SUPPLY AGREEMENT


This Supply  Agreement is made this 19th day of June,  1997  between  McKesson
Drug Company, a division of McKesson Corporation ("McKesson") and Phar-Mor, Inc.
("Phar-Mor")  to  establish a program for the supply of  prescription  drugs and
other health and beauty aids to Phar-Mor and its retail pharmacies.  The parties
hereto agree as follows:


1.       MERCHANDISE

         For  purposes  hereof,  "Merchandise"  shall be  defined  as all  items
         normally  stocked by  McKesson,  including  prescription  drugs  (which
         include all diabetic  products),  ethical Over the Counter (OTC) drugs,
         select  pharmaceutical  supplies  mutually agreed to by the parties and
         select  Phar-Mor  private  label  products as  mutually  agreed by both
         parties  hereto.  This Agreement does not apply to merchandise  sold to
         Phar-Mor by McKesson  Corporation  divisions or subsidiaries other than
         McKesson Drug Company.


2.       ORDERING AND DELIVERY

         McKesson  shall provide an electronic  order entry system to facilitate
         Phar-Mor's  ordering  of  Merchandise.  Prescription  products  will be
         delivered to  Phar-Mor's  in-store  pharmacies up to five (5) times per
         week, as needed.

         Orders  transmitted  by any  Phar-Mor  stores  by  9:00  p.m.  will  be
         delivered by 12:00 noon on the next business day in accordance with the
         attached schedule.

3.       MANUFACTURERS' CONTRACTS

         McKesson agrees to service all manufacturers'  contracts  negotiated by
         Phar-Mor,   provided  such  manufacturers  are  approved  suppliers  of
         McKesson.   Merchandise  will  be  supplied  at  Phar-Mor's  negotiated
         contract prices,  plus McKesson's  reduction or mark-up, as applicable,
         as described in Section 19 "Cost of Goods" of this Agreement.


4.       PHARMACEUTICAL PRICE INCREASE

         For  prescription  drug items only that incur price  increases  and for
         which McKesson receives the opportunity from the manufacturer to obtain
         additional inventory or is allowed additional allocation buys, a rebate
         will be paid to Phar-Mor  headquarters  for the difference  between the
         old price and new price based on average purchases made by Phar-Mor for
         these items for the thirty (30) days prior to the announced increase.
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                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


         McKesson  guarantees that the savings  associated with this rebate will
         not fall below (*) of total Phar-Mor purchases for each one year period
         of this Agreement.


5.       MANUFACTURER PRICE CHANGE COMMUNICATIONS

         Advance  notice  of  prescription  drug  price  increases,  when and if
         received from the  manufacturer,  shall be submitted to Phar-Mor in the
         fastest manner  possible.  McKesson agrees to use fax  communication to
         provide immediate  information  related to open to buy price increases,
         special  deals,   extended  dating  or  investment  buy   opportunities
         (speculative) in order to maximize Phar-Mor's investment opportunities.
         Other  investment  purchasing  information  will be provided on regular
         basis, whether via fax or electronic mail.

         McKesson will notify  Phar-Mor in writing thirty (30) days prior to the
         expiration  or   termination  of  all  goods  for  which  Phar-Mor  has
         negotiated a contract price with pharmaceutical manufacturers.


6.       TECHNOLOGY

         McKesson  will  provide  the  resources  reasonably  necessary  to meet
         Phar-Mor's  systems and technology  requirements  in furtherance of its
         commitment  to provide  "Best in Class"  service  through  leading edge
         technology.  Phar-Mor  will be given  the  opportunity  to  partner  in
         McKesson's  technology  development  by testing new programs and system
         enhancements  whenever  appropriate.  Technology  created  and owned by
         McKesson will be provided at no further cost to Phar-Mor.


7.       PURCHASE PRICE: DEFINITION OF COST

         The purchase  price of the  Merchandise  delivered to Phar-Mor shall be
         the Cost of the Merchandise less the reductions or plus the mark-up, as
         applicable,  set  forth  in the  cost of goods  schedule  set  forth in
         Section 19,  below.  "Cost"  means the  manufacturers'  invoice cost to
         McKesson  (exclusive  of cash  discounts)  at the time of  shipment  to
         Phar-Mor reduced for selected bonus goods,  manufacturers'  off-invoice
         allowances, and manufacturers' deal prices.

         The following Merchandise will be net items and not subject to the 
         retail cost of goods pricing in Section 19, Cost of Goods: SunMark,
         Durable Medical Equipment (DME), Home Health Care, RxPak, MultiSource,
         Select Generics, selected slow-moving products (defined  as OTC product
         with less than three turns per year) and any additional mutually agreed
         upon net priced items.


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                                Confidential Treatment Requested.
         The redacted  material has been separately filed with the Commission.


        
8.                         PURCHASE COMMITMENT AND DEVELOPMENTAL FUNDS

                           Purchase Commitment

         The cost of goods  schedule  set forth in  Section 19 below is based on
         Phar-Mor  purchasing a total of (*) (net of returns and allowances) per
         year from the  Implementation  Date as  defined  in  Section 11 of this
         Agreement in volume of Direct Store Delivery (D.S.D.)  Merchandise.  If
         at the end of any Phar-Mor  fiscal quarter  following the first year of
         this  Agreement  Phar-Mor  has not achieved  the  appropriate  pro-rata
         purchase volume,  McKesson reserves the right to redetermine the agreed
         upon cost of goods upon  thirty  (30) days  advance  written  notice to
         Phar-Mor.  In the event that the parties  cannot  mutually agree on the
         redetermined  cost of goods within thirty (30) days of written  notice,
         either party has the option to terminate the Agreement. If either party
         terminates  this  Agreement  due to failure to reach a mutually  agreed
         redetermined  cost of goods,  such  termination  shall not constitute a
         breach of this  Agreement and neither party shall have any liability to
         the other,  except for obligations  which accrued prior to or upon such
         termination.

         Developmental Funds

         In consideration for Phar-Mor's  purchase  commitment  specified above,
         McKesson  agrees  to pay to  Phar-Mor  within  forty-five  (45) days of
         execution of this Agreement by both parties  ("Execution Date") the sum
         of $(*) as developmental  funds and thereafter upon each anniversary of
         the  Execution   Date,   McKesson  shall  pay  Phar-Mor  an  additional
         $(*)during the term of this Agreement.

          If this Agreement is terminated  prior to expiration of the sixty (60)
          month  term for any  reason  whatsoever,  Phar-Mor  shall  immediately
          reimburse   to   McKesson   the  then   applicable   portion   of  the
          above-specified  developmental  funds as  determined  by the following
          pro-rata reimbursement formula.



         Total Amount of Developmental              Number of months remaining
         Funds Previously Paid By          times    in the sixty month contract
         McKesson to Phar-Mor                       period upon the date of 
                                                            termination
                                                    --------------------------
                                                               60



9.       PAYMENT TERMS

         Retail Pharmacies
         Payment  for  Merchandise   shipped   directly  to  Phar-Mor's   retail
         pharmacies  shall be paid by Phar-Mor as follows:  Invoices  dated from
         the 1st to the 15th of the month are due and  payable  on the last work
         day of the same month.  Invoices  dated from the 16th to the end of the
         month are due and payable on the 15th of the following month.


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                       Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.

         Prepay Incentives

         30-day  Prepayment Terms Defined:  The prepayment is a one-time payment
         equivalent to 30 days' worth of purchases which is held as a deposit in
         a separate  account.  The deposit  shall be  adjusted  monthly to cover
         increases or decreases in purchase volume.  After the one-time payment,
         all  purchases  are payable  under  regular  Payment Terms as described
         above.

         15-day  Prepayment Terms Defined:  The prepayment is a one-time payment
         equivalent to 15 days' worth of purchases which is held as a deposit in
         a separate  account.  The deposit  shall be  adjusted  monthly to cover
         increases or decreases in purchase volume.  After the one-time payment,
         all  purchases  are payable  under  regular  Payment Terms as described
         above.

         Phar-Mor  shall be entitled to a reduction  in the mark-up set forth in
         the cost of goods  schedule  in Section 19 for  prepayment  if Phar-Mor
         elects  this  prepayment  option.  The  prepay  incentive  shall  be as
         follows:

        Prepay Incentive                    Mark-Up Reduction
             30 Days                               (*)%
             15 Days                               (*)%

         Until EDI financial technology is available to Phar-Mor, checks will be
         deposited on the specified due dates.

          If for whatever reason payments are not made as indicated herein,  any
          late  payments  will  result  in a one  and  one-half  percent  (1.5%)
          increase in the purchase price of the  Merchandise,  and a one percent
          (1%)  service  charge  will be imposed  semi-monthly  on all  balances
          delinquent  more than  fifteen (15) days.  In the  unlikely  event any
          penalties do occur,  both parties agree to meet and resolve this issue
          as soon as practical.

          This  Agreement is  conditioned  upon  Phar-Mor's  maintaining a sound
          financial  condition  throughout  the  term  hereof  and to that  end,
          Phar-Mor  agrees to promptly  substantiate  in writing,  at McKesson's
          request,  the  existence of such  condition  with  publicly  available
          financial  and  other  publicly   available   supporting   information
          reasonably requested by McKesson.

          McKesson  reserves  the right to change a payment  term or limit total
          credit  if  there  has  been  either  a  material  adverse  change  in
          Phar-Mor's  financial  condition  or a  payment  default  based on the
          payment terms and conditions specified in this Agreement which remains
          uncured for more than ten (10) days  following  notice of such payment
          default to Phar-Mor by McKesson.  Upon the  occurrence  of either such
          event, McKesson may
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          require cash payment or appropriate  security  before  shipment of any
          further  Merchandise  to  Phar-Mor.  In the event of such  changes  by
          McKesson,  Phar-Mor  may  terminate  this  Agreement  on ten (10) days
          written  notice  to  McKesson.   Any  such  termination  will  not  be
          considered a default  under this  Agreement  subject to the payment of
          damages;  provided however such termination shall not relieve Phar-Mor
          of its obligations  hereunder for accounts  receivable balances or any
          other payments due and payable upon termination of this Agreement.

10.      NEW PHARMACY OPENINGS

         Except as specified below,  opening order invoices for any new pharmacy
         opened by Phar-Mor which was not previously in existence ("Newly Opened
         Pharmacy") or any newly affiliated  pharmacy  resulting from a Business
         Combination as defined in Section 11 ("Newly Affiliated Pharmacy") will
         receive 90 day payment  terms.  For  purposes  of this  Section 10, any
         Newly  Affiliated  Pharmacy that is already being  serviced by McKesson
         shall not be  entitled  to such 90 day payment  terms.  Opening  orders
         include new pharmacy  orders  submitted to McKesson up to two (2) weeks
         after the pharmacy begins filling prescriptions.

         The prescription drug and OTC purchases made by any of Phar-Mor's Newly
         Opened  Pharmacies,  regardless of the applicable cost of goods pricing
         schedule,  shall not be  included  in the  calculation  of the  minimum
         chainwide or group-wide  average  monthly  purchase  volumes  specified
         herein  for a period of 18 months  after  the Newly  Opened  Pharmacy's
         opening order.

         A one time cleanup with no handling  charges will be provided after six
         (6)  months of  opening  date for  which a credit  equal to 100% of the
         purchase price of all eligible  Merchandise  shall be given by McKesson
         to  Phar-Mor.  In order to qualify as eligible  Merchandise  under this
         paragraph,  the  Merchandise  must  have at least  six  months'  dating
         remaining and be in salable condition.


11.      PRIMARY SUPPLIER

         The term of this  Agreement  shall be for the sixty (60)  month  period
         from the  Implementation  Date of this  Agreement,  and for such period
         Phar-Mor  agrees to  designate  McKesson  as its primary  supplier  for
         Merchandise  and to purchase  from  McKesson  substantially  all of the
         requirements  of its  pharmacies for  Merchandise.  It is agreed by the
         parties that the Implementation  Date of this Supply Agreement shall be
         November 15, 1996,  provided that this  Agreement is signed by Phar-Mor
         no later than June 20, 1997.  In the event that  Phar-Mor does not sign
         this  Agreement by June 20, 1997, the  Implementation  Date will become
         the date that this Agreement is fully executed by both parties.  Except
         as otherwise expressly specified in this Agreement,  the annual


<PAGE>

         periods specified in this Agreement and all volume incentives, rebates
         and other amounts to be paid  hereunder by McKesson  shall be based on
         the Implementation Date.

         Both parties agree to review this Agreement annually between November 1
         and  December 1. The  purpose of this  review  process is to allow both
         parties to address any pertinent changes within the market or their own
         internal  organizations  that would  influence  the  structure  of this
         Agreement.  Provided that Phar-Mor  meets its  commitment to both sales
         volume and timely  payments,  McKesson will not propose any increase to
         this  Agreement's  cost of goods schedule.  Quarterly  meetings will be
         held  between  senior  managers  of both  parties  to  ensure  constant
         communication.

         In the event of an  acquisition,  merger or other business  combination
         that   involves   Phar-Mor,    directly   or   indirectly    ("Business
         Combination"),  it is  intended  by the  parties  that one of the three
         specific  pricing  options  set forth  below  shall apply to such Newly
         Affiliated Pharmacies:

                  (i) If any such Newly  Affiliated  Pharmacies  are  subject to
                  existing   agreements  which,   after  reasonable  efforts  by
                  Phar-Mor,  cannot be  terminated  without  penalty,  then such
                  pharmacies  will not be subject to this  Agreement  until such
                  agreements expire.  Further, if such pharmacies are subject to
                  agreements   with  better  terms  and  conditions  than  those
                  provided for herein,  then Phar-Mor may provide  McKesson with
                  the  opportunity to meet the terms and conditions  provided in
                  such agreement for such pharmacy.  If within fifteen (15) days
                  of its  receipt of such  notice  from  Phar-Mor,  McKesson  is
                  unable or  unwilling to meet such terms and  conditions,  then
                  such Newly  Affiliated  Pharmacy  shall not be subject to this
                  Agreement,  and Phar-Mor  shall have no obligation to purchase
                  goods from McKesson for such  pharmacy.  Any such inability or
                  unwillingness  on the part of  McKesson to meet such terms and
                  conditions shall not constitute a breach of this Agreement; or

                  (ii) Phar-Mor,  at its election,  may exclude a group of Newly
                  Affiliated  Pharmacies acquired through a Business Combination
                  from the  pricing  terms  specified  in  Section  19 below and
                  instead base its Cost of Goods for  Merchandise for such Newly
                  Affiliated  Pharmacies  on  the  following  pricing  schedule.
                  Phar-Mor's  purchases of Merchandise from McKesson pursuant to
                  this subsection  11.(ii) shall be included in calculating each
                  of the following:


                      (i)   Prepayment payment amount and incentive specified
                            in  Section  9; 
                      (ii)  Chainwide  returns  in  Section 16.B.;
                      (iii) Annual  Volume  Incentive  specified in Section 19;
                      (iv)  Select  Generics  Program in Section 20; and 
                      (v)   Repack quarterly volume in Section 21.


<PAGE>

                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.

                           The parties agree to meet to discuss possible further
                  reductions in the prepayment  incentive  percentages set forth
                  in Section 9 based on any additional  purchase volume provided
                  pursuant to this Section 11.(ii).

                           Group-wide Monthly Average
                  per Newly Affiliated Pharmacy          Rx                OTC
                  -------------------------------------------------------------
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)
                  $                 (*)                  (*)              (*)

                  It is further  understood  and agreed by the  parties  that if
                  Phar-Mor  is unable to achieve or fails to  maintain a minimum
                  group-wide  average  monthly  volume  of  $(*)  in net  D.S.D.
                  prescription  drug and OTC product purchases from McKesson per
                  each Newly  Affiliated  Pharmacy  involved in a given Business
                  Combination  during any rolling three (3) month period of this
                  Agreement  [excluding  the first  three (3)  months  following
                  consummation of the Business Combination], McKesson shall have
                  the right, in its sole  discretion,  to refuse to service such
                  Newly  Affiliated  Pharmacies.  Such  refusal  on the  part of
                  McKesson shall not constitute a breach of this Agreement .

                  For  purposes  of this  Subsection  11.  (ii),  each  Business
                  Combination  shall  constitute  a  separate   transaction  and
                  Phar-Mor shall be permitted to combine the purchase volumes of
                  groups of Newly Affiliated Pharmacies acquired in separate and
                  distinct Business Combinations; or

                  (iii)  Purchases  by  Newly  Affiliated  Pharmacies  shall  be
                  covered  by the  Cost of  Goods  pricing  terms  set  forth in
                  Section 19.


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                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


12.      COMPETITIVE BID

         If at any time after the second anniversary of the Implementation  Date
         of this Agreement, Phar-Mor is able to secure more competitive material
         terms favorable to Phar-Mor,  including value-added business solutions,
         Phar-Mor may  terminate  this  Agreement  upon giving  thirty (30) days
         written  notice.  Said written  notice will provide  McKesson  with the
         exclusive opportunity to meet or exceed those more competitive material
         terms  and/or  services,  Phar-Mor  shall  make  available  in  writing
         pertinent  sections  of any  competitive  material  bid for  review  by
         McKesson for this process.  McKesson  shall have fifteen (15) days from
         receipt  of this  notice  to  accept  or  reject  the  change  in terms
         necessary to meet the more  competitive  material  offer or  agreement;
         provided  however,  that any  such  rejection  by  McKesson  shall  not
         constitute a default of this Agreement.

         Notwithstanding  the foregoing  provisions,  nothing in this Section 12
         shall relieve  Phar-Mor of its liability or obligation for any accounts
         receivable  balances or any other  payments due to McKesson at the date
         of termination.


13.      SERVICE COMMITMENT

         A.       Inventory
                  1)  Service Level
                      McKesson   will  ensure  a (*)%  service   level  for  any
                      prescription  drug  products.  In the  unlikely  event the
                      chainwide average falls below (*)% for (*) consecutive
                      (*),  a (*) penalty will be paid to Phar-Mor on its total
                      purchases for that period.

                      In  the   event  of  a  breach  of  this   service   level
                      requirement,   in  addition  to  the  termination   rights
                      accorded Phar-Mor hereunder, Phar-Mor, at its own expense,
                      may remedy the  shortfall  with the purchase of goods from
                      third parties without any liability to McKesson for same.

                      Service  level is defined as total  lines ordered (partial
                      lines  included)  less  total omit lines (ordered  but not
                      filled).  Items that the manufacturer is unable to supply,
                      manufacturer back-orders,  product recalls  and new  items
                      for a (*) day period  from first distribution by  McKesson
                      to any of Phar-Mor's  pharmacies are  to be excluded  from
                      the service level calculation.

                  2)  Items out of Stock
                      a)  In  the  event  the  primary  Distribution  Center  is
                          temporarily out of stock of Phar-Mor prescription drug
                          and ethical OTC products, the Distribution

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                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


                          Center will utilize McKesson's  National  Distribution
                          Network  to make those  items  ordered  available  for
                          re-order,  within  (*)  hours.  If  the  item  is  not
                          available within the McKesson network, it will be drop
                          shipped from the vendor if stock is available.  In the
                          event that  prescription drug and ethical OTC products
                          are not available  within (*)hours,  Phar-Mor,  at its
                          own  expense,   shall  be  entitled  to  purchase  any
                          prescription   drug  products  from  any  third  party
                          without penalty.

                      b)  Any  prescription  drug and ethical OTC  products  not
                          stocked by the  primary  Distribution  Center  will be
                          available through  McKesson's Premier Customer Service
                          Center.  If stocked in another  McKesson  location  it
                          will be available  for store order,  within (*) hours.
                          If not stocked in any  McKesson  location,  it will be
                          drop shipped from the vendor,  if stock is  available.
                          In the event that any  prescription  drug and  ethical
                          OTC  products  are not  available  within  (*)  hours,
                          Phar-Mor,  at its own  expense,  shall be  entitled to
                          purchase  any   prescription   drug  and  ethical  OTC
                          products from any third party without penalty.

         B.       Delivery

                  All  deliveries  to  Phar-Mor   pharmacies  will  be  made  in
                  accordance with the attached delivery  schedule.  An exception
                  to the  delivery  schedule may arise in the event of inclement
                  weather   conditions  which  would  disallow  normal  delivery
                  performance. In such circumstances, McKesson will exercise its
                  best  efforts  to  deliver  the  Merchandise  as  close to the
                  scheduled time as possible.


14.      SYSTEMS AND SERVICES

         All  Phar-Mor  in-store  pharmacies  will  be  provided  access  to the
         following components of the ECONOMOST Asset Management System:

                  A. On-line access to Phar-Mor data via McKesson's  Information
                  Warehouse  technology (to include Phar-Mor  requested reports)
                  at no charge.

                  B. Telxon  electronic  order entry equipment  (including shelf
                  wand) at no charge.

                  C. Item price stickers, at no charge, with Phar-Mor custom 
                   pricing, where required,

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                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.

                           and other features such as:
                                    1)  Department number
                                    2)  Invoice cost
                                    3)  Month and year ordered
                                    4)  Store name
                                    5)  AWP or retail pricing
             (Note: Each feature is available for both Rx and OTC.)

                  D. Bar-coded shelf labels, at no charge.

                  E.  Consolidated  Quarterly  Purchase Reports for all Phar-Mor
                  store purchases, at no charge.

                  F. Monthly  report of  controlled  substances  purchased  from
                  McKesson Drug for each store, at no charge.

                  G. A  complete  catalog  or  microfiche  of items  stocked  by
                  McKesson's Distribution Centers, at no charge.

                  H.  Econolink  system  available  for  the  Pharmacy  and  OTC
                  departments  located at Phar-Mor  Headquarters,  at no charge.
                  Retail  Econolink  systems  will be  available to all Phar-Mor
                  pharmacies,  at no  charge.  Econolink  shall be  subject to a
                  separate  agreement  between  the  parties  governing  use and
                  maintenance at no charge.

         I.       Electronic price update information will be provided weekly,
                  at no charge.

         J.       OmniLink:  Terms and conditions for  utilization of McKesson's
                  OmniLink program will be agreed to under separate contract.

                  McKesson  guarantees that Phar-Mor's  average cost benefit for
                  this  program  will not fall below (*) per  transaction.  This
                  guarantee  is  contingent  on  Phar-Mor  participating  in all
                  designated  transaction  edits that McKesson and Phar-Mor have
                  reasonably  identified as being  capable of creating  economic
                  value.  Phar-Mor will reserve the right to negotiate  directly
                  for competitive switch fees in the event they choose to do so.

                  Phar-Mor  will  reserve the right to  negotiate  directly  for
                  competitive switch fees in the event they choose to do so.

                  OmniLink  will serve as the  platform  for  McKesson's  future
                  development of additional value added programs,  e.g.,  market
                  share, patient enhancement, asset management, etc.

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                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


                  McKesson  will  provide  Phar-Mor  with a test of the OmniLink
                  program  to one  region  in  Phar-Mor's  chain at no charge to
                  Phar-Mor.


15.               ON-SITE SUPPORT

         McKesson  will pay Phar-Mor (*) within  thirty (30) days  following the
         execution  of this  Agreement  by both  parties and  annually  upon the
         anniversary  of the  Implementation  Date towards the cost of hiring an
         employee to provide  internal support at Phar-Mor for the execution and
         administration  of this Agreement and its  prescription  drug business.
         Such  individual  will be an employee of Phar-Mor,  and McKesson  shall
         have no  obligation to such employee  whatsoever,  its only  obligation
         relating  to  the  payment  of  funds  as  provided  herein.  Upon  the
         termination  of this  Agreement,  McKesson's  obligation  to  fund  the
         position  provided  for in this  Section  15 shall  cease  without  the
         payment of any further monies in connection with same.  Further, in the
         event of early termination of this Agreement by either party,  Phar-Mor
         shall  immediately  repay to McKesson a pro-rata  portion of the monies
         paid hereunder in accordance with the following reimbursement formula:

             Total Amount of On-Site                    Number of months
             Support Monies Previously      times       remaining in the sixty
             Paid By McKesson to                        month contract period
                     Phar-Mor                           upon date of termination
                                                        -----------------------
                                                                 60

16.               RETURNED GOODS HANDLING

         A.       The following  policy is  predicated on Phar-Mor's  ability to
                  not exceed an average  monthly return  percentage of (*)%. All
                  returns to be processed  through  McKesson's  electronic order
                  entry system.  Merchandise  purchased from Phar-Mor's previous
                  wholesale  supplier  will be eligible for return in accordance
                  with the following guidelines.

               1.  Credits from  McKesson are divided into four (4)  categories,
               depending on the reason for the claim. Credits will be issued for
               any of the following reasons: 

               a)   Non-merchandise  problems,  such  as  shortages,   shipping,
                    billing and pricing errors;

               b)   McKesson merchandise received in error; c) Recalls; and

<PAGE>

                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


               d)   Outdated  merchandise  [defined  as items with less than six
                    (6) months dating].

          2.   The amount of credit allowed by McKesson will vary, as follows:

               a)   (*)credit will be given for:
                    i.   Pricing errors, shipping errors and billing errors;
                    ii.  Shortages  (required to be phoned into the Distribution
                         Center within 48 hours of receipt of Merchandise);
                    iii. Ordering  errors  (must be  returned  within 30 days of
                         receipt);
                    iv.  Manufacturer recalls,
                    v.   Items  received  with less than six (6) months  dating,
                         and
                    vi.  Merchandise that had concealed damage.


<PAGE>


                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


               b)   (*) credit will be given for: i. Clean,  salable merchandise
                    with at least nine (9) months  dating  returned more than 30
                    days after store receipt.

               c)   (*) credit  will be given  for:  i.  Unsalable  merchandise;
                    which can be returned to  manufacturer  ii.  Outdated  items
                    (subject to the  approved  vendor  list);  and iii.  Salable
                    merchandise with price tickets not removed.

                            d) (*) credit will be given for:
               i.   Merchandise   damaged  in  in-store   pharmacies,   and  ii.
                    Merchandise  from  manufacturers  not listed on the approved
                    vendor  list.  These  items will be returned to the store of
                    origination.

               e)   Phar-Mor   stores  will  be  allowed  to  return   overstock
                    Merchandise  for 100%  credit  one  time  per  year  with no
                    handling charge assessed. The Merchandise must have at least
                    six (6) months dating remaining and be in salable condition.

          B.   Understanding that returns are a costly process for both parties,
               McKesson agrees to provide the following pricing  adjustment,  as
               applicable, to Phar-Mor:

                                                    Adjustment to Cost of Goods
                       Chainwide Returns &                Reduction/Mark Up
                  Allowances to Net Purchases            on all Net Purchases
                  ---------------------------            --------------------
                              (*)                                (*)
                              (*)                                (*)
  
               Adjustment to Cost of Goods  Reduction/Mark Up will be calculated
               at  the  end  of  each  quarter  and  will  be  credited  on  the
               immediately  previous  quarter's  business  (i.e.,  1st  quarter,
               Returns & Allowances = 0.0%, (*)  adjustment  paid on 1st quarter
               purchases.)

          C.   McKesson agrees to undertake certain administrative activities to
               reasonably  assist Phar-Mor with the processing of its returns of
               outdated and damaged  goods through BFI  Pharmaceutical  Services
               Inc. ("BFI").  In this regard,  McKesson will credit Phar-Mor (or
               pay in the event of amounts  due  following  termination  of this
               Agreement) the full amount of any related  payments made directly
               to  McKesson  by the  manufacturers  to  which  such  goods  were
               returned by BFI on Phar-Mor's behalf. Returns through BFI will be

<PAGE>

               made  three  (3)  times  per year and  credit  shall be issued to
               Phar-Mor within thirty (30) days following  McKesson's receipt of
               payment from the  manufacturer  or other party in connection with
               such returns.  Notwithstanding  the  foregoing,  McKesson  hereby
               assumes no liability or responsibility  for the actual collection
               or timely payment of any such sums  contemplated by Phar-Mor from
               the manufacturer based on this returns process.


17.      CUSTOMER SUPPORT

         A.      National Account  Customer service  personnel will be available
                 at the McKesson  Premier  Service Center from 8:00 a.m. to 7:00
                 p.m. Monday through Friday.  Technical and emergency support is
                 available 24 hours a day, seven days a week.

         B.      A National  Account  Executive and National  Accounts  Customer
                 Relations  Manager will be assigned to Phar-Mor's  headquarters
                 and will be available as needed.

         C.      Phar-Mor  will be provided the names and  telephone  numbers of
                 its key contacts at McKesson as well as the names and telephone
                 numbers of McKesson's designated support personnel.

         D.      A McKesson  representative will visit each of Phar-Mor's stores
                 once each quarter  during the term hereof.  Such visits will be
                 scheduled with reasonable advance notice with such stores.


18.      INSTALLATION AND TRAINING

         McKesson  field   management  will  contact   Phar-Mor's   Headquarters
         personnel   to  arrange   meetings   for   orientation   to  begin  the
         implementation  process  with timing that is mutually  agreeable to the
         parties.

         McKesson  agrees to provide the  necessary  training  on the  Economost
         system at no cost prior to the  Implementation  Date. This will include
         training  on the  electronic  order  entry  device if needed as well as
         instruction on how to utilize the information  provided on the invoice,
         item  sticker and shelf label.  Other  appropriate  in-store  training,
         e.g., EconoLink will be made available at no cost as reasonably needed.

         McKesson agrees to provide the manpower reasonably necessary to install
         shelf labels for all stores at no cost.





<PAGE>

                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


19.      COST OF GOODS

         The  following  Retail Cost of Goods is based on  Phar-Mor  achieving a
         minimum  chainwide  average  volume  of (*) in  Direct  Store  Delivery
         ("D.S.D.")  prescription drug and OTC product purchases (net of returns
         and allowances)  per store per month from McKesson  throughout the term
         of this Agreement.

         Retail Direct Store Delivery

                  Rx                    Cost (*)
                  OTC                   Cost (*)

         In the event  that  Phar-Mor  fails to  maintain  a  minimum  chainwide
         average volume of (*) in net D.S.D.  prescription  drug and OTC product
         purchases per store per month from McKesson during any (*) month period
         of this Agreement  [excluding the first (*) months of this  Agreement],
         all retail cost of goods  pricing  hereunder  shall be increased to the
         then  applicable  pricing based on the following  schedule  during each
         subsequent  (*) month period  until such time as the minimum  chainwide
         net  D.S.D.   prescription   drug  and  OTC  product   purchase  volume
         requirement of (*) is met for (*) consecutive months.


         Chain-wide Monthly
         Average Per Store                           Rx       OTC

         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)
         (*)                                         (*)      (*)

         It is further  understood  and agreed by the  parties  that if Phar-Mor
         fails to  maintain  a minimum  chainwide  average  volume of (*) in net
         D.S.D.  prescription drug and OTC product purchases per store per month
         from  McKesson  during any rolling (*) month  period of this  Agreement
         [excluding the first (*) months of this Agreement],  such failure shall
         constitute a default of this Agreement by Phar-Mor.




<PAGE>

                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.

         Annual Volume Incentive

         McKesson  agrees to pay Phar-Mor a volume  incentive  payment  based on
         Phar-Mor's  annual purchase volume of D.S.D.  prescription drug and OTC
         products  (net of  returns  and  allowances)  in  accordance  with  the
         following  schedule.  This annual  purchase  volume shall be calculated
         using the twelve month period commencing on the Implementation  Date of
         this Agreement or the anniversary thereof, as appropriate, and any such
         volume  incentive  earned  by  Phar-Mor  shall be paid by check  within
         forty-five   (45)  days   following   the   anniversary   date  of  the
         Implementation Date of this Agreement. The net D.S.D. prescription drug
         and OTC products  purchased by both Phar-Mor's Newly Opened  Pharmacies
         and  Newly  Affiliated  Pharmacies  shall  be  included  in the  Volume
         Incentive calculation.

         Volume Incentive
         Annual D.S.D.  Prescription Drug
         and OTC Product Purchases                % on Total

         Less than         (*)                                         (*)
                           (*)                                         (*)
                           (*)                                         (*)
                           (*)                                         (*)
                           (*)                                         (*)
                           (*)                                         (*)
                           (*)                                         (*)
                           (*)                                         (*)

20.      GENERIC PHARMACEUTICALS

         McKesson  shall pay to Phar-Mor an annual  guaranteed  rebate  based on
         Phar-Mor's  participation  in McKesson's  Select Generics  Program.  In
         order   to   qualify   as   participation    hereunder,   all   generic
         pharmaceuticals  purchased by Phar-Mor  pharmacies shall be required to
         be purchased  through  McKesson's  Select  Generics  Program.  Provided
         Phar-Mor's participation meets the percentage levels as specified below
         in any year, the guaranteed rebate schedule shall be as follows:

         Select Generics Rebate Schedule
         % of Select Generics to Total Rx                      Rebate
         ----------------------------------------------------------------------
         (*)                                                     (*)
         (*)                                                     (*)
         (*)                                                     (*)
         (*)                                                     (*)
         (*)                                                     (*)

<PAGE>

                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.



Select Generics Rebate Schedule
% of Select Generics to Total Rx                        Rebate
---------------------------------                       ------
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)
           (*)                                           (*)

         The  guaranteed  rate shall be paid in  prorated  payments  to Phar-Mor
         quarterly.

         McKesson shall conduct quarterly reviews of the Select Generics Program
         to ensure Phar-Mor of the market competitiveness of the Select Generics
         Program.

             McKesson  will ensure a (*)% service  level for products  purchased
             under the Select  Generics  Program,  assuming  the  manufacturers'
             ability to supply the product.

             In the event of a Business Combination, the parties agree to modify
             the above Select Generics Rebates prorata to include the additional
             new Select Generics volume that results from the  combination.  For
             example,  if  Phar-Mor's  annual  total  Rx  purchases  are (*) and
             Phar-Mor is purchasing McKesson Select Generics at the(*)% of total
             Rx  level  and  Phar-Mor  then  combines  with  a  comparable-sized
             business entity (that is also purchasing (*) in total Rx purchases)
             and that also  purchases  Select  Generics  at the (*)% of total Rx
             purchases  level,  then the combined  entity's  rebate would be (*)
             annually.


21 .     REPACK PHARMACEUTICALS

         A  competitive  and  comprehensive  program  will be made  available to
         Phar-Mor for repacked pharmaceuticals.  Stores shall be net-billed with
         an additional volume rebate to be paid to Phar-Mor  headquarters,  each
         quarter.


<PAGE>

                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


         Quarterly Repack Volume                              Rebate %
                  (*)                                                  (*)
                  (*)                                                  (*)
                  (*)                                                  (*)


2.       FORCE MAJEURE

         If service from any of McKesson's  Distribution Centers to any Phar-Mor
         store(s) is interrupted or delayed  because of strike,  lockout,  labor
         dispute,  fire or other  casualty,  or any  other  reasons  beyond  the
         reasonable  control of McKesson,  McKesson will take such action as may
         be reasonably necessary, without additional cost or expense to Phar-Mor
         to maintain  service as mutually agreed upon to affected Stores from an
         alternate  McKesson  distribution  center.   Notwithstanding   anything
         contained  herein to the  contrary,  if  McKesson  cannot  deliver  the
         Merchandise in accordance with the terms of this  Agreement,  Phar-Mor,
         at its own expense,  shall be entitled to purchase the Merchandise from
         any third party without penalty.


23.      TERMINATION

         Any breach of this Agreement by either party shall constitute a default
         if not cured within sixty (60) days after written notice of such breach
         is given by the non-breaching  party. Upon default by either party, the
         other party may  terminate  this  Agreement  on five (5) days'  written
         notice.

         Either party may, on ten (10) days notice,  terminate  this  Agreement,
if:

            A. The  other  party  shall  file  any  petition  under  bankruptcy,
               reorganization,  insolvency or moratorium laws, or any other laws
               for the relief of or intention to the relief of debtors; or

            B. The other party  shall file any  involuntary  petition  under any
               bankruptcy statute or a receiver or trustee shall be appointed to
               take  possession of all or substantial  part of the assets of the
               party which has not been  dismissed  or  terminated  within sixty
               (60) days of such filing or appointment; or

            C. The other party shall make a general  assignment  for the benefit
               of  creditors  or shall  become  unable or admit in  writing  its
               inability to meet its obligations as they mature; or


<PAGE>

            D. The other party shall  institute any  proceedings for liquidation
               or the  winding up of its  business  other than for  purposes  of
               reorganization, consolidation or merger; or

         E.    The other party fails to make any payment when due in  accordance
               with  the  terms  of  this  Agreement;   provided  however,  such
               termination shall not take effect if the payment default is cured
               prior to expiration of the ten (10) day notice period.

         Upon termination  pursuant to this Section 23, neither party shall have
         any further  obligations or liabilities  hereunder  except for accounts
         receivable  balances or any other  payments  due to either  party based
         upon  obligations  under  this  Agreement  at  the  date  or  upon  the
         occurrence of such termination.


24.      CONFIDENTIALITY

         The parties  agree to maintain in confidence  the terms and  conditions
         contained  herein,  and shall take every  precaution  to  disclose  the
         contents  of this  Agreement  only to  those  employees  of each of the
         parties  who have a  reasonable  need to know  such  information  or as
         required by law or legal process.  Notwithstanding the foregoing,  each
         party  hereto may reveal the terms of this  Agreement,  or  appropriate
         portions hereof,  to (i) those of its (or its  affiliates')  employees,
         directors,  agents, and outside accountants,  auditors,  legal counsel,
         and lenders who need to know the  information  embodied herein to carry
         out the express  purposes of this Agreement or otherwise to advise them
         or (ii) potential lenders,  potential  investment bankers, or potential
         bona  fide  investors  or  (iii)   professionals   (legal  counsel  and
         accountants)  representing  either of the parties to the extent  deemed
         necessary  or  advisable  by a party,  provided  each such party hereto
         informs each such  employee,  director,  agent,  outside  accountant or
         auditor, or any other authorized  third-party recipient specified above
         of  the  confidential  nature  of  this  Agreement  and  such  persons'
         obligations to maintain the confidentiality herein provided.


25.      NOTICES

         All notices given or required to be given hereunder shall be in writing
         and shall be deemed to have been duly given when delivered in person or
         three (3) days  after  being sent by  certified  mail,  return  receipt
         requested,  postage  prepaid,  or when received via overnight  courier,
         confirmed  telecopy,  telex or other  electronic  transmission,  in all
         cases  addressed  to the party from whom  intended  at its  address set
         forth below, provided that either party may, by like notice, change the
         address to which subsequent notices shall be sent.


<PAGE>

           If to McKesson:                        If to Phar-Mor:

          McKesson Drug Company                 Phar-Mor, Inc.
          1220 Senlac Drive                     20 Federal Plaza West
          Carrollton, TX  75006                 P.O. Box 400
          ATTN:  Senior Vice President,         Youngstown, OH  44501-0400
                 National Accounts East         ATTN:  Vice President,
                 Facsimile: (972)446-4499              Pharmacy Operations
                                                       Facsimile: (330)740-1085
         With a copy to
          McKesson Corporation                      With a copy to:
          One Post Street                        Phar-Mor, Inc.
          San Francisco, CA  94104               20 Federal Plaza West
          ATTN:  General Counsel                 P.O. Box 400
                 Facsimile: (415)983-8826        Youngstown, OH  44501-0400
                                                 ATTN:  General Counsel
                                                        Facsimile: (330)740-2985
26.      MISCELLANEOUS

                  A. This Agreement  embodies the entire  agreement  between the
                  parties  with  regard  to  the  subject   matter   hereof  and
                  supersedes   all   prior   agreements,    understandings   and
                  representations  and may not be  modified  except  by  writing
                  signed by the parties hereto.

                  B. Neither party shall have the right to assign this Agreement
                  or any interest  therein  without the prior written consent of
                  the other party.

                  C. This  Agreement  shall be construed in accordance  with the
                  laws  of the  State  of  Ohio  without  regard  to  the  rules
                  regarding conflicts of laws.

                  D. If any  federal,  state or local  tax  currently  or in the
                  future  is  levied  upon  McKesson  in  a  jurisdiction  where
                  McKesson  or  Phar-Mor  do  business  and such tax  relates or
                  applies to the Merchandise or any transactions covered by this
                  Agreement  (excluding taxes imposed on McKesson's net income),
                  the cost of goods  payable to McKesson  by Phar-Mor  hereunder
                  shall be increased by a corresponding percentage amount, or in
                  the  alternative,  the  amount of any such tax will be paid by
                  Phar-Mor as a separate invoice charge.

                  E. If any  provision of this  Agreement  shall be held invalid
                  under any applicable law, such invalidity shall not affect any
                  other  provision of this  Agreement,  except to the extent the
                  absence  of such  invalid  provision  deprives  a party of the
                  benefit of its bargain hereunder,  in which case, the party so
                  deprived may terminate this Agreement on ten (10) days written
                  notice to the other party, without any further liability other
                  than for any amount owed at the time of such termination.


<PAGE>

                  F. The  failure of either  party to enforce at any time or for
                  any period of time any one or more of the  provisions  thereof
                  shall not be construed to be a waiver of such provisions or of
                  the  right of such  party  thereafter  to  enforce  each  such
                  provision.

                  G.  Phar-Mor  understands  and  acknowledges  that all product
                  discounts and rebates earned by or granted to its stores under
                  McKesson's  programs  may be  subject  to  certain  state  and
                  federal  laws  and  regulations   regarding  reporting  and/or
                  disclosure requirements and may be required to be reflected in
                  the costs claimed or charges made by  Phar-Mor's  stores under
                  Medicaid,  Medicare  or any other  health  care  reimbursement
                  program or provider plan.

                  H. McKesson carries  significant  insurance.  However, it also
                  requires its vendors to provide insurance coverage of at least
                  three million dollars ($3,000,000) to cover product claims and
                  looks to them for any deficiencies.

                           McKesson shall at its own expense obtain and maintain
                  comprehensive  general liability  insurance including products
                  liability, personal injury and contractual liability, covering
                  McKesson's   actions  and   omissions   with  respect  to  its
                  performance  hereunder,  including those of all its employees,
                  agents and representatives,  in the minimum amount of not less
                  than  Three  Million  Dollars  ($3,000,000)  per  person,  per
                  occurrence,  and Five Hundred Thousand ($500,000) for Property
                  damage . Such policy  shall be deemed  primary as to any other
                  valid and  collectible  insurance  which may be carried by any
                  other  liable  party.  Such policy  shall name  Phar-Mor as an
                  additional  insured  and shall  provide at least 30 days prior
                  written  notice to Phar-Mor of any  proposed  cancellation  or
                  material  change in the policy for any cause.  McKesson  shall
                  provide  a  certificate  of  insurance   reflecting  all  such
                  coverages  within ten days of execution of this Agreement.  It
                  is agreed by the parties that  McKesson  shall have the option
                  to self-insure for this coverage.

                  I.  McKesson  shall  defend,   indemnify,  and  hold  Phar-Mor
                  harmless from and against any and all losses, claims, damages,
                  liabilities,  and expenses (including attorneys' fees) arising
                  out  of or  resulting  from  (1)  the  storage,  handling,  or
                  delivery by
                           McKesson of products  sold to Phar-Mor  hereunder and
                           (2) for  product  liability  to the  extent  that the
                           manufacturer  fails to  indemnify  Phar-Mor  from any
                           liability for
                  such  manufacturer's  products sold to Phar-Mor  hereunder and
                  (2) for product  liability to the extent that the manufacturer
                  fails  to  indemnify  Phar-Mor  from  any  liability  for such
                  manufacturer's products sold to Phar-Mor hereunder;  provided,
                  however,  that  such  indemnification  shall  not apply to the
                  extent  Phar-Mor  has caused  such  losses,  claims,  damages,
                  liabilities,  and  expenses by reason of the acts or omissions
                  of Phar-Mor, its employees or agents.

                  J. Phar-Mor shall have the right, during normal business hours
                  upon thirty (30) days  written  notice to  McKesson,  to audit
                  such portions of the books and records of

<PAGE>

                        Confidential Treatment Requested.
      The redacted material has been separately filed with the Commission.


                           McKesson  relating  to the  purchase  of  goods  sold
                  hereunder to  Phar-Mor,  which audit shall be limited in scope
                  to  verification of the cost to McKesson of goods sold and the
                  amount and price of goods  shipped  hereunder.  In  connection
                  with any such audit,  McKesson shall (1) provide  Phar-Mor and
                  its legal counsel, accountants, and other representatives with
                  reasonable   access   to  all   facilities,   employees,   and
                  accountants (upon reasonable request and advance notice),  and
                  such portions of the books and records of McKesson relating to
                  such cost,  price,  and  shipment  hereunder  and (2)  furnish
                  Phar-Mor   and  such   persons   copies  of  such   documents,
                  information, and data concerning such cost, price and shipment
                  hereunder as Phar-Mor or such persons may reasonably request.

                           If, after any such audit  pursuant  hereto,  Phar-Mor
                  disputes  the  cost,  price  of  amount  of goods  shipped  or
                  received  hereunder or the calculation of cost as reflected on
                  the books and  records of  McKesson,  Phar-Mor  shall  provide
                  McKesson   with  a  written   report   reflecting   Phar-Mor's
                  determination of such disputed items. Within fifteen (15) days
                  after  receiving such report,  McKesson shall (3) pay Phar-Mor
                  any additional  amounts due to Phar-Mor or the portion thereof
                  which is not disputed or (4) provide Phar-Mor with notice that
                  McKesson  disagrees  with  Phar-Mor's  determination  of  such
                  disputed items and the specific details of such  disagreement.
                  If  McKesson   and   Phar-Mor   are  unable  to  resolve  such
                  disagreement  within fifteen (15) days after such negotiations
                  begin, then such disagreement shall be submitted to a mutually
                  satisfactory   independent   auditor  for   resolution.   Such
                  independent  auditor's  resolution  of any  such  disagreement
                  shall  be  reflected  in  a  written  report  which  shall  be
                  delivered  to,  and  shall  be  binding  upon,   Phar-Mor  and
                  McKesson. Any amounts due as a result of such resolution shall
                  be paid by the  party  required  to make such  payment  to the
                  other party  within  fifteen (15) days after such paying party
                  receives the independent  auditor's  written report.  Phar-Mor
                  shall pay all costs and fees of the independent auditor unless
                  McKesson is required to pay an amount in excess of $100,000 as
                  a result of the resolution by the  independent  auditor of any
                  disagreement,  in which case, McKesson shall pay all costs and
                  fees of the independent auditor.




<PAGE>









         IN WITNESS  WHEREOF the parties  have caused this  Agreement to be duly
executed,  subject to ratification by Phar-Mor's Board of Directors on or before
July 15, 1997, as of the date and year first above written.

Phar-Mor, Inc.


By:___Robert Sarvas________________  Title: Vice President, Pharmacy Operations

Print
Name:   Robert Sarvas                 Date: ___6/19/97____________________


McKESSON DRUG COMPANY
a Division of McKESSON CORPORATION


By:       Mark Majeske               Title: President, Customer Operations

Print
Name:  Mark Majeske                  Date: ____6/23/97_______________________