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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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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, 1999

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

Commission File Number 1-13252

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McKESSON HBOC, INC.
A Delaware Corporation

I.R.S. Employer Identification Number 94-3207296

McKessonHBOC Plaza,
One Post Street,
San Francisco, CA 94104

Telephone--Area Code (415) 983-8300

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

(Name of Each Exchange on Which
(Title of Each Class) Registered)
Common Stock, $.01 par value New York Stock Exchange Pacific
Exchange, Inc.

Preferred Stock Purchase Rights New York Stock Exchange Pacific
Exchange, Inc.

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 June 30, 1999: $8,335,183,427

Number of shares of common stock outstanding at June 30, 1999: 281,277,000

Documents Incorporated By Reference

Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on August 25, 1999 are incorporated by reference into
Part III of this report.

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TABLE OF CONTENTS

Item Page
---- ----

PART I

1. Business.......................................................... 3

2. Properties........................................................ 11

3. Legal Proceedings................................................. 11

4. Submission of Matters to a Vote of Security Holders............... 15

Executive Officers of the Registrant.............................. 16

PART II

Market for the Registrant's Common Stock and Related Stockholder
5. Matters........................................................... 17

6. Selected Financial Data........................................... 17

Management's Discussion and Analysis of Financial Condition and
7. Results of Operations............................................. 17

7A. Quantitative and Qualitative Disclosures About Market Risk........ 17

8. Financial Statements and Supplementary Data....................... 17

Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure.............................................. 17

PART III

10. Directors and Executive Officers of the Registrant................ 18

11. Executive Compensation............................................ 18

12. Security Ownership of Certain Beneficial Owners and Management.... 18

13. Certain Relationships and Related Transactions.................... 18

PART IV

14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K... 18

Signatures........................................................

Item 1. Business

(a) General Development of Business

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

The Company is a leading health care supply management company in North
America. In addition, the Company provides software solutions, technological
innovation and comprehensive services to the health care industry and, through
its Water Products segment, processes and markets pure drinking water.

The Company's mission is to be the world leader in health care supply
management and health care information technologies across the entire
continuum of health care, through the operation of market-leading businesses
in pharmaceutical and medical-surgical distribution and information technology
and services for health care providers and payors.

Recent Acquisitions 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:

Health Care Supply Management Segment Acquisitions

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

. In February 1997, the Company acquired General Medical, Inc. ("MGM"), a
multi-market distributor of medical-surgical supplies to acute-care and
alternate site markets, for approximately $775 million in cash and
Company common stock.

. In November 1996, the Company acquired FoxMeyer Corporation's
pharmaceutical distribution business out of bankruptcy, for
approximately $598 million in cash and payment or assumption of
liabilities.

Health Care Information Technologies Segment Acquisitions

. In December 1998, the Company acquired Access Health, Inc. ("Access"), a
provider of clinically based care management programs and health care
information services, for approximately 34.4 million shares of HBOC
common stock (equivalent to approximately 12.7 million shares of Company
common stock after application of the exchange ratio of 0.37 shares of
Company common stock for each share of HBOC common stock (the "Exchange
Ratio")).

. 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 approximately 9.6 million shares of HBOC
common stock and 1.6 million HBOC stock options (equivalent to
approximately 3.6 million shares of Company common stock and 0.6 million
Company stock options after application of the Exchange Ratio).

. In December 1997, the Company acquired HPR Inc. ("HPR"), a provider of
clinical information systems for the managed care industry, for
approximately 18.4 million shares of HBOC common stock (equivalent to
approximately 6.8 million Company common shares after application of the
Exchange Ratio).

. In June 1997, the Company acquired Enterprise Systems, Inc. ("ESi"), a
developer of resource management solutions including materials
management, operating room logistics, scheduling and financial
management, for approximately 15.2 million shares of HBOC common stock
(equivalent to approximately 5.6 million shares of Company common stock
after application of the Exchange Ratio).

. In June 1997, the Company acquired AMISYS Managed Care Systems, Inc.
("AMISYS"), a provider of managed care information systems for the payor
market, for approximately 10.8 million shares of HBOC common stock
(equivalent to approximately 4.0 million shares of Company common stock
after application of the Exchange Ratio).

. In December 1996, the Company acquired GMIS Inc., a provider of data
quality tools and decision support software for the payor marketplace,
for approximately 14.8 million shares of HBOC common stock (equivalent
to approximately 5.5 million shares of Company common stock after
application of the Exchange Ratio).

. In August 1996, the Company acquired CyCare Systems, Inc., a provider of
management software systems and electronic data interchange services for
physician practices, for approximately 17.6 million shares of HBOC
common stock (equivalent to approximately 6.5 million shares of Company
common stock after application of the Exchange Ratio).

Dispositions

. In March 1997, the Company disposed of Millbrook Distribution Services
Inc. ("Millbrook"), a non-health care business, for cash in an amount
which, on an after-tax basis, approximated Millbrook's book value.

. In December 1996, the Company disposed of its 55% equity interest in
Armor All Products Corporation ("Armor All"), a non-health care
business.

(b) Financial Information About Industry Segments

Financial information for the three years ended March 31, 1999 is included
in Financial Note 18 to the consolidated financial statements, "Segments of
Business," appearing on pages F-70 to F-72 to this Annual Report on Form 10-K.

Matters Relating to Restatement of Financial Results

In its April 22, 1999, press release the Company preliminarily reported
consolidated net income (loss) of ($60.4) million and $96.8 million, or
($0.22) and $0.35 per diluted share in the quarters ended March 31, 1999 and
1998, respectively, and $237.1 million and $330.4 million, or $0.84 and $1.19
per diluted share in the fiscal years ended March 31, 1999 and 1998.

On April 28, 1999, the Company announced that, during the course of its
year-end financial audit process, the Company determined that certain software
sales transactions (aggregating $26.2 million for the fourth quarter ended
March 31, 1999 and $16.0 million in the prior quarters of the fiscal year)
were improperly recorded because they were subject to contingencies and had
been reversed. It also announced that the audit process was ongoing. The Audit
Committee of the Company's Board of Directors subsequently initiated an
investigation into this matter. On May 25, 1999, the Company announced that,
as a result of information developed through its year-end internal and
external audit process and Audit Committee review, additional instances of
improper revenue recognition had been found, that further downward revision
would be required of the results for the fiscal year ended March 31, 1999, as
well as of quarterly results during the fiscal year, and that prior years'
results of the Health Care Information Technology business unit (HBOC) could
also require restatement.

As a result of the findings of the investigation, the Company's consolidated
financial statements, which give retroactive effect to the HBOC Transaction
and other acquisitions completed by McKesson and HBOC in fiscal year 1999
accounted for under the pooling of interests method, reflect amounts for HBOC
which have been restated from those previously reported by HBOC.

As a result of the restatement of previously reported amounts for HBOC,
revised consolidated financial information for the Company is as follows (in
millions, except per share amounts):

Three months
ended Year ended
March 31, March 31,
------------- -------------
1999 1998 1999 1998
------ ----- ------ ------

Preliminarily reported consolidated net income
(loss)........................................... $(60.4) $96.8 $237.1 $330.4
Revised consolidated net income (loss)............ (61.2) 81.7 84.9 304.6
Preliminarily reported consolidated net income
(loss) per diluted share......................... (0.22) 0.35 0.84 1.19
Revised consolidated net income (loss) per diluted
share............................................ (0.22) 0.29 0.31 1.10

The impact of these restatements resulted in net reductions, from previously
reported amounts, in the Health Care Information Technology segment as follows
(in millions):

Three months
ended Year ended
March 31, March 31,
--------------- ------------------
1999 1998 1999 1998
------- ------ -------- --------

Health Care Information Technology
Preliminarily reported revenues........... $ 431.9 $393.1 $1,783.9 $1,477.3
Revised revenues.......................... 402.6 376.8 1,538.1 1,429.2
Preliminarily reported operating profit
(loss)................................... (102.1) 99.4 221.8 269.3
Revised operating profit (loss) .......... (105.5) 74.3 (31.6) 227.0

See Financial Note 3 to the consolidated financial statements,
"Restatement," appearing on pages F-40 to F-48 to this Annual Report on Form
10-K.

Class Action Litigation and Government Investigations

A description of certain class action and other litigation arising
subsequent to the Company's announcements discussed above are described in
Item 3, "Legal Proceedings" on pages 11 to 15 of this Annual Report on Form
10-K. The United States Attorney's Office for the Northern District of
California and the San Francisco District Office of the United States
Securities and Exchange Commission ("SEC") have also commenced investigations
in connection with the matters relating to the restatement of previously
reported amounts for HBOC described above. The SEC has advised the Company
that its inquiry should not be construed as an indication by the SEC or its
staff that any violations of law have occurred.

Management Changes

On June 21, 1999, the Company announced that its Board of Directors had
appointed new executive management for the Company. John H. Hammergren and
David L. Mahoney were appointed Co-Presidents and Co-Chief Executive Officers
of the Company effective July 15, 1999 and Heidi E. Yodowitz, Senior Vice
President and Controller, was appointed Acting Chief Financial Officer of the
Company. The Company also announced the resignations of Mark A. Pulido,
previously President and Chief Executive Officer, and Richard H. Hawkins,
previously Executive Vice President and Chief Financial Officer, effective
July 15, 1999.

Additionally, the Company announced the removal of Charles W. McCall as
Chairman of the Board of Directors and his dismissal as an employee of the
Company. Alan Seelenfreund, a former Chairman and Chief Executive Officer of
McKesson, was appointed Chairman of the Board.

The Company also announced the dismissal of several executives of its Health
Care Information Technology segment including its former president and chief
executive officer. The Company appointed Graham O. King as the president of
that segment.

(1) Description of Segments of Business

The Company is organized under three operating segments, Health Care Supply
Management, Health Care Information Technology and Water Products. 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, outsourcing and other services to health care
organizations throughout the United States and certain foreign countries. The
Water Products segment is engaged in the processing and sale of bottled
drinking water to homes and businesses and packaged water through retail
stores.

The Company generated annual sales of $30.4 billion, $22.4 billion, and
$16.9 billion in fiscal years 1999, 1998, and 1997, respectively:
approximately $28.4 billion, 94%; $20.6 billion, 92%; and $15.4 billion, 91%;
respectively, in the Health Care Supply Management segment: approximately $1.5
billion, 5%; $1.4 billion, 6%; and $1.1 billion, 7%; respectively, in the
Health Care Information Technology segment: and approximately $0.4 billion,
1%; $0.3 billion, 2%; and $0.3 billion, 2%; respectively, in the Water
Products segment.

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 in North America. The Company's Health Care
Supply Management segment consists of its core U.S. pharmaceutical
distribution business, its medical-surgical distribution and services
business, its automated pharmacy systems and services, its sales, marketing
and other support services to pharmaceutical manufacturers and includes the
Company's international operations in Canada and Mexico (collectively, the
"Supply Management Business").

Through its Pharmaceutical Group, the Supply Management Business provides
domestic distribution of pharmaceuticals and health and beauty care products
to independent and chain pharmacies, hospitals, alternate site health care
facilities, food stores and mass merchandisers in all 50 states. The Medical
Group offers a full range of medical-surgical supplies, equipment, pharmacy
management services, logistics and management information support to
hospitals, physicians' offices, long-term care, and homecare providers.
Through the Automation Group, the Company manufactures and markets automated
pharmacy systems and services to hospitals and retail pharmacies.

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). These three customer categories represented
approximately 38.5%, 28.7%, and 32.8%, respectively, of the Pharmaceutical
Distribution Group's revenues in fiscal 1999. Operating under the tradenames
Economost(TM) and Econolink(TM) 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 directed at retail pharmacies.
These initiatives include the Valu-Rite(TM), Valu-Rite/ CaremaxSM and
HealthMart(TM) retail networks, the Omnilink(TM) centralized pharmacy
technology platform, which offers retail network members connectivity with
managed care organizations while promoting compliance with managed care plans.
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% to help ensure that the right product arrives at the right time and
place for both the Company's customer 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. This group also includes the
MedManagement business unit, a provider of pharmacy and medication management
consulting and related services to health care providers for the purpose of
reducing total cost, and MedPath which primarily provides distribution of
oncology medications to physicians' offices.

The Medical Group offers a full range of medical-surgical supplies,
equipment 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 MGM, the nation's third largest distributor
of medical-surgical supplies to hospitals (acute care) and the 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 (extended care); RedLine, a distributor of
medical supplies and services to the extended-care market, including long-term
homecare supply; and Hawk Medical Supply, a distributor of medical-surgical
supplies.

The Automation Group manufactures and markets automated pharmacy systems 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, and AcuScan-Rx(TM) which
records, automates, and streamlines drug administration and medication
information requirements through bar code scanning at the patient's bedside.
APS manufactures a wide range of pharmaceutical dispensing and productivity
products ranging from convenient table-top universal counters to advanced
robotics systems.

The Pharmaceutical Partners Group combines the Company's pharmaceutical
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 though Healthcare Delivery Systems ("HDS"), which provides
marketing, distribution, and reimbursement services; McKessonHBOC BioServices,
a provider of services in support of clinical trials and biomedical research;
J. Knipper and Company, which provides sales and marketing services in the
form of direct mail and fulfillment services; Kelly/Waldron and Co., which
provides decision support, data analysis, sales and marketing services;
Kelly/Waldron Technology Solutions, which provides full service sales force
automation and business analytics; and Alliance Sales Partners, which provides
integrated contract sales and marketing support services.

Also included in the Supply Management Business is Zee Medical, Inc., a
distributor of first-aid products and safety supplies to industrial and
commercial customers. International operations include Medis Health and
Pharmaceutical Services, Inc. ("Medis"), a wholly-owned subsidiary and the
largest pharmaceutical distributor in Canada; and the Company's 23% 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 are: ECONOMOST(TM), ECONOLINK(TM), VALU-RITE(TM), Valu-
Rite/CareMaxSM, OmniLink(TM), Health Mart(TM), ROBOT-Rx(TM), AcuDose-Rx(TM),
AcuScan(TM), Baker Cells(TM), Baker Cassettes(TM), Baker Universal(TM),
Autoscript(TM), and Pharmacy 2000(TM). 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 and registration has been obtained or applied
for in Canada 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; the Canadian registrations have
fifteen-year terms. 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, managed care and strategic management software
solutions for payors and providers 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, medical call
centers, 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,
Canada, Ireland, Saudi Arabia, Kuwait, Australia, Puerto Rico and New Zealand.

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

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, financial and management decision-making.

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 and medical imaging as well as an enterprise
master person index.

Community Health Management. Community Health Management applications and
services focus on managing the demand for health care services by predicting
what care may be required, preventing illness and managing the care required
as cost effectively as possible. Components of the Company's community health
management strategy include care management services and medical call center
management; data analysis to provide early identification of members with
high-risk/high-cost diseases and health conditions; guidelines and standards
to enable enterprises to improve care management processes; and computer
telephony and Internet links to provide electronic connectivity between
providers and consumers.

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.

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 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.

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.

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 offers outsourcing services in the United Kingdom as well.
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, 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, 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, including both R&D expense as well as
capitalized software, has increased as the Health Care Information Technology
segment has addressed new software applications and enhanced existing products
for installed systems. The Health Care Information Technology segment

expensed $114.7 million (7.5% of revenue) for R&D activities during fiscal
1999, as compared to $112.5 million (7.9% of revenue) and $103.0 million (9.1%
of revenue) during 1998 and 1997, respectively. The Health Care Information
Technology segment capitalized 31%, 26% and 23% of its R&D expenditures in
1999, 1998 and 1997, respectively.

Information regarding R&D is included in Financial Note 2 to the
consolidated financial statements, "Accounting Policies" appearing on pages F-
37 to F-40 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), ASK-A-NURSE(R), Connect 2000(TM), Credentialer(R), CRMS(TM),
Episode Profiler, ERS(R), HealthQuest(R), InterQual(R), ParagonSM, Patterns
Profiler(TM), Pathways 2000(R) and TRENDSTAR(R). SMR(R) and Smart Medical
Record(R) are used under license from HBOC Medical, Ltd. 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, 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, and hardware vendors. Competition varies in size from small
to large companies, in geographical coverage, and in scope and breadth of
products and services offered.

Water Products

Products and Markets

Water Products is a leading provider in the $4.2 billion bottled water
industry in the United States. It is the largest U.S.-owned bottled water
company and the third largest overall in the United States. Water Products is
engaged in the processing and sales of bottled drinking water through direct
delivery and retail channels. Under its Sparkletts, Alhambra, and Crystal
brands it delivers to more than 690,000 homes and businesses throughout
California, Nevada, the Southwest, Pacific Northwest, and Mid-Atlantic
regions.

Intellectual Property

The principal trademarks and service marks of the Water Products segment
are: SPARKLETTS(R), ALHAMBRA(R), and CRYSTAL(TM). The Company also owns other
registered and unregistered trademarks and service marks used by the Water
Products segment. All of the principal trademarks and service marks are
registered in the United States, 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 Water Products
segment.

Competition

Although this business faces competition from several larger competitors,
the competition is generally widely dispersed among many different entities.
Principal among the large local competitors of the Water Products segment are:
Arrowhead (California and Arizona), Poland Spring and Deer Park (Mid-
Atlantic), and Ozarka/Oasis (Texas) (owned by Nestle); Hinckley & Schmitt
(Arizona, Las Vegas, and Southern California), Cloister (Mid-Atlantic), and
Sierra Springs (Northern California and Texas) (owned by Suntory International
Corporation); Crystal Geyser (nationally distributed); Evian (nationally
distributed and owned by Groupe Danone, S.A.), and private label brands. This
operation faces significant competition in both price and service in all
aspects of its business.

(2) Other Information About the Business

Customers--No material part of the business is dependent upon a single or a
very few customers, the loss of any one of which could have a material adverse
effect on the Company or any of its business segments.

Environmental Legislation--The Company sold its chemical distribution
operations in fiscal 1987. In connection with the disposition of those
operations, the Company retained responsibility for certain environmental
obligations and has entered into agreements with the Environmental Protection
Agency and certain states pursuant to which it is or may be required to
conduct environmental assessments and cleanups at several closed sites. These
matters are described further in Item 3 "Legal Proceedings" on pages 11 to 15
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 1999 and is not expected to be material in the next
fiscal year.

Employees--At March 31, 1999, the Company employed approximately 24,600
persons.

(d) Financial Information About Foreign and Domestic Operations and Export
Sales

Information as to foreign operations is included in Financial Note 18 to the
consolidated financial statements "Segments of Business" appearing on pages F-
70 to F-72 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 13 to the
consolidated financial statements, "Lease Obligations" appearing on pages F-60
to F-61 of this Form 10-K Report.

Item 3. Legal Proceedings

On April 28, 1999, the Company announced that, during the course of its
year-end financial audit process, the Company determined that software sales
transactions (aggregating $26.2 million for the fourth quarter ended March 31,
1999 and $16.0 million in the prior quarters of the fiscal year) were
improperly recorded because they were subject to contingencies and had been
reversed. It also announced that the audit process was ongoing. The Audit
Committee of the Company's Board of Directors subsequently initiated an
investigation into this matter. On May 25, 1999, the Company announced that as
a result of information developed through its continuing year-end

internal and external audit process and Audit Committee review, additional
instances of improper revenue recognition had been found, that further
downward revision would be required of the results for the fiscal year ended
March 31, 1999, as well as quarterly results during the fiscal year, and that
prior years' results of the Health Care Information Technology Business unit
("HBOC") could also require restatement.

Since the Company's announcement on April 28, 1999, and as of July 6, 1999,
fifty-three class action lawsuits, three derivative actions, and two
individual actions have been filed against the Company, and certain current or
former officers and directors of the Company (the "Defendants"). One of the
actions also names as defendants Bear, Stearns & Company, Inc., and Arthur
Andersen LLP. Fifty-three of the actions were filed in Federal Court (the
"Federal Actions") alleging violations of the federal securities laws. Of
these, fifty-two were filed in the United States District Court for the
Northern District of California, and one was filed in the Northern District of
Illinois. Of the fifty-two filed in the Northern District of California,
fifty-one are class actions and one is a derivative action. The action filed
in the Northern District of Illinois is a class action. The Company expects
that the Federal Actions, with the exception of the derivative action, will be
consolidated into a single action, and the Company will not be required to
respond until after the filing of a consolidated complaint.

The class actions are purportedly brought on behalf of a class of the
Company's shareholders that varies according to the complaint, with July 16,
1996 being the earliest date for shareholders who purchased or acquired the
Company's shares and May 25, 1999 being the latest date. In general, these
actions allege that the Company and certain officers or directors made false
and misleading statements concerning the Company's future prospects and
financial results in violation of the federal securities laws. Plaintiffs seek
damages in an unspecified amount. Plaintiffs also request pre-judgment and
post-judgment interest, costs and attorneys fees.

Five actions have also been filed in various state courts (the "State
Actions"). Of these, two are derivative actions, one filed in the Chancery
Court of the State of Delaware (Fine v. McCall, et. al.), and the other in
California State Court in San Francisco (Mitchell v. McCall, et. al). Two
individual actions have also been filed, one in California State Court in San
Francisco (Yurick v. McKesson et. al.), and the other, for which a summons has
issued but a complaint not yet filed, in the Court of Common Pleas, Chester
County, Pennsylvania (Grant v. McKesson). One purported class action, on
behalf of a class of shareholders of McKesson Corporation at the time of the
merger with HBOC, has been filed in the Delaware Court of Chancery. The State
Actions seek unspecified damages for alleged breaches of fiduciary duty and
other causes of action arising out of the events that led to the Company's
need to revise its financial statements. The Company is currently required to
respond to the derivative action in Delaware by July 30, 1999 and the actions
in California by July 26, 1999. The Company is not currently required to
respond to the action filed in Pennsylvania.

One additional Federal Action has been filed in the Northern District of
Georgia, but that action names only two former officers, and does not name the
Company; and one additional class action has been filed in the Delaware Court
of Chancery against HBOC, Inc. and former officers and directors of a company
acquired by HBOC in 1998, alleging breach of fiduciary duties by such parties
in connection with such sale, and is brought on behalf of the shareholders of
the acquired company.

In addition, the United States Attorney's Office for the Northern District
of California and the San Francisco District Office of the United States
Securities and Exchange Commission ("SEC") have also commenced investigations
in connection with the matters relating to the restatement of previously
reported amounts for HBOC described above. The SEC has advised the Company
that its inquiry should not be construed as an indication by the SEC or its
staff that any violations of law have occurred.

The Company does not believe it is feasible to predict or determine the
outcome or resolution of these 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.

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 directed verdict. On July 13, 1999, the Seventh Circuit affirmed
the District Court's judgement as to the dismissal of the claims against the
wholesalers. The Individual Actions, which are still pending in the Northern
District of Illinois for pre-trial purposes, will be remanded to their
original transferor jurisdictions for trial. The wholesalers' motion for
partial summary judgment that they should not be liable for any damages
resulting from drugs sold prior to four years from the October 1997 amended
complaints in those cases was granted. Most of the individual cases brought by
chain stores have been settled.

The currently pending state court antitrust cases against the Company are in
California, Alabama, Mississippi and Tennessee. The state cases are based
essentially on 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 California (referred to as Coordinated Special
Proceeding, Pharmaceutical Cases I, II & III) is pending in Superior Court for
the State of California (San Francisco County). A class of retail pharmacies
has been certified and the case is trailing MDL 997. In the Alabama case
(Durrett, et al. v. The Upjohn Co. et al.), the Supreme Court has recently
held that the Alabama state antitrust statute at issue does not reach the
conduct alleged in the complaint. 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. The Tennessee case, filed in Knoxville, is a
class action on behalf of consumers who purchased brand-name drugs from retail
stores in fourteen states. The claims, brought under Tennessee law, allege
deceptive trade practices, conspiracy to fix prices, price discrimination, and
fraudulent concealment. On July 6, 1998, the court conditionally certified the
case as a multi-state class action. A motion to dismiss the complaint is
pending on the grounds, among others, that (i) plaintiff class members are
indirect purchasers and are not entitled to bring an action against the
wholesalers and manufacturers and (ii) the state antitrust statues on which
the class relied do not apply to interstate commerce. A motion is also pending
for permission to file an interlocutory appeal from the order denying
defendants' motion to vacate the order granting conditional class
certification.

In each of the cases, plaintiffs seek remedies in the form of injunctive
relief and unquantified monetary damages, and attorneys fees and costs.
Plaintiffs in the California cases also seek restitution. In addition, trebled
damages are sought in the Federal Class Action, the Individual Actions, the
California case and the Tennessee case and statutory penalties of $500 per
violation are sought in the Mississippi and Alabama cases. The Company
believes it has meritorious defenses to the allegations made against it and
intends to vigorously defend itself in all of these actions. In addition, 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.

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.

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. A renewed motion for summary judgment on the
four remaining counts of Avatex's complaint in the Texas Action is pending
before the Delaware court. In addition, the Company filed an amended complaint
adding the Trustee and debtors as defendants. 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 counterclaim and cross-claim
against Avatex and Mssrs. 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
denying transfer. A cross-appeal by Avatex from the order dismissing the three
counts with prejudice is still pending. The Company and several of the other
defendants have appealed to the Court of Appeals the ruling upholding the
order denying transfer.

The Company has been named as a defendant, or has received from customers
tenders of defense, in approximately forty 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 Alabama,
California, Idaho, Michigan, New Mexico and New York. The Company has tendered
the cases to the manufacturers of the drugs and is currently defending the
cases pending resolution of its negotiations with the manufacturers.

Certain subsidiaries of the Company (i.e. MGM and RedLine, collectively, the
"Subsidiaries") are defendants in approximately forty 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. The
Subsidiaries' insurers are providing coverage for these cases, subject to the
applicable deductibles.

There are six state court class actions in New York, Ohio, Oklahoma,
Pennsylvania, South Carolina and Texas filed against MGM on behalf of all
health care workers in those states 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 these actions. All cases except the Texas case
are in the early stages of discovery. The Texas court held a class
certification hearing on June 1, 1999, and stayed its ruling on certification
pending a decision from the Texas Supreme Court on the issue of whether a
products liability class action is proper where issues of comparative fault
exist. These cases have been tendered to MGM's suppliers, their insurers, and
to MGM's insurer. The Company has filed a declaratory relief action in
California against its major supplier's insurer to obtain a determination of
rights as an additional insured under the supplier's insurance policy.

indemnify SSB pursuant to the contracts. On May 12, 1999 defendants' motions
to stay the action were denied; the Company's motion to dismiss was denied,
and HBOC's motion to dismiss was partially granted as to some of the tort
claims against it. On June 21, 1999, defendants filed their answer and
counterclaims against SSB for violations of Section 10(b) of the Securities
Exchange Act of 1934; breach of fiduciary duty; negligence; breach of
contract; misappropriation of trade secrets; and rescission and restitution.
Trial is scheduled for October 1999.

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 $17 million, net of approximately $3.5
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 $17 million is
expected to be paid out between April 1999 and March 2028 and is included in
the Company's recorded environmental liabilities at March 31, 1999.

In addition, the Company has been designated as a potentially responsible
party (PRP) by the U.S. Environmental Protection Agency under the
Comprehensive Environmental Response Compensation and Liability Act of 1980,
as amended (the "Superfund" law), for environmental assessment and cleanup
costs as the result of the Company's alleged disposal of hazardous substances
at 19 Superfund sites. With respect to each of these Superfund sites, numerous
other PRP's 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 19 Superfund sites is approximately $2
million. The aggregate settlements and costs paid by the Company in Superfund
matters to date has not been significant. The $2 million is included in the
Company's recorded environmental liabilities at March 31, 1999.

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 alternate 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
arising from the Company's restatement of previously reported amounts for
HBOC, 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

A special meeting of the Company's stockholders was held on January 12,
1999, to consider and vote upon a proposal to approve the merger agreement
between McKesson and HBOC and the transactions contemplated by the Agreement,
including the issuance of Company stock to effect the merger and the change of
the Company's name to "McKesson HBOC, Inc." The proposal was approved by the
following vote of the Company's stockholders:

Votes For Votes Against Votes Withheld
--------- ------------- --------------

75,956,677 3,357,587 460,719

Executive Officers of the Registrant

The following table sets forth information concerning the executive officers
of the Registrant as of July 14, 1999. 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 Registrant. 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
been qualified, or until death, resignation or removal, whichever is sooner.

Name Age Position with Registrant and Business Experience
---- --- ------------------------------------------------

John H. Hammergren............... 40 Co-President and Co-Chief Executive Officer
effective July 15, 1999 and a director
effective July 12, 1999. Formerly Executive
Vice President, President and Chief Executive
Officer, Supply Management Business (January-
June 1999); Group President, McKesson Health
Systems Group (1997-1999) and Vice President
since 1996. President, Medical/Surgical
Division, Kendall Healthcare Products Company
(1993-1996). Service with the Company--3
years.

David L. Mahoney................. 45 Co-President and Co-Chief Executive Officer
effective July 15, 1999 and a director
effective July 12, 1999. Formerly Executive
Vice President, President and Chief Executive
Officer, Pharmaceutical Services Business
(January-June 1999); Vice President since
1990; Group President, Pharmaceutical Services
and International Group (1997-1999);
President, Pharmaceutical and Retail Services
(1996-1997); President, Pharmaceutical
Services Group (December 1995-August 1996);
President, Health Care Delivery Systems, Inc.,
subsidiary (1994-1995). Service with the
Company--9 years.

Heidi E. Yodowitz................ 45 Acting Chief Financial Officer since June 18,
1999. Senior Vice President since January 1999
and Controller since 1996. Formerly Staff Vice
President, Planning & Analysis (1995-1996);
Assistant Controller (1990-1994). Service with
the Company--9 years.

Ivan D. Meyerson................. 54 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--21 years.

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 stock is also traded on the Pacific
Exchange, Inc. High and low prices for the common stock by quarter are
included in Financial Note 20 to the consolidated financial statements,
"Quarterly Financial Information (Unaudited)," appearing on page F-77 of this
Annual Report on Form 10-K.

(b) Holders

The number of record holders of the Company's common stock at June 30, 1999
was approximately 17,500.

Dividend information is included in Financial Note 20 to the consolidated
financial statements, "Quarterly Financial Information (Unaudited)," appearing
on page F-77 to this Annual Report on Form 10-K.

(d) Other Information

On August 3, 1998, the Company issued 2,022,711 shares of common stock to
former shareholders of Hawk Medical Supply, Inc. ("Hawk"), a privately held
company, in connection with the Company's acquisition of Hawk. The former
shareholders of Hawk were limited in number and were either accredited
investors or otherwise sophisticated investors. The shares were issued
pursuant to the exemption from the registration requirements of the Securities
Act of 1933, as amended (the "Act"), provided by Section 4(2) of the Act.

On September 23, 1998, the Company issued 1,396,079 shares of common stock
to the former shareholders of APS, a privately held company, in connection
with the Company's acquisition of APS. The former shareholders of APS were
limited in number and were either accredited investors or otherwise
sophisticated investors. The shares were issued pursuant to the exemption from
the registration requirements of the Act provided by Section 4(2) of the Act.

Item 6. Selected Financial Data

Selected financial data is presented in the Six-Year Highlights on pages F-2
to F-4 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-5 to
F-28 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-23 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-77 of
this Annual Report on Form 10-K.

Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure

None

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 1999 Proxy Statement (the "Proxy Statement").
Certain information relating to Executive Officers of the Company appears page
16 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 Company's Proxy Statement.

Item 11. Executive Compensation

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

Item 13. Certain Relationships and Related Transactions

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

PART IV

Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K

(a) Financial Statements, Financial Statement Schedule and Exhibits

Page
----

(1) Consolidated Financial Statements and Independent Auditors'
Reports:
See "Index to Consolidated Financial Statements"............... F-1

(2) Supplementary Consolidated Financial Statement Schedule--
Valuation and Qualifying Accounts.............................. 21

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
filed with the SEC and those incorporated by reference to other
filings are listed on the Exhibit Index........................ 22

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the three months
ended March 31, 1999:

Form 8-K
Date of Report: January 14, 1999
Date Filed: January 14, 1999

Item 2. Acquisition or disposition of assets
The Registrant reported the completion of its acquisition of HBO &
Company pursuant to the Agreement and Plan of Merger dated October 17,
1998, as amended.

Item 5. Other events

The Registrant reported the completion of certain actions, including
the change of the Company's name from "McKesson Corporation" to
"McKesson HBOC, Inc.," and amendment of the By-Laws pursuant to the
terms of the Merger agreement. The Registrant also reported the
resignation of each of Mary G.F. Bitterman, John M. Pietruski, David S.
Pottruck and Robert H. Waterman, Jr. as a director of McKesson and of
Alan Seelenfreund as Chairman of the Board of Directors, and, the
election of Alfred C. Eckert III, Alton F. Irby III, Gerald E. Mayo and
James V. Napier as Directors, and the election of Charles W. McCall to
serve as Chairman of the Board of Directors.

Form 8-K

Date of Report: January 27, 1999
Date Filed: January 27, 1999

Item 5. Other events

The Registrant filed certain information regarding the Company
including a copy of the Registrant's press release of January 25, 1999
announcing its financial results for the third fiscal quarter ended
December 31, 1998.

The Registrant also filed certain consolidated financial information of
HBOC for the quarter ended December 31, 1998 for purposes of satisfying
the requirements of ASR 135 for the benefit of certain former
shareholders of IMNET Systems, Inc. IMNET was acquired by HBOC in
October 1998 in a transaction accounted for as a pooling of interests.

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, July 14, 1999 /s/ Heidi E. Yodowitz
By __________________________________
Heidi E. Yodowitz Senior Vice
President and Controllerand Acting
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on July 14, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated:

*
- -------------------------------------
John H. Hammergren
Co-President and Co-Chief Executive
Officer Elect
and Director
(Principal Executive Officer)

*
- -------------------------------------
David L. Mahoney
Co-President and Co-Chief Executive
Officer Elect
and Director
(Principal Executive Officer)

*
- -------------------------------------
Heidi E. Yodowitz
Senior Vice President and Controller
and
Acting Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

*
- -------------------------------------
Alfred C. Eckert III, Director

*
- -------------------------------------
Tully M. Friedman, Director

*
- -------------------------------------
Alton F. Irby III, Director

*
- -------------------------------------
Christine Jacobs, Director

*
- -------------------------------------
Gerald E. Mayo, Director

- -------------------------------------
Charles W. McCall, Director

*
- -------------------------------------
James V. Napier, Director

*
- -------------------------------------
David Pottruck, Director

- -------------------------------------
Mark A Pulido, Director

*
- -------------------------------------
Carl E. Reichardt, Director

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

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

/s/ Ivan D. Meyerson
- -------------------------------------
Ivan D. Meyerson
*Attorney-in-Fact

Dated: July 14, 1999

Schedule II

McKESSON HBOC, INC.--SUPPLEMENTARY CONSOLIDATED FINANCIAL
STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(in millions)

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)
----------- ------------ ---------- ---------- ------------- ----------

Amounts deducted from
assets to which they
apply:
Year Ended March 31,
1999
Allowances for doubtful
accounts receivable... $54.7 $87.3(3) $16.3 $(17.0) $141.3
Other reserves......... 29.8 11.1 -- (0.1) 40.8
----- ----- ----- ------ ------
$84.5 $98.4 $16.3 $(17.1) $182.1
===== ===== ===== ====== ======
Year Ended March 31,
1998
Allowances for doubtful
accounts receivable... $38.4 $17.0 $ -- $ (0.7) $ 54.7
Other reserves......... 22.8 20.1 -- (13.1) 29.8
----- ----- ----- ------ ------
$61.2 $37.1 $ -- $(13.8) $ 84.5
===== ===== ===== ====== ======
Year Ended March 31,
1997
Allowances for doubtful
accounts receivable... $35.9 $28.5(4) $ -- $(26.0) $ 38.4
Other reserves......... 15.2 18.6 -- (11.0) 22.8
----- ----- ----- ------ ------
$51.1 $47.1 $ -- $(37.0) $ 61.2
===== ===== ===== ====== ======

Notes: 1999 1998 1997
- ------ ------ ----- -----

(1)Deductions:
Written off................................................ $ 17.1 $13.6 $37.0
Credited to other accounts................................. -- 0.2 --
------ ----- -----
Total...................................................... $ 17.1 $13.8 $37.0
====== ===== =====
(2)Amounts shown as deductions from:
Current receivables........................................ $181.5 $83.7 $60.4
Notes receivable........................................... 0.6 0.8 0.8
------ ----- -----
Total...................................................... $182.1 $84.5 $61.2
====== ===== =====

(3) Includes charge of $70 million for receivable reserves for the Health Care
Information Technology segment related to exposures for bad debts, disputed
amounts and customer allowances.
(4) Includes charges of $15.1 million for receivables related to management's
reevaluation of the U.S. Health Care Supply Management business estimated
exposures for bad debts, disputed amounts, customer allowances and rebates.

EXHIBIT INDEX

Exhibit
Number Description
------- -----------

2.1 Agreement and Plan of Merger, dated as of October 17, 1998, by and
among McKesson Corporation ("McKesson"), 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 McKesson, 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 Restated By-Laws of the Company, as amended through April 26, 1999.

3.4 Amendment to Restated By-Laws of the Company dated April 26, 1999.
4.1 Rights Agreement dated as of October 21, 1994 between McKesson and
First Chicago Trust Company of New York, as Rights Agent (the "Rights
Agreement") (Exhibit 4.1 (5)).

4.2 Amendment No. 1 to the Rights Agreement dated October 19, 1998
(Exhibit 99.1 (6)).

4.3 Indenture, dated as of March 11, 1997, by and between McKesson, as
Issuer, and The First National Bank of Chicago, as Trustee (Exhibit
4.4 (7)).

4.4 Amended and Restated Declaration of Trust of McKesson Financing Trust,
dated as of February 20, 1997, among McKesson, 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 (8)).

4.5 McKesson Corporation Preferred Securities Guarantee Agreement, dated
as of February 20, 1997, between McKesson, as Guarantor, and The First
National Bank of Chicago, as Preferred Guarantor (Exhibit 4.7 (9)).

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* Form of Employment Agreement, dated as of March 31, 1999, by and
between the Company and certain designated Executive Officers.

10.2* Employment Agreement, dated as of March 31, 1999, by and between the
Company and a former Executive Vice President who was also the
President and Chief Executive Officer of the Company's Information
Technology Business.

10.3* Amended and Restated Employment Agreement, dated March 26, 1999, by
and between the Company and its former President and Chief Executive
Officer.

10.4* Form of Termination Agreement by and between the Company and certain
designated Corporate Officers (Exhibit 10.23 (10)).

10.5* McKesson HBOC, Inc. 1994 Stock Option and Restricted Stock Plan (as
amended through January 27, 1999).

10.6* McKesson HBOC, Inc. 1997 Non-Employee Directors' Equity Compensation
and Deferral Plan, as amended through January 27, 1999.

Exhibit
Number Description
------- -----------

10.7* McKesson HBOC, Inc. Supplemental PSIP.

10.8* McKesson HBOC, Inc. Deferred Compensation Administration Plan amended
as of January 27, 1999.

10.9* McKesson HBOC, Inc. Deferred Compensation Administration Plan II, as
amended effective January 27, 1999.

10.10* McKesson HBOC, Inc. 1994 Option Gain Deferral Plan, as amended
effective January 27, 1999.

10.11* McKesson HBOC, Inc. Directors' Deferred Compensation Plan, as amended
effective January 27, 1999.

10.12* McKesson HBOC, Inc. 1985 Executives' Elective Deferred Compensation
Plan, amended as of January 27, 1999.

10.13* McKesson HBOC, Inc. Management Deferred Compensation Plan, amended as
of January 27, 1999.

10.14* McKesson HBOC, Inc. 1984 Executive Benefit Retirement Plan, as amended
through January 27, 1999.

10.15* McKesson HBOC, Inc. 1988 Executive Survivor Benefits Plan, as amended
effective January 27, 1999.

10.16* McKesson HBOC, Inc. Executive Medical Plan Summary.

10.17* McKesson HBOC, Inc. Severance Policy for Executive Employees (as
amended through January 27, 1999).

10.18* McKesson HBOC, Inc. 1989 Management Incentive Plan, as amended through
January 27, 1999.

10.19* McKesson HBOC, Inc. Long-Term Incentive Plan, as amended through
January 27, 1999.

10.20* McKesson HBOC, Inc. Stock Purchase Plan, as amended through January
27, 1999.

10.21* McKesson HBOC, Inc. 1999 Executive Stock Purchase Plan (Exhibit 99.1
(11)).

10.22* Form of Consulting Agreement, dated as of March 28, 1997, by and
between McKesson and its former Chairman and retired Chief Executive
Officer (Exhibit 10.32 (7)).

10.23* Amendment No. 1 to Consulting Agreement, entered into as of March 25,
1998, by and between McKesson and its Chairman and retired Chief
Executive Officer (Exhibit 10.1(3)).

10.24* HBO & Company 1990 Executive Incentive Plan (Exhibit 4 (12) and
Exhibit 4(a) (12)).

10.25* HBO & Company 1993 Stock Option Plan for Nonemployee Directors
(Exhibit 4 (13)).

10.26* HBO & Company Omnibus Stock Incentive Plan (Exhibit 4 (14)).

10.27* McKesson HBOC, Inc. 1998 Employee Stock Purchase Plan (as amended and
restated effective January 12, 1999 (Exhibit 99.25 (4)).

10.28* Statement of Terms and Conditions Applicable to Certain Stock Options
Granted on January 27, 1999.

10.29 Credit Agreement dated as of November 10, 1998 among McKesson, Medis
Health and Pharmaceutical Services Inc., an Ontario corporation and
indirect wholly owned subsidiary of McKesson, 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.

10.30 Stock Option Agreement, dated October 17, 1998, between McKesson and
HBOC (Exhibit 99.1 (1)).

10.31 Stock Option Agreement, dated October 17, 1998, between HBOC and
McKesson (Exhibit 99.2 (1)).

Exhibit
Number Description
------- -----------

***

21 List of Subsidiaries of the Company.

23.1 Consent of Deloitte & Touche LLP.

23.2 Consent of Arthur Andersen LLP.

24 Power of Attorney.

27.1 Financial Data Schedule.

27.2 Financial Data Schedule.

27.3 Financial Data Schedule.

99.1 Registration Rights Agreement dated as of June 22, 1998 by McKesson
and the other undersigned parties thereto (Exhibit 10.1(15)).

99.2 Registration Rights Agreement dated as of August 27, 1998, by McKesson
and the other undersigned parties thereto.

99.3 Annual Report on Form 11-K for HBO & Company Profit-Sharing and
Savings Plan.

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

* Denotes management contract or compensatory plan, contract or arrangement.
(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 McKesson'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 Amendment No. 3 to
McKesson's Registration Statement on Form 10 filed on October 27, 1994.
(6) Incorporated by reference to designated exhibit to McKesson's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
(7) Incorporated by reference to designated exhibit to McKesson's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997.
(8) Incorporated by reference to designated exhibit to Amendment No. 1 to
McKesson's Form S-3 Registration Statement No. 333-26433 filed on June
18, 1997.
(9) Incorporated by reference to designated exhibit to McKesson's Form S-3
Registration Statement No. 333-26433 filed on May 2, 1997.
(10) Incorporated by reference to designate exhibit to McKesson's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995.
(11) Incorporated by reference to designated exhibit to the Company's Form S-8
Registration Statement No. 333-71917 filed on February 5, 1999.
(12) Incorporated by reference to designated exhibits to HBOC's Form S-8
Registration Statement No. 33-82962 filed on August 1, 1994 and its Form
S-8 Registration Statement No. 333-05759 filed on June 12, 1996.
(13) Incorporated by reference to designated exhibit to HBOC's Form S-8
Registration Statement No. 33-67300 filed on August 12, 1993.
(14) Incorporated by reference to designated exhibit to HBOC's Form S-8
Registration Statement No. 333-26885 filed on May 12, 1997.
(15) Incorporated by reference to designated exhibit to McKesson's Form S-3
Registration Statement No. 333-66359 filed on October 30, 1998.

CONSOLIDATED FINANCIAL INFORMATION

CONTENTS

Page
----

Six-Year Highlights....................................................... F-2
Financial Review.......................................................... F-5
Consolidated Financial Statements
Independent Auditors' Report............................................ F-29
Report of Independent Public Accountants................................ F-30
Statements of Consolidated Income for the years ended March 31, 1999,
1998 and 1997.......................................................... F-31
Consolidated Balance Sheets, March 31, 1999, 1998 and 1997.............. F-32
Statements of Consolidated Stockholders' Equity for the years ended
March 31, 1999,
1998 and 1997.......................................................... F-34
Statements of Consolidated Cash Flows for the years ended March 31,
1999, 1998 and 1997.................................................... F-36
Financial Notes......................................................... F-37

F-1

SIX-YEAR HIGHLIGHTS

CONSOLIDATED OPERATIONS

Years Ended March 31
-----------------------------------------------------------------------------------
1999 1998 1997(1) 1996 1995 1994
--------- --------- --------- --------- --------- ---------
(dollars in millions except per share amounts)

Revenues................. $30,382.3 $22,419.3 $16,914.3 $13,804.0 $12,948.5 $11,826.5
Percent change.......... 35.5 % 32.5% 22.5% 6.6 % 9.5 % 7.2 %
Gross profit(2).......... 2,665.6 (2) 2,393.4 1,711.0 1,358.6 1,130.0 (2) 1,046.7
Percent of revenues..... 8.8 % 10.7% 10.1% 9.8 % 8.7 % 8.9 %
Operating profit......... 356.3 (3) 632.5(4) 252.6(5) 199.7 (6) 128.2 (7) 240.7
Percent of revenues..... 1.2 % 2.8% 1.5% 1.4 % 1.0 % 2.0 %
Operating profit
excluding unusual
items(8)................ 764.8 728.6 481.1 339.7 266.5 240.7
Percent of revenues..... 2.5 % 3.2% 2.8% 2.5 % 2.1 % 2.0 %
EBIT(9)(21).............. 304.6 (3) 584.8(4) 209.8(5) 164.2 (6) 15.5 (10) 190.6 (11)
Percent of revenues..... 1.0 % 2.6% 1.2% 1.2 % 0.1 % 1.6 %
EBIT(9)(21) excluding
unusual items(8)........ 713.1 680.9 438.3 304.2 228.2 204.0
Percent of revenues..... 2.3 % 3.0% 2.6% 2.2 % 1.8 % 1.7 %
Interest expense-net of
corporate interest
income.................. 96.4 78.4 38.6 11.8 31.1 34.5
Income (loss) before
income taxes............ 208.2 (3) 506.4(4) 171.2(5) 152.4 (6) $ (15.6)(10) 156.1 (11)
Income taxes............. 117.1 195.6(12) 87.2 57.9 109.1 (13) 60.7
Effective tax rate....... 56.2 % 38.6% 50.9% 38.0 % -- 38.9 %
Dividends on preferred
securities of subsidiary
trust, net of tax
benefit................. 6.2 6.2 0.7 -- -- --
Income (loss) after taxes
Continuing operations... 84.9 (3) 304.6(4) 83.3(5) 94.4 (6) (124.8)(10,13) 95.3 (11)
Discontinued
operations............. -- -- 128.8(14) 14.7 554.6 (15) 87.8 (16)
Extraordinary item...... -- -- -- -- -- (4.1)
Cumulative effect of
accounting change...... -- -- -- -- -- (16.7)
Net income............... 84.9 304.6 212.1 109.1 429.8 162.3
Percent change.......... (72.1)% 43.6% 94.4% (74.6)% 164.8 % 11.5 %
Average stockholders'
equity.................. 2,772.0 2,273.8 1,690.9 1,093.9 841.7 639.4
Return on equity(17).... 3.1 % 13.4% 12.5% 10.0 % 51.1 % 25.4 %
Depreciation and
amortization of
intangibles............. 173.4 148.7 124.7 104.0 84.1 72.1
EBITA(18)(21)............ 346.6 619.7 234.2 184.3 27.9 200.5
Average committed
capital(19)............. 3,026.8 2,230.7 1,541.7 843.5 972.2 917.3
Return on committed
capital(20)............. 11.5 % 27.8% 15.2% 21.8 % 2.9 % 21.9 %
Return on committed
capital excluding
unusual items(8,20)..... 24.9 % 32.1% 30.0% 38.4 % 24.7 % 23.3%
Common dividends
declared................ 84.9 62.0 52.1 45.5 57.2 67.5
Diluted earnings (loss)
per common share
Continuing operations... $ 0.31 $ 1.10 $ 0.32 $ 0.36 $ (0.56) $ 0.39
Discontinued
operations............. -- -- 0.48 0.06 2.40 0.39
Extraordinary item...... -- -- -- -- (0.02)
Cumulative effect of
accounting change...... -- -- -- -- (0.07)
Total................... 0.31 1.10 0.80 0.42 1.84 0.69

- --------
(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 Corp. from the acquisition date
of February 21, 1997.
(2) Revenues less cost of sales; fiscal 1999 and 1995 include $1.2 million
and $35.9 million, respectively, of Health Care Supply Management charges
for restructuring, asset impairments and other operating items
representing 0.004% and 0.3% of 1999 and 1995 revenues, respectively.
(3) Includes $180.3 million of Health Care Supply Management, $215.6 million
of Health Care Information Technology and $12.6 million of Water Products
segment charges for transaction costs, costs associated with employee
benefits, primarily related to the 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, $293.9
million after-tax.
(4) Includes $16.7 million of Health Care Supply Management segment charges
for the terminated merger with AmeriSource Health Corporation
("AmeriSource") and $13.9 million in costs associated primarily with the
integration and rationalization of recent acquisitions; and, $65.5
million of Health Care Information Technology segment acquisition charges
related to the acquisitions of AMISYS Managed Care Systems, Inc.,
Enterprise Systems, Inc., HPR Inc. and National Health Enhancement
Systems, Inc. and the merger of Access Health, Inc. and Informed Access
Systems, Inc., 0.4% of revenues in the aggregate, $65.3 million after-
tax.
(footnotes continued on following page)

F-2

(5) Includes Health Care Supply Management and Water Products segment charges
of $98.8 million for restructuring, asset impairment and other operating
items and $48.2 million for the write-off of purchased in-process
technology related to the acquisition of Automated Healthcare, Inc. and,
Health Care Information Technology segment charges of $81.5 million
related to the acquisition of CyCare Systems, Inc., Management Software,
Inc. and GMIS Inc. and the merger of Access Health, Inc. and Informed
Access Systems Inc., 1.4% of revenues in the aggregate; $161.2 million
after-tax.
(6) Includes Health Care Information Technology segment charges of $116.4
million for asset write-offs, $19.0 million for acquisition-related
severance and $4.6 million in product related write-offs, 1.0% of
revenues in the aggregate, $84.2 million after-tax.
(7) Includes $124.6 million of Health Care Supply Management and Water
Products segment charges for restructuring, asset impairments and other
operating items and, $13.7 million of Health Care Information Technology
segment charges for acquisition-related activities and severance costs,
1.1% of revenues, in the aggregate.
(8) 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 2, 3, 4, 5, 6, 7, 10, 11, 12 and 13.
(9) Income (loss) from continuing operations before interest expense-net of
corporate interest income, taxes and dividends on preferred securities of
subsidiary trust.
(10) Includes $124.6 million of Health Care Supply Management and Water
Products segment charges for restructuring, asset impairments and other
operating items, $13.7 million of Health Care Information Technology
segment charges for acquisition-related activities and severance costs,
$74.3 million of Corporate expenses for compensation costs associated
with the sale of the Company's pharmaceutical benefit management business
("PCS") and charges for restructuring, asset impairment and other
operating items representing 1.6% of revenues in the aggregate, $138.8
million after-tax.
(11) Includes a loss on the termination of interest rate swap arrangements of
$13.4 million, $8.2 million after-tax.
(12) Includes a $4.6 million favorable tax adjustment.
(13) Includes $107.0 million of income tax expense related to the sale of PCS.
(14) Includes gain on sale of Armor All Products Corporation ("Armor All") of
$120.2 million after-tax.
(15) Includes gain on sale of PCS of $576.7 million after-tax, write-down of
the Company's investment in Millbrook Distribution Services, Inc.
("Millbrook") of $72.8 million after-tax, and $1.0 million of income
after-tax from a donation of Armor All stock.
(16) Includes $32.7 million after-tax relating to a gain on the sale and
donation of Armor All stock.
(17) Based on net income.
(18) Earnings before interest expense-net of corporate interest income, income
taxes and amortization of intangibles.
(19) Capital employed less cash and cash equivalents, marketable securities
and intangibles.
(20) Earnings 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).
(21) EBITA and EBIT are not intended to represent cash flow from operations,
or alternatives to net income, each as defined by generally accepted
accounting principles. 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-3

SIX YEAR HIGHLIGHTS

CONSOLIDATED FINANCIAL POSITION

Years Ended March 31
-------------------------------------------------------------
1999 1998 1997(1) 1996 1995 1994
-------- -------- -------- -------- -------- --------
(in millions except per share amounts)
-------------------------------------------------------------

Customer receivables.... $2,322.0 $1,802.8 $1,477.4 $ 810.4 $ 887.0 $ 794.7
Days of sales(2)....... 27.5 28.9 25.9 21.1 24.9 24.2
Inventories............. 3,529.0 2,608.7 2,277.5 1,332.4 1,092.9 907.9
Days of sales(2)....... 45.8 46.9 44.5 38.5 33.3 30.3
Drafts and accounts
payable................ 3,579.7 2,206.8 2,125.3 1,410.6 1,422.8 1,268.1
Days of sales(2)....... 46.5 39.7 41.5 40.8 43.3 42.3
Current assets.......... 6,499.5 5,357.1 4,612.6 3,013.4 2,932.1 1,912.4
Current liabilities..... 4,800.1 3,127.0 3,078.3 1,939.8 1,819.6 1,533.6
Working capital......... 1,699.4 2,230.1 1,534.3 1,073.6 1,112.5 378.8
Percent of
revenues(2)........... 5.6% 9.9% 9.1 % 7.8% 8.7% 3.2%
Property, plant and
equipment--net......... 694.0 593.1 489.3 459.7 432.0 419.0
Percent of
revenues(2)........... 2.3% 2.6% 2.9 % 3.3% 3.4% 3.5%
Capital expenditures... 250.7 219.1 128.0 102.2 98.5 83.3
Total assets............ 9,081.6 7,349.7 6,473.3 4,356.8 4,146.8 3,196.2
Total debt(3)........... 1,157.5 1,335.8 1,047.1 428.8 447.6 527.2
Trust convertible
preferred securities... 195.6 195.4 194.8 -- -- --
Stockholders' equity.... 2,881.8 2,561.7 2,081.8 1,710.0 1,636.7 960.9
Capital employed(4)..... 4,234.9 4,092.9 3,323.7 2,138.5 2,084.3 1,488.1
Ratio of net debt to
net capital
employed(5)........... 22.4% 19.0% 16.4 % -- -- 28.8%
Diluted shares.......... 289.8 282.1 265.2 243.8 231.1 228.4
Common shares
outstanding at March
31..................... 280.6 271.0 259.0 246.1 224.5 213.1
Dividends per common
share(6)............... 0.44 0.50 0.50 0.50 0.67 0.83
Cash distribution from
the sale of PCS per
common share........... -- -- -- -- 38.00(7) --
Book value per common
share(8)............... 10.27 9.45 8.04 6.95 7.29 3.92
Market price
High................... 96 1/4 61 3/4 34 1/8 27 13/16 54 5/8 34 1/4
Low.................... 52 1/4 31 1/2 20 9/16 18 5/8 15 1/16 19 5/16
At year end............ 66 57 3/4 32 25 5/8 20 3/16 29 3/4

- --------
(1) Includes the results of the FoxMeyer business from the acquisition date of
November 8, 1996 and of McKesson General Medical Corp. 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.
(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) Received by stockholders directly from Eli Lilly and Company.
(8) Stockholders' equity less preferred stock plus portion of ESOP notes and
guarantee related to the Series B ESOP preferred stock divided by year-end
common shares outstanding.

F-4

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
condition of McKesson HBOC, Inc., together with its subsidiaries. This
discussion and analysis should be read in conjunction with the Company's
consolidated financial statements and accompanying Financial Notes.

HBOC TRANSACTION

On January 12, 1999, the Company, formerly McKesson Corporation
("McKesson"), completed a merger with HBO & Company ("HBOC"), a leading health
care information technology company, by exchanging 177 million shares of
Company common stock for all of the issued and outstanding shares of common
stock of HBOC (the "HBOC Transaction"). Each share of HBOC was exchanged for
0.37 of a share of Company common stock. The Company was renamed McKesson
HBOC, Inc. ("McKesson HBOC" or "the Company"). The merger was structured as a
tax-free reorganization and was accounted for as a pooling of interests. The
historical financial statements give retroactive effect to the HBOC
Transaction and other acquisitions completed by McKesson and HBOC accounted
for under the pooling of interests method.

FACTORS AFFECTING FORWARD LOOKING STATEMENTS

In addition to historical information, management's discussion and analysis
includes certain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ
materially. Also, words such as "estimates", "expects", "anticipates",
"plans", "believes" and similar expressions identify forward-looking
statements involving risks and uncertainties. These include, but are not
limited to: the resolution or outcome of the pending litigation and government
investigations relating to the previously announced financial restatement (the
"Pending Proceedings"); the Company's ability to successfully integrate and
operate acquired businesses and the risks associated with such businesses,
including the merger that created McKessonHBOC; the changing U.S. health care
environment, including potential changes in private and governmental
reimbursement for health care services, the method by which such services are
delivered, legislation or regulations governing such services or mandated
benefits, and changes in manufacturers' pricing or distribution policies; the
ability of the Company's Health Care Information Technology business to retain
existing customers and to attract new customers in light of rapid
technological advances and changing business models, slowing of demand for
software products because of Year 2000 concerns, and challenges in integrating
the Company's software products; the effect of the Pending Proceedings on the
Company's ability to manage its businesses and to attract and retain employees
and management; and the Company's ability and the ability of the Company's
vendors and customers to complete the necessary actions to achieve a Year 2000
conversion for computer systems and applications.

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 three operating business
segments: Health Care Supply Management, Health Care Information Technology
and Water Products. 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 marketing and other support services to pharmaceutical
manufacturers, the manufacture and sale of automated pharmaceutical

F-5

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

dispensing systems for hospitals and retail pharmacists, 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
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, managed care, payor and strategic
management software solutions, as well as networking technologies, electronic
commerce, outsourcing and other services to health care organizations
throughout the U.S. and certain foreign countries.

The Water Products segment is engaged in the processing, delivery and sale
of bottled drinking water to homes and businesses and the sale of packaged
water to retail stores.

HBOC Restatements

On April 28, 1999, the Company announced that during the course of its year-
end audit process, the Company determined that certain software sales
transactions at its Health Care Information Technology business were
improperly recorded and had been reversed. The Audit Committee of the
Company's Board of Directors subsequently initiated an investigation into such
matters. As a result of the findings of the investigation and the year end
internal and external audit process, the Company's consolidated financial
statements reflect amounts for HBOC which have been restated from those
previously reported by HBOC. The results of operations of HBOC have been
restated for the quarters ended December 31, 1998, September 30, 1998 and June
30, 1998 and the fiscal years ended March 31, 1998 and 1997 to reflect
corrections of accounting errors in the Company's Health Care Information
Technology segment (formerly HBOC). See Financial Note 3 to the consolidated
financial statements, and "Business--Matters Relating to Restatement of
Financial Results".

The operating results of the Company and its underlying business segments
include business combinations that were accounted for as poolings of
interests. Accordingly, all financial information gives retroactive effect to
these business combinations as if all of the pooled companies operated as one
entity for all periods presented. In addition, the Company and certain of its
business segments also include businesses that were acquired and accounted for
as purchases. The results of operations of purchased companies are included in
the consolidated financial statements since their dates of acquisition. See
Financial Note 4 to the consolidated financial statements.

Acquisitions

Fiscal Year 1999 Acquisitions

In addition to the HBOC Transaction, the Company completed several
acquisitions in fiscal 1999 in the Health Care Supply Management and Health
Care Information Technology segments 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.

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.

F-6

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

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 approximately 1.9 million shares of
HBOC common stock (equivalent to approximately 700,000 shares of Company
common stock after application of the exchange ratio of 0.37 shares of Company
common stock for each share of HBOC common stock (the "Exchange Ratio")).

In October 1998, the Company completed the acquisition of IMNET Systems,
Inc., a leading provider of electronic information and document management
solutions for the health care industry, for approximately 9.6 million shares
of HBOC common stock and 1.6 million HBOC stock options (equivalent to
approximately 3.6 million shares of Company common stock and 0.6 million
Company stock options after application of the Exchange Ratio).

In December 1998, the Company acquired Access Health, Inc., a provider of
clinically based care management programs and health care information
services, for approximately 34.4 million shares of HBOC common stock
(equivalent to approximately 12.7 million shares of Company common stock after
application of the Exchange Ratio).

Also in fiscal 1999, the Company's Water Products segment completed the
acquisitions of Ephrata Diamond Spring Water Company and Keystone National
Water Company for an aggregate of approximately 0.5 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 LLC ("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 40 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.

Fiscal Year 1998 Acquisitions

In fiscal 1998, the Company's Canadian Health Care Supply Management
business, Medis Health and Pharmaceutical Services Inc. ("Medis"), announced
an agreement with Drug Trading Company, Limited ("Drug Trading") to acquire
Drug Trading's retail customers over a transition period. This transition
began in August 1997 and was substantially completed by the end of the fiscal
year. The acquisition was funded with proceeds from operations and short-term
borrowings. In fiscal 1998, the Company also made several smaller acquisitions
in the Health Care Supply Management segment.

In October 1997, the Company acquired in its Health Care Information
Technology segment AT&T's UK Specialist Health Care Services Division ("ATT-
UK"), a provider of software solutions and remote processing services for
financial and payroll needs of health care providers in the United Kingdom for
approximately $30 million in cash. The Company allocated $7.7 million of the
purchase price to in-process research and development projects as determined
by an independent appraisal of the business, which was expensed as of the
acquisition date.

F-7

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

The Drug Trading and ATT-UK acquisitions were accounted for under the
purchase method of accounting.

In fiscal 1998, the Company completed the acquisitions of the following
companies in its Health Care Information Technology segment, all accounted for
as poolings of interests:

In June 1997, the Company acquired AMISYS Managed Care Systems, Inc.
("AMISYS"), a provider of managed care information systems for the payor
market, for approximately 10.8 million shares of HBOC common stock (equivalent
to approximately 4.0 million shares of Company common stock after application
of the Exchange Ratio).

Also in June 1997, the Company completed the acquisition of Enterprise
Systems, Inc ("ESi"), a developer of resource management solutions including
materials management, operating room logistics, scheduling and financial
management, for approximately 15.2 million shares of HBOC common stock
(equivalent to approximately 5.6 million shares of Company common stock after
application of the Exchange Ratio).

In December 1997, the Company completed the acquisition of HPR, Inc.
("HPR"), a provider of clinical information systems for the managed care
industry for approximately 18.4 million shares of HBOC common stock
(equivalent to approximately 6.8 million shares of Company common stock after
application of the Exchange Ratio).

Also in December 1997, the Company acquired National Health Enhancement
Systems, Inc., ("NHES"), a provider of health information technology solutions
specializing in demand and disease management products, for approximately 3.6
million shares of HBOC common stock (equivalent to approximately 1.3 million
shares of Company common stock after application of the Exchange Ratio).

Fiscal Year 1997 Acquisitions

In fiscal 1997, the Company completed the acquisitions of the following
businesses in its Health Care Supply Management segment, all accounted for
under the purchase method of accounting:

In April 1996, the Company acquired Automated Healthcare, Inc. ("MAH") for
$61.4 million in cash and the assumption of $3.2 million of employee stock
incentives. MAH designs, manufactures, sells, and installs automated
pharmaceutical dispensing equipment for use by health care institutions.
Goodwill relating to the acquisition of approximately $13.4 million is being
amortized on a straight-line basis over ten years. A one-time charge of $48.2
million was recorded to write-off the portion of the purchase price allocated
to technology for which technological feasibility had not been established as
of the acquisition date. Existing technology was valued at $0.4 million and is
being amortized on a straight-line basis over three years.

In November 1996, the Company acquired FoxMeyer Corporation's pharmaceutical
distribution business ("FoxMeyer") for approximately $598 million, pursuant to
an expedited auction process in the FoxMeyer Corporation bankruptcy proceeding
in Wilmington, Delaware. The Company paid approximately $23 million in cash to
the debtors, paid off approximately $500 million in secured debt, and assumed
an additional $75 million in other liabilities. The Company utilized proceeds
from commercial paper issuances and a note payable to a bank to fund the
transaction. The note payable was repaid prior to March 31, 1997, with cash
flow from operations and proceeds from divestitures (see "Divestitures"
section below). The Company acquired assets consisting primarily of accounts
receivable and inventories of $650 million, customer contracts, and property
and equipment. At the time of the acquisition, FoxMeyer was receiving very
little trade credit from suppliers. Normal trade credit was restored
subsequent to the acquisition resulting in a reduction in the investment
associated with the retained FoxMeyer customer base to approximately $400
million at March 31, 1997. The excess of the fair value of the net assets
acquired over the purchase price, after reducing to zero the carrying value of
long-term assets which were expected to be retained for use by the Company,
was approximately $30 million (negative goodwill). Negative goodwill is being
amortized on a straight-line basis over a five-year period.

F-8

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

In February 1997, the Company acquired General Medical Corp. ("MGM"), a
supplier of medical-surgical supplies to the full range of alternate-site
health care facilities, including physicians and clinics, long-term care and
home-care sites, and the third largest distributor of medical-surgical
supplies to hospitals, for approximately $775 million, including the issuance
of 5.6 million shares of Company common stock and the assumption of
approximately $428 million in debt. The excess of the purchase price over the
fair value of the net assets acquired was approximately $600 million and is
being amortized on a straight-line basis over 40 years.

In fiscal 1997, the Company completed the acquisitions of the following
businesses in its Health Care Information Technology segment, all accounted
for as poolings of interests:

In August 1996, the Company acquired CyCare Systems, Inc. ("CyCare"), a
provider of physician practice management software systems and electronic
commerce services for medical group practices, faculty practice plans and
medical enterprises for approximately 17.6 million shares of HBOC common stock
(equivalent to approximately 6.5 million shares of Company common stock after
application of the Exchange Ratio).

In September 1996, the Company acquired Management Software, Inc. ("MSI"), a
provider of software solutions for the home care industry, for approximately
3.4 million shares of HBOC common stock (equivalent to approximately 1.3
million shares of Company common stock after application of the Exchange
Ratio).

In December 1996, the Company acquired GMIS Inc., a developer of data
quality and decision support software for the payor marketplace for
approximately 14.8 million shares of HBOC common stock (equivalent to
approximately 5.5 million shares of Company common stock after application of
the Exchange Ratio).

Divestitures:

In December 1996, the Company sold its 55% equity interest in Armor All
Products Corporation ("Armor All") for $221.9 million in cash and recognized
an after-tax gain of $120.2 million.

In March 1997, the Company sold its service merchandising unit, Millbrook
Distribution Services, Inc. ("Millbrook"). The after-tax cash proceeds on the
sale approximated Millbrook's book value.

The Armor All and Millbrook segments are classified as discontinued
operations in fiscal 1997.

In March 1997, the Company sold its Aqua-Vend vended water business ("Aqua-
Vend"), a unit of the Water Products segment for cash. The after-tax proceeds
on the sale approximated its book value, after giving effect to the $7.0
million pre-tax provision recorded in the third quarter of fiscal 1997 for the
impairment of certain Aqua-Vend assets.

F-9

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

Financial Results

The results of continuing operations include the following:

Years Ended March 31
-------------------------------------------------------
1999 1998 1997
------------------ ----------------- ------------------
Pre-
Pre-tax After-tax tax After-tax Pre-tax After-tax
------- --------- ------ --------- ------- ---------
(in millions)

Income from Continuing
Operations
Before unusual items
and dividends on
convertible preferred
securities of
subsidiary trust..... $ 616.7 $ 385.0 $602.5 $371.5 $ 399.7 $ 245.2
Dividends on
convertible preferred
securities of
subsidiary trust..... (6.2) (6.2) (0.7)
------- ------- ------ ------ ------- -------
Before unusual items.. 616.7 378.8 602.5 365.3 399.7 244.5
Unusual items
Health Care Supply
Management........... (180.3) (112.9) (30.6) (25.4) (140.0) (105.2)
Health Care
Information
Technology........... (215.6) (172.9) (65.5) (39.9) (81.5) (51.7)
Water Products........ (12.6) (8.1) (7.0) (4.3)
Favorable tax
adjustment........... 4.6
------- ------- ------ ------ ------- -------
Income from Continuing
Operations............. $ 208.2 $ 84.9 $506.4 $304.6 $ 171.2 $ 83.3
======= ======= ====== ====== ======= =======

Fiscal 1999

Fiscal 1999 income from continuing operations before unusual items, after
the previously discussed HBOC restatements, was $378.8 million, a 4% increase
over the prior year's income from continuing operations before unusual items
of $365.3 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.

Fiscal 1998

Fiscal 1998 income from continuing operations before unusual items, after
the previously discussed HBOC restatements, was $365.3 million, a 49% increase
over the prior year's income from continuing operations before unusual items
of $244.5 million. Fiscal 1998 results reflect internal growth, operating
margin expansion and the full-year effect of acquisitions accounted for as
purchases made late in the prior fiscal year.

Fiscal 1997

Fiscal 1997 income from continuing operations before unusual items, after
the previously discussed HBOC restatements, was $244.5 million, a 36% increase
from the prior year's income from continuing operations before unusual items
of $180.0 million. Fiscal 1997 results reflect significant growth in the
Health Care Information Technology segment offset in part by the temporary
dilutive effect of acquisitions and investments in strategic initiatives
geared toward enhancing the Company's competitive position in the
institutional and retail markets in the Health Care Supply Management segment.

F-10

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

Unusual Items

In each of fiscal 1999, 1998 and 1997, the Company incurred charges, as
restated for HBOC, 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, these items are referred
to as "unusual items" in the Financial Review. Charges associated with the
Health Care Information Technology segment have been restated from amounts
previously reported to correct previous overstatements of such amounts. The
results of operations excluding "unusual items" are not intended to represent
income from operations, or alternatives to net income, each as defined by
generally accepted accounting principles. 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 1999, 1998 and 1997 are as follows:

Years Ended March
31,
--------------------
1999 1998 1997
------ ------ ------
(in millions)

Transaction costs..................................... $ 84.9 $ 16.0 $ 17.2
Costs associated with the terminated merger
transaction with AmeriSource Health Corporation...... 16.7
Costs associated with employee benefits, primarily
related to change in control provisions.............. 88.7 1.4
Employee severance.................................... 33.3 17.5 12.0
Restructuring and asset impairments................... 111.3 36.8 114.8
Other merger-related costs............................ 13.8 7.7 57.2
Acquisition-related integration costs incurred ....... 40.3
Other operating items................................. 36.2 27.3
------ ------ ------
Total pre-tax......................................... $408.5 $ 96.1 $228.5
====== ====== ======
Total after-tax....................................... $293.9 $ 65.3 $161.2
====== ====== ======

Fiscal 1999 Unusual Items

In fiscal 1999, the Company recorded pre-tax charges for unusual items of
$180.3 million in the Health Care Supply Management segment, $215.6 million in
the Health Care Information Technology segment and $12.6 million in the Water
Products segment, $408.5 million in the aggregate. Following is a description
of costs by type of expenditure in fiscal 1999:

Transaction Costs

Total unusual items include $84.9 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. Approximately $83.9 million of invoices were paid in fiscal
1999, with a balance of $1.0 million which will be paid in fiscal 2000.

F-11

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

Employee Benefits

The Company incurred $88.7 million of employee benefit costs related to the
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
were paid in fiscal 1999, and the remaining $8.3 million will be paid in
fiscal 2000.

Severance

Severance costs totaled $33.3 million, 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 1,650 employees, primarily in distribution centers,
administration and product functions. Severance of $9.1 million was paid in
fiscal 1999. The remaining severance will be paid in fiscal 2000.

Restructuring and Asset Impairments

In fiscal 1999, the Health Care Supply Management segment identified six
distribution centers for closure to be completed by the middle of fiscal 2000.
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. 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 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 from acquired companies that do not have future
use by the Company. Of the above charges, $40.1 million were non-cash asset
write-offs, $3.9 million was paid in fiscal 1999, and the remaining amounts
will be paid 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 made by the Health Care Information
Technology segment and the merger with McKesson, duplicate facilities,
products and internal systems were identified for elimination, resulting in
charges of $22.2 million, relating principally to the write-off of capitalized
costs, lease termination costs, and royalty agreements which were terminated
at a cost of $12.0 million because products subject to minimum royalty
payments to third parties were replaced with acquired products. 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.

The Water Products segment identified and wrote off $2.5 million of computer
equipment and inventory which were abandoned as the result of acquisitions
during the year. In addition, management decided to close

F-12

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

down an acquired bottling facility during fiscal 2000 which was determined to
be inefficient, and recorded $0.4 million of estimated costs required to
prepare the facility for closure which are expected to be paid during fiscal
2000.

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 merger with HBOC.

Acquisition-related Integration Costs

Acquisition-related integration costs of $40.3 million consist of $1.9
million incurred for salaries and benefits of integration and affiliation team
members of the Company and $38.4 million of other direct costs associated with
the integration and rationalization of recent acquisitions in the Health Care
Supply Management, Health Care Information Technology and Water Products
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.

Fiscal 1998 Unusual Items

In fiscal 1998, the Company recorded pre-tax charges for unusual items of
$30.6 million in the Health Care Supply Management segment and $65.5 million
in the Health Care Information Technology segment, $96.1 million in the
aggregate. Following is a description of costs by type of expenditure in
fiscal 1998:

Transaction Costs

Total unusual items include $32.7 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 $16.7 million of transaction costs related to the Company's
termination of its proposed merger with AmeriSource Health Corporation.
Substantially all related invoices were paid during fiscal 1998.

Employee Benefits

The Company incurred $1.4 million of employee benefit costs related to
change of control provisions associated with the acquisition of NHES.

Severance

Severance costs totaled $17.5 million, 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 charge relates to the termination of
approximately 600 employees primarily in distribution center and back office
functions in the Health Care Supply Managment segment, and operating and
corporate personnel in the Health Care Information Technology segment.
Severance of $7.5 million was paid during fiscal 1998. The remaining severance
was paid in fiscal 1999.

Restructuring and Asset Impairments

In fiscal 1998, the Health Care Supply Management segment recorded a $3.7
million loss on the sale of an investment, and a charge of $0.7 million
associated with the closure of a facility in Canada.

F-13

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

In connection with acquisitions made by the Health Care Information
Technology segment, duplicate products, facilities and internal systems were
identified which resulted in charges of $22.4 million (all non-cash),
consisting primarily of capitalized costs and intangible write-offs of $19.3
million related to discontinuance of duplicate product lines. Revenues and net
income from the discontinued product lines were replaced by acquired product
lines. In addition, a $10.0 million minority investment became impaired and
was written off (all non-cash).

Other Merger-related Costs

In connection with the acquisition of ATT-UK by the Health Care Information
Technology segment, a charge of $7.7 million was recorded to write off the
portion of the purchase price allocated to purchased in-process technology for
which feasibility had not been established as of the acquisition date.

Fiscal 1997 Unusual Items

In fiscal 1997, the Company recorded pre-tax charges for unusual items of
$140.0 in the Health Care Supply Management segment, $81.5 million in the
Health Care Information Technology segment and $7.0 million in the Water
Products segment, $228.5 million in the aggregate. Following is a description
of costs by type of expenditure in fiscal 1997:

Transaction Costs

Total unusual items include $17.2 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.
Substantially all related invoices were paid during fiscal 1997.

Severance

Severance costs in the Health Care Information Technology segment totaled
$12.0 million resulting from the consolidation of acquired company operating
and corporate functions and other employee terminations. Severance of $8.8
million was paid during fiscal 1997, and the remaining severance was primarily
paid in fiscal 1998.

Restructuring and Asset Impairments

The acquisition of the assets and operations of FoxMeyer by the Health Care
Supply Management segment resulted in a significant increase in sales volume,
a substantial change in the customer mix (primarily a large increase in
institutional customers), and overlapping, duplicate and "similar purpose"
assets.

As a result of this acquisition, management reassessed the Company's
operations, distribution center network and business strategies, including
program offerings. As a result of this reassessment, management developed a
plan to optimize the U.S. network configuration from the combined distribution
centers of the Company and those acquired from FoxMeyer. At the same time,
management approved a plan to rationalize the distribution network and
eliminate certain facilities being used at its Canadian subsidiary. These
plans have resulted in the closure of 15 distribution centers and the disposal
of duplicate assets during fiscal 1997 and fiscal 1998.

In connection with the plans discussed above, during fiscal 1997 the Company
recorded charges of $10.1 million (primarily non-cash) to reduce the carrying
value of certain of the Company's distribution facilities to their estimated
fair value less disposal costs. Fair value was determined based on sales of
similar assets,

F-14

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

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.

Subsequent to the acquisition of FoxMeyer, management reassessed strategies
and program offerings for expanding certain customer markets in light of the
larger and more diverse customer base, and identified certain of the Company's
programs and investments that would no longer be pursued as originally
contemplated. As a result, the Company recorded charges of $28.0 million
(primarily non-cash) to write off costs incurred to develop systems and other
product offerings for customers that would no longer be used or sold. In
addition, management reevaluated its current systems capabilities and needs,
in light of the resources acquired through FoxMeyer, and identified several
systems that were duplicate or not providing benefits to the combined company.
This resulted in a charge of $29.3 million (primarily non-cash) for the write-
off of hardware and software systems that would no longer be used by the
Company.

In fiscal 1997, the Health Care Information Technology segment completed
several acquisitions. In connection with these acquisitions, duplicate
products were eliminated. The elimination of duplicate products resulted in
charges of $22.8 million, consisting primarily of capitalized costs, and
intangible write-offs, and reserves for customer settlements. Revenues and net
income from the discontinued product lines were replaced by acquired product
lines. In addition, a $12.3 million intangible representing a non-compete
agreement of an acquired company and $5.3 million of other assets and
investments were written off because they were determined to have no future
value to the Company. Of the above charges, $32.7 million were non-cash asset
write-offs, $3.0 million was paid in fiscal 1997 and the remaining amounts
were paid in fiscal 1998.

During fiscal 1997, management of the Water Products segment decided to exit
from the vended water business. Offers received from potential buyers
indicated that the net assets of this business were impaired. As a result, the
Company recorded a charge of $7.0 million (non-cash) to reduce the carrying
value to estimated fair value less disposal costs. The business was sold later
in fiscal 1997 with no significant gain or loss recognized.

Other Merger-related Costs

The Health Care Supply Management segment recorded a charge of $48.2 million
to write off the portion of the purchase price of the acquisition of MAH
allocated to purchased in-process technology for which feasibility had not
been established as of the acquisition date.

The Health Care Information Technology segment recorded a charge of $8.6
million to write off the portion of the purchase price of an acquisition
allocated to purchased in-process technology for which feasibility had not
been established as of the acquisition date and $0.4 million of other charges.

Other Operating Items

Other operating items include $15.1 million of receivables reserves recorded
by the Health Care Supply Management segment resulting from management's
reevaluation of estimated exposures from bad debts, disputed amounts, customer
allowances, and rebates. Also included are $2.8 million of costs incurred
during a strike at a distribution center, $1.5 million for the termination of
a marketing program and certain distributor relationships, and $5.0 million of
other charges. In addition, the Health Care Information Technology segment
recorded a charge of $2.9 million primarily related to an employee stock
option grant of an acquired company that was variable until shareholder
approval was received authorizing the shares that were granted.

F-15

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

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.

Health Care Supply Management

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

1999 1998 1997
------- ------- -------
(dollars in millions)

Revenues
Excluding sales to customers' warehouses
Pharmaceutical distribution and services
U.S. Health Care............................. $17,400 $14,418 $10,930
International................................ 1,953 1,639 1,513
------- ------- -------
Total pharmaceutical......................... 19,353 16,057 12,443
Medical-Surgical distribution and services.... 2,292 1,879 182
------- ------- -------
Subtotal..................................... 21,645 17,936 12,625
Sales to customers' warehouses................. 6,813 2,704 2,824
------- ------- -------
Total........................................ $28,458 $20,640 $15,449
======= ======= =======
Revenue growth
Excluding sales to customers' warehouses
Pharmaceutical distribution and services
U.S. Health Care............................. 20.7% 31.9% 34.0%
International................................ 19.1 8.4 (0.8)
Total pharmaceutical......................... 20.5 29.0 28.5
Medical-Surgical distribution and services.... 22.0 N.M. N.M.
Total excluding sales to customers'
warehouses................................... 20.7 42.1 30.4
Total.......................................... 37.9 33.6 21.7
Operating profit................................ $ 521.9 $ 383.4 $ 234.1
Percentage change.............................. 36.1% 63.8% 11.8%
Gross profit margin(1).......................... 7.4 7.4 6.5
Operating expense margin(1)..................... 5.0 5.3 4.6
Operating profit as a percent of revenues(1).... 2.4 2.1 1.9
Depreciation.................................... $ 51.8 $ 48.5 $ 41.6
Amortization of intangibles..................... 22.6 17.4 6.6
Capital expenditures............................ 97.2 82.1 46.3
Capital employed at year-end
Committed capital(3)
Operating working capital(2).................. $ 2,176 $ 2,061 $ 1,746
Other--net.................................... 71 80 (90)
------- ------- -------
Total........................................ 2,247 2,141 1,656
Intangibles.................................... 989 795 749
------- ------- -------
Total........................................ $ 3,236 $ 2,936 $ 2,405
======= ======= =======
Returns
Committed capital(4)........................... 20.3% 19.8% 18.0%
Total capital employed(5)...................... 14.4 13.4 15.0

- --------
(1) Excluding sales to customer's warehouses.
(2) Receivables and inventories net of related payables.
(3) Capital employed less cash and cash equivalents, marketable securities and
goodwill and other intangibles.
(4) Operating profit before amortization of intangibles divided by average
committed capital.
(5) Operating profit divided by average capital employed.

F-16

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

Over the most recent three fiscal years, the Health Care Supply Management
segment has experienced strong revenue growth from internal growth and
acquisitions. Operating margins have also improved from a combination of
higher margin service offerings, improved product procurement profits and
ongoing expense efficiencies which have more than offset continued pressure on
selling margins to customers. The result, when combined with improved asset
efficiency, is operating profit growth in excess of revenue growth and
increasing returns on invested capital.

Revenue growth in this segment, excluding sales to customers' warehouses, is
as follows:

1999 1998 1997
---- ---- ----

Pharmaceutical Distribution and Services
Existing businesses...................................... 20.0% 13.4% 14.6%
Acquisitions............................................. 0.5 15.6 13.9
---- ---- ----
Total.................................................... 20.5% 29.0% 28.5%
==== ==== ====
Medical-Surgical Distribution and Services
Existing businesses...................................... 14.5%
Acquisitions............................................. 7.5 N.M N.M
----
Total.................................................... 22.0%
====

Internal growth in Health Care Supply Management has been primarily volume
driven due to increasing sales 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, utilization reviews as well as the health care information
services available from the Health Care Information Technology segment. These
retail chain and institutional capabilities have resulted in the
implementation of significant long-term contracts with major customers.

1999 1998 1997
----- ----- -----

Customer Mix--
Pharmaceutical
Distribution and Services
Independents............ 28.7% 34.9% 38.1%
Retail Chains........... 38.5 32.3 33.3
Institutions............ 32.8 32.8 28.6
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====

Operating margins expanded in the three years due to a change in business
mix to 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.

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 1999 was primarily the result of two
significant contracts with retail chains which also provided new direct store
sales growth.

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

F-17

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

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 from manufacturer price decreases.
Price declines on many generic pharmaceutical products in this segment in each
of the fiscal years ending March 31, 1999, 1998, and 1997 moderated the
effects of inflation in other product categories, which resulted in minimal
overall price changes in those fiscal years.

Fiscal 1999 capital expenditures include higher levels to support the growth
in the automation and services businesses. The growth in fiscal 1998 capital
expenditures reflects expansion of certain facilities in conjunction with the
integration and rationalization of the FoxMeyer, MGM and Drug Trading
businesses.

The Health Care Supply Management segment requires a substantial investment
in operating working capital (customer receivables and inventories net of
related trade payables). Average capital employed increased in fiscal 1999,
reflecting the MedManagement and RedLine acquisitions, capital spending and
increased working capital to support the 19% growth from existing businesses.
The increase in average capital employed in fiscal 1998 reflects the Drug
Trading acquisition, capital spending related to the integration and
rationalization of the FoxMeyer, MGM and Drug Trading businesses and growth in
working capital to support the 14% revenue growth for existing businesses.
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. Typically
operating working capital is lower at March 31 than the average balance during
the year. At March 31, 1999, vendor payables were unusually high relative to
inventory both as a result of purchases made late in the fiscal year and the
timing of vendor payments. As a result, average operating working capital
levels in fiscal 2000 would be expected to be significantly higher than the
March 31, 1999 balance. At March 31, 1998, vendor payables were relatively low
due to a lower level of purchase activity at year end and revised payment
terms with certain vendors in the medical-surgical distribution and services
business.

Health Care Information Technology

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

1999 1998 1997
------ ------ ------
(dollars in
millions)

Revenues
Software........................................... $ 345 $ 406 $ 321
Services........................................... 984 809 646
------ ------ ------
Subtotal.......................................... 1,329 1,215 967
Hardware........................................... 209 214 162
------ ------ ------
Total revenues.................................... $1,538 $1,429 $1,129
====== ====== ======
Revenue Growth
Software........................................... (15.0)% 26.5%
Services........................................... 21.6 25.2
Subtotal.......................................... 9.4 25.6
Hardware........................................... (2.3) 32.1
Total............................................. 7.6 26.6
Operating profit.................................... $184.0 $292.5 $203.4
Percent change..................................... (37.1)% 43.8%
Gross profit margin................................. 50.5 55.5 55.2
Operating expense margin............................ 38.5 35.0 37.2
Operating profit as a percent of revenues........... 12.0 20.5 18.0

F-18

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

1999 1998 1997
----- ----- -----

Depreciation............................................ $46.4 $35.9 $28.6
Amortization of intangibles ............................ 18.4 17.4 17.6
Amortization of capitalized software.................... 25.9 21.3 16.6
Capital expenditures.................................... 79.2 76.9 41.2
Capital employed
Committed capital(1)................................... $ 382 $ 383 $ 227
Intangibles............................................ 226 188 194
----- ----- -----
Total................................................. $ 608 $ 571 $ 421
===== ===== =====
Returns
Committed capital(2)................................... 65.1% 126.8% 113.2%
Total capital employed(3).............................. 38.0 68.2 52.2

- --------
(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, after giving effect to the
restatements, increased 8% to $1.5 billion in fiscal 1999 and 27% to
$1.4 billion in fiscal 1998. The fiscal 1999 decline in software revenues of
15% 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. 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 are
due to Year 2000 issues, technological innovations, increased competition,
greater requirement for integration of products and general market conditions
in the computer software industry. Services revenues increased, in part, as
implementation activity increased for enterprise solutions and materials
management products as a result of increased sales in fiscal 1998. Outsourcing
growth was strong as a significant number of new outsourcing customers were
added in fiscal 1999. In addition to general growth in services as a result of
a growing business, services increased due to the full year impact of the
purchase of ATT-UK.

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

The segment's fiscal 1998 software sales growth reflected continued demand
for enterprise solutions, including strong home care, materials management and
payor product sales as new sales channels were provided by acquisitions.
Hardware sales of RISC-based processors increased in conjunction with software
sales. In addition to general growth in services as a result of a growing
business, services increased due to the inclusion of ATT-UK operations from
the date of purchase.

Health Care Information Technology segment operating profit before unusual
items declined 37% to 184.0 million in fiscal 1999 reflecting the previously
discussed decline in software sales, a lower mix of higher-margin software
sales in fiscal 1999 compared to fiscal 1998 (22% vs. 28% as a percentage of
total Health Care Information Technology revenues), bad debt provisions of $70
million, and a termination fee associated with a telecommunications contract.
The bad debt provision was unusually high in the year and reflects, in part,
inadequate staffing of and focus on receivables collections during a portion
of the year, implementation issues associated with certain products and
contingencies associated with litigation.

F-19

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

Health Care Information Technology segment operating profit before unusual
items increased 44% to $292.5 million in fiscal 1998 reflecting sales volume
increases, product mix shift to higher-margin software and service revenues,
and operating expense efficiencies.

The fiscal 1999 and 1998 capital expenditures reflect the acquisition and
construction of the segment's new corporate office in Georgia and the purchase
of an aircraft in 1998.

The increase in capital employed in Health Care Information Technology in
fiscal 1998 primarily reflected the growth in working capital to support the
27% growth in the business and increased capital spending as noted earlier.

The return on committed capital and total capital employed in fiscal 1999
reflect the previously discussed decline in operating profit.

Water Products

Significant performance measures of the Water Products segment are as
follows:

1999 1998 1997
----- ----- -----

Revenues................................................ $ 354 $ 314 $ 302
Percent change........................................ 12.7% 4.0% 6.2%
Operating profit........................................ $58.9 $52.7 $43.6
Percent change........................................ 11.8% 20.9% 4.8%
Gross profit margin..................................... 75.3 76.2 77.9
Operating expense margin................................ 58.6 59.4 63.4
Operating profit as a percent of revenues............... 16.7 16.8 14.5
Depreciation............................................ $27.5 $23.9 $24.4
Amortization of intangibles............................. 1.0 0.2 0.2
Capital expenditures.................................... $51.5 $52.7 $36.6
Total capital employed.................................. 184 150 116
Return on total capital employed(1)..................... 33.0% 36.5% 32.7%

- --------
(1) Operating profit divided by average capital employed.

Water Products revenues increased 13% in fiscal 1999 to $353.6 million,
reflecting growth in both the direct-delivery business and packaged water
sales to the retail trade. Water Products revenue increased 4% in fiscal 1998
to $313.6 million reflecting higher packaged water sales to the retail trade
and moderate growth in the direct-delivery business.

Water Products segment operating profit before unusual items increased 12%
to $58.9 million in fiscal 1999 reflecting higher sales. Operating profit
before unusual items increased 21% to $52.7 million in fiscal 1998 reflecting
the 4% increase in revenues and productivity improvements.

Fiscal 1999 and 1998 capital expenditures reflect expenditures for
additional processing plants to support the expansion into new territories.

The increases in capital employed in fiscal 1999 and 1998 reflect sales
growth and the higher capital spending levels discussed in the prior
paragraph. The decline in the return on capital in fiscal 1999 employed before
unusual items was impacted by the higher levels of capital spending in fiscal
1999 and 1998.

F-20

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

International Operations

International operations accounted for 6.8%, 7.6%, 9.2% and 6.0%, 3.7%, 7.9%
of fiscal 1999, 1998 and 1997 consolidated revenues and operating profits
before unusual items, respectively, and 5.5%, 5.9% and 4.0% of consolidated
assets at March 31, 1999, 1998 and 1997, 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 8.3%, 10.5% and 10.4% at March 31,
1999, 1998 and 1997, respectively. The calculation is based on year-end
balances and assumes major purchase acquisitions occurred at the beginning of
the year.

The decline in the operating working capital ratio in fiscal 1999 is
primarily due to the timing of vendor payments in the U.S. pharmaceutical and
medical-surgical distribution businesses which offset the effect of operating
working capital growth in the Health Care Information Technology segment.

The increase in the operating working capital ratio in fiscal 1998 reflects
revised payment terms with certain vendors in the medical-surgical
distribution and services business and the timing of vendor payments in the
U.S. pharmaceutical distribution business in the Health Care Supply Management
segment and, growth in the Health Care Information Technology segment due
primarily to an increase in receivables resulting from an increase in sales
and timing of customer collections.

CASH FLOW AND LIQUIDITY

Cash and cash equivalents and marketable securities (primarily U.S. Treasury
securities with maturities of one year or less) were $269 million, $683
million, and $600 million at March 31, 1999, 1998 and 1997, respectively. The
decline in fiscal 1999 reflects the use of HBOC cash balances following the
January 1999, merger to pay down short-term borrowings. Cash balances include
$23 million, $77 million and $110 million at March 31, 1999, 1998 and 1997,
respectively, from the sale of Armor All, which is restricted and held in
trust as exchange property in connection with the Company's exchangeable
debentures.

Cash Flows from Operations for Capital Expenditures

The following table summarizes the excess of cash flows from operations over
capital expenditures:

Years Ended March
31
-------------------
1999 1998 1997
----- ----- -----
(in millions)
(to be updated)

Net cash provided by continuing operations:
Income from continuing operations(1).................. $ 85 $ 305 $ 83
Depreciation.......................................... 131 114 100
Amortization of intangibles........................... 42 35 24
Amortization of capitalized software ................. 26 21 17
Other non-cash charges(1)............................. 370 195 193
Working capital changes............................... (338) (387) 1
----- ----- -----
Total............................................... 316 283 418
----- ----- -----
Capital expenditures.................................. (251) (219) (128)
----- ----- -----
Excess.............................................. $ 65 $ 64 $ 290
===== ===== =====

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

F-21

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

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 1999 primarily reflects
increases in receivables and inventories resulting from sales growth in all
operating segments and timing of customer collections in the Health Care
Supply Management and Health Care Information Technology segments. The working
capital increase in fiscal 1998 primarily reflects sales growth and timing of
customer collections in the Health Care Information Technology segment,
revised payment terms with certain vendors in the medical-surgical
distribution and services business and the timing of vendor payments in the
U.S. pharmaceutical distribution business. Working capital changes in fiscal
1997 were favorably impacted by the previously discussed restoration of trade
credit from suppliers of FoxMeyer related to purchases following the
acquisition.

Other Financing Activities

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

In February 1998, the Company issued fixed-rate unsubordinated debt totaling
$300 million to finance internal growth. On March 1, 2005, $150 million of the
debt matures, and the remaining $150 million is due on March 1, 2008.

In October 1997, a subsidiary of the Company issued $125 million of fixed-
rate debt which matures on November 1, 2002. Proceeds were used to pay down
short-term borrowings of the Company's Canadian subsidiary, Medis.

During fiscal 1997, the Company repurchased 6.8 million shares of its common
stock for $156 million as part of a share repurchase program that was
suspended in January 1997. In February 1997, the Company issued approximately
5.6 million shares of Company common stock in conjunction with the MGM
acquisition.

In fiscal 1997, the Company, through a wholly-owned subsidiary trust, issued
$200 million of trust convertible preferred securities to fund internal
growth. These securities are convertible into approximately 5.4 million shares
of Company common stock, yield a 5% dividend and are callable by the Company
beginning in March 2000 at 103.5% of par value.

Also in fiscal 1997, the Company issued $525 million of fixed-rate debt to
term-out the financing of the MGM acquisition including the refinancing of
higher cost debt assumed in the acquisition.

Credit Resources

The Company currently has $1.8 billion of available credit under committed
revolving credit lines: a $400 million five-year facility expiring in fiscal
2004, an $800 million 364-day facility expiring on November 9, 1999, and a
$575 million facility expiring on October 29, 1999. $1.2 billion of these
revolving credit facilities is primarily available to support commercial paper
borrowings. In addition, the Company has committed revolving receivables sales
facilities aggregating $750 million. At March 31, 1999, the Company had no
commercial paper or revolving credit borrowings outstanding. As of June 30,
1999, the Company had $592 million of commercial paper borrowings outstanding,
no outstanding borrowings under the revolving credit agreement and had fully
utilized its accounts receivable sales facility.

The Company's senior debt credit ratings from S&P, Duff & Phelps, and
Moody's are currently BBB+, A-, and Baa1, and its commercial paper ratings are
currently A-2, D-2, and P-2, respectively. The Company's senior debt ratings
and one of its commercial paper ratings were lowered by the rating agencies to
the above levels, and both the senior debt and commercial paper ratings were
placed under review with negative implications, following the Company's June
21, 1999 announcement of senior management changes within the Company.

F-22

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

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.

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 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 net income, comprehensive
income and in equity are discussed in Financial Note 2 on pages F-37 to F-40
of the accompanying consolidated financial statements.

Capitalization

The Company's capitalization was as follows:

March 31
----------------------
1999 1998 1997
------ ------ ------
(in millions)

Short-term borrowings.............................. $ 17 $ 94 $ 125
Term debt.......................................... 1,104 1,129 762
Exchangeable debt.................................. 37 113 160
------ ------ ------
Total debt....................................... 1,158 1,336 1,047
Convertible preferred securities of subsidiary
trust............................................. 196 195 195
Stockholders' equity............................... 2,882 2,562 2,082
------ ------ ------
Total capitalization............................. $4,236 $4,093 $3,324
====== ====== ======
Debt-to-capital ratio at March 31.................. 27.3% 32.6% 31.5%
Net debt-to-capital ratio at March 31(1)........... 22.4% 19.1% 16.4%
Average interest rates during year
Total debt....................................... 6.3% 6.5% 5.9%
Short-term borrowings............................ 5.6 5.6 5.7
Other debt....................................... 6.7 7.0 6.1

- --------
(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 primarily reflects the
increase in net debt to fund internal growth and acquisitions in each of the
three years, and share repurchases in fiscal 1997.

F-23

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

respectively, undivided interests in the Company's total trade accounts
receivable. The program qualifies for sale treatment under Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". 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 289.8 million in fiscal 1999, 282.1 million in
fiscal 1998 and 265.2 million in fiscal 1997. Common stock outstanding
increased to 280.6 million at March 31, 1999 from 271.0 million at March 31,
1998 and 259.0 million at March 31, 1997, due primarily to the issuance of
common stock under employee benefit plans.

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.
There were no adjustments made to the reserves in fiscal 1999, 1998 and 1997.
Management does not believe that changes in the remediation cost estimates in
future periods, or the ultimate resolution of the Company's environmental
matters, will have a material impact on the Company's consolidated financial
position or results of operations. See Financial Note 19, "Other Commitments
and Contingent Liabilities" on pages F-72 to F-77 of the accompanying
consolidated financial statements.

Income Taxes

The tax rate on income from continuing operations (excluding unusual items)
was 56.2% in fiscal 1999, 38.6% in fiscal 1998 and 50.9% in fiscal 1997.

YEAR 2000

Background

The "Year 2000 problem" refers to the fact that some computer hardware,
software and embedded firmware are designed to read and store dates using only
the last two digits of the year. The Company relies heavily on computer
technologies to operate its business. In 1996, the Company conducted an
initial assessment of its information technology to determine which Year 2000
related problems might cause processing errors or computer system failures.
Based on the results of that initial analysis, the Company's executive
management identified the Year 2000 problem as a top corporate priority and
established a central office to provide enterprise-wide management of its Year
2000 project (the "Project"), which is currently estimated to have a total
project cost of less than $45 million (see "Costs").

The following discussion of the implications of the Year 2000 problem for
the Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the Project and the date on which the
Company plans to complete its internal Year 2000 modifications are based on
the Company's best estimates, which were derived utilizing a number of
assumptions of future events including the continued availability of internal
and external resources, third party modifications and other factors. However,
there can be no guarantee that these estimates will be achieved, and actual
results could differ. Moreover, although the Company believes it will be able
to make the necessary modifications in advance, there can be no guarantee that
the failure to modify the systems would not have a material adverse effect on
the Company.

F-24

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

In addition, the Company places a high degree of reliance on computer
systems of third parties, such as customers, trade suppliers and computer
hardware and commercial software suppliers. Although the Company is assessing
the readiness of these third parties and preparing contingency plans, there
can be no guarantee that the failure of these third parties to modify their
systems in advance of December 31, 1999, would not have a material adverse
effect on the Company.

Readiness

The Project is intended to ensure that all critical systems, devices and
applications, as well as data exchanges with customers, trade suppliers, and
other third parties ("Trading Partners") have been evaluated and will be
suitable for continued use into and beyond the year 2000. In addition to areas
normally associated with information technology ("IT"), the project also
includes areas normally considered outside of IT, but which may have embedded
microprocessors with potential Year 2000 problems. Examples of such non-IT
areas include the 30,000 hand-held order entry devices the Company has
provided its customers, and recently implemented bar-code scanning devices
used in warehouse operations.

Responsibility for implementation of the Project has been divided among
fourteen business units (including the Company's Health Care Information
Technology segment), each with its own IT resources. Each business unit
operates under published corporate standards, and progress is monitored by the
corporate Year 2000 central office. Responsibilities have been further
subdivided into functional areas. General priorities have been defined,
dependencies identified, preliminary delivery dates assigned, detailed project
plans developed, and internal and external technical resources assigned or
hired. In addition, internal management reporting requirements have been
established. Plans, and progress against those plans, are reviewed by the
Project's central project office and are reported to the Chief Information
Officer, executive steering committee and the Company's Board of Directors.

The Project now consists of hundreds of individual projects, varying in
priority and resource requirements from large undertakings, such as replacing
certain financial and electronic commerce (EDI) systems, to smaller projects,
such as certification of telephony systems. Regardless of its size, each
individual project generally progresses through the following seven phases,
which are divided into two stages:

Stage One: Stage Two:
---------- ----------

Awareness (Phase 1) Examination and analysis (Phase 3)
Assessment of risk (Phase 2) Modification and/or renovation (Phase 4)
Data conversion (Phase 5)
Acceptance testing (Phase 6)
Redeployment back into production (Phase 7)

Prior to combining with McKesson in January 1999, HBOC had, since 1994, been
pursuing its own Year 2000 compliance project. That compliance project has now
been integrated into the Company's Project. Nevertheless, because the Health
Care Information Technology segment is principally engaged in the sale and
licensing of computer software and systems, the Year 2000 problem raises a
different set of concerns from those of the Company's other businesses. For
that reason, the Year 2000 readiness of the Health Care Information Technology
business is discussed separately.

Businesses Other than Health Care Information Technology

The Company has completed Stage One for all identified projects. Because of
the size of the Project at the Company, and variation in assessed risk, some
individual projects have completed all phases while others are at various
phases within Stage Two. Most of the Company's mission critical projects
(i.e., those projects whose

F-25

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

failure to be completed would create a significant business disruption) are at
Phase 6 or higher, have been installed or will be installed by July 31, 1999.
A limited number of systems requiring extended migration, installation or
conversion efforts will require work extending past July 31, 1999 but, in any
case, the Company expects to complete all phases of all identified projects by
September 30, 1999. In the third quarter of calendar year 1999, the Company
will be conducting a rigorous final level of review called systems integration
testing under post-Year 2000 conditions.

The Company has conducted and plans to continue to conduct systems testing
with Trading Partners during the remainder of calendar year 1999. In addition,
to insure Year 2000 readiness with trade suppliers, the Company is
participating in an industry effort organized by the National Wholesale Drug
Association with special attention to critical suppliers such as manufacturers
of branded pharmaceutical products.

Since early 1997, the Company has required Year 2000 compliance statements
from all suppliers of the Company's computer hardware and commercial software.
As of March 31, 1999, approximately 90% of the computer hardware and purchased
software used in the Company's Health Care Supply Management segment was
certified by vendors as being compliant. Regardless of the compliance
statements, all third party hardware and software will also be subjected to
testing to reconfirm its Year 2000 readiness.

Health Care Information Technology

The Health Care Information Technology Year 2000 project team is addressing
Year 2000 readiness of (i) the Health Care Information Technology's software
products licensed to customers; (ii) third party software vendor business
partners; and (iii) the segment's internal systems.

The Company's assessment indicates that, with a few exceptions, products
available for licensing and acquisition from the Health Care Information
Technology segment were, as of March 31, 1999, Year 2000 compliant. The
readiness effort has been conducted in the ordinary course of business
regarding the development and enhancement of such software pursuant to
software maintenance and support agreements.

Substantially all of the identified projects involving Health Care
Information Technology software products are at Phase 6 or higher.

The Health Care Information Technology segment continues to monitor
performance of Year 2000 compliant releases of Company software products in
customer environments, and any deployment of maintenance releases to remediate
any Year 2000 issues identified during and after deployment of Year 2000
releases of Company software products will be done in the ordinary course of
business.

The Health Care Information Technology project team is making ongoing
inquiries with respect to the Year 2000 readiness of its software vendor
business partners. While the Company's current assessment does not suggest it,
there can be no guarantee that the failure of these third parties to modify
their systems in advance of December 31, 1999 would not have a material
adverse effect on the Company.

The Health Care Information Technology project team has substantially
completed its assessment efforts with respect to internal systems except for
certain remote locations. The Company expects that remediation efforts with
respect to all of the Health Care Information Technology's material internal
systems will be completed by September 30, 1999, with the exception of the
foregoing remote locations, as to which the assessment is ongoing.

Costs

The Company incurred costs of approximately $14 million in fiscal 1999 and
$7 million in fiscal 1998, associated with modifications to the Company's
existing systems to make them Year 2000 ready, related testing and outside
consulting. The Company expects to incur costs of between $10 million and $20
million in fiscal

F-26

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

2000 for a total project cost of less than $45 million. Such costs are being
expensed as incurred. The costs associated with creating Year 2000-compliant
versions of the Health Care Information Technology segment's software products
have not been separately tracked, as the underlying activities were performed
in the ordinary course of the segment's business. Year 2000 Project costs are
difficult to estimate accurately and the project cost could change due to
unanticipated technological difficulties, project vendor delays, project
vendor cost overruns and the degree to which systems of newly acquired
businesses are compliant.

Risks

Because of the range of possible issues and the large number of variables
involved (including the Year 2000 readiness of any entities acquired by the
Company), it is impossible to quantify the potential cost of problems should
the Company's remediation efforts or the efforts of those with whom it does
business not be successful. Such costs and any failure of such remediation
efforts could result in a loss of business, damage to the Company's
reputation, and legal liability. Consequently, any such costs or failures
could have a material adverse effect on the Company.

The Health Care Information Technology segment may experience an increase in
warranty claims relating to (i) malfunctions in Company products which have
not been upgraded, either because the Company has discontinued support for
such products and has therefore not provided the necessary enhancement or
because the customer has not installed an enhancement made available by the
Company or (ii) malfunctions resulting from Year 2000 problems in third-party
hardware or software used in connection with the operation of Company software
products. Although such warranty claims are generally subject to contractual
liability limitations, the Company is not able to accurately assess or
estimate the possible impact of such claims.

Finally, management believes that the costs of work by customers related to
Year 2000 issues have caused some Health Care Information Technology customers
and prospective customers to defer current projects or prospective decisions
regarding the acquisition of new software.

The Company believes that the most likely risks of serious Year 2000
business disruptions are external in nature, such as (i) disruptions in
telecommunications, electric, or transportation services, (ii) failure of
third party payors or insurers to provide timely reimbursement to the
Company's customers and (iii) noncompliance of smaller trading partners. Of
all the external risks, the Company believes the most reasonably likely worst
case scenario would be a business disruption resulting from an extended and/or
extensive communications failure. With its extensive use of technology, the
Company is now dependent on data and voice communications to receive, process,
track and bill customers orders, move funds, replenish product and complete
other activities critical to the Company's business. Based on the Company's
information regarding the readiness of its major communications carriers and
the redundancy built into the Company's network architecture, as well as the
Company's developing contingency plans, the Company expects that any such
disruption would be likely to be localized and of short duration, and would
therefore not be likely to have a material adverse effect on the Company.

Contingency Plans

Business disruptions in the form of floods, blizzards, hurricanes,
earthquakes, and power failures are a normal part of the Company's contingency
planning. In an effort to reduce the risks associated with the Year 2000
problems, the Company has established and is currently continuing to develop
Year 2000 contingency plans that build upon existing disaster recovery and
contingency plans. Examples of the Company's existing contingency plans
include alternative electronic and manual means for placing and receiving
orders, and alternative power supplies and communication lines.

F-27

McKESSON HBOC, INC.

FINANCIAL REVIEW--(Continued)

The Company's contingency planning methodology attempts to identify,
explore, and document every potential failure point, internal and external in
each of the Company's businesses. Failure points are then prioritized based on
likelihood and criticality. Contingency plans are then developed for each of
the potential failure points deemed likely and/or critical. Included in the
Company's contingency plan are preparations that need to be completed
currently (such as printing special forms to be used in the event operations
shift into contingency mode, identifying the triggers for shifting into
contingency mode, and appointing and training resource response teams),
identification of alternate processes to be used in the event of
contingencies, as well as design of the process for exiting contingency mode.

Contingency planning for possible Year 2000 disruptions will continue to be
defined, improved, and implemented.

NEW ACCOUNTING PRONOUNCEMENTS

See Financial Note 2 "Significant Accounting Policies" on pages F-37 to F-40
of the accompanying consolidated financial statements.

F-28

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, 1999, 1998, and
1997, and the related statements of consolidated income, consolidated
stockholders' equity and consolidated 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. The consolidated financial
statements and supplementary consolidated financial statement schedule give
retroactive effect to the merger of McKesson Corporation and subsidiaries and
HBO & Company and subsidiaries ("HBOC") on January 12, 1999, which has been
accounted for as a pooling of interests as described in Note 1 to the
consolidated financial statements. We did not audit the consolidated financial
statements or supplementary consolidated financial statement schedule of HBOC
as of and for the years ended March 31, 1998 and 1997, which statements
reflect total assets of $1,698.9 million and $1,264.9 million as of March 31,
1998 and 1997, respectively, revenues of $1,429.2 and $1,129.4 million, and
net income of $151.1 million and $77.0 million for the years ended March 31,
1998 and 1997, respectively. Those consolidated statements and supplementary
consolidated financial statement schedule were audited by other auditors whose
report (which expresses an unqualified opinion and includes an explanatory
paragraph related to certain shareholder litigation) has been furnished to us,
and our opinion, insofar as it relates to the amounts included for HBOC as of
and for the years ended March 31, 1998 and 1997, is based solely on the report
of such other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company at March 31, 1999,
1998, and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the report of other auditors,
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 19 to the consolidated financial statements,
the Company is involved in certain shareholder litigation related to HBOC.

Deloitte & Touche LLP
San Francisco, California
July 12, 1999

F-29

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To McKesson HBOC, Inc.:

We have audited the consolidated balance sheets of HBO & COMPANY (a Delaware
corporation and a wholly-owned subsidiary of McKesson HBOC, Inc.) AND
SUBSIDIARIES as of March 31, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity, and cash flows (not presented
herein) for the years then ended. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HBO & Company and
subsidiaries as of March 31, 1998 and 1997 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule, valuation
and qualifying accounts (not presented herein), is presented to comply with
the Securities and Exchange Commission rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

As discussed in Note 10 to the consolidated financial statements, McKesson
HBOC, Inc. is involved in certain shareholder litigation related to the
Company.

Arthur Andersen LLP

Atlanta, Georgia
July 12, 1999

F-30

McKESSON HBOC, INC.

STATEMENTS OF CONSOLIDATED INCOME

Years Ended March 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(in millions except per share amounts)

Revenues (Note 2).................... $ 30,382.3 $ 22,419.3 $ 16,914.3
------------ ------------ ------------
Costs and Expenses (Note 5)
Cost of sales...................... 27,716.7 20,025.9 15,203.3
Selling............................ 506.2 463.0 315.9
Distribution....................... 626.5 485.2 362.1
Research & development............. 114.7 112.5 103.0
Administrative..................... 1,086.0 717.4 697.8
Interest........................... 124.0 108.9 61.0
------------ ------------ ------------
Total............................ 30,174.1 21,912.9 16,743.1
------------ ------------ ------------
Income from Continuing Operations
Before Taxes on Income and Dividends
on Preferred Securities of
Subsidiary Trust.................... 208.2 506.4 171.2
Income taxes (Note 16)............... 117.1 195.6 87.2
------------ ------------ ------------
Income from Continuing Operations
Before Dividends on Preferred
Securities of Subsidiary Trust...... 91.1 310.8 84.0
Dividends on preferred securities of
subsidiary trust, net of tax benefit
of $4.1, $4.4 and $0.4 (Note 12).... (6.2) (6.2) (0.7)
------------ ------------ ------------
Income After Taxes
Continuing operations.............. 84.9 304.6 83.3
Discontinued operations (Notes 4
and 10)........................... -- -- 8.6
Discontinued operations (Notes 4
and 10)--Gain on sale of Armor All
stock............................. -- -- 120.2
------------ ------------ ------------
Net Income........................... $ 84.9 $ 304.6 $ 212.1
============ ============ ============
Earnings Per Common Share
Diluted
Continuing operations.............. $ 0.31 $ 1.10 $ 0.32
Discontinued operations............ -- -- 0.03
Discontinued operations--Gain on
sale of Armor All stock........... -- -- 0.45
------------ ------------ ------------
Total............................ $ 0.31 $ 1.10 $ 0.80
============ ============ ============
Basic
Continuing operations.............. $ 0.31 $ 1.14 $ 0.33
Discontinued operations............ -- -- 0.03
Discontinued operations--Gain on
sale of Armor All stock........... -- -- 0.47
------------ ------------ ------------
Total............................ $ 0.31 $ 1.14 $ 0.83
============ ============ ============
Shares on Which Earnings Per Common
Share Were Based
Diluted............................ 289.8 282.1 265.2
Basic.............................. 275.2 266.2 253.9

See Financial Notes.

F-31

McKESSON HBOC, INC.

CONSOLIDATED BALANCE SHEETS

March 31
----------------------------------
1999 1998 1997
---------- ---------- ----------
(in millions except par value)

Assets
Cash and cash equivalents (Note 2)........ $ 240.8 $ 566.3 $ 434.5
Marketable securities available for sale
(Note 2)................................. 28.2 117.1 165.6
Receivables (Note 7)...................... 2,583.7 1,960.0 1,612.2
Inventories (Note 8)...................... 3,529.0 2,608.7 2,277.5
Prepaid expenses (Note 16)................ 117.8 105.0 122.8
---------- ---------- ----------
Total current assets.................... 6,499.5 5,357.1 4,612.6
---------- ---------- ----------
Property, plant and equipment, net (Note
9)....................................... 694.0 593.1 489.3
Capitalized software...................... 106.9 77.2 70.3
Notes receivable.......................... 73.4 34.5 29.1
Goodwill and other intangibles............ 1,228.4 973.8 934.1
Other assets (Notes 16 and 17)............ 479.4 314.0 337.9
---------- ---------- ----------
Total assets............................ $ 9,081.6 $ 7,349.7 $ 6,473.3
========== ========== ==========
Liabilities
Drafts payable............................ $ 425.5 $ 287.1 $ 211.0
Accounts payable--trade................... 3,154.2 1,919.7 1,914.3
Deferred revenue.......................... 408.6 282.1 201.2
Short-term borrowings..................... 16.7 93.8 125.4
Current portion of long-term debt (Note
11)...................................... 195.3 18.4 67.6
Salaries and wages........................ 101.2 100.1 88.9
Taxes (Note 16)........................... 95.2 43.4 55.5
Interest and dividends.................... 34.7 30.1 21.3
Other..................................... 368.7 352.3 393.1
---------- ---------- ----------
Total current liabilities............... 4,800.1 3,127.0 3,078.3
---------- ---------- ----------
Postretirement obligations and other
noncurrent liabilities (Note 17).......... 258.6 242.0 264.3
Long-term debt (Note 11)................... 945.5 1,223.6 854.1
McKesson HBOC-obligated mandatorily
redeemable convertible preferred
securities of subsidiary grantor trust
whose sole assets are junior subordinated
convertible debentures of McKesson HBOC
(Note 12)................................. 195.6 195.4 194.8
Other Commitments and Contingent
Liabilities (Note 19).....................
Stockholders' Equity
Common stock (400.0 shares authorized,
281.1, 271.2 and 260.2 issued as of March
31, 1999, 1998 and 1997, respectively; par
value of $.01) (Note 15).................. 2.8 2.7 2.6
Additional paid-in capital................. 1,725.7 1,330.9 1,081.0
Other ..................................... (107.7) (59.1) (23.5)
Retained earnings.......................... 1,465.0 1,462.5 1,219.2
Accumulated other comprehensive loss....... (57.7) (54.9) (50.9)
ESOP notes and guarantees (Note 17)........ (115.5) (115.6) (118.3)
Treasury shares, at cost (Note 15)......... (30.8) (4.8) (28.3)
---------- ---------- ----------
Stockholders' equity...................... 2,881.8 2,561.7 2,081.8
---------- ---------- ----------
Total liabilities and stockholders'
equity................................. $ 9,081.6 $ 7,349.7 $ 6,473.3
========== ========== ==========

See Financial Notes.

F-32

[This Page Intentionally Left Blank]

F-33

McKESSON HBOC, INC.

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

Years Ended March 31, 1999, 1998 and 1997
(shares in thousands, dollars in millions)

Common
Stock Additional
-------------- Paid-in
Shares Amount Capital
------- ------ ----------

Balances, March 31, 1996............................ 247,326 $2.5 $ 899.4
Issuance of shares under employee plans (Note 15)... 9,310 0.1 74.1
Purchase of shares..................................
ESOP note payments..................................
Translation adjustment..............................
Unrealized loss on marketable securities............
Additional minimum pension liability, net of tax of
$16.7 (Note 17)....................................
Public offering..................................... 1,879 24.5
Net income..........................................
Acquisitions........................................ 1,690 83.0
Other...............................................
Cash dividends declared (Note 15)...................
------- ---- --------
Balances, March 31, 1997............................ 260,205 2.6 1,081.0
Issuance of shares under employee plans (Note 15)... 10,957 0.1 249.0
ESOP note payments..................................
Translation adjustment..............................
Additional minimum pension liability, net of tax of
$(2.2) (Note 17)...................................
Net income..........................................
Other............................................... 0.9
Cash dividends declared (Note 15)
------- ---- --------
Balances, March 31, 1998............................ 271,162 2.7 1,330.9
Issuance of shares under employee plans (Note 15)... 7,454 0.1 288.3
ESOP note payments..................................
Translation adjustment..............................
Additional minimum pension liability, net of tax of
$(0.2) (Note 17)...................................
Net income..........................................
Sale of shares to Employee Stock Ownership Plan..... 1,346 105.2
Other .............................................. 1,161 1.3
Cash dividends declared (Note 15)...................
------- ---- --------
Balances, March 31, 1999............................ 281,123 $2.8 $1,725.7
======= ==== ========

See Financial Notes.

F-34

Accumulated Treasury
Other ESOP Notes ---------------
Retained Comprehensive and Common Stockholders' Comprehensive
Other Earnings Loss Guarantees Shares Amount Equity Income
----- -------- ------------- ---------- ------ ------- ------------- -------------

$ (15.8) $1,055.2 $(80.5) $(122.5) (1,204) $ (28.3) $1,710.0
(7.7) 2,868 66.0 132.5
(6,780) (155.7) (155.7)
4.2 4.2
5.1 5.1 $ 5.1
(1.1) (1.1) (1.1)
25.6 25.6 25.6
24.5
212.1 212.1 212.1
3,892 89.7 172.7
4.0 4.0
(52.1) (52.1)
------- -------- ------ ------- ------ ------- -------- ------
(23.5) 1,219.2 (50.9) (118.3) (1,224) (28.3) 2,081.8 $241.7
======
(35.6) 1,045 23.5 237.0
2.7 2.7
(0.6) (0.6) (0.6)
(3.4) (3.4) (3.4)
304.6 304.6 304.6
0.7 1.6
(62.0) (62.0)
------- -------- ------ ------- ------ ------- -------- ------
(59.1) 1,462.5 (54.9) (115.6) (179) (4.8) 2,561.7 $300.6
======
(48.6) (360) (26.0) 213.8
0.1 0.1
(2.5) (2.5) (2.5)
(0.3) (0.3) (0.3)
84.9 84.9 84.9
105.2
2.5 3.8
(84.9) (84.9)
------- -------- ------ ------- ------ ------- -------- ------
$(107.7) $1,465.0 $(57.7) $(115.5) (539) $ (30.8) $2,881.8 $ 82.1
======= ======== ====== ======= ====== ======= ======== ======

F-35

McKESSON HBOC, INC.

STATEMENTS OF CONSOLIDATED CASH FLOWS

Years Ended March 31
----------------------------
1999 1998 1997
-------- ------- ---------
(in millions)

Operating Activities
Income from continuing operations............... $ 84.9 $ 304.6 $ 83.3
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation.................................... 131.4 113.7 100.3
Amortization of intangibles and capitalized
software ...................................... 67.9 56.3 41.0
Provision for bad debts......................... 87.3 17.0 28.5
Deferred taxes on income........................ (31.9) 45.3 (29.2)
Other non-cash (Note 5)......................... 314.2 133.5 193.2
-------- ------- ---------
Total......................................... 653.8 670.4 417.1
-------- ------- ---------
Effects of changes in:
Receivables..................................... (688.6) (233.1) (255.8)
Inventories..................................... (895.5) (296.1) (335.1)
Accounts and drafts payable..................... 1,277.1 53.3 550.8
Taxes........................................... (45.8) 100.2 0.5
Deferred revenue................................ 126.5 80.9 100.4
Other........................................... (112.0) (92.5) (59.3)
-------- ------- ---------
Total......................................... (338.3) (387.3) 1.5
-------- ------- ---------
Net cash provided by continuing operations.... 315.5 283.1 418.6
Discontinued operations (Notes 4 and 10)........ 1.6 (2.4) 11.5
-------- ------- ---------
Net cash provided by operating activities..... 317.1 280.7 430.1
-------- ------- ---------
Investing Activities
Purchases of marketable securities.............. (27.9) (118.3) (274.2)
Maturities of marketable securities............. 117.9 183.9 344.4
Property acquisitions........................... (250.7) (219.1) (128.0)
Properties sold................................. 29.0 21.3 7.2
Proceeds from sales of subsidiaries and
investments (Note 4)........................... 3.2 1.8 300.8
Notes receivable issuances, net................. -- (13.8) --
Acquisitions of businesses, less cash and short-
term investments acquired (Note 4)............. (302.7) (177.9) (1,226.9)
Other........................................... (222.7) (132.6) (117.5)
-------- ------- ---------
Net cash used by investing activities......... (653.9) (454.7) (1,094.2)
-------- ------- ---------
Financing Activities (Notes 11, 12 and 15)
Proceeds from issuance of debt.................. 82.7 449.0 1,127.1
Proceeds from issuance of trust convertible
preferred securities, net of issuance costs.... -- -- 195.1
Repayment of debt............................... (200.6) (215.7) (555.1)
Dividends paid on convertible preferred
securities..................................... (10.0) (10.3) --
Capital stock transactions:
Issuances....................................... 224.9 149.0 79.7
Share repurchases............................... -- (1.2) (157.9)
ESOP note payments.............................. 0.1 2.6 4.2
Dividends paid.................................. (84.8) (59.5) (51.9)
Other........................................... (1.0) (8.1) (6.2)
-------- ------- ---------
Net cash provided by financing activities..... 11.3 305.8 635.0
-------- ------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents.................................... (325.5) 131.8 (29.1)
Cash and Cash Equivalents at beginning of year.. 566.3 434.5 463.6
-------- ------- ---------
Cash and Cash Equivalents at end of year........ $ 240.8 $ 566.3 $ 434.5
======== ======= =========

See Financial Notes.

F-36

McKESSON HBOC, INC.

FINANCIAL NOTES

1. HBOC Transaction

On January 12, 1999, McKesson Corporation ("McKesson") completed a merger
with 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 (the "HBOC
Transaction"). Each share of HBOC stock was exchanged for 0.37 of a share of
McKesson common stock. The merged company was renamed McKesson HBOC, Inc.
("McKessonHBOC" or the "Company"). The merger was structured as a tax-free
reorganization and was accounted for as a pooling of interests.

The historical financial statements give retroactive effect to the HBOC
Transaction and other acquisitions completed by McKesson and HBOC in fiscal
year 1999 accounted for under the pooling of interests method. Transaction
costs related to such acquisitions have been included in the Statements of
Consolidated Income. See Financial Note 4.

2. Significant Accounting Policies

The consolidated financial statements of 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 three operating segments, Health Care Supply
Management, Health Care Information Technology, and Water Products. 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, outsourcing and other services to health care
organizations throughout the United States and certain foreign countries. The
Water Products segment is engaged in the processing and sale of bottled
drinking water to homes and businesses and packaged water through retail
stores.

The preparation of financial statements in conformity with generally
accepted accounting principles 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. At March 31, 1999, the fair value approximated the amortized cost of
these securities. The investments mature on various dates through fiscal 2000.

Inventories are stated at the lower of cost or market. Inventories of the
Health Care Supply Management and Water Products segments 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.

F-37

MCKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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 45 years.

Capitalized Software primarily reflects costs of the Health Care Information
Technology segment to develop 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 $56.3 million, $41.8
million, and $33.7 million in fiscal 1999, 1998, and 1997, respectively.
Amortization of capitalized software costs totaled $25.9 million,
$21.3 million and $16.6 million in 1999, 1998, and 1997, respectively. Royalty
fees of $39.0 million, $32.1 million and $30.8 million, were expensed in 1999,
1998 and 1997, respectively, for software provided by third-party business
partners.

Capitalized software of the Health Care Supply Management and Water Products
segments, included in other assets, reflects costs related to internally
developed or purchased software for projects with costs in excess of $250,000
that are capitalized and amortized on a straight-line basis over periods not
exceeding seven years.

Goodwill and Other Intangibles are amortized on a straight-line basis over
periods estimated to be benefited, generally 3 to 40 years. Negative goodwill
arising from the acquisition of the FoxMeyer business is being amortized over
a five-year period (see Financial Note 4). Accumulated amortization balances
netted against goodwill and other intangibles were $175.1 million, $133.1
million, and $101.0 million at March 31, 1999, 1998 and 1997, respectively.

Long-lived Assets. The Company periodically assesses the recoverability of
the cost of its long-lived assets, including goodwill, based on a review of
projected undiscounted cash flows associated with these assets. These cash
flows are prepared and reviewed by management in connection with the Company's
annual long range planning process. See Financial Note 5 for charges the
Company has recorded related to impairment of assets.

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 and Water
Products segments 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 $6.8 billion in 1999, $2.7 billion in 1998 and $2.8 billion in 1997.

On April 1, 1998, the Company adopted Statement of Position (SOP) 97-2,
"Software Revenue Recognition". Previously the Company utilized SOP 91-1,
"Software Revenue Recognition". Revenues of the Health Care Information
Technology segment include systems and services revenues. Information systems
are marketed under equipment purchase and software license agreements as well
as service agreements. One-time software and hardware revenue is generally
recognized when the Company ensures that there is persuasive evidence that an
arrangement exists, the fee is fixed and determinable, collectibility is
probable and the software

F-38

MCKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

or hardware, as applicable, has been shipped. The Company's contracts
generally allow separate accounting treatment for the systems and services
components of the agreement. The Company also licenses software using
multiyear agreements under which revenue is recognized on a subscription basis
over the term of the agreement. Implementation fees and outsourcing services
are recognized as the work is performed. Revenue from software maintenance
contracts sold together with licenses is deferred when the license agreement
is executed and recognized ratably over the contract term. Maintenance and
support agreements sold separately are marketed under annual and multiyear
agreements and are recognized ratably over the period covered by the
agreements. Electronic commerce and remote processing services are recognized
monthly as the work is performed.

Also included in revenues is interest income of $37.9 million, $37.6
million, and $28.6 million in fiscal 1999, 1998 and 1997, respectively.

Income Taxes. The Company accounts for income taxes under the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes". See Financial Note 16.

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.

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". See
Financial Note 15 for the disclosures of pro forma earnings and earnings per
share had the fair value method been used to account for stock-based employee
compensation plans in accordance with SFAS No. 123, "Accounting for Stock-
Based Compensation".

New Accounting Pronouncements. In fiscal year 1999, the Company adopted SFAS
No. 130 "Reporting Comprehensive Income", SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information" and SFAS No. 132
"Employers' Disclosures about Pension and Other Postretirement Benefits".

SFAS No. 130 requires an enterprise report, by major components and as a
single total, the change in its net assets, during the period from non-owner
sources. The components of comprehensive income are shown in the Statements of
Consolidated Stockholders' Equity.

SFAS No. 131 changes the way companies report segment information and
requires segments to be determined and reported based on how management
measures performance and makes decisions about allocating resources. See
Financial Note 18.

FAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. This Statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional

F-39

MCKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

information on changes in the benefit obligation and fair values of plan
assets that will facilitate financial analysis and eliminates certain
disclosures. Restatement of disclosures as of and for the years ended March
31, 1998 and 1997 has been made for comparative purposes. See Financial Note
17.

In 1998, the Financial Accounting Standards Board ("FASB") issued 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. SFAS No. 133 is expected to be effective for the
Company's fiscal year 2002. The Company is currently evaluating what impact,
if any, SFAS No. 133 may have on its consolidated financial statements.

3. Restatement

In April 1999, the Company discovered improper accounting practices (see
Financial Note 19) at HBOC. The Audit Committee of the Company's Board of
Directors initiated an investigation into such matters. As a result of the
findings of the investigation, the Company's consolidated financial statements
reflect amounts for HBOC (pre-merger) that are restated from those previously
reported by HBOC (pre-merger) in its fiscal 1999 quarterly results and annual
results for fiscal 1998 and 1997. Statements of income for the three-month
period and year ended March 31, 1999, and the balance sheet at March 31, 1999,
are not presented because the HBOC Transaction occurred on January 12, 1999,
therefore, HBOC had not previously reported its results for these periods.
Management has made all adjustments considered necessary as a result of the
investigations into these improper accounting practices.

In addition, the Company's consolidated financial statements give
retroactive effect to the HBOC Transaction and other acquisitions completed by
McKesson and HBOC in fiscal 1999 accounted for under the pooling of interests
method.

The following statements of income and balance sheets reconcile previously
reported and restated financial information. The unaudited statements of
income for the three-month periods ended June 30, 1998, September 30, 1998,
and December 31, 1998, include all adjustments necessary for a fair
presentation of the results of operations for such periods.

F-40

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Statement of Income
--------------------------------------------------------------------------------------------------
Year Ended March 31, 1998
--------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
Contingent
HBO as Improper Revenues Effect of McKesson as Effect of McKesson
Previously Application Improperly Pooling HBOC as Previously Pooling HBOC as
Reported(1) of SOP 91-1 Recognized Other Transactions Restated Reported Transactions Restated
----------- ----------- ---------- ----- ------------ -------- ----------- ------------ ---------

Revenues............. $1,303.9 $(39.7) $(19.0) $ 1.6 $206.9 $1,453.7 $20,857.3 $108.3 $22,419.3
Costs and Expenses
Cost of sales....... 545.9 (5.6) 1.4 1.5 92.5 635.7 19,336.0 54.2 20,025.9
Selling,
distribution and
administration..... 471.2 (0.2) (0.3) 3.3 92.6 566.6 1,159.1 52.4 1,778.1
Interest............ 3.6 -- -- -- -- 3.6 102.5 2.8 108.9
-------- ------ ------ ----- ------ -------- --------- ------ ---------
Total............... 1,020.7 (5.8) 1.1 4.8 185.1 1,205.9 20,597.6 109.4 21,912.9
-------- ------ ------ ----- ------ -------- --------- ------ ---------
Income (Loss) Before
Income Taxes and
Dividends on
Preferred Securities
of Subsidiary
Trust............... 283.2 (33.9) (20.1) (3.2) 21.8 247.8 259.7 (1.1) 506.4
Income taxes......... 113.2 (13.6) (8.0) (1.3) 6.3 96.6 98.6 0.4 195.6
Dividends on
preferred securities
of subsidiary
trust............... -- -- -- -- -- -- (6.2) -- (6.2)
-------- ------ ------ ----- ------ -------- --------- ------ ---------
Net Income (Loss).... $ 170.0 $(20.3) $(12.1) $(1.9) $ 15.5 $ 151.2 $ 154.9 $ (1.5) $ 304.6
======== ====== ====== ===== ====== ======== ========= ====== =========
Earnings (Loss) per
Common Share
Diluted............. $ 0.39 $ 1.59 $ 1.10
Basic............... 0.40 1.69 1.14
Shares on Which
Earnings Per Common
Share Were Based
Diluted............. 434.0 101.2 282.1
Basic............... 420.6 91.5 266.2

- ------
(1) Recast to a March 31 year end.

F-41

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Statement of Income
--------------------------------------------------------------------------------------------------
Year Ended March 31, 1997
--------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
Contingent
HBOC as Improper Revenues Effect of McKesson as Effect of McKesson
Previously Application Improperly Pooling HBOC as Previously Pooling HBOC as
Reported(1) of SOP 91-1 Recognized Other Transactions Restated Reported Transactions Restated
----------- ----------- ---------- ----- ------------ -------- ----------- ------------ ---------

Revenues............ $1,021.8 $(21.1) $(20.0) $(0.2) $163.1 $1,143.6 $15,710.8 $59.9 $16,914.3
Costs and Expenses
Cost of sales...... 436.7 (1.1) (1.4) 0.3 71.5 506.0 14,673.5 23.8 15,203.3
Selling,
distribution and
administration.... 420.3 -- (1.8) (2.5) 85.5 501.5 944.5 32.8 1,478.8
Interest........... 3.2 -- -- -- -- 3.2 55.7 2.1 61.0
-------- ------ ------ ----- ------ -------- --------- ----- ---------
Total............. 860.2 (1.1) (3.2) (2.2) 157.0 1,010.7 15,673.7 58.7 16,743.1
-------- ------ ------ ----- ------ -------- --------- ----- ---------
Income (Loss) Before
Income Taxes and
Dividends on
Preferred
Securities of
Subsidiary Trust... 161.6 (20.0) (16.8) 2.0 6.1 132.9 37.1 1.2 171.2
Income taxes........ 64.5 (8.0) (6.7) 0.8 5.3 55.9 31.3 -- 87.2
Dividends on
preferred
securities of
subsidiary trust... -- -- -- -- -- -- (0.7) -- (0.7)
-------- ------ ------ ----- ------ -------- --------- ----- ---------
Income (Loss) After
Taxes
Continuing
Operations......... 97.1 (12.0) (10.1) 1.2 0.8 77.0 5.1 1.2 83.3
Discontinued
Operations......... -- -- -- -- -- -- 8.6 -- 8.6
Discontinued
Operations--Gain on
Sale of Armor All
Stock.............. -- -- -- -- -- -- 120.2 -- 120.2
-------- ------ ------ ----- ------ -------- --------- ----- ---------
Net Income (Loss)... $ 97.1 $(12.0) $(10.1) $ 1.2 $ 0.8 $ 77.0 $ 133.9 $ 1.2 $ 212.1
======== ====== ====== ===== ====== ======== ========= ===== =========
Earnings (Loss) per
Common Share
Diluted
Continuing
operations........ $ 0.23 $ 0.06 $ 0.32
Discontinued
operations........ -- 0.10 0.03
Discontinued
operations--Gain
on Sale of Armor
All Stock ........ -- 1.35 0.45
-------- --------- ---------
Total.............. $ 0.23 $ 1.51 $ 0.80
======== ========= =========
Basic
Continuing
operations $ 0.24 $ 0.06 $ 0.33
Discontinued
operations........ -- 0.10 0.03
Discontinued
operations--Gain
on sale of Armor
All Stock......... -- 1.41 0.47
-------- --------- ---------
Total.............. $ 0.24 $ 1.57 $ 0.83
======== ========= =========
Shares on Which
Earnings Per Common
Share Were Based
Diluted............ 424.5 89.4 265.2
Basic.............. 408.1 85.5 253.9

- ------
(1) Recast to a March 31 year end.

F-42

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Statement of Income
-----------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1998 (unaudited)
-----------------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
Contingent
HBOC as Improper Revenues Effect of McKesson as Effect of McKesson
Previously Application Improperly Backdated Pooling HBOC as Previously Pooling HBOC as
Reported of SOP 97-2 Recognized Contracts Other Transactions Restated Reported Transactions Restated
---------- ----------- ---------- --------- ------ ------------ -------- ----------- ------------ --------

Revenues.......... $382.8 $(25.8) $(32.6) $(4.7) $ (5.5) $62.3 $376.5 $5,870.9 $35.9 $6,283.3
Costs and Expenses
Cost of sales.... 155.1 -- -- -- (0.1) 28.8 183.8 5,468.6 18.0 5,670.4
Selling,
distribution and
administration.. 99.6 1.7 (4.9) -- 21.8 28.8 147.0 302.2 16.0 465.2
Interest......... 2.1 -- -- -- -- -- 2.1 28.0 0.8 30.9
------ ------ ------ ----- ------ ----- ------ -------- ----- --------
Total........... 256.8 1.7 (4.9) -- 21.7 57.6 332.9 5,798.8 34.8 6,166.5
------ ------ ------ ----- ------ ----- ------ -------- ----- --------
Income Before
Income Taxes and
Dividends on
Preferred
Securities of
Subsidiary
Trust............ 126.0 (27.5) (27.7) (4.7) (27.2) 4.7 43.6 72.1 1.1 116.8
Income taxes...... 50.4 (11.0) (11.1) (1.9) (11.0) 1.8 17.2 28.4 0.5 46.1
Dividends on
preferred
securities of
subsidiary
trust............ -- -- -- -- -- -- -- (1.6) -- (1.6)
------ ------ ------ ----- ------ ----- ------ -------- ----- --------
Net Income........ $ 75.6 $(16.5) $(16.6) $(2.8) $(16.2) $ 2.9 $ 26.4 $ 42.1 $ 0.6 $ 69.1
====== ====== ====== ===== ====== ===== ====== ======== ===== ========
Earnings per
Common Share
Diluted.......... $ 0.17 $ 0.43 $ 0.25
Basic............ 0.18 0.45 0.25
Shares on Which
Earnings Per
Common Share Were
Based
Diluted.......... 441.9 103.5 288.4
Basic............ 430.0 92.9 272.4

F-43

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Statement of Income
-----------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998 (unaudited)
-----------------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
Contingent
HBOC as Improper Revenues Effect of McKesson as Effect of McKesson
Previously Application Improperly Backdated Pooling HBOC as Previously Pooling HBOC as
Reported of SOP 97-2 Recognized Contracts Other Transactions Restated Reported Transactions Restated
---------- ----------- ---------- --------- ------ ------------ -------- ----------- ------------ --------

Revenues........... $406.1 $(20.8) $(22.9) $2.4 $(27.8) $55.8 $392.8 $6,941.5 $3.0 $7,337.3
Costs and Expenses
Cost of sales..... 161.3 0.6 (2.2) -- 2.8 28.7 191.2 6,512.8 0.4 6,704.4
Selling,
distribution and
administration... 105.1 0.7 (3.4) -- 44.3 24.7 171.4 381.9 2.4 555.7
Interest.......... 0.2 -- -- -- 0.1 -- 0.3 29.4 0.2 29.9
------ ------ ------ ---- ------ ----- ------ -------- ---- --------
Total........... 266.6 1.3 (5.6) -- 47.2 53.4 362.9 6,924.1 3.0 7,290.0
------ ------ ------ ---- ------ ----- ------ -------- ---- --------
Income (Loss)
Before Income
Taxes and
Dividends on
Preferred
Securities of
Subsidiary Trust.. 139.5 (22.1) (17.3) 2.4 (75.0) 2.4 29.9 17.4 -- 47.3
Income taxes....... 55.8 (8.9) (6.9) 1.0 (30.0) 2.0 13.0 6.5 -- 19.5
Dividends on
preferred
securities of
subsidiary trust.. -- -- -- -- -- -- -- (1.5) -- (1.5)
------ ------ ------ ---- ------ ----- ------ -------- ---- --------
Net Income......... $ 83.7 $(13.2) $(10.4) $1.4 $(45.0) $ 0.4 $ 16.9 $ 9.4 $-- $ 26.3
====== ====== ====== ==== ====== ===== ====== ======== ==== ========
Earnings per Common
Share
Diluted........... $ 0.19 $ 0.10 $ 0.10
Basic............. 0.19 0.10 0.10
Shares on Which
Earnings Per
Common Share Were
Based.............
Diluted........... 441.8 108.8 289.9
Basic............. 431.1 98.1 274.6

F-44

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Statement of Income
----------------------------------------------------------------------------------------------------------
Three Months Ended December 31, 1998 (unaudited)
----------------------------------------------------------------------------------------------------------
(in millions, except per share amounts)
Contingent
HBOC as Improper Revenues Effect of McKesson as Effect of McKesson
Previously Application Improperly Backdated Pooling HBOC as Previously Pooling HBOC as
Reported of SOP 97-2 Recognized Contracts Other Transactions Restated Reported Transactions Restated
---------- ----------- ---------- --------- ----- ------------ -------- ----------- ------------ --------

Revenues.......... $475.8 $(33.7) $(48.8) $(2.8) $(2.7) $-- $387.8 $7,978.8 $-- $8,366.6
Costs and Expenses
Cost of sales.... 199.3 0.7 (3.0) -- (6.8) -- 190.2 7,505.8 -- 7,696.0
Selling,
distribution and
administration.. 171.3 (0.1) (7.2) -- 13.5 -- 177.5 371.2 -- 548.7
Interest......... 0.5 -- -- -- -- -- 0.5 32.4 -- 32.9
------ ------ ------ ----- ----- ---- ------ -------- ---- --------
Total........... 371.1 0.6 (10.2) -- 6.7 -- 368.2 7,909.4 -- 8,277.6
------ ------ ------ ----- ----- ---- ------ -------- ---- --------
Income (Loss)
Before Income
Taxes and
Dividends on
Preferred
Securities of
Subsidiary
Trust............ 104.7 (34.3) (38.6) (2.8) (9.4) -- 19.6 69.4 -- 89.0
Income taxes...... 45.1 (13.7) (15.4) (1.1) (3.8) -- 11.1 25.7 -- 36.8
Dividends on
preferred
securities of
subsidiary
trust............ -- -- -- -- -- -- -- (1.5) -- (1.5)
------ ------ ------ ----- ----- ---- ------ -------- ---- --------
Net Income........ $ 59.6 $(20.6) $(23.2) $(1.7) $(5.6) $-- $ 8.5 $ 42.2 $-- $ 50.7
====== ====== ====== ===== ===== ==== ====== ======== ==== ========
Earnings per
Common Share
Diluted.......... $ 0.40 $ 0.18
Basic............ 0.43 0.18
Shares on Which
Earnings Per
Common Share Were
Based
Diluted.......... 109.1 289.7
Basic............ 98.6 275.2

F-45

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Balance Sheet
-----------------------------------------------------------------------------------------------
March 31, 1998
-----------------------------------------------------------------------------------------------
(in millions)
HBOC as Effect of Improper McKesson as Effect of McKesson
Previously Pooling Accounting HBOC as Previously Pooling Other HBOC as
Reported Transactions Practices Restated Reported Transactions Reclassifications Restated
---------- ------------ ---------- -------- ----------- ------------ ----------------- --------

Assets
Cash and cash
equivalents............ $ 467.9 $ 57.8 $ -- $ 525.7 $ 35.7 $ 4.9 $ -- $ 566.3
Marketable securities
available for sale..... 5.0 34.2 -- 39.2 77.9 -- -- 117.1
Receivables............. 454.1 58.5 48.1 560.7 1,380.4 19.3 (0.4) 1,960.0
Inventories............. 7.9 4.0 4.3 16.2 2,583.5 9.0 -- 2,608.7
Prepaid expenses........ 48.4 17.8 25.7 91.9 28.1 1.6 (16.6) 105.0
-------- ------ ------ -------- -------- ------ ------ --------
Total current
assets.............. 983.3 172.3 78.1 1,233.7 4,105.6 34.8 (17.0) 5,357.1
-------- ------ ------ -------- -------- ------ ------ --------
Property, plant and
equipment, net......... 96.8 26.7 -- 123.5 430.3 39.3 -- 593.1
Capitalized software.... 72.9 4.3 -- 77.2 -- -- -- 77.2
Notes receivable........ -- -- -- -- -- -- 34.5 34.5
Goodwill and other
intangibles............ 165.9 22.6 -- 188.5 752.4 32.9 -- 973.8
Other assets............ 49.3 15.7 11.0 76.0 319.2 3.2 (84.4) 314.0
-------- ------ ------ -------- -------- ------ ------ --------
Total assets......... $1,368.2 $241.6 $ 89.1 $1,698.9 $5,607.5 $110.2 $(66.9) $7,349.7
======== ====== ====== ======== ======== ====== ====== ========
Liabilities
Deferred revenue........ $ 166.0 $ 16.7 $ 99.4 $ 282.1 $ -- $ -- $ -- $ 282.1
Other current
liabilities............ 179.8 32.7 85.8 298.3 2,577.8 23.5 (54.7) 2,844.9
-------- ------ ------ -------- -------- ------ ------ --------
Total current
liabilities......... 345.8 49.4 185.2 580.4 2,577.8 23.5 (54.7) 3,127.0
-------- ------ ------ -------- -------- ------ ------ --------
Postretirement
obligations and other
noncurrent
liabilities............ 7.6 0.1 -- 7.7 233.3 2.9 (1.9) 242.0
Long-term debt.......... 0.9 0.2 -- 1.1 1,194.2 28.3 -- 1,223.6
McKessonHBOC-obligated
mandatorily redeemable
preferred securities of
subsidiary grantor
trust whose sole assets
are junior subordinated
debentures of
McKessonHBOC........... -- -- -- -- 195.4 -- -- 195.4
Stockholders' Equity
Total stockholders'
equity.............. 1,013.9 191.9 (96.1) 1,109.7 1,406.8 55.5 (10.3) 2,561.7
-------- ------ ------ -------- -------- ------ ------ --------
Total liabilities and
stockholders'
equity.............. $1,368.2 $241.6 $ 89.1 $1,698.9 $5,607.5 $110.2 $(66.9) $7,349.7
======== ====== ====== ======== ======== ====== ====== ========

F-46

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Balance Sheet
-------------------------------------------------------------------------------------------------------
March 31, 1997
-------------------------------------------------------------------------------------------------------
HBOC as Effect of Improper McKesson as Effect of McKesson
Previously Pooling Accounting HBOC as Previously Pooling Other HBOC as
Reported Transactions Practices Restated Reported Transactions Reclassifications Restated
---------- ------------ ---------- -------- ----------- ------------ ----------------- --------
(in millions)

Assets
Cash and cash
equivalents..... $ 249.3 $ 59.4 $ -- $ 308.7 $ 124.8 $ 1.0 $ -- $ 434.5
Marketable
securities
available for
sale............ 37.7 22.9 -- 60.6 105.0 -- -- 165.6
Receivables...... 335.0 37.3 4.5 376.8 1,224.5 11.2 (0.3) 1,612.2
Inventories...... 10.1 3.4 -- 13.5 2,259.5 4.5 -- 2,277.5
Prepaid
expenses........ 45.5 6.5 13.7 65.7 47.3 1.4 8.4 122.8
-------- ------ ----- -------- -------- ----- ------ --------
Total current
assets......... 677.6 129.5 18.2 825.3 3,761.1 18.1 8.1 4,612.6
-------- ------ ----- -------- -------- ----- ------ --------
Property, plant
and equipment,
net............. 57.0 24.6 -- 81.6 373.6 34.1 -- 489.3
Capitalized
software........ 68.1 2.2 -- 70.3 -- -- -- 70.3
Notes
receivable...... -- -- -- -- -- -- 29.1 29.1
Goodwill and
other
intangibles..... 177.7 16.8 -- 194.5 736.2 3.4 -- 934.1
Other assets..... 60.3 24.2 8.7 93.2 301.9 1.6 (58.8) 337.9
-------- ------ ----- -------- -------- ----- ------ --------
Total assets.... $1,040.7 $197.3 $26.9 $1,264.9 $5,172.8 $57.2 $(21.6) $6,473.3
======== ====== ===== ======== ======== ===== ====== ========
Liabilities
Deferred
revenue......... $ 115.5 $ 12.7 $73.0 $ 201.2 $ -- $ -- $ -- $ 201.2
Other current
liabilities..... 200.1 24.4 14.2 238.7 2,637.2 11.2 (10.0) 2,877.1
-------- ------ ----- -------- -------- ----- ------ --------
Total current
liabilities.... 315.6 37.1 87.2 439.9 2,637.2 11.2 (10.0) 3,078.3
-------- ------ ----- -------- -------- ----- ------ --------
Postretirement
obligations and
other noncurrent
liabilities..... 8.1 -- -- 8.1 255.1 3.1 (2.0) 264.3
Long-term debt... 0.6 2.3 -- 2.9 824.9 26.3 -- 854.1
McKessonHBOC-
obligated
mandatorily
redeemable
preferred
securities of
subsidiary
grantor trust
whose sole
assets are
junior
subordinated
debentures of
McKessonHBOC.... -- -- -- -- 194.8 -- -- 194.8
Stockholders'
Equity
Total
stockholders'
equity......... 716.4 157.9 (60.3) 814.0 1,260.8 16.6 (9.6) 2,081.8
-------- ------ ----- -------- -------- ----- ------ --------
Total
liabilities and
stockholders'
equity......... $1,040.7 $197.3 $26.9 $1,264.9 $5,172.8 $57.2 $(21.6) $6,473.3
======== ====== ===== ======== ======== ===== ====== ========

F-47

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

HBOC As Previously Reported

Prior to its merger with McKesson, HBOC's fiscal year end was December 31.
HBOC's financial statements were recast to a March 31 year end. Accordingly,
the previously reported 1998 and 1997 HBOC calendar year first quarter net
income of $64.9 million and $38.4 million, respectively, have been added and
the 1997 and 1996 HBOC calendar year first quarter net income of $38.4 million
and $23.6 million, respectively, have been subtracted from the respective 1997
and 1996 HBOC calendar years to derive the previously reported HBOC financial
information for the twelve months ended March 31, 1998 and 1997. All share and
earnings per share amounts have been restated to reflect the fiscal 1999 two-
for-one stock split effected in the form of a stock dividend. In addition,
certain reclassifications have been made to conform to McKesson's financial
statement presentation. The twelve months ended March 31, 1998 and 1997 as
shown have not been previously presented in this format.

Improper Application of SOP 97-2 or SOP 91-1

These adjustments represent the net effects of the reversal or deferral of
software, hardware and services revenues (including related maintenance) and
other related items because the conditions required for revenue recognition by
SOP 97-2, or SOP 91-1, were not met at the time revenue was recognized. In
addition, the adjustments include the net deferral of software revenues
recognized under multiyear agreements that are required to be recognized over
the term of the contract.

Contingent Revenues Improperly Recognized

These adjustments represent the net effects of the reversal or deferral of
software, hardware and services revenues and other related items because the
sales were contingent upon a future event which had not occurred, such as
board approval, legal review or third party financing. In most cases these
contingencies were contained in side letters or other agreements outside of
the normal contract process.

Backdated Contracts

These adjustments represent the net effects of the reversal or deferral of
software, hardware and services revenues and other related items because the
customer contracts were determined to have been signed subsequent to quarter
end and backdated such that revenue was prematurely recognized. These
adjustments include the offsetting effect of revenues recognized under these
contracts in the periods the contracts were actually signed.

Other Adjustments to Statements of Income

These adjustments primarily include other revenue adjustments related to the
timing of recognition of customer credit memos and one nonmonetary transaction
in the quarter ended September 30, 1998 where the earnings process was not
complete, expense underaccruals (including commissions and bad debt
provisions), and the reversal of certain excess accruals recorded by HBOC in
conjunction with acquisitions.

Effect of Pooling Transactions

These adjustments include the results of operations and financial position
of acquired companies, other than the HBOC Transaction, for which the pooling
of interests method was utilized.

Adjustments to Balance Sheets

These adjustments represent the balance sheet impact of the adjustments
described above to the Statements of Income, and consist primarily of the
reversal of accounts receivable and deferred maintenance revenues related to
the revenue reversals and liability adjustments related to expense accruals.
Receivables which had been sold and removed from the balance sheet were
reinstated, along with the related obligation, because accounting requirements
for removal had not been met. In addition, certain reclassifications have been
made to conform to the Company's fiscal 1999 consolidated financial statement
presentation.

F-48

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

4. Acquisitions, Investments and Divestitures

Poolings of Interests:

In addition to the HBOC Transaction (see Financial Note 1), 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 approximately 9.6 million shares of HBOC
common stock and 1.6 million HBOC stock options (equivalent to approximately
3.6 million shares of Company common stock and 0.6 million Company stock
options after application of the Exchange Ratio).

Also in fiscal 1999, the Company's Water Products segment completed the
acquisitions of Ephrata Diamond Spring Water Company ("Ephrata Diamond") and
Keystone National Water Company ("Keystone") for an aggregate of approximately
0.5 million shares of Company common stock.

In June 1997, the Company completed the acquisition of AMISYS Managed Care
Systems, Inc. ("AMISYS"), a provider of information systems for managed care
entities and other parties that assume financial risk for healthcare
populations, for approximately 10.8 million shares of HBOC common stock
(equivalent to approximately 4.0 million shares of Company common stock after
application of the Exchange Ratio).

Also in June 1997, the Company completed the acquisition of Enterprise
Systems, Inc. ("ESi"), a developer of resource management solutions, for
approximately 15.2 million shares of HBOC common stock (equivalent to
approximately 5.6 million shares of Company common stock after application of
the Exchange Ratio).

In December 1997, the Company completed the acquisition of HPR, Inc.
("HPR"), a provider of clinical information systems for the managed care
industry, for approximately 18.4 million shares of HBOC common

F-49

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

stock (equivalent to approximately 6.8 million shares of Company common stock
after application of the Exchange Ratio).

Also in December 1997, the Company completed the acquisition of National
Health Enhancement Systems, Inc. ("NHES"), a provider of health care
information technology solutions specializing in demand and disease management
products for approximately 3.6 million shares of HBOC common stock (equivalent
to approximately 1.3 million shares of Company common stock after application
of the Exchange Ratio).

In August 1996, the Company completed the acquisition of CyCare Systems,
Inc. ("CyCare"), a provider of physician practice management software systems
and electronic commerce services for medical group practices, faculty practice
plans and medical enterprises, for approximately 17.6 million shares of HBOC
common stock (equivalent to approximately 6.5 million shares of Company common
stock after application of the Exchange Ratio).

In September 1996, the Company completed the acquisition of Management
Software Inc. ("MSI"), a provider of software solutions for the home care
industry, for approximately 3.4 million shares of HBOC common stock
(equivalent to approximately 1.3 million shares of Company common stock after
application of the Exchange Ratio).

In December 1996, the Company completed the acquisition of GMIS Inc., a
developer of data quality and decision support software for the payor
marketplace, for approximately 14.8 million shares of HBOC common stock
(equivalent to approximately 5.5 million shares of Company common stock after
application of the Exchange Ratio).

In connection with the acquisitions discussed above, which were accounted
for as pooling of interests, the Company incurred transaction costs, primarily
consisting of professional fees such as investment banking, legal and
accounting fees, of $84.9 million, $32.7 million and $17.2 million for the
years ended March 31, 1999, 1998 and 1997, respectively. The costs for the
year ended March 31, 1999 include approximately $6.6 million of transaction
costs associated with various terminated transactions which had been explored
by the Company, and for the year ended March 31, 1998 include approximately
$16.7 million of transaction costs associated with the terminated merger with
AmeriSource Health Corporation.

In addition, the Company incurred costs of $88.7 million and $1.4 million
during the years ended March 31, 1999 and 1998, respectively, primarily
related to benefits received by employees in connection with change of control
provisions, signing and retention bonuses granted and retirement and employee
benefits granted associated with acquisitions.

Purchase Transactions:

The following 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 40 years.

In November 1998, the Company acquired Red Line 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

F-50

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

assets acquired included the recognition of liabilities totaling $5.8 million
related to closures of duplicate facilities, and involuntary termination and
relocation benefits which remained outstanding as of March 31, 1999. 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 and five water processing
businesses. The aggregate cost of these acquisitions, accounted for as
purchases, totaled approximately $35 million.

In August 1997, the Company's Canadian health care distribution business,
Medis Health and Pharmaceutical Services Inc. ("Medis") announced an agreement
with Drug Trading Company, Limited ("Drug Trading") to transition Drug
Trading's retail customers to Medis over a six-month period. The Company
acquired assets consisting primarily of accounts receivable, inventories and
customer contracts, for approximately $83 million in cash. The transaction was
funded with proceeds from operations and short-term borrowings. This
acquisition was accounted for under the purchase accounting method and the
excess of the purchase price over the fair value of the net assets acquired of
$9.2 million is being amortized on a straight-line basis over 40 years.

In October 1997, the Company acquired AT&T's UK Specialist Health Care
Services Division ("ATT-UK"), a provider of software solutions and remote
processing services for financial and payroll needs of health care providers
in the United Kingdom for approximately $30 million in cash. In connection
with the acquisition, the Company wrote off $7.7 million of purchase price
allocated to in-process technology. These costs were expensed as of the
acquisition date.

In fiscal 1998, the Company also made a number of smaller acquisitions
including six distributors of first-aid products, two distributors of medical-
surgical supplies, and a pharmaceuticals distributor. The aggregate cost of
these acquisitions, accounted for as purchases, amounted to approximately $20
million.

On February 21, 1997, the Company acquired General Medical Inc. ("MGM"), a
multi-market distributor of medical-surgical supplies to acute-care, primary
care, and extended-care markets, for approximately $775 million including the
issuance of approximately 5.6 million shares of the Company's common stock and
the assumption of approximately $428 million in debt. The valuation of the MGM
net assets acquired included the recognition of liabilities totaling $7.9
million related to closures of duplicate facilities and involuntary
termination and relocation benefits, of which $0 million, $1.0 million and
$7.3 million remained outstanding as of March 31, 1999, 1998 and 1997,
respectively. Changes to the reserve in fiscal 1999 and 1998 consisted
primarily of cash payments for severance benefits and costs to close down
duplicate facilities. The excess of the purchase price over the fair value of
the net assets acquired of approximately $600 million is being amortized on a
straight-line basis over 40 years.

On November 8, 1996, the Company acquired FoxMeyer Corporation's
pharmaceutical distribution business ("FoxMeyer"), pursuant to an expedited
auction process in the FoxMeyer Corporation bankruptcy proceeding in
Wilmington, Delaware. The Company paid approximately $23 million in cash to
the debtors, paid off approximately $500 million in secured debt, and assumed
an additional $75 million in other liabilities. The Company utilized proceeds
from commercial paper issuances and a note payable to a bank to fund the
transaction. The note payable was repaid prior to March 31, 1997, with cash
flow from operations and proceeds from divestitures. The Company acquired
assets consisting primarily of accounts receivable and inventories of
approximately $650 million, customer contracts and property and equipment.

As further discussed in Financial Note 5, as a result of the FoxMeyer
acquisition, management assessed strategies and program offerings and
initiated a plan to optimize the network configuration from the combined

F-51

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

distribution centers of the Company and those acquired. This plan was
reflected in the valuation of the FoxMeyer net assets acquired. The plan to
consolidate the FoxMeyer business was executed during the latter part of
fiscal 1997, fiscal 1998 and fiscal 1999. Liabilities of $37.6 million were
recognized for costs associated with closures of duplicate distribution
centers and workforce reductions of which $0.3 million, $3.0 million and $21.9
million remained outstanding as of March 31, 1999, 1998 and 1997,
respectively. Reductions in the reserves in fiscal 1999 and 1998 consisted
primarily of cash payments for severance benefits and costs related to
FoxMeyer facility closures. The excess of the fair value of net assets
acquired over the purchase price, after reducing to zero the carrying value of
long-term assets expected to be retained for use by the Company, of $28
million (negative goodwill) is being amortized over 5 years.

The following unaudited pro forma information for fiscal 1997 has been
prepared assuming FoxMeyer and MGM had been acquired as of the beginning of
the year (in millions except per share amounts):

1997
---------

Revenues.......................................................... $18,602.3
Net loss.......................................................... (191.1)
Loss per share
Diluted......................................................... (0.75)
Basic........................................................... (0.75)

The unaudited pro forma information above is not indicative of the
consolidated financial position or results of operations of the Company as
they may be in the future or as they might have been had the MGM and FoxMeyer
acquisitions been effected on the assumed dates. For instance, due to
FoxMeyer's bankruptcy filing on August 27, 1996, and the resulting
deterioration in its operations through November 8, 1996, FoxMeyer experienced
a decline in its sales base, wrote off its goodwill and other intangibles
totaling $207.9 million, and established substantial accounts receivable and
inventory reserves and an additional valuation allowance for deferred tax
assets aggregating $153.4 million during the period from April 1, 1996 to
November 8, 1996.

Unaudited pro forma information is not presented for acquisitions accounted
for by the purchase method during the years ended March 31, 1999, 1998 and
1997, other than FoxMeyer and MGM, as the impact on consolidated revenues, net
income and net income per share would not be significant.

In April 1996, the Company acquired Automated Healthcare, Inc. ("MAH") for
$61.4 million in cash and the assumption of $3.2 million of employee stock
incentives. MAH designs, manufactures, sells, and installs automated
pharmaceutical dispensing equipment for use by health care institutions. The
goodwill related to the acquisition of approximately $13.4 million is being
amortized on a straight-line basis over ten years. A $48.2 million charge was
recorded to write off the portion of the purchase price of MAH 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. Existing technology was valued at $0.4 million and is being amortized on
a straight-line basis over a three-year period. The Company utilized a
discounted cash flow methodology by product line to value in-process and
existing technologies as of the acquisition date.

Divestitures:

On March 31, 1997, the Company sold its service merchandising unit,
Millbrook Distribution Services, Inc. ("Millbrook"), to R.A.B. Holdings, Inc.
The after-tax proceeds on the sale approximated Millbrook's book value.

In March 1997, the Company sold its Aqua-Vend vended water business ("Aqua-
Vend"), a unit of the Water Products segment. The after-tax proceeds on the
sale approximated Aqua-Vend's book value, after giving effect to the $7.0
million pre-tax provision for impairment of certain assets recorded in the
third quarter of fiscal 1997. See Financial Note 5.

F-52

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

In December 1996, the Company sold its 55% equity interest in Armor All
Products Corporation ("Armor All") to The Clorox Company for $221.9 million
and recognized an after-tax gain of $120.2 million. At closing, after-tax
proceeds of $109.8 million replaced the 6.9 million Armor All shares held in
trust as exchange property for the Company's $180 million exchangeable
subordinated debentures, see Financial Note 11.

All of the net assets and results of operations of both Armor All and
Millbrook are classified as discontinued operations.

5. Restructuring and Asset Impairments

In fiscal 1999, 1998 and 1997 the Company recorded charges for
restructurings and asset impairments of $144.6 million, $54.3 million, and
$126.8 million, respectively. The major components of the charges are as
follows:

1999 1998 1997
------ ----- ------
(in millions)

Write-down of assets and other exit-related costs...... $111.3 $36.8 $114.8
Severance.............................................. 33.3 17.5 12.0

Fiscal 1999

Health Care Supply Management

In fiscal 1999, the Company identified six distribution centers for closure
to be completed by the middle of fiscal 2000. 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.
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 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. $25.5 million of the
$42.7 million discussed above was non-cash.

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. The remaining severance will be paid in fiscal 2000.

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.

Health Care Information Technology

In fiscal 1999, the Health Care Information Technology segment completed
several acquisitions. In connection with these acquisitions, and the merger
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 $18.6 million (net of a $3 million reversal of previously recorded
severance obligations which were determined to be in excess). The severance
charge relates

F-53

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

to the termination of approximately 550 employees, primarily in development
and administrative functions. Severance of $6.4 million was paid during fiscal
1999. The remaining severance will be paid in fiscal 2000.

In addition, duplicate facilities, products and internal systems were
identified for elimination, resulting in charges of $22.2 million, relating
principally to the write-off of capitalized costs, lease termination costs,
and royalty agreements which were terminated at a cost of $12.0 million
because products subject to minimum royalty payments to third parties were
replaced with acquired products. 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-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.

Water Products

Upon completion of certain acquisitions accounted for as pooling of
interests during fiscal 1999, the Company identified and wrote off $2.5
million of computer equipment and other assets which were abandoned. In
addition, management decided to close down an acquired bottling facility
during fiscal 2000 which was determined to be inefficient, and recorded $0.4
million of estimated costs required to prepare the facility for closure which
are expected to be paid during fiscal 2000.

As a result of duplicative functions arising from certain acquisitions, the
Company recorded a charge of $1.4 million for workforce reductions of
approximately 100 operational and management personnel, primarily in overhead
functions. The individuals will be terminated and severance paid in fiscal
2000.

The charges discussed above have been recorded in selling, distribution and
administrative expenses. During fiscal 1999 there were no significant changes
in estimates or recharacterization of amounts from restructuring reserves
recorded in prior years.

Fiscal 1998

Health Care Supply Management

The Company recorded a charge of $9.4 million for workforce reductions
announced in fiscal 1998. The severance charge relates to the termination of
approximately 600 employees, primarily in distribution center and back-office
functions. Approximately 200 of these employees had been terminated, and
$2.8 million of severance costs had been paid during fiscal 1998. The
remaining employees were terminated, and the remaining severance was paid, in
fiscal 1999. In addition, $3.7 million was recorded due to the loss on the
sale of an investment, and a charge of $0.7 million associated with the
closure of a facility in Canada.

Health Care Information Technology

In fiscal 1998, the Health Care Information Technology segment completed
several acquisitions. In connection with these acquisitions, duplicate
products, facilities and internal systems were eliminated and, employees were
terminated. In addition, a minority investment became impaired.

F-54

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

The Company identified workforce reductions, including both acquired company
and Company personnel, and recorded severance costs of $8.1 million. Severance
of $4.6 million was paid during fiscal 1998 and the remaining severance was
paid in fiscal 1999.

Duplicate products, facilities and internal systems were identified which
resulted in charges of $22.4 million (non-cash), consisting primarily of
capitalized costs and intangible write-offs of $19.3 million related to
discontinuance of certain product lines. Revenues and net income from the
discontinued product lines were replaced by acquired product lines. In
addition, a $10.0 million minority investment became impaired and was written
off (non-cash).

The charges discussed above have been recorded in selling, distribution and
administrative expenses. During fiscal 1998 there were no significant changes
in estimates or recharacterization of amounts from restructuring reserves
recorded in prior years.

Fiscal 1997

Health Care Supply Management

The acquisition of the assets and operations of FoxMeyer (see Financial Note
4) resulted in a significant increase in sales volume, a substantial change in
the customer mix (primarily a large increase in institutional customers), and
overlapping, duplicate, and "similar purpose" assets. As a result of this
acquisition, management reassessed the Company's operations, distribution
center network and business strategies, including program offerings. As a
result of this reassessment, management developed a plan to optimize the U.S.
network configuration from the combined distribution centers of the Company
and those acquired from FoxMeyer. At the same time, management approved a plan
to rationalize the distribution network and eliminate certain facilities being
used at its Canadian subsidiary. These plans resulted in the closure of 15
distribution facilities, and the disposal of duplicate assets during fiscal
1997 and into fiscal 1998.

In connection with the plans discussed above, during fiscal 1997 the Company
recorded charges of $10.1 million (non-cash) to reduce the carrying value of
the distribution facilities to their estimated fair value less disposal costs.
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.

Subsequent to the acquisition of FoxMeyer, management reassessed strategies
and program offerings for expanding certain customer markets in light of the
larger and more diverse customer base, and identified certain programs and
investments that would no longer be pursued as originally contemplated. As a
result, the Company recorded charges of $28.0 million (primarily non-cash) for
the write off of costs incurred to develop systems and other product offering
for customers that would no longer be used or sold. In addition, management
reevaluated it current systems capabilities and needs, in light of the
resources acquired through FoxMeyer, and identified several systems which were
duplicate or not providing benefits to the combined company. This resulted in
a charge of $29.3 million (primarily non-cash) for the write off of hardware
and software systems which were abandoned by the Company.

Health Care Information Technology

In fiscal 1997, the Health Care Information Technology segment completed
several acquisitions. In connection with these acquisitions, duplicate
products were eliminated, and employees were terminated. In addition, a non-
compete agreement of an acquired company was written off.

F-55

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

The Company identified workforce reductions, including both acquired company
and Company operating and corporate personnel, and recorded severance costs of
$12.0 million. Severance of $8.8 million was paid during fiscal 1997 and the
remaining severance was paid in fiscal 1998.

The elimination of duplicate products resulted in charges of $22.8 million,
consisting primarily of the write-off of capitalized costs and intangibles,
and reserves for customer settlements. Revenues and net income from the
discontinued product lines were replaced by acquired product lines. In
addition, a $12.3 million intangible representing a non-compete agreement of
an acquired company and $5.3 million of other assets and investments were
written off because they were determined to have no future value to the
Company. Of the above charges, $32.7 million were non-cash asset write-offs,
$3.0 million were paid in fiscal 1997 and the remaining liabilities were paid
in fiscal 1998.

Water Products

The charges discussed above have been recorded in selling, distribution and
administrative expenses. During fiscal 1997 there were no significant changes
in estimates or recharacterization of amounts from restructuring reserves
recorded in prior years.

Summary of Reserve Balances

The remaining balances outstanding for the combined reserves at March 31,
1999, 1998 and 1997 are as follows, in millions:

March 31,
-----------------
1999 1998 1997
----- ----- -----

Write-down of assets and other exit-related costs ....... $56.3 $18.0 $27.5
===== ===== =====
Severance ............................................... $24.2 $10.0 $ 3.2
===== ===== =====

6. 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. This risk is spread over a
large number of geographically dispersed customers.

The Company entered into an accounts receivable sales program with a
financial institution in March 1999, 1998 and 1997, providing for the sale by
the Company of $400.0 million, $299.9 million and $147.4 million,
respectively, of undivided interests in the Company's total 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". 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 to repurchase inventory in the event the
customers are unable to meet certain obligations to the financial
institutions. Medis has also agreed to guarantee the payment of a major
customer's leases. The amounts

F-56

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

related to these guarantees were approximately $83.7 million for the inventory
and $17.2 million for the lease obligations at March 31, 1999.

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, 1999, a total of $81.0 million of these
commitments remained outstanding. In addition, the Company has agreed to
guarantee a customer's $15 million loan to a bank.

7. Receivables

March 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions)

Customer accounts.............................. $2,322.0 $1,802.8 $1,477.4
Other.......................................... 443.2 240.9 195.2
-------- -------- --------
Total........................................ 2,765.2 2,043.7 1,672.6
Allowances..................................... (181.5) (83.7) (60.4)
-------- -------- --------
Net.......................................... $2,583.7 $1,960.0 $1,612.2
======== ======== ========

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

8. Inventories

The LIFO method was used to value approximately 80%, 75% and 75% of the
inventories at March 31, 1999, 1998, and 1997, respectively. Inventories
before the LIFO cost adjustment, which approximates replacement cost, were
$3,762.6 million, $2,846.3 million and $2,556.6 million at March 31, 1999,
1998 and 1997, respectively.

9. Property, Plant and Equipment, Net

March 31
----------------------------
1999 1998 1997
-------- -------- --------
(in millions)

Land........................................... $ 50.7 $ 43.3 $ 39.7
Buildings, machinery and equipment............. 1,324.3 1,159.7 1,019.5
-------- -------- --------
Total property, plant and equipment............ 1,375.0 1,203.0 1,059.2
Accumulated depreciation....................... (681.0) (609.9) (569.9)
-------- -------- --------
Property, plant and equipment, net............. $ 694.0 $ 593.1 $ 489.3
======== ======== ========

10. Discontinued Operations

The net liabilities of discontinued operations included in other current
liabilities were as follows:

March 31
-------------------
1999 1998 1997
----- ----- -----
(in millions)

Total assets............................................ $ 1.5 $ 1.9 $ 2.5
Total liabilities....................................... (4.1) (2.8) (5.8)
----- ----- -----
Net liabilities....................................... $(2.6) $(0.9) $(3.3)
===== ===== =====

F-57

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

Assets consist primarily of land held for sale and investments in
affiliates. Liabilities consist primarily of other accrued liabilities.

Results of discontinued operations were as follows:

Years Ended March
31
--------------------
1999 1998 1997
----- ----- ------
(in millions)

Revenues............................................. $ 1.5 $ 0.2 $592.1
===== ===== ======
Discontinued operations before taxes................. $ 0.1 $ 0.1 $ 17.2
Provision for taxes on income........................ (0.1) (0.1) (5.6)
Minority interest in Armor All....................... -- -- (3.0)
----- ----- ------
Discontinued operations............................ -- -- 8.6
----- ----- ------
Gain on sale of Armor All stock...................... -- -- 154.5
Tax expense.......................................... -- -- (34.3)
----- ----- ------
Discontinued operations-gain on sale of Armor All
stock............................................. -- -- 120.2
----- ----- ------
Total............................................ $ -- $ -- $128.8
===== ===== ======

Discontinued operations in fiscal 1997 of $8.6 million after-tax includes
$3.7 million and $4.9 million after-tax from the operations of Armor All and
Millbrook, respectively.

11. Long-Term Debt

March 31
------------------------
1999 1998 1997
-------- -------- ------
(in millions)

ESOP related debt................................. $ 115.5 $ 115.6 $118.3
4.50% exchangeable subordinated debentures due
2004............................................. 37.3 113.3 160.4
8.625% Notes due 1998............................. -- -- 49.0
6.60% Notes due 2000.............................. 175.0 175.0 175.0
6.875% Notes due 2002............................. 175.0 175.0 175.0
6.55% Notes due 2002.............................. 125.0 125.0 --
6.30% Notes due 2005.............................. 150.0 150.0 --
6.40% Notes due 2008.............................. 150.0 150.0 --
7.65% Debentures due 2027......................... 175.0 175.0 175.0
3.15% to 5.375% IDRBs due through 2026............ 15.0 17.8 21.4
Capital lease obligations (averaging 8.9%)........ 19.4 6.7 7.8
Other, 6.0% to 10.875%, due through 2021.......... 3.6 38.6 39.8
-------- -------- ------
Total........................................... 1,140.8 1,242.0 921.7
Less current portion.............................. 195.3 18.4 67.6
-------- -------- ------
Total........................................... $ 945.5 $1,223.6 $854.1
======== ======== ======

The Company has a revolving credit agreement with several U.S. and Canadian
banks whereby the banks commit $400 million borrowing availability at the
reference rate (7.75% at March 31, 1999) or money market-based rates. The
agreement expires in fiscal 2004. The agreement permits the Company's wholly-
owned Canadian subsidiary, Medis, to borrow the Canadian dollar equivalent of
up to $100 million (as part of the $400 million arrangement) at the Canadian
prime rate or Canadian money market-based rates. The agreement contains
limitations

F-58

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

on additional indebtedness. Compensating balances are not required. The
Company has an additional $800 million available for general purposes under a
facility with a duration of 364 days or less which is due to expire on
November 9, 1999. At March 31, 1999, the Company had $1.2 billion of unused
borrowing capacity under these agreements, which are used primarily to support
commercial paper borrowings.

On May 28, 1999, the Company entered into a revolving credit agreement with
certain banks participating in the facility referred to in the previous
paragraph. This agreement provides the Company with additional credit in the
amount of $575 million, and it is due to expire on October 29, 1999. In
addition, the Company has a $750 million committed receivables sales facility
available.

Total interest payments were $120.6 million, $97.3 million, and $55.6
million in fiscal 1999, 1998 and 1997, respectively.

ESOP related debt (see Note 17) is payable to banks and insurance companies,
bears interest at rates ranging from 8.6% fixed rate to approximately 80% of
prime or LIBOR +0.4% and is due in installments through 2009.

In connection with the 4.5% exchangeable subordinated debentures, the March
31, 1999 marketable securities balance includes $22.9 million held in trust as
exchange property for the exchangeable subordinated debentures. Through March
31, 1999, the Company had repurchased $142.7 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 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; the
floating rates at March 31, 1999 were 5.24% and 5.14%, respectively. These
swaps include an imbedded interest rate cap of 7%.

Also 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 that the Company's total debt not exceed
56.5% of total capitalization (total debt plus equity). At March 31, 1999, the
Company was in compliance with its capitalization and other financial
covenants.

Aggregate annual payments on long-term debt and capitalized lease
obligations (see Financial Note 13) for the years ending March 31 are:

Long-Term Capital
Debt Leases Total
--------- ------- --------
(in millions)

2000.............................................. $ 186.0 $ 9.3 $ 195.3
2001.............................................. 11.4 5.0 16.4
2002.............................................. 187.4 2.0 189.4
2003.............................................. 137.9 0.4 138.3
2004.............................................. 11.0 0.5 11.5
Later Years....................................... 587.7 2.2 589.9
-------- ----- --------
Total........................................... $1,121.4 $19.4 $1,140.8
======== ===== ========

F-59

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

12. 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 on
June 1, 2027, bear interest at the rate of 5%, payable quarterly, and are
redeemable by the Company beginning in March 2000 at 103.5% of the principal
amount thereof.

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 103.5% of the liquidation amount beginning in March
2000.

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.

13. 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 $4.4 million, $4.6 million, and $4.6 million at March 31, 1999,
1998 and 1997, respectively. Amortization of capital leases is included in
depreciation expense.

As of March 31, 1999, future minimum lease payments and sublease rentals in
years ending March 31 are:

Non- Non-
cancelable cancelable
Operating Sublease Capital
Leases Rentals Leases
---------- ---------- -------
(in millions)

2000.......................................... $ 87.8 $ 5.8 $11.0
2001.......................................... 69.9 4.6 5.4
2002.......................................... 56.7 3.5 2.5
2003.......................................... 45.6 2.9 0.8
2004.......................................... 34.7 1.6 0.8
Later Years................................... 104.9 4.2 1.9
------ ----- -----
Total minimum lease payments................ $399.6 $22.6 22.4
====== =====
Less amounts representing interest............ 3.0
-----
Present value of minimum lease payments..... $19.4
=====

Rental expense was $114.9 million, $104.2 million, and $70.8 million in
fiscal 1999, 1998 and 1997, respectively.

F-60

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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.

14. Fair Value of Financial Instruments

At March 31, 1999, 1998 and 1997, 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:

1999 1998 1997
------------------------- ------------------------- ------------------------
Carrying Estimated Fair Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value Amount Value
--------- -------------- --------- -------------- -------- --------------
(in millions)

Long-term debt,
including current
portion................ $(1,140.8) $(1,152.1) $(1,242.0) $(1,215.1) $(921.7) $(902.8)
Interest rate swaps..... -- 3.7 -- (5.1) -- --
Foreign currency rate
swap................... -- 12.6 -- 4.0 -- --

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

At March 31, 1999, the Company had an investment in WebMD which had a cost
basis of $23 million. The fair value at that date was unknown because a
readily available market did not exist. Subsequent to year end, WebMD entered
into a merger transaction with Healtheon Corp., which if consummated, could
result in a value substantially above cost for the Company's investment.

The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of March 31, 1999, 1998
or 1997 or that will be realized in the future.

15. Stockholders' Equity

On October 29, 1997, the Company's board of directors declared a two-for-one
split of the Company's common stock. The split was effective January 2, 1998
for shareholders of record on December 1, 1997. All share and per share
amounts have been restated for the split.

Before giving effect to the acquisitions accounted for as pooling of
interests (see "HBOC Transaction" Financial Note 1 and "Acquisitions,
Investments and Divestitures" Financial Note 4), McKesson declared dividends
of $0.435, $0.50 and $0.50 per share and HBOC declared dividends of $0.04,
$0.035 and $0.02 per share, in fiscal years 1999, 1998, and 1997,
respectively.

At March 31, 1999, 1998, and 1997, 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 280,584,000 shares, 270,983,000 shares and 258,981,000
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 one hundredth of a share of Series A Junior Participating
Preferred Stock. Triggering events include, without

F-61

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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 described
earlier, each share of common stock now has attached to it one-half of a
Right.

The following is a reconciliation of the numerators and denominators of the
basic and diluted per-share computations for income from continuing
operations:

1999
-----------------------
Income Shares Per Share
------ ------ ---------
(in millions, except
per share amounts)

Basic EPS
Income from continuing operations................ $ 84.9 275.2 $0.31
=====
Effect of Dilutive Securities
Options to purchase common stock................. -- 8.9
Trust convertible preferred securities........... 6.2 5.4
Restricted stock................................. -- 0.3
------ -----
Diluted EPS
Income available to common stockholders plus
assumed conversions............................. $ 91.1 289.8 $0.31
====== ===== =====

1998
-----------------------
Income Shares Per Share
------ ------ ---------
(in millions, except
per share amounts)

Basic EPS
Income from continuing operations................ $304.6 266.2 $1.14
=====
Effect of Dilutive Securities
Options to purchase common stock................. -- 10.1
Trust convertible preferred securities........... 6.2 5.4
Restricted stock................................. -- 0.4
------ -----
Diluted EPS
Income available to common stockholders plus
assumed conversions............................. $310.8 282.1 $1.10
====== ===== =====

1997
-----------------------
Income Shares Per Share
------ ------ ---------
(in millions, except
per share amounts)

Basic EPS
Income from continuing operations................ $ 83.3 253.9 $0.33
=====
Effect of Dilutive Securities
Options to purchase common stock................. -- 10.6
Trust convertible preferred securities........... 0.7 0.6
Restricted stock................................. -- 0.1
------ -----
Diluted EPS
Income available to common stockholders plus
assumed conversions............................. $ 84.0 265.2 $0.32
====== ===== =====

F-62

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

As of March 31, 1999, the Company had three stock option plans. The 1994
Stock Option and Restricted Stock Plan provides grants of nonqualified stock
options to employees of the Company, and, until January 1, 1997 to non-
employee directors. After January 1, 1997, all non-employee directors receive
grants under the 1997 Non-Employee Director's Equity Compensation and Deferral
Plan. The 1998 Canadian Stock Incentive Plan provides grants of nonqualified
stock options with stock appreciation rights to the Company's Canadian
employees. Most grants under the Director's Equity Compensation and Deferral
Plan vest immediately on grant date. Most other options generally vest over
four years and all options expire ten years after the grant date. Under the
plans, options are generally granted at prices not less than the fair value of
the stock on the date of grant. In fiscal 1999, two grants were made at below
market prices under the 1998 Canadian Stock Incentive Plan. Under the Plans,
the Company is authorized to grant up to 46.6 million shares, including 44.4
million for options as of March 31, 1999. In addition to the above-described
plans, options have been granted to certain key executives on generally the
same terms as those granted under the 1994 Plan. Finally, the Company has
assumed options of acquired companies in connection with the acquisition of
such companies.

The following is a summary of options outstanding at March 31, 1999:

Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted- Number of
Number of Average Weighted- Options Weighted-
Range of Options Remaining Average Exercisable Average
Exercise Outstanding Contractual Exercise at Year Exercise
Prices At Year End Life Price End Price
-------- ----------- ----------- --------- ----------- ---------
(in years)

$ 1.08 to $ 9.94....... 3,824,272 3.9 $ 6.75 3,808,109 $ 6.75
$10.56 to $ 19.57....... 1,438,649 5.6 16.13 1,181,344 16.55
$20.13 to $ 29.92....... 5,295,709 7.1 26.56 3,461,978 26.32
$30.16 to $ 39.74....... 2,141,375 7.5 38.03 763,514 36.95
$41.39 to $ 49.90....... 1,482,969 8.0 44.29 615,796 44.65
$50.38 to $ 59.46....... 2,608,741 8.6 52.94 1,897,959 51.77
$60.63 to $ 69.88....... 181,040 9.2 66.49 36,179 63.49
$70.86 to $ 78.75....... 20,586,278 9.7 72.89 494,879 72.11
$80.41 to $136.74....... 1,686,549 9.1 103.30 237,399 87.20
---------- ----------
39,245,582 8.4 55.26 12,497,157 27.93
========== ==========

Expiration dates range from April 13, 1999 to March 15, 2009.

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. Due to certain tax and accounting issues, the
vesting for certain officers was postponed until April 22, 1999.

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

1999 1998 1997
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- ---------- ---------

Outstanding at beginning
of year................ 24,060,607 $31.39 24,599,182 $19.42 22,142,524 $11.79
Granted................. 21,287,422 75.10 7,478,095 53.17 8,158,921 33.30
Exercised............... (3,762,649) 23.79 (6,815,460) 12.77 (4,653,940) 7.67
Canceled................ (2,339,798) 40.95 (1,201,210) 27.48 (1,048,323) 18.37
---------- ---------- ----------
Outstanding at year
end.................... 39,245,582 55.26 24,060,607 31.39 24,599,182 19.42
========== ========== ==========
Exercisable at year
end.................... 12,497,157 27.93 10,558,317 20.59 12,432,083 13.67
========== ========== ==========

F-63

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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 and earnings
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 net income may not be representative of
compensation cost in subsequent years, when the effect of amortization of
multiple awards would be reflected.

Years Ended March
31,
-------------------
1999 1998 1997
----- ------ ------
(in millions,
except per share
amounts)

Net income
As reported........................................... $84.9 $304.6 $212.1
Pro forma............................................. 17.6 253.5 185.3
Earnings per common share--diluted
As reported........................................... $0.31 $ 1.10 $ 0.80
Pro forma............................................. 0.06 0.92 0.70
Earnings per common share--basic
As reported........................................... $0.31 $ 1.14 $ 0.83
Pro forma............................................. 0.06 0.95 0.73

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:

Years Ended
March 31,
----------------
1999 1998 1997
---- ---- ----

Expected stock price volatility............................ 32.4% 40.4% 31.6%
Expected dividend yield.................................... 1.42% 0.64% 0.74%
Risk-free interest rate.................................... 4.8% 5.9% 6.4%
Expected life (in years)................................... 5.0 7.3 7.2

The weighted average grant date fair values of the options granted during
1999, 1998 and 1997 were $24.06, $27.54 and $15.67 per share, respectively.

Other, within stockholders' equity, includes notes receivable from certain
of the Company's officers and senior managers totaling $99.0 million at March
31, 1999 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, are full recourse to the borrower, and $55.6 million are
collateralized by the related stock. The notes bear interest at rates ranging
from 4.7% to 8.0% and are due at various dates through February, 2002.

F-64

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

16. Taxes on Income

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

Years Ended March 31,
------------------------
1999 1998 1997
------- ------- -------
(in millions)

Current
Federal............................................ $ 124.7 $ 116.5 $ 99.5
State and local.................................... 15.5 24.2 13.4
Foreign............................................ 8.8 9.6 3.5
------- ------- -------
Total current.................................... 149.0 150.3 116.4
------- ------- -------
Deferred
Federal............................................ (23.2) 41.1 (25.5)
State.............................................. (7.5) 4.2 (3.1)
Foreign............................................ (1.2) -- (0.6)
------- ------- -------
Total deferred................................... (31.9) 45.3 (29.2)
------- ------- -------
Total provision.................................. $ 117.1 $ 195.6 $ 87.2
======= ======= =======

Deferred income taxes arise from temporary differences between the tax basis
of assets and liabilities and their reported amounts in the financial
statements. Foreign pre-tax earnings were $24.9 million, $29.6 million, and
$16.5 million in fiscal 1999, 1998 and 1997, respectively.

The reconciliation between the Company's effective tax rate on income from
continuing operations and the statutory Federal income tax rate follows:

Years Ended March 31,
-------------------------
1999 1998 1997
------- ------- -------

Statutory Federal income tax rate............... 35.0% 35.0% 35.0%
State and local income taxes, net of Federal tax
benefit........................................ 6.6 4.2 5.8
Nondeductible charge for the write-off of in-
process technology............................. -- -- 9.9
Nondeductible acquisition costs................. 16.7 1.1 --
Nondeductible amortization...................... 5.4 1.1 1.1
Nontaxable income--life insurance............... (1.4) (0.8) (1.5)
Favorable tax adjustments from the completion of
audits for certain prior years................. (4.1) (0.9) --
Dividends paid deduction--ESOP allocated
shares......................................... (0.5) (0.2) (0.5)
Tax-advantaged debt issuance.................... (1.2) (0.2) --
Other--net...................................... (0.3) (0.7) 1.1
------- ------- -------
Effective tax rate............................ 56.2% 38.6% 50.9%
======= ======= =======

Income tax payments were $175.8 million, $84.5 million, and $125.0 million
in fiscal 1999, 1998 and 1997, respectively.

F-65

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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

1999 1998 1997
------- ------- -------
(in millions)

Assets
Nondeductible accruals for environmental
obligations........................................ $ 7.8 $ 8.9 $ 10.6
Receivable reserves................................. 63.6 31.1 20.8
Deferred revenue.................................... 65.1 50.2 27.9
Compensation and benefit-related accruals........... 46.6 19.4 16.5
Loss and credit carryovers.......................... -- 39.2 9.4
Costs associated with duplicate facility closures
and workforce reductions related to acquired
businesses......................................... 7.5 2.4 11.7
Other............................................... 45.5 38.8 38.1
------- ------- -------
Current......................................... 236.1 190.0 135.0
------- ------- -------
Nondeductible accruals for:
Postretirement and postemployment plans........... 66.5 68.8 76.2
Deferred compensation............................. 33.5 31.1 33.2
Costs associated with facility closures........... 10.0 7.0 11.1
System development costs............................ -- -- 11.8
Intangibles......................................... 65.5 59.8 47.6
Loss and credit carryforwards....................... 67.0 12.5 4.3
Other............................................... 17.3 28.5 38.7
------- ------- -------
Noncurrent...................................... 259.8 207.7 222.9
------- ------- -------
Total........................................... $ 495.9 $ 397.7 $ 357.9
======= ======= =======
Liabilities
Basis differences for inventory valuation........... $(192.3) $(139.1) $ (70.1)
Other............................................... (1.2) (4.2) (5.3)
------- ------- -------
Current......................................... (193.5) (143.3) (75.4)
------- ------- -------
Accelerated depreciation............................ (22.9) (41.1) (40.7)
Systems development costs........................... (83.6) (65.7) (23.2)
Retirement plan..................................... (17.3) (13.5) (8.5)
Other............................................... (8.9) (4.8) (10.9)
------- ------- -------
Noncurrent...................................... (132.7) (125.1) (83.3)
------- ------- -------
Total........................................... $(326.2) $(268.4) $(158.7)
======= ======= =======
Total net current--included in prepaid expenses..... $ 42.6 $ 46.7 $ 59.6
======= ======= =======
Total net noncurrent--included in other assets...... $ 127.1 $ 82.6 $ 139.6
======= ======= =======

At March 31, 1999, the Company had Federal, state and local operating loss
carryforwards, the tax effect of which is $41.6 million. These carryforwards
will expire principally in 2012.

17. 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.

F-66

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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 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 employment. 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:

1999 1998 1997
------ ------ ------
(in millions)

Change in benefit obligations:
Benefit obligation at beginning of year........... $312.0 $299.9 $328.5
Service cost...................................... 0.7 0.7 5.4
Interest cost..................................... 21.7 22.6 23.6
Amendments........................................ 15.0 -- (0.2)
Acquisitions...................................... 17.8 -- --
Actuarial losses (gains).......................... 11.0 24.7 (34.0)
Benefit payments.................................. (28.8) (35.9) (23.4)
------ ------ ------
Benefit obligation at end of year................. $349.4 $312.0 $299.9
====== ====== ======
Change in plan assets:
Fair value of plan assets at beginning of year.... $294.0 $262.3 $249.1
Actual return on plan assets...................... 42.5 55.4 35.5
Employer contributions............................ 5.3 14.8 2.7
Expenses paid..................................... (2.1) (2.6) (1.6)
Benefits paid..................................... (28.8) (35.9) (23.4)
------ ------ ------
Fair value of plan assets at end of year.......... $310.9 $294.0 $262.3
====== ====== ======
Funded status:
Funded status at end of year...................... $(38.5) $(18.0) $(37.6)
Unrecognized net actuarial loss................... 30.1 28.8 34.3
Unrecognized prior service cost................... 1.2 1.3 1.4
Unrecognized prior service cost-plan amendments... 23.0 -- (3.1)
Unrecognized transition obligation................ -- (0.3) 0.4
------ ------ ------
Prepaid (accrued) benefit cost.................... $ 15.8 $ 11.8 $ (4.6)
====== ====== ======

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

1999 1998 1997
------ ------ ------
(in millions)

Prepaid benefit cost............................... $ 38.5 $ 29.6 $ 21.4
Accrued benefit cost............................... (22.7) (17.8) (26.0)
Intangible asset................................... 24.2 1.3 1.9
Minimum pension liabilitiy--net of tax of $6.2,
$6.0 and $3.9..................................... (9.6) (9.3) (5.9)
------ ------ ------
Net amount recognized.............................. $ 30.4 $ 3.8 $ (8.6)
====== ====== ======

F-67

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 plan:

1999 1998 1997
------ ------ ------
(in millions)

Service cost--benefits earned during the year...... $ 0.7 $ 0.7 $ 5.4
Interest cost on projected benefit obligation...... 21.7 22.6 23.6
Return on assets................................... (27.6) (24.8) (23.4)
Amortization of unrecognized loss and prior service
costs............................................. 1.1 0.8 5.9
Amortization of unrecognized net transition asset.. (0.3) (2.5) (2.5)
Curtailment loss recognized in connection with the
December 31, 1996 plan amendment.................. -- -- 0.4
------ ------ ------
Net pension expense (income)..................... $ (4.4) $ (3.2) $ 9.4
====== ====== ======

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 benefit obligations for Company-
sponsored plans were determined using discount rates of 7.00% at December 31,
1998, 7.25% at December 31, 1997 and 7.75% at December 31, 1996 and an assumed
increase in future compensation levels of 4.0% for all periods. 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 11).

After-tax ESOP expense (income), including interest expense on ESOP debt,
was $0.9 million, $(0.1) million, and $2.3 million in fiscal 1999, 1998 and
1997, respectively. Additional tax benefits received on dividends paid on
unallocated shares of $2.2 million, $2.4 million, and $3.1 million in fiscal
1999, 1998 and 1997, respectively, have been credited directly to retained
earnings in accordance with SFAS No. 109.

Contribution expense for the PSIP in fiscal 1999, 1998 and 1997 was all ESOP
related and is reflected in the amounts above. In fiscal 1999, 1998 and 1997
approximately 642,000, 808,000 and 907,000 shares, respectively, were
allocated to plan participants.

Through March 31, 1999, 12.1 million common shares have been allocated to
plan participants. At March 31, 1999, 12.2 million common shares in the ESOP
Trust had not been allocated to plan participants.

F-68

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. The benefits have been
reduced significantly for those employees retiring after December 31, 1990. 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:

1999 1998 1997
----- ----- -----
(in millions)

Service cost--benefits earned during the period....... $ 0.9 $ 0.7 $ 1.1
Interest cost on projected benefit obligation......... 8.4 9.1 9.4
Amortization of unrecognized gain and prior service
costs................................................ (0.9) (0.9) (0.9)
Recognized actuarial gain............................. (4.0) (8.0) (4.6)
Settlement gain....................................... (4.0) -- --
----- ----- -----
Total............................................... $ 0.4 $ 0.9 $ 5.0
===== ===== =====

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

1999 1998 1997
------- ------- -------
(in millions)

Change in benefit obligation:
Benefit obligation at beginning of year........ $ 120.2 $ 122.9 $ 134.6
Service cost................................... 0.9 0.7 1.1
Interest cost.................................. 8.4 9.1 9.4
Actuarial loss (gain).......................... 7.5 (0.7) (9.1)
Settlement..................................... (4.0) -- --
Benefits paid.................................. (12.3) (11.8) (13.1)
------- ------- -------
Benefit obligation at end of year.............. $ 120.7 $ 120.2 $ 122.9
======= ======= =======
Funded Status
Funded status at end of year................... $(120.7) $(120.2) $(122.9)
Unrecognized actuarial loss.................... 4.4 (7.1) (14.3)
Unrecognized prior service cost................ (8.0) (9.0) (9.9)
------- ------- -------
Accrued post-retirement benefit obligation..... $(124.3) $(136.3) $(147.1)
======= ======= =======

The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were 5.0%, 5.33% and 6.0% at the end of
1999, 1998 and 1997, respectively. 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, 1999 by $7.0 million and the
related fiscal 1999 aggregate service and interest costs by $0.6 million.
Decreasing the trend rate by one percentage point would reduce the accumulated
postretirement health care and life insurance obligation as of March 31, 1999
by $6.6 million and the related fiscal 1999 aggregate service and interest
cost by $0.6 million. The discount rates used in determining the accumulated
postretirement benefit obligation were 7.00%, 7.25% and 7.75% at March 31,
1999, 1998 and 1997, respectively.

F-69

McKESSON HBOC

FINANCIAL NOTES--(Continued)

Through the HBOC Transaction, the Company assumed an employee discount stock
purchase plan for eligible employees of HBOC. Under such plan, participants
may use up to 10% of their annual compensation up to certain dollar
limitations whichever is higher, to purchase, through payroll deductions, the
Company's common stock at the end of each plan year for 85% of the lower of
the beginning or ending stock price for the plan year.

HBOC also had a qualified profit-sharing and savings plan ("HBOC Plan")
covering all HBOC employees with more than six months of service. Except for
certain highly paid employees who were subject to certain limitations,
participants were eligible to contribute up to 15% of their compensation to
the plan. The Company matched these contributions at a rate equal to 75% of
the first 4% of compensation contributed annually. Total plan expense was
$10.6 million in fiscal 1999, $8.9 million in fiscal 1998 and $6.3 million in
fiscal 1997. On April 1, 1999, the HBOC Plan was merged into the Company
Profit-Sharing Investment Plan described earlier.

18. Segments of Business

Effective March 31, 1999, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 established standards for the way public business enterprises
report information about operating segments in annual financial statements,
and also established standards for enterprise-wide disclosure of segment
information based on products and services, geographic areas, and major
customers. Operating segments are defined by SFAS No. 131 as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision makers who determine the allocation of resources and evaluate the
financial performance of the operating segments are the Co-Chief Executive
Officers. 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 operating segments include Health Care Supply Management,
Health Care Information Technology and Water Products. The Company's Corporate
division 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 marketing and other support services to pharmaceutical manufacturers,
manufacture and sale of automated pharmaceutical dispensing systems for
hospitals and retail pharmacies, 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 distribution business).

The Water Products segment is engaged in the processing, delivery and sale
of bottled drinking water to homes and businesses and the sale of packaged
water to retail stores.

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

F-70

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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

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

1999 1998 1997
--------- ---------- ----------
(in millions)

Revenues
Health Care Supply Management............ $28,457.7 $ 20,640.4 $ 15,449.5
Health Care Information Technology....... 1,538.1 1,429.2 1,129.3
Water Products........................... 353.6 313.6 301.6
Corporate................................ 32.9 (1) 36.1 33.9
--------- ---------- ----------
Total.................................. $30,382.3 $ 22,419.3 $ 16,914.3
========= ========== ==========
Operating profit (loss)
Health Care Supply Management(2)......... $ 341.6 $ 352.8 $ 94.1
Health Care Information Technology....... (31.6) 227.0 121.9
Water Products........................... 46.3 52.7 36.6
--------- ---------- ----------
Total.................................. 356.3 632.5 252.6
Interest--net(3)......................... (96.4) (78.4) (38.6)
Corporate................................ (51.7) (47.7) (42.8)
--------- ---------- ----------
Income from continuing operations
before taxes on income and dividends
on preferred securities of subsidiary
trust................................. $ 208.2 $ 506.4 $ 171.2
========= ========== ==========
Segment assets--at year-end
Health Care Supply Management............ $ 6,889.7 $ 5,219.6 $ 4,630.9
Health Care Information Technology....... 1,357.3 1,133.9 895.7
Water Products........................... 234.0 187.7 155.9
--------- ---------- ----------
Total.................................. 8,481.0 6,541.2 5,682.5
Corporate
Cash, cash equivalents and marketable
securities............................ 269.0 683.4 600.1
Other.................................. 331.6 125.1 190.7
--------- ---------- ----------
Total.................................. $ 9,081.6 $ 7,349.7 $ 6,473.3
========= ========== ==========
Depreciation and amortization
Health Care Supply Management............ $ 74.4 $ 65.9 $ 48.2
Health Care Information Technology....... 90.7 74.6 62.8
Water Products........................... 28.5 24.1 24.6
Corporate................................ 5.7 5.4 5.7
--------- ---------- ----------
Total.................................. $ 199.3 $ 170.0 $ 141.3
========= ========== ==========
Expenditures for long-lived assets
Health Care Supply Management............ $ 97.2 $ 82.1 $ 46.3
Health Care Information Technology....... 79.2 76.9 41.2
Water Products........................... 51.5 52.7 36.6
Corporate................................ 22.8 7.4 3.9
--------- ---------- ----------
Total.................................. $ 250.7 $ 219.1 $ 128.0
========= ========== ==========

F-71

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

1999 1998 1997
--------- --------- ---------
(in millions)

Revenues by products and services
Health Care Supply Management
Pharmaceutical Distribution and Services..... $26,165.5 $18,761.9 $15,267.4
Medical-Surgical Distribution and Services... 2,292.2 1,878.5 182.1
Health Care Information Technology
Software..................................... 345.0 405.9 320.9
Services..................................... 984.4 809.1 646.6
Hardware..................................... 208.7 214.2 161.8
Water Products................................. 353.6 313.6 301.6
Corporate...................................... 32.9(1) 36.1 33.9
--------- --------- ---------
Total........................................ $30,382.3 $22,419.3 $16,914.3
========= ========= =========

- --------
(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 $13.3 million, $12.0 million and $11.5 million of pre-tax
earnings from an equity investment in fiscal 1999, 1998 and 1997,
respectively.
(3) Interest expense is shown net of corporate interest income.

Revenues and long-lived assets by geographic areas:

1999 1998 1997
--------- --------- ---------
(in millions)

Revenues
United States................................. $28,318.7 $20,706.9 $15,357.6
International(1).............................. 2,063.6 1,712.4 1,556.7
--------- --------- ---------
Total....................................... $30,382.3 $22,419.3 $16,914.3
========= ========= =========
Operating profit
United States................................. $ 315.9 $ 606.4 $ 222.9
International(1).............................. 40.4 26.1 29.7
--------- --------- ---------
Total....................................... $ 356.3 $ 632.5 $ 252.6
========= ========= =========
Long-lived assets, at year end
United States................................. $ 654.4 $ 549.2 $ 471.0
International(1).............................. 39.6 43.9 18.3
--------- --------- ---------
Total....................................... $ 694.0 $ 593.1 $ 489.3
========= ========= =========

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

19. Other Commitments and Contingent Liabilities

F-72

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

were subject to contingencies and had been reversed. It also announced that
the audit process was ongoing. The Audit Committee of the Company's Board of
Directors subsequently initiated an investigation into this matter. On May 25,
1999, the Company announced that as a result of information developed through
its continuing year-end internal and external audit process and Audit
Committee review, additional instances of improper revenue recognition had
been found, that further downward revision would be required of the results
for the fiscal year ended March 31, 1999, as well as quarterly results during
the fiscal year, and that prior years' results of the Health Care Information
Technology business unit ("HBOC") could also require restatement.

One additional Federal Action has been filed in the Northern District of
Georgia, but that action names only two former officers, and does not name the
Company; and one additional class action has been filed in the Delaware Court
of Chancery against HBOC, Inc. and former officers and directors of a company
acquired by HBOC in 1998 alleging breach of fiduciary duties by such parties
in connection with such sale, and is brought on behalf of the shareholders of
the acquired company.

F-73

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

The Company does not believe it is feasible to predict or determine the
outcome or resolution of these 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.

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 directed verdict. On July 13, 1999, the Seventh Circuit affirmed
the District Court's judgment as to dismissal of the claims against the
wholesalers. The Individual Actions, which are still pending in the Northern
District of Illinois for pre-trial purposes, will be remanded to their
original transferor jurisdictions for trial. The wholesalers' motion for
partial summary judgment that they should not be liable for any damages
resulting from drugs sold prior to four years from the October 1997 amended
complaints in those cases was granted. Most of the individual cases brought by
chain stores have been settled.

F-74

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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.

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. 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") alleges 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.

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. A renewed motion for summary judgment on the
four remaining counts of Avatex' complaint in the Texas Action is pending
before the Delaware court. In addition, the Company filed an amended complaint
adding the Trustee and debtors as defendants. 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 counterclaim and cross-claim
against Avatex and Mssrs. 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
denying transfer. A cross-appeal by Avatex from the order dismissing the three
counts with prejudice is still pending. The Company and several of the other
defendants have appealed to the Court of Appeals the ruling upholding the
order denying transfer.

F-75

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

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 these actions. All cases except the
Texas case are in the early stages of discovery. The Texas court held a class
certification hearing on June 1, 1999, and stayed its ruling on certification
pending a decision from the Texas Supreme Court on the issue of whether a
products liability class action is proper where issues of comparative fault
exist. These cases have been tendered to MGM's suppliers, their insurers, and
to MGM's insurer. The Company has filed a declaratory relief action in
California against its major supplier's insurer to obtain a determination of
rights as an additional insured under the supplier's insurance policy.

Salomon Smith Barney ("SSB") filed an action against McKesson and HBOC on
December 9, 1998 in federal district court in New York City claiming
entitlement to $50 million in fees in connection with the January 12, 1999
merger of the two companies. SSB has sued on the theories of breach of
contract, quantum meruit and unjust enrichment; it has also sued HBOC for
tortious interference with contract, tortious interference with business
relations, and prima facie tort. It also seeks compensatory damages from HBOC
for tortiously interfering with its contract and relations with McKesson. SSB
also seeks a judgment requiring defendants to indemnify SSB pursuant to the
contracts. On May 12, 1999 defendants' motions to stay the action were denied;
the Company's motion to dismiss was denied, and HBOC's motion to dismiss was
partially granted as to some of the tort claims against it. On June 21, 1999,
defendants filed their answer and counterclaims against SSB for violations of
Section 10(b) of the Securities Exchange Act of 1934; breach of fiduciary
duty; negligence; breach of contract; misappropriation of trade secrets; and
rescission and restitution. Trial is scheduled for October 1999.

F-76

McKESSON HBOC, INC.

FINANCIAL NOTES--(Continued)

laws and regulations and their interpretations; the timing, varying costs and
effectiveness of alternate 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
arising from the Company's restatement of previously reported amounts for
HBOC, 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 Financial Note 19 will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.

20. Quarterly Financial Information (unaudited)

First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
--------- -------- -------- -------- ---------
(in millions except per share amounts)

Fiscal 1999
Revenues................... $ 6,283.3 $7,337.3 $8,366.6 $8,395.1 $30,382.3
Gross profit............... 612.9 632.9 670.6 749.2 2,665.6
Net income (loss).......... 69.1 26.3 50.7 (61.2)(1) 84.9

Earnings (loss) per common
share
Diluted.................. $ 0.25 $ 0.10 $ 0.18 $ (0.22) $ 0.31
Basic.................... 0.25 0.10 0.18 (0.22) 0.31

Cash dividends per common
share..................... $ 0.125 $ 0.125 $ 0.125 $ 0.06 $ 0.435
Market prices per common
share
High..................... $85 13/16 $96 1/4 $ 96 $ 89 3/4 $ 96 1/4
Low...................... 57 5/8 73 5/8 66 1/2 52 1/4 52 1/4

Fiscal 1998
Revenues................... $ 5,324.5 $5,523.1 $5,793.9 $5,777.8 $22,419.3
Gross profit............... 560.7 575.9 616.9 639.9 2,393.4
Net income................. 68.7 82.6 71.6 81.7 (1) 304.6

Earnings per common share
Diluted.................. $ 0.25 $ 0.30 $ 0.26 $ 0.29 $ 1.10
Basic.................... 0.26 0.31 0.27 0.30 1.14

Cash dividends per common
share..................... 0.125 0.125 0.125 0.125 0.50
Market prices per common
share
High..................... $ 40 1/16 $53 1/8 $ 56 7/8 $ 61 3/4 $ 61 3/4
Low...................... 31 1/2 38 1/4 48 11/16 47 7/8 31 1/2

- --------
(1) Includes after-tax charges of $89.1 million and $16.8 million during the
three months ended March 31, 1999 and 1998, respectively, related to
transaction costs and costs associated with employee benefits, primarily
related to change in control provisions, incurred in connection with
acquisitions (See Financial Note 4). Also includes after-tax charges of
$55.3 million and $8.7 million during the three months ended March 31,
1999 and 1998, respectively, related to employee severance and
restructuring closures, workforce reductions, and the elimination of
product lines and systems (See Financial Note 5).

F-77

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

There is no parent of the Company. The following is a listing of the
significant subsidiaries of the Company, or if indented, subsidiaries of the
Company under which they are listed:

Jurisdiction of
Organization
---------------

HBO & Company................................................ Delaware
McKesson Water Products Company.............................. California
Medis Health and Pharmaceutical Services Inc. ............... Canada
GM Holdings, Inc. ........................................... Delaware
McKesson General Medical Corp. ............................ Virginia

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in McKesson HBOC, Inc.
Registration Statement Nos. 33-86536, 333-00611, 333-02871, 333-21931, 333-
32643, 333-32645, 333-43101, 333-43079, 333-48337, 333-48339, 333-48859, 333-
50261, 333-70501, and 333-71917 on Form S-8 and Registration Statement Nos.
333-50985, 333-50985-01, 333-50985-02, 333-50985-03 and 333-66359, on Form S-
3, and Registration Statement No. 333-56623 on Form S-4 of our report dated
July 12, 1999 (which report was modified to indicate that the consolidated
financial statements of HBO & Company ("HBOC"), as of and for the two years
ended March 31, 1998 were audited by other auditors whose report (which
expresses an unqualified opinion and includes an explanatory paragraph related
to certain shareholder litigation) has been furnished to us, and our opinion,
insofar as it relates to the amounts included for HBOC as of and for the two
years ended March 31, 1998 is based solely on the report of such auditors and
to refer to certain shareholder litigation as discussed in Financial Note 19
to the consolidated financial statements), appearing in this Annual Report on
Form 10-K of McKesson HBOC, Inc., for the year ended March 31, 1999.

Deloitte & Touche LLP
San Francisco, California
July 12, 1999

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report dated July 12, 1999 with respect to the consolidated financial
statements of HBO & Company as of March 31, 1998 and 1997 and for the years
then ended, included in this Form 10K of McKesson HBOC, Inc., into the
following previously filed Registration Statements of McKesson HBOC, Inc.:

. Registration Statements on Form S-3 (No.'s 333-50985, 333-50985-01, 333-
50985-02, 333-50985-03 and 333-66359)

. Registration Statement on Form S-4 (No. 333-56623)

. Registration Statements on Form S-8 (No.'s 33-86536, 333-00611, 333-
02871, 333-21931, 333-32643, 333-32645, 333-43101, 333-43079, 333-48337,
333-48339, 333-48859, 333-50261, 333-70501 and 333-71917)

Reference is made to said report in which the opinion contains an
explanatory fourth paragraph with respect to certain shareholder litigation as
discussed in Note 10 to the consolidated financial statements.

Arthur Andersen LLP

Atlanta, Georgia
July 12, 1999