified against all
Expenses incurred in connection therewith.

7. DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF AND PRESUMPTIONS. It shall be
a defense to any action brought by the Indemnitee against the Company to enforce
this Agreement (other than an action brought to enforce a claim for expenses
incurred in defending a Proceeding in advance of its final disposition where the
required undertaking has been tendered to the Company) that the Indemnitee has
not met the standards of conduct that make it permissible under the Delaware
General Corporation Law for the Company to indemnify the Indemnitee for the
amount claimed. In connection with any determination by the Reviewing Party or
otherwise as to whether the Indemnitee is entitled to be indemnified hereunder,
the burden of proving such a defense shall be on the Company. Neither the
failure of the Company (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action by the Indemnitee that indemnification of the
claimant is proper under the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its stockholders) that the Indemnitee
had not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the Indemnitee has not met the applicable
standard of conduct. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.

8. NON-EXCLUSIVITY. The rights of the Indemnitee hereunder shall be in
addition to any other rights Indemnitee may have under the Company's Certificate
of Incorporation or By-laws or the Delaware General Corporation Law or
otherwise. To the extent that a change in the Delaware General Corporation Law
(whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Certificate of
Incorporation and By-laws and this Agreement, it is the intent of the parties
hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change.

9. LIABILITY INSURANCE. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.

10. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of
action shall be asserted by or on behalf of the Company or any affiliate of the
Company against Indemnitee, Indemnitee's spouse, heirs, executors or personal or
legal representatives after the expiration of two years from the date of accrual
of such cause of action, or such longer period as may be required by state law
under the circumstances, and any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided,

5
<PAGE> 27

however, that if any shorter period of limitations is otherwise applicable to
any such cause of action such shorter period shall govern.

11. AMENDMENT OF THIS AGREEMENT. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.

12. SUBROGATION. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.

13. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this
Agreement to make any payment in connection with any claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, By-law or otherwise) of the amounts otherwise
indemnifiable hereunder.

14. SETTLEMENT OF CLAIMS. The Company shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any action
or claim effected without the Company's written consent. The Company shall not
settle any action or claim in any manner which would impose any penalty or
limitation on Indemnitee without Indemnitee's written consent. Neither the
Company nor the Indemnitee will unreasonably withhold their consent to any
proposed settlement. The Company shall not be liable to indemnify the Indemnitee
under this Agreement with regard to any judicial award if the Company was not
given a reasonable and timely opportunity, at its expense, to participate in the
defense of such action.

15. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all, or a substantial part, of the business and/or assets of the
Company, by written agreement in form and substance satisfactory to the
Indemnitee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. This Agreement shall continue in effect
regardless of whether Indemnitee continues to serve as a director or officer of
the Company or of any other enterprise at the Company's request.

16. SEVERABILITY. The provisions of this Agreement shall be severable in the
event that any of the provisions hereof (including any provision within a single
section, paragraph or sentence) is held by a court of competent jurisdiction to
be invalid, void or otherwise unenforceable, and the remaining provisions shall
remain enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including, without
limitation, each portion of this Agreement containing any provision held to be
invalid, void or otherwise unenforceable, that is not itself invalid, void or
unenforceable) shall be construed so as to give effect to the intent manifested
by the provision held invalid, illegal or unenforceable.

6
<PAGE> 28

17. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such State without giving effect to the
principles of conflicts of laws.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Agreement as of the _______________ day of __________________, 19___.

McKESSON HBOC, INC.

By: ________________________________
Name:
Title:

________________________________
[Indemnitee]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>3
<FILENAME>f72121ex10-23.txt
<DESCRIPTION>EXHIBIT 10.23
<TEXT>

<PAGE> 1

EXHIBIT 10.23

MCKESSON HBOC, INC.
FIRST AMENDMENT
TO CREDIT AGREEMENT

(364 DAY FACILITY)

This FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is
dated as of October 10, 2000 and entered into by and among McKesson HBOC, Inc.,
a Delaware corporation (the "COMPANY"), the financial institutions listed on the
signature pages hereof (the "BANKS"), The Chase Manhattan Bank, as a
documentation agent for the Banks, First Union National Bank, as a documentation
agent for the Banks, Bank One, N.A., as a documentation agent for the Banks,
Morgan Guaranty Trust Company, as a documentation agent for the Banks and Bank
of America, N.A. as administrative agent for the Banks (the "ADMINISTRATIVE
AGENT"), and is made with reference to that certain Credit Agreement dated as of
October 22, 1999 (the "CREDIT AGREEMENT"), by and among the parties thereto.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.

RECITALS

WHEREAS, the Company and the Banks desire to amend the Credit
Agreement (a) to extend the Revolving Facility Termination Date for an
additional 364 day period, (b) to provide for a term loan option, and (c) to
modify certain other provisions;

NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:

SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT

1.1 AMENDMENTS TO ARTICLE I: DEFINITIONS

A. Section 1.1 of the Credit Agreement is hereby amended by
adding thereto the following definitions, which shall be inserted in proper
alphabetical order:

"Term Loans" has the meaning specified in Section 2.16.

"Term Loan Maturity Date" means October 8, 2002.

B. Section 1.1 of the Credit Agreement is hereby further amended
by deleting in the definition of the term "Applicable Margin", the paragraph
below the table which begins "The margin set forth...." and substituting in
place of such paragraph the following:

1
<PAGE> 2

"The margin set forth above for any Applicable Rating
Level on a given date shall be increased by fifteen (15.0) basis points
if, on such date, either (a) the sum of (x) the Total Utilization of
Facility A Commitments (as such term is defined in the November 1998
Credit Agreement) existing on such date and (y) the principal amount of
Loans (as defined herein) made pursuant to Section 2.1 outstanding on
such date, exceeds 30% of the sum of (A) the aggregate of the Facility A
Commitments (as such term is defined in the November 1998 Credit
Agreement) existing on such date and (B) the aggregate of the
Commitments (as defined herein) existing on such date, or (b) any Term
Loans are outstanding."

C. Section 1.1 of the Credit Agreement is hereby further amended
by adding, in the definition of "Commitment," the following phrase immediately
before the period at the end thereof: "provided that if the Term Loans are made,
"Commitments" means the aggregate principal amount of Term Loans outstanding on
such date".

D. Section 1.1 of the Credit Agreement is hereby further amended
by deleting, in the definition of "Interest Period," clause (3) in its entirety
and substituting in lieu thereof the following:

"(3) no Interest Period for any Loan shall extend beyond
(i) in the case of Loans made pursuant to Section 2.1, until a Notice of
Borrowing has been received by the Agent in accordance with subsection
2.16(b), the Revolving Facility Termination Date; provided that once
such Notice of Borrowing has been received by the Agent in accordance
with subsection 2.16(b), the limitation in subpart (ii) of this
paragraph shall apply to Loans made pursuant to Section 2.1 and (ii) the
Term Loan Maturity Date, in the case of the Term Loans."

E. Section 1.1 of the Credit Agreement is hereby further amended
by deleting, in the definition of "Revolving Facility Termination Date," the
date "October 19, 2000" and substituting in lieu thereof the date "October 9,
2001".

1.2 AMENDMENT TO ARTICLE II: THE CREDITS

A. Section 2.1 of the Credit Agreement is hereby amended by
deleting the reference to "$850,000,000" and substituting in lieu thereof the
amount "$825,000,000."

B. Section 2.7(a) of the Credit Agreement is hereby amended by
adding the phrase "Except as provided in Section 2.16," to the beginning of the
sentence.

C. Section 2.9(a) of the Credit Agreement is hereby amended by
deleting the date "September 17, 1999" and substituting in lieu thereof the date
"September 8, 2000".

D. Section 2.9(b) of the Credit Agreement is hereby amended by
deleting in the first sentence of the second paragraph thereof the portion of
such sentence preceding the semicolon and substituting in lieu thereof the
following:

2
<PAGE> 3

"Such facility fee shall accrue from the Closing Date to
the Revolving Facility Termination Date or, if the Term Loans are made,
the Term Loan Maturity Date, and shall be due and payable quarterly in
arrears on each date specified above following the end of each calendar
quarter through such termination date or maturity date, as applicable,
with the final payment to be made on such termination date or maturity
date, as applicable"

E. Article II of the Credit Agreement is hereby further amended
by adding a new Section 2.16 at the end thereof to read as follows:

"2.16 Conversion of Loans to Term Loans.

(a) Each Bank severally agrees on the terms and conditions set
forth in this Agreement to advance to the Company (upon request of the Company
pursuant to this Agreement) on the Revolving Facility Termination Date an amount
up to the sum of (i) the outstanding principal amount of the Loans made by such
Bank pursuant to Section 2.1 and outstanding as of the opening of business on
the Revolving Facility Termination Date plus (ii) the amount available to be
borrowed from such Bank as of the opening of business on the Revolving Facility
Termination Date. The aggregate of such advances is collectively called the
"Term Loans" and shall be made by