##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the Fiscal Year EndedMarch 30, 2007

or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number0-23832

PSS WORLD MEDICAL, INC.

(Exact name of Registrant as specified in its charter)



|                                                |  |                                     
|----------------------------------------------- |  | ------------------------------------
|FLORIDA                                         |  | 59-2280364                          
|(State of incorporation)                        |  | (I.R.S. Employer Identification No.)
|                                                | 
|4345 Southpoint Boulevard Jacksonville, Florida |  | 32216                               
|(Address of principal executive offices)        |  | (Zip Code)                          

Registrants telephone number, including area code (904) 332-3000

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



|                                        |  |                                     
|--------------------------------------- |  | ------------------------------------
|Title of each class                     |  | Name of Exchange on which
registered
|Common Stock, $0.01 par value per share |  | NASDAQ Stock Market                 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ̈

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ̈No þ

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 þ 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. ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):



|                          |  |                    |  |                       
|------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer þ |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ̈No þ

The aggregate market value of common stock held by non-affiliates, computed by reference to the closing price as reported on the NASDAQ, as of September 29, 2006 was approximately $1,294,068,222.

The number of shares of Common Stock, $0.01 par value, of the Registrant outstanding at May 23, 2007, was 67,196,884.



---

##### Table of Contents

Document Incorporated by Reference

Portions of the Registrants Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after March 30,
2007, are incorporated by reference into Part III of this Annual Report on Form 10-K.



1



---

##### Table of Contents

TABLE OF CONTENTS



|     |  |                                                                                                              |  |     
|---- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|Item |  |                                                                                                              |  | Page
|     |  | Cautionary StatementsForward-Looking Statements                                                             |  | 3   
|     |  |                                                                                                             
|     |  | Part I                                                                                                       |  |     
|     |  |                                                                                                             
|1.   |  | Business                                                                                                     |  | 6   
|     |  |                                                                                                             
|1A.  |  | Risk Factors                                                                                                 |  | 15  
|     |  |                                                                                                             
|1B.  |  | Unresolved Staff Comments                                                                                    |  | 27  
|     |  |                                                                                                             
|2.   |  | Properties                                                                                                   |  | 28  
|     |  |                                                                                                             
|3.   |  | Legal Proceedings                                                                                            |  | 29  
|     |  |                                                                                                             
|4.   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 29  
|     |  |                                                                                                             
|     |  | Part II                                                                                                      |  |     
|     |  |                                                                                                             
|5.   |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 30  
|     |  |                                                                                                             
|6.   |  | Selected Financial Data                                                                                      |  | 33  
|     |  |                                                                                                             
|7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 34  
|     |  |                                                                                                             
|7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 61  
|     |  |                                                                                                             
|8.   |  | Financial Statements and Supplementary Data                                                                  |  | F-1 
|     |  |                                                                                                             
|9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 63  
|     |  |                                                                                                             
|9A.  |  | Controls and Procedures                                                                                      |  | 63  
|     |  |                                                                                                             
|9B.  |  | Other Information                                                                                            |  | 65  
|     |  |                                                                                                             
|     |  | Part III                                                                                                     |  |     
|     |  |                                                                                                             
|10.  |  | Directors, Executive Officers and Corporate Governance                                                       |  | 66  
|     |  |                                                                                                             
|11.  |  | Executive Compensation                                                                                       |  | 66  
|     |  |                                                                                                             
|12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 66  
|     |  |                                                                                                             
|13.  |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 67  
|     |  |                                                                                                             
|14.  |  | Principal Accountant Fees and Services                                                                       |  | 67  
|     |  |                                                                                                             
|     |  | Part IV                                                                                                      |  |     
|     |  |                                                                                                             
|15.  |  | Exhibits and Financial Statement Schedules                                                                   |  | 68  
|     |  |                                                                                                             
|     |  | Signatures                                                                                                   |  | 73  



2



---

##### Table of Contents

CAUTIONARY STATEMENTS

Forward-Looking Statements

Management may from time-to-time make written or oral forward-looking statements with respect to the Companys annual or long-term goals, including statements contained in this Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports to shareholders, press releases, and other communications. These statements are subject to risks and uncertainties that could cause actual results to differ materially
from historical earnings and those currently anticipated or projected. Management cautions readers not to place undue reliance on any of the Companys forward-looking statements, which speak only as of the date made.

Words such as anticipates, expects, intends, plans, believes, seeks, estimates,
may, could, and similar expressions identify forward-looking statements. Forward-looking statements contained in this Annual Report on Form 10-K that involve risks and uncertainties include, without limitation:



| |  | Managements belief that the medical products distribution industry is expected to experience continued growth due to the aging U.S. population, increased
healthcare awareness, the proliferation of medical technology and testing, new pharmacology treatments, and expanded third-party insurance coverage;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the elder care market is expected to continue benefiting from the increasing growth rate of the U.S. elderly population and the
expansion of provider care into the patients home;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the physician market is expected to continue benefiting from the shift of procedures and diagnostic testing in hospitals to alternate
sites, particularly physician offices;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the conversion of the customer order entry channels (electronic data interface, GSOnline, and JD Edwards systems order entry) for the
Elder Care Business into a single enterprise-wide solution will be completed during fiscal year 2008;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the enhancements to the i2 SCM and JD Edwards systems (JDE) will enable the Company to improve fill rates and
increase inventory turnover for globally-sourced products to support rapid expansion of the global product sourcing initiative;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements intent to further enhance the Companys information systems by leveraging additional EDI transactions sets and enhancing demand forecasting
capabilities to increase operating inventory turnover and decrease administrative expenses;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the Companys costs associated with complying with the various applicable federal and state statutes and regulations, as they now
exist and as they may be modified, could be material;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the healthcare services industry will continue to be subject to extensive regulation at the federal, state, and local levels and the
Company has had, and will continue to have, adequate compliance programs and controls to ensure compliance with the laws and regulations;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that any new legislation or regulations, or new interpretations of existing statutes and regulations, governing the manner in which the
Company conducts its business could have a material adverse impact on the Company and could adversely affect its profitability;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that a failure of a manufacturer to comply with the requirements of the Food and Drug Administration, the Drug Enforcement Administration
and other Federal, state and local authorities, or changes in such requirements, could result in recalls, seizures, manufacturing suspensions or other
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3



---

##### Table of Contents

| | interruptions in the production, supply, and sale of its products that may result in a material adverse impact on the Companys business;
| | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that changes in the extensive regulations, or in their interpretation or enforcement, applicable to the Companys customers, could
adversely impact the Companys business in ways which are difficult for the Company to predict;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that relations with employees are good and the Companys long-term success depends on good relations with its employees, including its
sales professionals;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the outcome of legal proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the
Companys consolidated financial position, liquidity, or results of operations;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements intention to retain earnings for the growth and development of the Companys business and not declare cash dividends in the foreseeable
future;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the global sourcing initiative is expected to improve its cost competitiveness and increase its gross margins on certain products and
will continue to increase income from operations during fiscal year 2008;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that fluctuations in fuel costs may negatively impact gross margin, the cost to deliver, or expected improvements in cost to deliver in
future periods;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that Southern Anesthesia & Surgical, Inc.s expertise in the distribution of controlled pharmaceutical products strengthens
the Physician Business product offerings, accelerates the penetration into the pharmaceutical market segment, and will continue to increase the Physician Business overall competency and effectiveness in serving the pharmaceutical market;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that nursing home divestitures within the Elder Care Business may continue to negatively impact net sales in future periods as large,
national chain customers may continue to divest facilities including those located in states with high malpractice claims, insurance costs, and litigation exposure;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that ownership changes of national chain customers may impact net sales in future periods where the acquirer of an existing customer may
not have a previous relationship with the Company;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements expectation that gross profit as a percentage of net sales may decrease in future periods due to expected increased sales of pharmaceutical
products and diagnostic equipment in the Physician Business, which generate lower gross profit margins;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that gross margin may increase in future periods as a result of growth in ancillary billing services in the Elder Care Business;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements expectation that the remaining state net operating loss carryforwards will be utilized prior to their expiration date;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Managements expectation to continue to make strategic business acquisitions in order to increase revenues and market share;
|- |  | ----------------------------------------------------------------------------------------------------------------------------



| |  | Managements expectation that cash flows from operations during fiscal year 2008 will fund future working capital needs, capital expenditures, and other
investing and financing activities, excluding business combinations;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4



---

##### Table of Contents

| |  | Managements expectation that the overall growth in the business will be funded through a combination of cash flows from operating activities, borrowings under
the revolving line of credit, capital markets, and/or other financing arrangements;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the Company may seek to retire a portion of its outstanding equity through cash purchases and/or reduce its debt and may also seek to
issue additional debt or equity to meet its future liquidity requirements;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements intent to either renegotiate existing leases or execute new leases upon the expiration date of such agreements;
|- |  | ----------------------------------------------------------------------------------------------------------------------------



| |  | Managements expectation that the industry oversupply of influenza vaccines will continue into next year, and its intention not to participate in the influenza
vaccine market during its fiscal year 2008;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the Company may in future periods negotiate settlement of payments to manufacturers in the local currency of the country providing a
product which would then subject the Company to foreign currency risk; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managements belief that the deferred tax assets as of March 30, 2007 will be realizable to offset the projected future taxable income.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, management is
identifying important factors that could affect the Companys financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current
statements about the Companys goals or expectations. The Companys future results could be adversely affected by a variety of factors, including those discussed in Item 1A. Risk Factors. In addition, all forward-looking
statements are qualified by and should be read in conjunction with the risks described or referred to in Item 1A. Risk Factors.



5



---

##### Table of Contents

PART I



|ITEM  1. | BUSINESS
|-------- | --------

THE COMPANY

PSS World Medical, Inc. (the Company or PSSI), a Florida corporation which began operations in 1983, is a national distributor of medical
products, equipment, and pharmaceutical related products to alternate-site healthcare providers including physician offices, long-term care and assisted living facilities, home health care and hospice providers through 41 full-service
distribution centers, which serve all 50 states throughout the United States. The Company currently conducts business through two operating segments, the Physician Business and the Elder Care Business, which serve a diverse customer base throughout
the United States.

PSSI is a market leading company in the two alternate-site segments it serves as a result of value-added, solutions -based
marketing programs; a differentiated customer distribution and service model; a consultative sales force with extensive product, disease state, reimbursement, and supply chain knowledge; unique arrangements with manufacturers; innovative information
systems and technology that serve its core markets; innovative marketing programs; and a culture of performance. The Company is focused on improving business operations and management processes, maximizing its core distribution capability and
efficiency, and developing and implementing innovative marketing strategies. In addition, the Company has historically made strategic acquisitions to broaden its reach and leverage its infrastructure and may continue to make acquisitions in the
future.

THE INDUSTRY

According to industry
estimates, the market size of the medical supply and equipment, home health care and office-administered pharmaceutical segments of the United States (U.S.) healthcare industry exceeds $45 billion. These market segments consist of
medical products, medical equipment, and pharmaceutical products, which are distributed to alternate-site healthcare providers, including physician offices, long-term care and assisted living facilities, home health care providers and agencies,
dental offices, and other alternate-site providers, such as outpatient surgery centers, and veterinarians. The Companys business strategy focuses on the estimated $26.5 billion sub-segment of this market that includes the distribution of
medical products, medical equipment, and office-administered pharmaceutical products to physician offices, long-term care and assisted living facilities, home health care and hospice providers, and equipment dealers.

The medical products distribution industry is expected to experience continued growth due to the aging U.S. population, increased healthcare awareness, the introduction
of new medical technology, and new pharmacology treatments, and expanded third-party insurance coverage. The elder care market is expected to benefit from the increasing growth rate of the U.S. elderly population and the expansion of provider care
into the patients home. The January 2000 U.S. Bureau of the Census estimated the U.S. elderly population will more than double by the year 2040. In 2000, four million Americans age 85 years and older represented the segment of the
population in the greatest need of long-term and elder care services and this segment is projected to more than triple to over 14 million by the year 2040. The segment of the population age 65 to 84 years is projected to more than double in the
same time period. The physician market is expected to grow in part to the shift of procedures and diagnostic testing in hospitals to alternate sites, particularly physician offices. Furthermore, as cosmetic surgery and elective procedure markets
continue to expand, physicians are increasingly performing these procedures in their offices. Current estimated growth rates for the physician and elder care markets are approximately 4.0 - 6.0% and 3.0 - 5.0%, respectively. The nursing home, home
health care and hospice segments of the elder care market are growing at estimated rates ranging from (1%) - 1%, 3% - 7% and 11% - 12%, respectively. As a result of these market dynamics, annual expenditures for healthcare services continue to
increase in the United States.



6



---

##### Table of Contents

The healthcare industry is subject to extensive government regulation, licensure, and operating compliance procedures.
National healthcare reform has been the subject of a number of legislative initiatives by Congress. Additionally, government and private insurance programs fund a significant portion of medical care costs in the United States. In recent years,
federal and state-imposed limits on reimbursement to hospitals, long-term care and assisted living facilities, physicians, home health care and other healthcare providers have affected spending budgets in certain markets within the medical products
industry. In addition to these changes, the nursing home and home health care industries have been impacted by shifts in operations and business strategies, facility divestitures of elder care providers, migration of patient care to private homes as
well as overall general economic conditions over the last few years.

THE PHYSICIAN BUSINESS

The Physician Business, or the Physician Sales & Service division, is a leading distributor of medical supplies, diagnostic equipment, and pharmaceutical
related products to primary care office-based physicians in the United States based on revenues, number of physician-office customers, number and quality of sales representatives, diagnostic equipment and reagent revenues, and number of products
distributed under exclusive arrangements. The Physician Business has approximately 740 sales professionals. On September 30, 2005, to expand its product offering, the Physician Business acquired Southern Anesthesia & Surgical,
Inc. (SAS). SAS is a leading distributor of pharmaceutical products, including controlled and non-controlled drugs, and supplies to specialty physician offices and other alternate site healthcare providers.

Customers

The Physician Business primarily distributes products to
office-based physicians who specialize in internal medicine, family practice, primary care, pediatrics, OB/GYN, and general practice. SAS distributes products to specialty physician offices and other alternate site healthcare providers who
specialize in oral maxillofacial surgery, plastic surgery, anesthesiology, general dentistry and periodontics. The Physician Business target market consists of approximately 600,000 physicians practicing at over 240,000 sites in the United
States.

Customer pricing for each product is either negotiated directly with the physician or contracted through group purchasing organizations
(GPOs). GPOs negotiate directly with medical product manufacturers and distributors on behalf of their members, establishing exclusive or multi-supplier relationships.

Distribution Infrastructure

At March 30, 2007, the Physician Business operates a distribution network
consisting of 29 full-service distribution centers, 29 break-freight locations, and 4 redistribution facilities to serve customers throughout the United States. The operations of a full-service distribution center include sales
support and certain administrative functions, such as customer billing, collections, cash application, and customer service, as well as general warehousing functions, inventory management, and product delivery. The procurement of inventory is
centralized at the Companys headquarters in Jacksonville, Florida. Full-service distribution centers receive inventory directly from manufacturers and distribute product to customers and break-freight locations on a daily basis via the
Companys fleet of leased delivery vehicles or third party transportation providers. Break-freight locations receive processed customer orders from full-service distribution centers and distribute orders directly to customers on a daily basis.
The distribution network is complemented by myPSS.com, a customer Internet ordering portal, and Instant Customer Order Network (ICON), a laptop-based sales force automation tool which enables the Physician Business to extend
customer-specific services with local market product and pricing flexibility.

Products

The Physician Business distributes over 84,000 products consisting of medical-surgical disposable supplies, pharmaceuticals, diagnostic equipment, and non-diagnostic
equipment.



7



---

##### Table of Contents

Medical-Surgical Disposable Supplies.  This product category includes a broad range of medical supplies,
including paper goods, needles and syringes, gauze and wound dressings, surgical instruments, sutures, examination gloves, orthopedic soft goods, tongue blades and applicators, sterilization and intravenous solutions, specimen containers, diagnostic
equipment reagents, and diagnostic rapid test kits. The Physician Business offers a broad array of branded products sourced from various medical product manufacturers as well as its own brand. During fiscal year 2006, the Physician Business
re-branded its own product line from PSS Select to Select Medical Products in connection with the Companys focus on sourcing through global channels to drive enhanced customer satisfaction and profitability.

Pharmaceutical Products.  This product category includes various vaccines, injectables, inhalants, topicals, opthalmic ointments and solutions, otic
solutions and oral analgesics, antacids and antibiotics, which are used or administered in the physicians office. As a result of the acquisition of SAS on September 30, 2005, this product category also includes controlled pharmaceutical
products. Controlled pharmaceutical products include injectable anesthesia agents, narcotics, and pain management drugs.

Diagnostic
Equipment.  This product category includes various equipment lines such as blood chemistry analyzers, automated cell and differential counters, immunoassay analyzers, bone densitometers, electrocardiograph monitors and defibrillators,
cardiac stress systems, cardiac and OB/GYN ultrasound, holter monitors, flexible sigmoidoscopy scopes, and microscopes. Sales of certain diagnostic equipment entail the ongoing reordering of disposable diagnostic reagents. Demand for diagnostic
equipment is increasing due to technological advances that enable increasingly sophisticated diagnostic tests to be performed in the physicians office.

Non-Diagnostic Equipment.This product category includes all other equipment used in a medical practice such as aesthetic lasers, autoclaves, examination tables, medical scales, and furniture.

Healthcare IT.  This product category includes various information technology products and services designed to improve the accuracy, efficiency, and
effectiveness of customer business practices.

Competition

The Physician Business operates in a highly competitive industry where products sold and certain services rendered are readily available to customers from a number of manufacturers, distributors, and suppliers. Competitors of the Physician
Business are large, multinational, full-line distributors, many smaller regional and local distributors, and manufacturers who sell directly to customers.

THE ELDER CARE BUSINESS

The Elder Care Business, or Gulf South Medical Supply, Inc., is a national distributor of medical supplies and
related products to the long-term and elder care industry in the United States. The Elder Care Business also provides Medicare Part B reimbursable products and billing services, either on a fee-for-service or a full-assignment basis. The Elder
Care Business primarily serves the nursing home and home health care industries as well as the assisted living market segment. The nursing home industry refers to customers that operate skilled nursing facilities. The home health care industry
refers to providers (companies, agencies, and care givers) of medical services, medical supplies, and equipment to patients in a home or residential setting. The Elder Care Business has approximately 120 sales professionals.

Customers

The Elder Care Business distributes to independent,
regional, and national nursing home facilities, home health agencies, assisted living centers, hospices, and home medical equipment dealers. The Elder Care Business has a number of large, national chain customers, which have experienced significant
financial pressure since the advent



8



---

##### Table of Contents

of the Prospective Payment System in 1998. Approximately 16%, 19%, and 21%, of the Elder Care Business net sales for fiscal years 2007, 2006, and 2005,
respectively, represent sales to its largest five customers.

Distribution Infrastructure

At March 30, 2007, the Elder Care Business operates a distribution network consisting of 12 full-service distribution centers, 5 break-freight locations,
5 ancillary service centers, and 3 redistribution centers, which serve customers throughout the United States. The operations of a full-service distribution center include general warehousing functions such as inventory management,
warehouse management, and product delivery directly to customers on a daily basis. Accounts receivable collections, cash application, customer billing, and procurement of inventory are centralized in the Companys corporate headquarters in
Jacksonville, Florida, while customer order processing, customer service, and sales support are centralized in Jackson, Mississippi. Full-service distribution centers receive inventory directly from manufacturers and distribute product to customers
and break-freight locations. Break-freight locations receive processed customer orders from full-service distribution centers and distribute orders directly to customers on a daily basis. Product is delivered using either the Companys fleet of
leased delivery vehicles or third party common carriers. Coupled with a team of sales professionals and GSOnline, an automated customer Internet platform, the Elder Care Business provides service to customers ranging from independent nursing homes
to providers of home health agencies and hospice, sub-acute, rehabilitation, and transitional care.

Products

The Elder Care Business distributes over 26,000 medical and related products consisting of medical supplies, incontinent supplies and personal care items, enteral
feeding supplies, home medical equipment, and other supplies required by the long-term care patient. The Elder Care Business offers a broad array of branded products from various manufacturers as well as its own private-label product line. During
fiscal year 2006, the Elder Care Business re-branded its private label product line from GSSelect to Select Medical Products.

Services

The Elder Care Business provides Medicare Part B billing services, either on a fee-for-service or a full-assignment basis.

Competition

The Elder Care Business operates in a
highly competitive industry where products sold and certain services rendered are readily available to customers from a number of manufacturers, distributors, and suppliers. Competitors of the Elder Care Business are large, national, or
multinational distributors, many smaller national, regional, and local distributors, and manufacturers who sell directly to customers.

CORPORATE SHARED
SERVICES

Corporate Shared Services is a concentration of Company resources performing functions across the organization with a common goal of
providing standardized service levels at an efficient operating cost. Corporate Shared Services includes: accounting and finance; information technology development, infrastructure, and support; operations management; regulatory compliance; human
resources, training, and payroll administration; and procurement of inventory and non-inventory products and services. Corporate Shared Services allocates direct and variable costs to the two operating segments for shared departmental operating
costs and interest expense. The allocation of shared operating costs is generally proportional to the revenues of each operating segment. Interest expense is allocated based on (i) an internally calculated carrying value of historical capital
used to acquire or develop the operating segments operations and (ii) budgeted operating cash flow.



9



---

##### Table of Contents

SUPPLIER RELATIONSHIPS

The Company pursues the opportunity to market and sell medical equipment and supplies through unique and exclusive marketing arrangements. Manufacturers of medical diagnostic equipment and supplies seek to optimize the number of
distributors selling their products to end users in order to reduce the cost associated with marketing and field sales support. The Company has been successful in obtaining unique or exclusive arrangements to sell certain products based on the
effectiveness of its sales and marketing efforts.

Supplier relationships are an integral part of the Companys businesses. Sales support, performance
incentives, product literature, samples, demonstration units, training, marketing intelligence, distributor discounts and rebates, and new products are important strategies in developing and enhancing vendor relationships. The Company seeks to
increase profitability by purchasing certain medical supplies, pharmaceutical products, and equipment at the lowest available price through volume discounts, rebates, product line consolidation, and under contracts whose terms are negotiated by the
supplier management group.

GLOBAL PRODUCT SOURCING

The Companys global product sourcing capabilities include monitoring quality assurance and controls, and aligning product availability with customer needs. The Companys global sourcing team consists of several fully dedicated
functional experts in areas such as global sourcing, logistics, supply chain design and management, supplier relations, product management, quality assurance and quality controls.

During fiscal year 2007, the Company expanded its private-label product offering, which carries the brand-name Select Medical Products. Several major milestones reached during fiscal year 2007 included,
(i) expansion of the Companys global sourcing resources in Asia, (ii) doubling the capacity of the redistribution infrastructure in the United States and (iii) design and implementation of a security assessment program for our
global manufacturers in compliance with the U.S. Customs Trade Partners Against Terrorism Act. At March 30, 2007, the Company had approximately $22.7 million of globally-sourced product inventory, which represented approximately 600 SKUs and 80
product categories. These products were sourced from manufacturers throughout China, Thailand, Malaysia, India, Sweden, Cambodia, and the Philippines.

INFORMATION SYSTEMS

Secure Datacenter

On February 9, 2007, the Company successfully moved its Production IT Systems to a new secure and private datacenter without interruption of its distribution services. The new datacenter, which is located in a leased multi-tenant
facility on 23 acres of secured grounds, is a hardened state-of-the-art facility representing the highest survivability and security standard available. The Company expects this move to enhance the security of the Companys data and disaster
recovery capabilities.

Core Enterprise Resource Planning ApplicationsJD Edwards XE®

The Physician and Elder Care Businesses operate the JD Edwards XE® platform (JDE) at all distribution centers. During fiscal year 2006, the Elder Care Business successfully completed the implementation of the JDE general ledger, accounts
receivable, accounts payable, and advanced warehouse distribution modules at all of its distribution centers. The Company is currently converting all customer order entry channels (electronic data interface, GSOnline, and JDE order entry) for the
Elder Care Business into a single enterprise-wide solution. Management anticipates the conversion of these order entry channels will be completed during fiscal year 2008.

Supply Chain Managementi2 Demand Planner, Replenishment Planner, Demand Fulfillment

I2 Supply Chain
Management (SCM) enables the Company to strategize, plan, and execute its inventory management, and service business processes across multiple locations to increase customer satisfaction and



10



---

##### Table of Contents

profitability. The implementation of i2 SCM has enabled the Company to reduce operating inventory stocking levels, improve fill rates, increase
operating inventory turnover, and increase cash flow from operations.

During fiscal year 2007, the Company developed and implemented enhancements to the
i2 SCM and JD Edwards systems to support rapid expansion of the global product sourcing initiative. These enhancements provided greater visibility and control over the longer, more variable lead times typical of products sourced directly from
overseas suppliers, and improved control of the distribution of globally-sourced product from the Companys redistribution centers to full-service distribution centers. Management believes these enhancements enable the Company to improve
customer fill rates and increase inventory turnover for globally-sourced products.

During fiscal year 2008, the Company will further enhance these systems
by leveraging additional EDI transactions sets and enhancing demand-forecasting capabilities to increase operating inventory turnover and decrease administrative expenses.

Customer/Sales Force Automation Systems

The objective of the Companys Customer Relationship Management
(CRM) systems is to create a seamless and effortless connection between customers, the Companys distribution services, and vendor resources. The Physician Business and the Elder Care Business develop and provide sales
representatives and customers with the latest technology in CRM solutions.

The Physician Business recently began the roll-out of a handheld inventory
management device, known as SmartScan, that allows customers to order product electronically and effectively manage their product inventory. The Physician Business laptop-based sales-force automation application, known as
ICON, carries customer buying history and accounts receivable detail, reflects on-hand inventory quantities for the local distribution center, and transmits orders over a secure wireless network. The Physician Business internet
portal, myPSS.com, provides its customers with sales history, accounts receivable detail, available inventory and supports a number of ordering methods. Approximately 79% of customer orders in the Physician Business are electronic orders received
via ICON or myPSS.com.

The Elder Care Business CRM systems include RepNet, GSOnline, AccuSCAN, FAST, and Budget Manager. The Elder Care Business has
been successful in providing these tools to its sales force and its customer base. As a result, the Elder Care Business is an industry leader in eCommerce transactions. Approximately 79% of customer orders in the Elder Care Business are electronic
orders.

REGULATORY MATTERS

General

Federal, state, and local government agencies extensively regulate the distribution of medical devices and supplies and over-the-counter
pharmaceutical products, as well as the distribution of prescription pharmaceutical products. Applicable federal and state statutes and regulations require the Company to meet various standards relating to, among other things, licensure, personnel,
physical security, maintenance of proper records, privacy of health information, maintenance and repair of equipment, and quality assurance programs.

The
Companys costs associated with complying with the various applicable federal and state statutes and regulations, as they now exist and as they may be modified, could be material. Many federal and state laws applicable to the Company are
broadly worded and have not been interpreted by courts. They may be interpreted or applied by governmental authorities in a manner that differs from the Companys interpretation, which could require the Company to make changes in its operating
procedures. It is the Companys intent and policy to comply completely with the intent of these regulations. Allegations by a state or the federal government that the Company has not complied with these laws could have a material adverse impact
on the Company. If it is determined that the Company has not complied with these laws, or if the Company enters into settlement



11



---

##### Table of Contents

agreements to resolve allegations of non-compliance, the Company could be required to make settlement payments, quarantine or destroy inventory, or be
subject to civil and criminal penalties, including fines and the loss of licenses or its ability to participate in Medicare, Medicaid and other federal and state healthcare programs. Any of the foregoing could have a material negative impact on the
Company. The Company believes that the healthcare services industry will continue to be subject to extensive regulation at the federal, state, and local levels. The Company believes it has had, and will continue to have, adequate compliance programs
and controls to ensure compliance with the laws and regulations.

The Food, Drug and Cosmetic Act, Prescription Drug Marketing Act of 1987, Safe Medical
Devices Act of 1990, Controlled Substances Act and Various State Regulations

The Companys business is subject to regulation under the Federal
Food, Drug and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the Safe Medical Devices Act of 1990, and state laws applicable to the manufacture, importation and distribution of medical devices and over-the-counter pharmaceutical
products, as well as the distribution of prescription pharmaceutical products. In addition, the Company is subject to regulations issued by the Food and Drug Administration, the Drug Enforcement Administration, and comparable state agencies.

The Federal Food, Drug, and Cosmetic Act generally regulates the manufacture and importation of drugs and medical devices shipped via interstate commerce,
including such matters as labeling, packaging, storage, and handling of such products. The Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes certain requirements applicable to the wholesale
distribution of prescription drugs, including the requirement that wholesale drug distributors be registered with the Secretary of Health and Human Services or be licensed in each state in which business is conducted in accordance with federally
established guidelines on storage, handling, and records maintenance. The Safe Medical Devices Act of 1990 imposes certain reporting requirements on distributors in the event of an incident involving serious illness, injury, or death caused by a
medical device. The Company may also be required to maintain licenses and permits for the distribution of pharmaceutical products and medical devices under the laws of the states in which it operates.

The Anti-Kickback Statute

Under Medicare, Medicaid, and other
government-funded healthcare programs, Federal and state governments enforce a Federal law called the Anti-Kickback Statute. The Anti-Kickback Statute prohibits any person from offering, paying, soliciting or receiving anything of value to or from
another person to induce the referral of business, including the sale or purchase of items or services covered by Medicare, Medicaid, or other federally subsidized programs. Many states also have similar anti-kickback statutes.

The Health Insurance Portability and Accountability Act of 1996

The
Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (collectively, HIPAA) establishes (1) national standards for some types of electronic health information transactions and the data elements
used in those transactions, (2) standards to protect the privacy of individually identifiable health information, and (3) security standards to ensure the integrity and confidentiality of health information. Health plans, health care
clearinghouses and most health care providers, including the Company, are Covered Entities subject to HIPAA.

Other Laws

The Company is subject to various additional Federal, state and local laws, and regulations in the United States, relating to the safe working conditions and the sales,
use and disposal of hazardous or potentially hazardous substances. In addition, U.S. and international import and export laws and regulations require that the Company abide by certain standards relating to the importation and exportation of finished
goods, raw materials, and



12



---

##### Table of Contents

supplies. Furthermore, the Department of Transportation regulates the conveyance of regulated materials, both in Company-leased delivery vehicles and via
common carrier.

Impact of Changes in Healthcare Legislation

Federal, state and foreign laws and regulations regarding the sale and distribution of medical devices and supplies, over-the-counter and prescription pharmaceutical products by the Company are subject to change. The Company cannot predict
what impact, if any, such changes might have on its business. Any new legislation or regulations, or new interpretations of existing statutes and regulations, governing the manner in which the Company conducts its business could have a material
adverse impact on the Company and could adversely affect its profitability.

The extensive Federal and state laws and regulations described above apply not
only to the Company, but also to the manufacturers which supply the products distributed by the Company and the Companys physician and other healthcare customers. For instance, medical product and device manufacturers are subject to design,
manufacturing, labeling, promotion and advertising standards imposed on, as well as registration and reporting requirements regarding, their facilities and products. Likewise, pharmaceutical manufacturers are subject to development, manufacturing
and distribution regulation by the Food and Drug Administration, the Drug Enforcement Administration and other Federal, state and local authorities. Failure of a manufacturer to comply with these requirements, or changes in such requirements, could
result in recalls, seizures, manufacturing suspensions or other interruptions in the production, supply, and sale of its products. Such interruptions may result in a material adverse impact on the Companys business. Similarly, changes in the
extensive regulations or in their interpretation or enforcement, applicable to the Companys customers could adversely impact the Companys business in ways which are difficult for the Company to predict.

PROPRIETARY RIGHTS

The Company has registered with the United
States Patent and Trademark Office the marks PSS WORLD MEDICAL (and Design), PSS, PSS ADVANTAGE CLUB THE ADVANTAGE IS SAVING YOU MONEY (and Design), ANSWERS (and Design), SMARTSCAN, SRX (and Design), PHYSICIAN SELECT, and NIGHTINGALE, among others,
and has applied to register the marks SOUTHERN ANESTHESIA & SURGICAL, INC. (and Design), ADVANCE PLUS + SOUTHERN ANESTHESIA & SURGICAL, Inc. (and Design), GULF SOUTH MEDICAL SUPPLY (and Design), and SELECT MEDICAL PRODUCTS (and
Design), among others. The Company believes that the PSS World Medical, Physician Sales & Service, and Gulf South Medical Supply names are well recognized in the medical supply industry and by healthcare providers and, therefore, are
valuable assets of the Company.

EMPLOYEES

As of
March 30, 2007, the Company employed 3,304 full-time and 45 part-time employees. The Company believes that ongoing employee training is critical to its success and, accordingly, invests significant resources in recruiting,
training, and continuing professional development. In support of the Companys mission statement and commitment of being the employer of choice, the Company offers both online and instructor-led training. The Companys Online
Source for Career Advancement and Retention (OSCAR) is an innovative, Internet-based, enterprise-wide learning management system that is designed to provide a comprehensive learning environment and in-depth training for every
employee At March 30, 2007, there were approximately 100 online classes available to employees and since its inception in 2001, employees have completed over 88,800 classes online. The Company conducted 33 classes and trained
over 700 employees in instructor-led classroom sessions during fiscal year 2007. As of March 30, 2007 the Company had developed and implemented a fully operational intranet, TheInsider.com, designed to provide all employees a secure,
single location to find clear, concise, accurate, and timely news and company resources including, but not limited to, sales and marketing, human resources, operations, and compliance. Management believes that relations with employees are good and



13



---

##### Table of Contents

the Companys long-term success depends on good relations with its employees, including its sales professionals.

AVAILABLE INFORMATION

The Company files annual, quarterly and
current reports, proxy statements and other information with the Securities and Exchange Commission (SEC). Any documents that have been filed with the SEC may be read or copied, at prescribed rates contingent upon a written request, at
its Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These documents are also filed with the SEC
electronically and are accessible on the SECs Internet website found at www.sec.gov. Copies of materials filed with the SEC may also be obtained free of charge from the Companys Internet website found at
www.pssworldmedical.com as soon as reasonably practicable after such material is electronically file with or furnished to the SEC.

The Company also
provides public access to its Code of Ethics, Audit Committee Charter and the Corporate Governance Committee Charter. The Code of Ethics and Audit Committee Charter may be viewed free of charge on the Companys web site
www.pssworldmedical.com. The Company intends to post amendments to or waivers from its Code of Ethics (to the extent applicable to the Companys principal executive officer, principal financial officer, or principal accounting officer)
on its web site. The Corporate Governance Committee Charter may be obtained by writing to: PSS World Medical, Inc., Investor Relations, 4345 Southpoint Blvd., Jacksonville, Florida 32216.



14



---

##### Table of Contents

|ITEM 1A. | RISK FACTORS
|-------- | ------------

The Companys continued success depends on
managements ability to identify, prioritize and appropriately manage a wide range of enterprise risk exposures. Readers should carefully consider each of the following risks and additional information set forth in this Annual Report on
Form 10-K. These risks and other factors may affect forward-looking statements, including those in this document or made by the Company elsewhere, such as in earnings release web casts, investor conference presentations, or press releases. The
risks and uncertainties described herein may not be the only ones facing the Company and are not organized in order of priority. Additional risks and uncertainties not presently known to management or that management currently believes to be
immaterial may also adversely affect the Companys business. If any of the following risks and uncertainties develops into actual events, it could materially affect the Companys business, financial condition or results of operations,
cause the trading price of the Companys common stock to decline materially, or cause actual results to differ materially from those expected.

The
Companys business is dependent on sophisticated data processing systems that are critical to the business operations.

The Company is highly
reliant on its information systems due to having centralized certain customer support, operating, and administrative processes. The success of the Companys business relies on the ability to obtain, process, analyze, maintain, and manage data.
Management relies on the capability, accuracy, timeliness, and stability of its data processing systems to:



| |  | receive and ship customer orders;
|- |  | ---------------------------------

| |  | manage customer billings and collections;
|- |  | -----------------------------------------

| |  | provide point-of-sale product cost information, net of rebates;
|- |  | ---------------------------------------------------------------

| |  | track and report third-party ancillary billing services;
|- |  | --------------------------------------------------------

| |  | provide product reporting, such as product sales by vendor and vendor incentives earned;
|- |  | ----------------------------------------------------------------------------------------

| |  | manage centralized inventory procurement and management processes;
|- |  | ------------------------------------------------------------------

| |  | track and report regulatory compliance related to certain drugs and devices;
|- |  | ----------------------------------------------------------------------------

| |  | provide sophisticated manufacturer rebate tracking, compliance, verification, and correction;
|- |  | ---------------------------------------------------------------------------------------------

| |  | ensure payments to suppliers are made in accordance with negotiated terms;
|- |  | --------------------------------------------------------------------------

| |  | ensure certain key automated internal controls are operating;
|- |  | -------------------------------------------------------------

| |  | report financial statements and related information on a quarterly basis to the public;
|- |  | ---------------------------------------------------------------------------------------

| |  | integrate acquisitions; and
|- |  | ---------------------------

| |  | process employee compensation and provide record keeping.
|- |  | ---------------------------------------------------------

The Companys business, financial condition, and results of operations may be materially adversely affected if, among other things:



| |  | data errors are created by the system and remain undetected;
|- |  | ------------------------------------------------------------

| |  | data processing capabilities are interrupted or fail to operate for any extended length of time;
|- |  | ------------------------------------------------------------------------------------------------

| |  | data services are not kept current;
|- |  | -----------------------------------

| |  | the data processing system becomes unable to support growth of the business;
|- |  | ----------------------------------------------------------------------------

| |  | data is lost or unable to be restored or processed;
|- |  | ---------------------------------------------------

| |  | data security is breached;
|- |  | --------------------------

| |  | product maintenance and upgrades to the enterprise resource planning (ERP) system, without reasonable notification, are no longer provided, by
suppliers; or
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a revision is made to the estimated useful lives for certain computer software.
|- |  | -------------------------------------------------------------------------------

Numerous factors, many of which cannot be controlled by the Company, may cause the Companys net sales and results of operations to fluctuate quarterly, which may adversely affect the market price of the
Companys common stock.



15



---

##### Table of Contents

The Companys net sales and operating results may fluctuate quarterly as a result of many factors, including:



| |  | fluctuating demand for the products and services offered by the Company;
|- |  | ------------------------------------------------------------------------

| |  | introduction of new products and services offered by the Company and its competitors;
|- |  | -------------------------------------------------------------------------------------

| |  | seasonal vaccine sales;
|- |  | -----------------------

| |  | retention of sales representatives and other key employees;
|- |  | -----------------------------------------------------------

| |  | acquisitions, disposals, or investments by the Company;
|- |  | -------------------------------------------------------

| |  | changes in manufacturers pricing policies and/or contract terms;
|- |  | -----------------------------------------------------------------

| |  | changes in manufacturers distribution strategies;
|- |  | --------------------------------------------------

| |  | changes in the level of operating expenses;
|- |  | -------------------------------------------

| |  | changes in estimates used by management;
|- |  | ----------------------------------------

| |  | changes in the Companys business strategies, or those of its competitors;
|- |  | --------------------------------------------------------------------------

| |  | product supply shortages;
|- |  | -------------------------

| |  | product recalls by manufacturers;
|- |  | ---------------------------------

| |  | inventory valuation adjustments;
|- |  | --------------------------------

| |  | changes in product mix;
|- |  | -----------------------

| |  | general economic conditions;
|- |  | ----------------------------

| |  | fuel costs and third party shipping rates;
|- |  | ------------------------------------------

| |  | inclement weather;
|- |  | ------------------

| |  | changes in accounting principles;
|- |  | ---------------------------------

| |  | disruptions resulting from implementing strategic business plans;
|- |  | -----------------------------------------------------------------

| |  | disruptions resulting from implementing ERP systems;
|- |  | ----------------------------------------------------

| |  | the number of selling days in a period; and
|- |  | -------------------------------------------

| |  | changes by the government, including changes in reimbursement rates and regulatory requirements related to the distribution of pharmaceutical products.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

Accordingly, management believes that period-to-period comparisons of the results of operations should not be relied upon as an
indication of future performance because these factors may cause the Companys results of operations to be below analysts and investors expectations in certain future periods. This could materially and adversely affect the trading
price of the Companys common stock.

The Companys ability to carry out its global sourcing strategy may affect the Companys overall
profitability.

The Company is focused on expanding its globally sourced product offering, which is marketed under the brand name Select Medical
Products (Select). The Companys global sourcing strategy revolves around sustaining global sourcing channels to drive enhanced customer satisfaction and profitability. To attain its strategic objectives, the Company has
focused on achieving certain milestones, which include:



| |  | expanding the Select product offering
|- |  | --------------------------------------

| |  | strengthening the global sourcing infrastructure
|- |  | ------------------------------------------------

| |  | improving product sourcing processes and sourcing partner coordination
|- |  | ----------------------------------------------------------------------

| |  | ensuring the quality of Select brand products
|- |  | ----------------------------------------------

| |  | supporting increases in volume of globally sourced products
|- |  | -----------------------------------------------------------

| |  | effective marketing and promotion of Select brand products
|- |  | -----------------------------------------------------------

Additionally, the Company faces the following risks related to its global souring initiatives:



| |  | political unrest in certain regions
|- |  | -----------------------------------

| |  | intermittent energy supply interruptions with global manufacturers
|- |  | ------------------------------------------------------------------

| |  | changes in foreign currency exchange rates
|- |  | ------------------------------------------

| |  | shipping disruptions due to transportation delays
|- |  | -------------------------------------------------



16



---

##### Table of Contents

| |  | fluctuations in the cost of commodities
|- |  | ---------------------------------------

| |  | increase in regulation of exports due to increasing trade deficit
|- |  | -----------------------------------------------------------------

| |  | natural disasters in certain regions
|- |  | ------------------------------------

| |  | regional tensions that adversely affect the development of ongoing pre-trade agreements
|- |  | ---------------------------------------------------------------------------------------

| |  | intellectual property violation claims
|- |  | --------------------------------------

The
Companys failure or inability to execute any of its strategic global sourcing initiatives could adversely impact the Companys future profitability.

The Companys future results of operations could be adversely affected by operational disruptions due to natural disasters, particularly in regions susceptible to hurricanes.

A severe weather event such as a hurricane, tornado, or flood could cause severe damage to the Companys property and inventory. In addition, such weather events
can cause extended disruptions to the Companys operations. The Company can provide no assurance that a future hurricane or other local disaster would not materially impact the Companys business or results of operations in the future.

The Company has developed disaster recovery plans, which include the use of third party back-up facilities for information system infrastructure. In
addition, the Company maintains business interruption insurance for instances of catastrophic loss. There is a risk the Company may fail to execute its disaster recovery plans and incur losses that exceed insurance policy limits or are excluded from
policy provisions. Furthermore, the Company may have difficulty obtaining business interruption insurance in the future or similar types of coverage may not be available in the markets in which it operates. The Companys failure to execute or
the inability to execute any of its disaster recovery plans and inability to obtain adequate insurance coverage could materially adversely impact the Companys business and results of operations.

The Company may face increasing, competitive pricing pressures on its sales to large national and regional accounts and consolidated provider groups.

Sales to large, national and regional accounts and consolidated provider groups, especially in the long-term care market, represent a significant portion of the
Companys revenue base. Competitive pricing pressures may increase due to:



| |  | change in ownership of the large chains;
|- |  | ----------------------------------------

| |  | additional negotiating leverage of large, regional and national chains;
|- |  | -----------------------------------------------------------------------

| |  | supplier agreements containing volume discounts;
|- |  | ------------------------------------------------

| |  | service specifications;
|- |  | -----------------------

| |  | financial health of customers;
|- |  | ------------------------------

| |  | activity of competitors; and
|- |  | ----------------------------

| |  | activity of GPOs.
|- |  | -----------------

The Companys business
strategy may not mitigate the effect of pricing pressures, which could adversely impact the Companys net sales, gross margins, and results of operations.

Pricing and customer credit quality pressures, due to reduced spending budgets by healthcare providers, may affect the Companys net sales, ability to collect accounts receivable, and results of operations.

A significant portion of medical care costs in the United States are funded by government and private insurance programs, such as Medicare, Medicaid, and corporate
health insurance plans. In recent years, government-imposed limits on reimbursement to hospitals, physicians, nursing homes, home health providers, and other healthcare providers have significantly impacted spending budgets in certain markets within
the medical-products industry. Future changes in Medicare and state administered Medicaid programs may limit payments to providers served by the Company, particularly within the long-term care industry. Also, any



17



---

##### Table of Contents

reduction in the reimbursements available to physicians under Medicare and Medicaid programs may lead to a corresponding reduction in the spending budgets of
physicians, the principal customers of the Physician Business. Significant reductions in reimbursement levels and adjustments may negatively impact the Companys customers financial health and liquidity and may negatively affect the
Companys results of operations.

The viability of the Companys customers may be threatened by increasing costs of malpractice claims and
liability insurance.

Insurance rates for customers of the Elder Care and Physician Businesses have greatly increased. If meaningful reform legislation
is not adopted or adopted legislation is not effective in reducing these rates, many of the Companys customers may be adversely affected which, in turn, could affect their profitability. As a result, customer financial viability may adversely
impact the Companys financial condition, net sales, results of operations, and cash flows from operations.

The Company may not be able to
continue to compete successfully with other medical supply companies and direct manufacturers.

The medical supply distribution market is highly
competitive. The Companys results of operations could be materially adversely affected if competitors lower prices of products similar to those distributed by the Company. Principal competitors of the Company include full-line and
full-service, multi-market medical distributors, internet distributors, and direct manufacturers, many of which have a national presence. The Company also faces significant competition from regional and local dealers, telesales firms, internet
companies, and mail order firms. The Companys competitors may have the following strengths:



| |  | sales representatives competing directly with the Company;
|- |  | ----------------------------------------------------------

| |  | capability to market products directly to the Companys customers;
|- |  | ------------------------------------------------------------------

| |  | access to many products distributed by the Company from various suppliers;
|- |  | --------------------------------------------------------------------------

| |  | substantially greater financial resources than the Company;
|- |  | -----------------------------------------------------------

| |  | lower product costs; and
|- |  | ------------------------

| |  | lower operating costs.
|- |  | ----------------------

If the Company is unable to
compete successfully with other medical supply distributors and direct manufacturers, the Companys business, financial condition, and results of operations may be materially adversely affected.

Continued consolidation of medical supply distributors within the healthcare industry may lead to increased competition.

Consolidation within the healthcare industry has resulted in increased competition by direct manufacturers, large national distributors, and drug wholesalers, and may
result in lower customer pricing and/or higher operating costs. Continued consolidation of medical supply distributors could result in the following:



| |  | competitors obtaining exclusive rights to market products to the Companys customers;
|- |  | -------------------------------------------------------------------------------------

| |  | potential new entrants to the markets the Company serves;
|- |  | ---------------------------------------------------------

| |  | national hospital distributors, drug wholesale distributors, and healthcare manufacturers could begin focusing their efforts more directly on the Companys
markets;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | hospitals that form alliances with long-term care facilities to create integrated healthcare networks may look to hospital distributors and manufacturers to supply
their long-term care affiliates; and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provider networks created through consolidation among physician provider groups, long-term care facilities, and other alternate site providers may shift purchasing
decisions to people with whom the Company has no current selling relationship.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



---

##### Table of Contents

There can be no assurance that the Company will maintain operating margins and customer relationships and avoid increased
competition and significant pricing pressure in the future if medical supply distributor consolidations occur.

Expansion of the multi-tiered costing
structure may place the Company at a competitive disadvantage.

The medical-products industry is subject to a multi-tiered costing structure, which can
vary by manufacturer and/or product. Under this structure, certain institutions can obtain more favorable prices for medical products than the Company. The multi-tiered costing structure continues to expand as many large integrated healthcare
providers and others with significant purchasing power, such as GPOs, demand more favorable pricing terms. Although the Company is seeking to obtain similar terms from manufacturers and obtain access to lower prices dictated by GPO contracts or
other contracts, management cannot assure that such terms will be obtained or contracts will be executed.

The Company depends on the availability of
multi-tiered priced products from other distributors at prices lower than the manufacturers list prices.

The Company depends on the availability
of multi-tiered priced products from other distributors at costs that are lower than the manufacturers list prices. The reduction of availability of lower-priced product costs could negatively impact the Companys gross margins. If the
Company cannot obtain prices from other distributors that are lower than the manufacturers list prices, the Companys gross margin and results of operations may be materially adversely affected.

If the government allows hospitals or GPOs to provide free hardware and software to physician offices, the Companys ability to distribute medical supplies may
be threatened.

Hospitals and GPOs may offer free goods or service, such as hardware and software, to physician offices in order to entice the
physicians to conduct business with them. As a result, physicians may gain direct access to hospital contracts and pricing and may have the hospitals perform the purchasing function directly. This may threaten the Companys ability to compete
effectively, which would in turn negatively impact the Companys results of operations.

The ability to maintain good relations with suppliers may
affect the Companys overall profitability.

Currently, the Company relies on suppliers to provide, among other things:



| |  | field sales representatives technical and selling support;
|- |  | -----------------------------------------------------------

| |  | acceptable purchasing, pricing, and delivery terms;
|- |  | ---------------------------------------------------

| |  | sales performance incentives;
|- |  | -----------------------------

| |  | vendor rebates for inventory purchases or sales volume
|- |  | ------------------------------------------------------

| |  | vendor incentives
|- |  | -----------------

| |  | financial support of sales and marketing programs;
|- |  | --------------------------------------------------

| |  | promotional materials; and
|- |  | --------------------------

| |  | product availability.
|- |  | ---------------------

There can be no assurance
that the Company will be successful in maintaining good relations with its suppliers. The Companys global sourcing strategy may threaten or endanger relations with certain suppliers. Additionally, there can be no assurance that the Company
will meet forecasted inventory purchases, sales volume, or other criteria required to obtain vendor rebates.



19



---

##### Table of Contents

The Company relies on significant distribution agreements and other purchasing arrangements with suppliers, and the
expiration or termination of any distribution agreement or other purchasing arrangement may reduce the Companys net sales and results of operations.

The Company has distribution agreements and other purchasing arrangements with over 2,000 suppliers. The Company relies on these suppliers to manufacture and/or supply products for and to the Company for resale to the Companys
customers. If any distribution agreement or other purchasing arrangement between the Company and a supplier expires or is terminated, or if the Company and any supplier otherwise cease conducting business with each other, then the Companys net
sales and results of operations may be materially adversely affected.

The Company must hire and retain qualified sales representatives to continue its
sales growth.

The Companys ability to retain existing customers and attract new customers is dependent upon hiring new sales representatives,
retaining existing sales representatives, and offering competitive compensation to sales representatives. Customer relationships are at risk if a sales representative ceases employment with the Company. This is particularly a risk where the
representative seeks employment with a competitor. The Company has increased the use of employment agreements containing restrictive covenants, which protect the Companys legitimate business interests. However, these agreements have not been
obtained from all sales representatives. In addition, the terms of these agreements, in certain states, may not be enforceable. The inability to adequately hire or retain sales representatives could limit the Companys ability to expand its
business and increase sales.

The Company must retain the services of senior management.

The Companys success depends largely on the efforts and abilities of senior management, particularly the executive management team. In addition, the Company is
also dependent upon the operations and sales managers at each distribution center because of the decentralized operating structure. Although the Company maintains key man life insurance for its chief executive officer, chief financial officer, and
the chief operating officer, the loss of services of one or more of its members of senior management may adversely affect the Companys business. In addition, the Company may not be successful in attracting and retaining other key personnel.

The Companys strategy for growth may not result in additional net sales or operating income and may have an adverse effect on working capital,
operating cash flow, and results of operations.

The Company seeks to increase revenues and operating income by:



| |  | expanding product offerings;
|- |  | ----------------------------

| |  | expanding sales support services;
|- |  | ---------------------------------

| |  | expanding sales force for home health care customers;
|- |  | -----------------------------------------------------

| |  | expanding sales force productivity;
|- |  | -----------------------------------

| |  | developing innovative marketing and distribution programs;
|- |  | ----------------------------------------------------------

| |  | maintaining and expanding vendor incentive programs;
|- |  | ----------------------------------------------------

| |  | expanding e-commerce initiatives and development;
|- |  | -------------------------------------------------

| |  | leveraging its infrastructure and information systems;
|- |  | ------------------------------------------------------

| |  | improving distribution capability and efficiency through systems development and implementation;
|- |  | ------------------------------------------------------------------------------------------------

| |  | improving supply chain efficiency through centralization and systems implementation; and
|- |  | ----------------------------------------------------------------------------------------

| |  | improving operating margins through the global product sourcing initiative.
|- |  | ---------------------------------------------------------------------------

These business strategies for growth will result in increased costs and expenses. There can be no assurance that the Companys business strategy for growth will result in additional net sales or operating income.
In addition, the implementation of the Companys business strategy for growth may have an adverse effect on working capital, operating cash flow, and results of operations.



20



---

##### Table of Contents

The Companys operations and prospects in Asia are subject to political, economic and legal uncertainties.

The Company is currently executing a global sourcing strategic initiative whereby certain products will be purchased directly from Asian
manufacturers. The Companys business, financial condition and results of operations may be adversely affected by changes in the political, social or economic environment in Asia. Changes in laws and regulations, or their interpretation, the
imposition of surcharges or any material increase in tax rates, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material
adverse effect on the Companys ability to conduct business and its results of operations.

The operating costs of the Companys delivery
fleet could increase due to fuel price fluctuations and/or service interruptions by third parties.

The Companys operating costs are affected by
increases or fluctuations in the cost of gasoline and diesel fuel. Products are delivered to customers either by the Company-leased delivery fleet or a third party, common carrier. The Physician and Elder Care Businesses currently operate a delivery
fleet of over 500 vehicles and management considers the deployment of this fleet to be one of the Companys competitive advantages. Significant increases in the cost of fuel have impacted the Companys cost to deliver product to
customers and the operating costs of common carriers. Some of these common carriers have passed these increases through to the Company in the form of a fuel surcharge, which has had an adverse effect on the Companys results of operations. In
addition, significant increases in the cost of fuel may increase the landed cost of product obtained from suppliers due to increased inbound freight costs as well as increased shipping costs for globally sourced product. Similarly, strikes or other
service interruptions by third party, common carriers may cause an increase in the Companys operating expenses and adversely affect the Companys ability to deliver products on a timely basis.

Management anticipates that fluctuations in fuel costs may negatively impact gross margin, the cost to deliver, or expected improvements in cost to deliver in future
periods. While the fuel surcharge implemented during fiscal year 2006 may offset a portion of this negative impact, the Companys operating costs may be negatively affected.

The Companys significant investment in inventory may be exposed to risk of product obsolescence or decline in market valuation.

In order to provide prompt and complete service to customers, the Company maintains a significant investment in inventory at its full-service distribution centers and redistribution centers. Inventory control
procedures and policies are in place to monitor the risk of product obsolescence or declining market prices. Nevertheless, management cannot assure that:



| |  | such procedures and policies will continue to be effective;
|- |  | -----------------------------------------------------------

| |  | the demand for certain product lines will continue;
|- |  | ---------------------------------------------------

| |  | unforeseen product development or price changes will not occur; or
|- |  | ------------------------------------------------------------------

| |  | the write-off of any unsold inventory in the future will not be significant.
|- |  | ----------------------------------------------------------------------------

In addition, inventory purchased as a result of a business combination may include different product lines that are not normally distributed by the Company. These product lines may be difficult to sell and, therefore,
may result in a write-off if such inventory is not saleable in the future. Any inventory write-offs could have a material adverse effect on the Companys business, financial condition, and results of operations.

Business acquisitions may decrease existing shareholders percentage ownership in the Company and/or require the Company to incur additional debt.

Future acquisitions or investments may be financed by the issuance of equity securities that would increase the number of outstanding common shares
and may decrease earnings per share. As a result, the market price of the Companys common stock may decline. Additionally, the Company may incur additional debt to finance an



21



---

##### Table of Contents

acquisition that could result in a decline in the market price of the Companys common stock. Furthermore, amortization expense related to identifiable
intangible assets may significantly reduce profitability and adversely affect the Companys business, financial condition, and results of operations.

If difficulties are encountered while integrating the operations of acquired companies with the operations of the Company, profitability may be adversely affected.

The Company may be unable to successfully integrate the operations of acquired companies and realize anticipated economic, operational, and other benefits in a timely manner. Integration of an acquired company may be
difficult when the acquired business is in a market in which the Company has limited or no expertise, or has a different corporate culture. If the operations of acquired companies are not successfully integrated, the Company may:



| |  | incur substantial costs and delays;
|- |  | -----------------------------------

| |  | experience operational, technical, or financial problems;
|- |  | ---------------------------------------------------------

| |  | divert managements attention and other resources away from the day-to-day operations; and
|- |  | ------------------------------------------------------------------------------------------

| |  | damage relationships with key customers and employees.
|- |  | ------------------------------------------------------

If the operations of acquired companies are not successfully integrated with the operations of the Company in an efficient manner, the Companys business, financial condition and results of operations may be adversely affected.

The Companys indebtedness may limit its ability to obtain additional financing in the future and may limit its flexibility to react to industry
or economic conditions.

The Company maintains an asset-based revolving line of credit (LOC), which permits maximum borrowings of up to
$200 million. The maximum borrowings may be increased to $250 million at the Companys discretion. Availability of borrowings depends upon a borrowing base calculation consisting of accounts receivable and inventory, subject to
satisfaction of certain eligibility requirements less any outstanding letters of credit. Any deterioration in the realizability of these assets could reduce the availability of borrowings under the LOC. At March 30, 2007, there were no
outstanding borrowings under the LOC and the Company had sufficient assets based on eligible accounts receivable and inventories to borrow up to an additional $199.6 million.

Increases in the level of the Companys indebtedness could adversely affect the Companys liquidity and reduce the Companys ability to:



| |  | obtain additional financing in the future for working capital requirements;
|- |  | ---------------------------------------------------------------------------

| |  | make capital expenditures;
|- |  | --------------------------

| |  | acquire businesses; and
|- |  | -----------------------

| |  | react to changes in the industry and economic conditions in general.
|- |  | --------------------------------------------------------------------

Operating cash requirements are normally funded by borrowings under the LOC and cash flows from operating activities. The Company expects that sources of capital to fund future growth in the business will be provided
by a combination of cash flows from operating activities, borrowings under the LOC, capital markets, and/or other financing arrangements. However, changes in capital markets or adverse changes to the Companys operations may disrupt the
Companys ability to maintain adequate levels of liquidity.

If the Company is unable to generate sufficient cash flow from operating activities to
service the indebtedness, the Company will be forced to adopt an alternative strategy that may include the following options:



| |  | reduce or delay acquisitions and capital expenditures;
|- |  | ------------------------------------------------------

| |  | sell assets;
|- |  | ------------

| |  | restructure or refinance existing indebtedness; and
|- |  | ---------------------------------------------------

| |  | seek additional equity capital.
|- |  | -------------------------------



22



---

##### Table of Contents

The price of the Companys common stock and the trading value of the convertible senior notes may be volatile.

The Companys common stock experiences significant price and volume fluctuations. Trading prices of the Companys common stock may be
influenced by operating results, projections, and economic, financial, regulatory and other factors. In addition, general market conditions, including the level of, and fluctuations in, the trading prices of stocks generally, could affect the price
of the Companys common stock.

The market price of the convertible senior notes (Notes) is expected to be significantly affected by the
market price of the Companys common stock as well as the general level of interest rates and the Companys credit quality. This may result in a significantly greater volatility in the trading value of the Notes than would be expected for
nonconvertible debt securities the Company may issue.

The price of the Companys common stock also could be affected by possible sales of the
Companys common stock by investors who view the Notes as a more attractive means of equity participation in the Company and by hedging or arbitrage activity that management expects to develop involving the Companys common stock as a
result of the issuance of the Notes. The hedging or arbitrage activity, in turn, could affect the trading prices of the Notes.

Tax legislation
initiatives could adversely affect the Companys net earnings and tax liabilities.

The Company is subject to the tax laws and regulations of the
United States Federal, state and local governments. From time to time, various legislative initiatives may be proposed that could adversely affect the Companys tax positions. There can be no assurance that the Companys effective tax rate
will not be adversely affected by these initiatives. In addition, United States Federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. Although the Company believes that its historical tax
positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that the Companys tax positions will not be challenged by relevant tax authorities or that the Company would be successful
in any such challenge.

The Company faces litigation and liability exposure for product liability claims, as well as other existing and potential legal
claims against the Company.

The Company is primarily a distributor of medical products, equipment, and pharmaceutical related products. As a result,
there is a risk that injury or other liability arising from the use or transportation of the products may occur and result in litigation against the Company. Accordingly, the Company maintains various insurance policies, including product liability
insurance, to cover such exposure at amounts that management considers adequate. In many cases, the manufacturer of the product for any product liability claims may indemnify the Company. However, there can be no assurance that the coverage
maintained by the Company under various insurance policies is sufficient to cover future claims or are available in adequate amounts at a reasonable cost. In addition, there can be no assurance that the indemnification agreements provided by
manufacturers will adequately protect the Company; particularly the enforceability of indemnification provisions provided by overseas suppliers for globally-sourced products. A successful claim brought against the Company in excess of available
insurance or indemnification agreements, or any claim that results in significant adverse publicity against the Company, could harm the Companys business, reputation, and results of operations.

In addition to product liability claims, the Company is subject to various legal and administrative proceedings and claims arising in the normal course of business,
which are described in Note 16, Commitments and Contingencies, of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The outcomes of such proceedings or claims that are unasserted, pending,
or known to be threatened could have a material adverse effect on the Companys consolidated financial position, liquidity, or results of operations.



23



---

##### Table of Contents

The Company faces risk that proprietary rights may infringe on the rights of third parties.

The Company believes that its private-label products and other intellectual property do not infringe upon the proprietary rights of third parties. However, from
time-to-time, third parties may assert infringement claims against the Company. If the Company was found to be infringing on others rights, the Company may be required to pay substantial damage awards, obtain a license, or cease selling the
products that contain the infringing property. Such actions may be significant and result in material losses to the Company.

The Companys
protections on intellectual property may not be adequate

The Company relies on a combination of patent, copyright and trademark laws, nondisclosure
and other contractual provisions to protect a number of its products, services, and intangible assets. These proprietary rights are important to the Companys ongoing operations. There can be no assurance that these protections will provide
meaningful protection against competitive products or services or otherwise be commercially valuable or that the Company will be successful in obtaining additional intellectual property or enforcing its intellectual property rights against
unauthorized users.

If environmental claims arise, the Company could incur substantial liabilities and costs.

The Companys operations and properties are subject to various federal, state and local laws and regulations relating to environmental matters. As such, the Company
may be responsible for the investigation and remediation of property contaminated by hazardous, toxic, or other chemical substances, regardless of whether the Company is responsible for such contamination. The costs of such investigation and
remediation requirements may be substantial. In addition, the Company could be held liable to governmental entities or third parties for any property damage, personal injury, and investigation and cleanup costs incurred by such parties in connection
with the contamination. These costs and liabilities could have a material adverse effect on the Companys business, financial condition, and results of operations. Furthermore, the costs of complying with more stringent standards, as well as
any liabilities associated with noncompliance with such standards imposed on the Company, may result in a material adverse effect on the Companys business, financial condition, and results of operations.

If management fails to maintain an effective system of internal controls, the Company may not be able to accurately report its financial results.

Effective internal controls are necessary to provide reliable financial reports. If the Company cannot provide reliable financial reports, its business and results of
operations could be adversely affected. Any failure to maintain effective internal controls over financial reporting may cause the Company to fail to meet its reporting obligations, which could have a negative impact on the trading price of its
common stock.

The Articles of Incorporation, Bylaws, Rights Agreement, and Florida law may inhibit a takeover of the Company or could deprive the
Companys shareholders of the opportunity to obtain a takeover premium for their shares.

The Companys Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws and Florida law contain provisions that may delay, deter, or inhibit a future acquisition that might otherwise result in the Companys shareholders receiving a takeover premium for their shares.
This could occur even if shareholders are offered an attractive value for their shares of common stock or if a substantial number or even a majority of the Companys shareholders believe the takeover is in their best interest. These provisions
are intended to encourage any person interested in acquiring the Company to negotiate with and obtain the approval of the Board of Directors in connection with any transaction. A staggered Board of Directors, the State of Floridas Affiliated
Transaction Statute, or the State of Floridas Control-Share Acquisition Statute could delay, deter, or inhibit potential offers to acquire the Company.



24



---

##### Table of Contents

In addition, the rights of holders of the Companys common stock will be subject to, and may be adversely affected
by, the rights of the holders of preferred stock that may be issued in the future and that may be senior to the rights of holders of common stock. On April 20, 1998, the Board of Directors approved a Shareholder Protection Rights Agreement that
provides for one preferred stock purchase right in respect of each share of common stock. These rights become exercisable upon a person or group of affiliated persons acquiring 15% or more of the Companys then-outstanding common stock by all
persons other than an existing 15% shareholder. This Rights Agreement also could discourage bids for shares of common stock at a premium and could have a material adverse effect on the market price of the common stock.

The Companys operations, marketing activities, and pricing are subject to review by federal or state agencies.

The health care industry is highly regulated and the Company is subject to various federal, state, and local laws and regulations, which include the operating and
security standards of the Drug Enforcement Agency (DEA), the FDA, various state boards of pharmacy, state health departments, the United States Department of Health and Human Services (HHS), the Occupational Safety and Health
Administration (OSHA), CMS, various State Attorneys General, State Medicaid fraud units, and other comparable agencies. The Companys global product sourcing initiatives have increased the Companys exposure to these regulatory
agencies. Certain of the Companys distribution service centers may be required to register for permits and/or licenses with, and comply with operating and security standards of, the DEA, the FDA, HHS, and various state boards of pharmacy,
state health departments and/or comparable state agencies as well as certain accrediting bodies depending upon the type of operations and location of product distribution, manufacturing, and sale. Although the Company believes that it is in
compliance, in all material respects, with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion concerning the compliance of the Companys operations with
applicable laws and regulations. Floridas Division of Medical Quality Assurance is currently conducting a review of the Companys Florida operations for compliance with guidelines for the receipt, storage, and distribution of products
covered by recent Florida drug pedigree legislation. There can be no assurance that the Company will be able to maintain or renew existing permits and licenses or obtain, without significant delay, future permits and licenses needed for the
operation of the Companys businesses.

The noncompliance by the Company with applicable laws and regulations or the failure to maintain, renew or
obtain necessary permits and licenses could have an adverse effect on the Companys results of operations and financial condition. In addition, if changes were to occur to the laws and regulations applicable to the Companys businesses,
such changes could adversely affect many of the Companys regulated operations, which include distributing pharmaceuticals. Also, the health care regulatory environment may change in a manner that could restrict the Companys existing
operations, limit the expansion of the Companys businesses, apply regulations to previously unregulated businesses or otherwise affect the Company adversely.

Although the Company attempts to comply with law and regulations applicable to the marketing and sale of medical products and supplies, such standards are rapidly developing and often subject to multiple interpretations. Failure to comply
with such laws and regulations could have a material adverse effect on the Company, including criminal and civil penalties, administrative sanctions, quarantine and destruction of inventory, fines, and other adverse actions, including but not
limited to exclusion from participation in Medicare, Medicaid, and other Federal and state health care programs. Furthermore, the circumvention or disregard by Company employees of Federal and state regulations pertaining to filing claims for health
care reimbursement by employees or customers could subject the Company to risk.

The distribution of controlled pharmaceutical products by the Physician
Business is subject to review by federal agencies. As such, an increase in regulation may increase the Physician Business operating costs and reduce profitability.

On September 30, 2005, the Physician Business acquired Southern Anesthesia & Surgical, Inc., a distributor of controlled and non-controlled pharmaceuticals as well as medical supplies to office-based
physicians and surgery centers in all 50 states. As a result, the Company must comply with DEA regulations when purchasing, handling



25



---

##### Table of Contents

or selling Schedule II, III, IV and V Drugs and List I Chemicals including ephedrine and Pseudoephedrine. The DEA conducts regular routine inspections of
facilities holding DEA permits. Failure to comply with the regulations governing Scheduled Drugs and Listed Chemicals could subject the Company to adverse actions by its customers and suppliers and could subject the Company to substantial fines or
penalties and other sanctions, including prohibiting the Company from purchasing, handling, and distributing such products. An adverse determination regarding the Companys compliance with the DEA regulations relating to physical security,
record-keeping and required reporting requirement, brought by either the government or a private individual, could have a material effect on the Companys financial condition and results of operations.

In 1999, the Food and Drug Administration (FDA) promulgated rules designed to protect American consumers from counterfeit drugs, but delayed the effective
date of enforcement. In June 2006, the FDA announced that they intended to enforce the 1999 legislation beginning December 1, 2006, with no further delays in the effective date. In recent years, some states have passed or have proposed
similar laws and regulations that are intended to protect the integrity of the supply channel that affects the purchase, sale, and shipment of pharmaceutical products. For example, Florida and other states are implementing pedigree requirements that
require wholesalers to provide healthcare providers access to paperwork tracing drugs back to the manufacturers. These and other requirements may increase the Companys cost of operations and, if the Companys processes implementing these
new requirements are not sufficient, may result in the Company failing to comply with those requirements and could subject the Company to substantial fines or penalties and other sanctions, including prohibiting the Company from purchasing,
handling, and distributing such products. As noted above, the Companys Florida operations are currently under review by state regulatory agencies for compliance with guidelines for the receipt, storage, and distribution of products covered by
recently enacted drug pedigree legislation.

As a result of political, economic and regulatory influences, the healthcare delivery industry in the United
States is under intense scrutiny and subject to fundamental changes. Management cannot predict which reform proposals will be adopted, when they may be adopted, or what impact they may have on the Company. Furthermore, the costs associated with
complying with federal and state regulations could be significant and the failure to comply with any such legal requirements could have a significant impact on the Companys results of operations and financial condition.

The Medicare Part B billing services provided by the Elder Care Business is subject to review by federal agencies.

The Elder Care Business provides Medicare Part B reimbursable products and billing services, either on a fee-for-service or a full-assignment basis. As a result,
the Company must comply with laws and regulations governed by the HIPPA, Medicare, Medicaid, other federal health care programs, managed care or third-party payer regarding billing, coding, claim submission, and coverage. Failure to comply with
HIPPA, Medicare, Medicaid, other federal programs, managed care or third party payer reimbursement, or financial reporting regulations, or otherwise committing healthcare fraud, may subject the Company to adverse actions by its clients, the
government, or private payers. These adverse actions may result in delays or lost reimbursement, recoupment of amounts previously paid, and could subject the Company to substantial fines or penalties, and other sanctions, including exclusion from
participation in any federal health care program. The government is actively involved in investigation of allegations of health care fraud. In addition, the Federal False Claims Act creates a financial incentive for private individuals, called
whistleblowers, to bring suit on behalf of the government to recover funds paid pursuant to a false claim, which may include failure to comply with technical requirements for claim submission, coding, and billing. An adverse determination regarding
the Companys compliance with Medicare, Medicaid, or other Federal health care programs billing, coding, claim submission, and coverage requirements, brought by either the government or a private individual, could have a material effect
on the Companys financial position and results of operations.



26



---

##### Table of Contents

Failure to comply with the United States Foreign Corrupt Practices Act and other laws could adversely impact the
Companys competitive position and subject us to penalties and other adverse consequences.

The Company is subject to the United States Foreign
Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may
compete with the Company, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the non-U.S. countries in which the Company conducts business. The Company has
implemented safeguards to prevent and discourage such practices by employees and agents. The Company can make no assurance, however, that employees or other agents will not engage in such conduct for which the Company might be held responsible. If
employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on the Companys business, financial condition and results of
operations. The Company is also subject to the Patriot Act and other anti-boycott and reporting laws. Failure to comply with these laws could subject the Company, its employees or other agents to penalties and other adverse consequences that may
have a material adverse effect on the Companys business, financial condition and results of operations.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS
|-------- | -------------------------

The Company has received no written
comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of fiscal year 2007 and that remain unresolved.



27



---

##### Table of Contents

|ITEM 2. | PROPERTIES
|------- | ----------

At March 30, 2007, PSS World Medical, Inc.
maintained 41 full-service distribution centers, 34 break-freight locations, 5 ancillary service centers, and several redistribution facilities, which serve all 50 states throughout the United States. The Company leases all locations.
The following tables identify the full-service distribution centers and break-freight locations for each operating segment.

Physician Business



|                                           |  |                   |  |                    |  |                    
|------------------------------------------ |  | ----------------- |  | ------------------ |  | -------------------
|Full-Service Distribution Center
Locations
|Charlotte, NC                              |  | Jacksonville, FL  |  | Orlando, FL        |  | Seattle, WA        
|Chicago, IL                                |  | Kennesaw, GA      |  | Phoenix, AZ        |  | St. Louis, MO      
|Columbia, SC                               |  | Lenexa, KS        |  | Plymouth, MN       |  | St. Petersburg, FL 
|Denver, CO                                 |  | Los Angeles, CA   |  | Pittsburgh, PA     |  | Wareham, MA        
|Fairfield, NJ                              |  | Louisville, KY    |  | Richmond, VA       |  | West Sacramento, CA
|Grand Prairie, TX                          |  | Lubbock, TX       |  | Rochester, NY      |  |                    
|Honolulu, HI                               |  | Memphis, TN       |  | Salt Lake City, UT |  |                    
|Houston, TX                                |  | New Orleans, LA   |  | San Antonio, TX    |  |                    
|                                          
|Break Freight Locations                   
|Albany, NY                                 |  | Chattanooga, TN   |  | Little Rock, AR    |  | San Diego, CA      
|Big Bend, WI                               |  | Farmingdale, NY   |  | Nashville, TN      |  | Tallahassee, FL    
|Blue Ash, OH                               |  | Fredricksburg, VA |  | Newark, CA         |  | Tulsa, OK          
|Bethlehem, PA                              |  | Hanover, MD       |  | Omaha, NE          |  | Troy, MI           
|Baton Rough, LA                            |  | Indianapolis, IN  |  | Pompano Beach, FL  |  | Tyler, TX          
|Birmingham, AL                             |  | Knoxville, TN     |  | Portland, OR       |  |                    
|Chesapeake, VA                             |  | Lafayette, LA     |  | Raleigh, NC        |  |                    
|Cleveland, OH                              |  | Las Vegas, NV     |  | Roanoke, VA        |  |                    
|                                          
|Redistribution Facilities                 
|Austell, GA                                |  | Jacksonville, FL  |  | Los Angeles, CA    |  | Columbia, SC       

Elder Care Business



|                                           |  |                  |  |                  |  |                
|------------------------------------------ |  | ---------------- |  | ---------------- |  | ---------------
|Full-Service Distribution Center
Locations
|Austell, GA                                |  | Mesquite, TX     |  | Ontario, CA      |  | Ridgeland, MS  
|Gahanna, OH                                |  | Middletown, PA   |  | Orlando, FL      |  | Sacramento, CA 
|Londonderry, NH                            |  | Morrisville, NC  |  | Omaha, NE        |  | Windsor, WI    
|                                          
|Break Freight Locations                   
|Eau Claire, WI                             |  | Fresno, CA       |  | Indianapolis, IN |  | San Antonio, TX
|Fallbrook, CA                              |  |                  |  |                  |  |                
|                                          
|Redistribution Facilities                 
|Austell, GA                                |  | Jacksonville, FL |  | Los Angeles, CA  |  |                
|                                          
|Ancillary Service Centers                 
|Birmingham, AL                             |  | Franklin, TN     |  | Indianapolis, IN |  | Ridgeland, MS  
|Fallbrook, CA                              |  |                  |  |                  |  |                



28



---

##### Table of Contents

In the aggregate, the Companys service center locations consist of approximately 2.5 million square feet of
leased space. The lease agreements have expiration dates ranging from April 2007 to September 2015 and facilities ranging in size from approximately 1,000 square feet to 168,500 square feet.

The Companys corporate office complex consists of approximately 121,300 square feet of leased office space located at 4345 Southpoint Boulevard and
4190 Belfort Road, Jacksonville, Florida 32216. This lease expires in March 2014.

As of March 30, 2007, the Companys facilities
provided adequate space for the Companys operations. Throughout the Companys history of growth, the Company has been able to secure adequate facilities to meet its operating requirements.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------

In May 1998, the Company and certain of
its current and former officers and directors were named as defendants in a securities class action lawsuit entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-CV 502-J-32TEM. The lawsuit alleged that the
defendants engaged in violations of Sections 14(a) and 20(a) of the Securities Exchange Act and SEC Rule 14a-9. The allegations referenced a decline in the Companys stock price following an announcement by the Company in May 1998
regarding the Gulf South Medical Supply, Inc. merger. On September 9, 2005, the parties filed a Joint Motion for Preliminary Approval of Class Action Settlement, which reflected the settlement reached by all the parties to the litigation for a
cash payment of approximately $16,500, of which approximately $12,700 was recovered through existing insurance policies. A hearing on the Joint Motion for Preliminary Approval of Class Action Settlement was held on October 7, 2005. The final
fairness hearing was held on December 20, 2005. The Court entered the Final Judgment and Order of Dismissal with Prejudice on December 20, 2005. During the three months ended December 30, 2005, the Company made payments totaling
approximately $3,800 to cover the uninsured losses and professional fees relating to this matter. As a result of these payments and the final fairness hearing, all obligations to the plaintiffs related to this litigation matter have been satisfied
by the Company as of December 30, 2005. During fiscal year 2007, the Company obtained a favorable settlement under separate litigation relating to this lawsuit resulting in a net gain of $1.8 million.

The Company is a party to various legal and administrative proceedings and claims arising in the normal course of business. While any litigation contains an element of
uncertainty, the Company, after consultation with outside legal counsel, believes that the outcome of such other proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Companys
consolidated financial position, liquidity, or results of operations.

The Company has various insurance policies, including product liability insurance,
covering risks and in amounts it considers adequate. In many cases in which the Company has been sued in connection with products manufactured by others, the Company is provided indemnification by the manufacturer. There can be no assurance that the
insurance coverage maintained by the Company is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide adequate protection for the Company.



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

No matters
were submitted to a vote of shareholders during the three months ended March 30, 2007.



29



---

##### Table of Contents

PART II



|ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | ----------------------------------------------------------------------------------------------------------------

Market Information

Shares of the Companys common stock are
quoted on Nasdaq Stock Market, Inc.s Global Select Market (NASDAQ GS) under the ticker symbol PSSI. The Nasdaq Stock Market (NASDAQ) became operational as a registered stock exchange on August 1, 2006.
The Companys common stock was quoted on NASDAQ before that time when it operated as an over the counter (OTC) market. The following table presents, for the periods indicated, the range of high and low sale prices per share of the
Companys common stock as reported on NASDAQ GS on or after August 1, 2006 and as quoted on the NASDAQ stock market before August 1, 2006.



|                                  |  |      |       |     |   |      
|--------------------------------- |  | ---- | ----- | --- | - | -----
|Quarter Ended                     |  | High |       | Low
|                                  |  |     
|Fiscal Year Ended March 31, 2006: |  |      |       |     |   |      
|July 1, 2005                      |  | $    | 12.59 |     | $ | 10.76
|September 30, 2005                |  | $    | 14.85 |     | $ | 12.13
|December 30, 2005                 |  | $    | 16.65 |     | $ | 11.92
|March 31, 2006                    |  | $    | 19.66 |     | $ | 14.74
|Fiscal Year Ended March 30, 2007: |  |      |       |     |   |      
|June 30, 2006                     |  | $    | 19.54 |     | $ | 16.33
|September 29, 2006                |  | $    | 20.87 |     | $ | 16.81
|December 29, 2006                 |  | $    | 21.60 |     | $ | 17.91
|March 30, 2007                    |  | $    | 21.75 |     | $ | 19.29

Cash Dividends

Since inception, the Company has neither declared nor paid cash dividends. Management intends to continue to retain earnings for the growth and development of the Companys business; therefore, the Company does not anticipate that any
cash dividends will be declared in the foreseeable future. The Companys revolving line of credit agreement contains certain covenants that limit the amount of cash dividends that can be declared by the Company.

Holders of Common Stock

As of
May 18, 2007, there were approximately 1,730 holders of record of the Companys common stock.



30



---

##### Table of Contents

Performance Graph

The graph below compares the cumulative total stockholder return on $100 invested, assuming reinvestment of dividends, if any, on March 29, 2002, the last trading day before the beginning of the Companys 2003 fiscal year through
the end of fiscal year 2007 with the cumulative return on $100 invested for the same period in the Nasdaq Stock Market (U.S. Companies) Composite Index.

The graph also compares the cumulative stockholder return to the Companys Peer Group Index, which includes the following companies: Amerisourcebergan Corporation, Baxter International, Inc., Cardinal Health, Inc., McKesson
Corporation, Owens & Minor, Inc., Patterson Companies, Inc., Henry Schein, Inc., and Graham Field Health Products, Inc.

LOGO

ASSUMES $100 INVESTED ON MARCH 29, 2002

ASSUMES DIVIDENDS REINVESTED

FISCAL YEAR ENDING MARCH 30, 2007



|                        |  |               |  |               |  |              |  |              |  |               |  |              
|----------------------- |  | ------------- |  | ------------- |  | ------------ |  | ------------ |  | ------------- |  | -------------
|                        |  | March 29,2002 |  | March 28,2003 |  | April 2,2004 |  | April 1,2005 |  | March 31,2006 |  | March 30,2007
|PSS World Medical, Inc. |  | 100.00        |  | 68.06         |  | 117.24       |  | 125.10       |  | 196.84        |  | 215.71       
|NASDAQ Composite        |  | 100.00        |  | 71.63         |  | 109.32       |  | 109.98       |  | 131.49        |  | 138.22       
|Peer Group              |  | 100.00        |  | 61.94         |  | 81.76        |  | 81.47        |  | 104.10        |  | 118.58       



31



---

##### Table of Contents

Issuer Purchases of Equity Securities

On June 8, 2004, the Companys Board of Directors approved a stock repurchase program authorizing the Company, depending upon market conditions and other factors, to repurchase up to a maximum of 5% of its
common stock, or approximately 3.2 million common shares, in the open market, in privately negotiated transactions, or otherwise. On December 6, 2006, the Companys Board of Directors amended the stock repurchase plan by authorizing
the repurchase of an additional 5%, or approximately 3.4 million common shares, in the open market, in privately negotiated transactions, or otherwise.

During the year ended March 30, 2007, the Company repurchased approximately 2.1 million shares of common stock under this program at an average price of $20.17 per common share for approximately $42.9 million. At
March 30, 2007, approximately 3.5 million shares were available to repurchase under this program.

The following table summarizes the
Companys repurchase activity during the three months ended March 30, 2007.



|                       |  |                                  |  |                              |       |                                                                                |         |                                                                                                          |          
|---------------------- |  | -------------------------------- |  | ---------------------------- | ----- | ------------------------------------------------------------------------------ | ------- | -------------------------------------------------------------------------------------------------------- | ---------
|Period                 |  | Total Number of Shares Purchased |  | Average Price Paid per
Share |       | Maximum Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms |         | Maximum Number (orApproximate DollarValue) of Shares that MayYet Be Purchased Underthe
Plans or Programs
|                       |  |                                  |  |                             
|December 30-January 29 |  |                                 |  | $                            |      |                                                                                |        |                                                                                                          | 4,250,161
|January 30-February 28 |  | 426                              |  |                              | 20.78 |                                                                                | 426     |                                                                                                          | 4,249,735
|March 1-March 30       |  | 750,000                          |  |                              | 20.64 |                                                                                | 750,000 |                                                                                                          | 3,499,735
|                       |  |                                  |  |                              |       |                                                                                |         |                                                                                                          |          
|Total fourth quarter   |  | 750,426                          |  | $                            | 20.64 |                                                                                | 750,426 |                                                                                                          | 3,499,735
|                       |  |                                  |  |                              |       |                                                                                |         |                                                                                                          |          

Rights Agreement

Pursuant to a Rights Agreement adopted in 1998, each outstanding share of the Companys common stock carries with it a right to purchase one additional share at a price of $115 (subject to anti-dilution adjustments). The rights become
exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 15% or more of the common stock by a person or group (an Acquiring Person) or the commencement of a tender or exchange offer for
15% or more of the common stock.

In the event that an Acquiring Person acquires 15% or more of the common stock or commences a tender or exchange offer
for 15% or more of the common stock, each right entitles the holder to purchase for the then current exercise price that number of shares of common stock having a market value of two times the exercise price, subject to certain exceptions.
Similarly, if the Company is acquired in a merger or other business combination or if 50% or more of the Companys assets or earning power is sold, each right entitles the holder to purchase at the then current exercise price that number of
shares of common stock of the surviving corporation having a market value of two times the exercise price. The rights, which do not entitle the holder thereof to vote or to receive dividends, expire on April 20, 2008 and may be terminated by the
Company under certain circumstances.



32



---

##### Table of Contents

|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The selected financial data for fiscal
years 2003 through 2007 have been derived from the Companys consolidated financial statements, which give retroactive effect to the restatement of the Imaging Business as discontinued operations. The selected financial data below should be
read in conjunction with the Companys financial statements and the notes thereto and Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.



|                                         |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|---------------------------------------- |  | --------------------------------------------- | --------- | ---- | - | --------- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                         |  | Fiscal Year Ended                             |          
|                                         |  | 2007                                          |           | 2006 |   | 2005      |  |   | 2004      |   |  | 2003 |          
|                                         |  | (Dollars in thousands, except per share data) |          
|Statement of Operations Data:            |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Net sales                                |  | $                                             | 1,741,639 |      | $ | 1,619,417 |  | $ | 1,473,769 |   |  | $    | 1,349,917 |   |  | $ | 1,177,893 |  
|Income from continuing operations        |  |                                               | 50,481    |      |   | 44,257    |  |   | 39,384    |   |  |      | 28,703    |   |  |   | 8,814     |  
|Total loss from discontinued operations  |  |                                               |          |      |   |          |  |   | (412      | ) |  |      | (1,164    | ) |  |   | (63,577   | )
|Net income (loss)                        |  | $                                             | 50,481    |      | $ | 44,257    |  | $ | 38,972    |   |  | $    | 27,539    |   |  | $ | (54,763   | )
|                                         |  |                                               |           |      |  
|Earnings (loss) per shareBasic:         |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Income from continuing operations        |  | $                                             | 0.75      |      | $ | 0.67      |  | $ | 0.61      |   |  | $    | 0.43      |   |  | $ | 0.12      |  
|Total loss from discontinued operations  |  |                                               |          |      |   |          |  |   | (0.01     | ) |  |      | (0.02     | ) |  |   | (0.91     | )
|                                         |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss)                        |  | $                                             | 0.75      |      | $ | 0.67      |  | $ | 0.60      |   |  | $    | 0.41      |   |  | $ | (0.79     | )
|                                         |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings (loss) per shareDiluted:       |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Income from continuing operations        |  | $                                             | 0.73      |      | $ | 0.66      |  | $ | 0.60      |   |  | $    | 0.42      |   |  | $ | 0.12      |  
|Total loss from discontinued operations  |  |                                               |          |      |   |          |  |   | (0.01     | ) |  |      | (0.02     | ) |  |   | (0.90     | )
|                                         |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Net income (loss)                        |  | $                                             | 0.73      |      | $ | 0.66      |  | $ | 0.59      |   |  | $    | 0.40      |   |  | $ | (0.78     | )
|                                         |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Weighted average shares outstanding:     |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                    |  |                                               | 67,219    |      |   | 65,643    |  |   | 64,547    |   |  |      | 67,074    |   |  |   | 69,680    |  
|Diluted                                  |  |                                               | 69,325    |      |   | 66,887    |  |   | 65,607    |   |  |      | 67,990    |   |  |   | 70,374    |  
|                                         |  |                                               |           |      |  
|Cash dividends declared per common share |  |                                               |          |      |   |          |  |   |          |   |  |      |          |   |  |   |          |  
|Ratio of earnings to fixed charges(a)    |  |                                               | 5.1       |      |   | 4.6       |  |   | 3.7       |   |  |      | 4.2       |   |  |   | 1.6       |  
|                                         |  |                                               |           |      |  
|Balance Sheet Data:                      |  |                                               |           |      |   |           |  |   |           |   |  |      |           |   |  |   |           |  
|Working capital(b)                       |  | $                                             | 304,542   |      | $ | 265,201   |  | $ | 228,583   |   |  | $    | 222,856   |   |  | $ | 91,591    |  
|Total assets                             |  | $                                             | 774,975   |      | $ | 736,975   |  | $ | 646,358   |   |  | $    | 586,846   |   |  | $ | 471,863   |  
|Long-term liabilities                    |  | $                                             | 211,882   |      | $ | 200,288   |  | $ | 180,310   |   |  | $    | 171,290   |   |  | $ | 18,607    |  



|(a) | For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of income from continuing operations before provision for income taxes, plus fixed charges,
less capitalized interest. Fixed charges consist of interest, whether expensed or capitalized, amortization of debt issuance costs, and the portion of rental expense estimated by management to be attributable to interest.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Assets and liabilities of discontinued operations for fiscal years 2004 and 2003 have been excluded from this calculation.
|--- | --------------------------------------------------------------------------------------------------------------------------



33



---

##### Table of Contents

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

THE COMPANY

PSS World Medical, Inc. (the Company or PSSI), a Florida corporation which
began operations in 1983, is a national distributor of medical products, equipment, pharmaceutical related products, and healthcare information technology solutions to alternate-site healthcare providers including physician offices, long-term care
and assisted living facilities, and home health care providers through 41 full-service distribution centers, which serve all 50 states throughout the United States. The Company currently conducts business through two operating segments, the
Physician Business and the Elder Care Business. These strategic segments serve a diverse customer base.

PSSI is a leader in the two market segments it
serves as a result of value-added, solution-based marketing programs; a customer differentiated distribution and service model; a consultative sales force with extensive product, disease state, reimbursement, and supply chain knowledge; unique
arrangements with product manufacturers; innovative information systems and technology that serve its core markets; innovative marketing programs; and a culture of performance. The Company is focused on improving business operations and management
processes, maximizing its core distribution capability and efficiency, and developing and implementing innovative marketing strategies. In addition, the Company has historically acquired companies to broaden its reach and leverage its infrastructure
and may continue to make acquisitions in the future.

THE COMPANYS STRATEGY

The Companys objective is to be the leading distributor and marketer of medical products and services to select medical market segments in the United States of America, with a goal to grow at twice the market
growth rate in new and existing markets. The key components of the Companys strategy include:

Develop and implement innovative
customer solutions.The Company develops programs that focus on identified needs of its customers, including increasing practice cash flows, providing cost containment or reduction opportunities, and improving patient care.

The Physician Business utilizes the following programs to accomplish these objectives: Advantage Club, Rx Extreme,and Can-Do.The Physician Business also implemented SmartScan, a device that allows customers to order product electronically and effectively manage their product inventory. During fiscal year 2007, the physician business expanded its product
offering to healthcare information technology solutions, which will play a major role in increasing practice cash flows and increasing practice efficiencies.

The Elder Care Business utilizes the following programs to accomplish these objectives: ANSWERS Housekeeping (ANSWERS HK), ANSWERS Plus, Partners in Efficiency (P.I.E.), Fast Accurate Supply
Technology (F.A.S.T), and AccuSCAN.

Leverage sales and marketing through relationships, products, and
services.  The Company believes its sales professionals, which consists of approximately 860 employees, and their customer relationships and knowledge are strategic competitive advantages. The Company trains its sales professionals to
build unique relationships with customers and provide solutions though innovative marketing programs, exclusive products, and new product or technology offerings. The Company seeks to establish unique distribution and marketing arrangements for
selected products from leading medical product and technology manufacturers.

Leverage investments in distribution
infrastructure.The Company has made a significant investment in its distribution infrastructure, information systems, process reengineering, and training over the past several years. In order to maximize profitability and build a
competitive edge in the market place, the Company will continue



34



---

##### Table of Contents

to focus on improving operations and distribution processes. During fiscal year 2007, the Physician Business continued to leverage the distribution
infrastructure investments and implemented various process improvements that have resulted in operating efficiencies and improved customer service levels.

During fiscal year 2006, the Elder Care Business completed the conversion of its Enterprise Resource Planning (ERP) system to the JD Edwards XE® platform (JDE XE). The conversion included implementing the advanced
warehouse distribution module, which facilitated the management and tracking of customer orders and inventory. The Company is currently in the process of converting all customer order entry channels (electronic data interface, GSOnline, and JDE
order entry) for the Elder Care Business into a single enterprise-wide solution. Management anticipates that the conversion of these order entry channels will be completed during fiscal year 2008 and will complete the enterprise implementation of
JDE. During fiscal year 2007, the Elder Care Business leveraged the capabilities of the new ERP system and implemented various process improvements to maximize operating efficiencies and improve customer service levels and profitability.

Be the employer of choice within the industry.The Company believes its management, sales force and employees are its most valuable
assets. Accordingly, the Company invests significant resources in recruiting, training, and continuing professional development. The Company seeks to be the employer of choice in the markets it serves, in terms of benefits offered to employees,
human resource competency training, and communications to employees regarding the Companys strategy, and training programs.

Conduct business in a legal and ethical manner.The Company believes each employee is responsible for personal integrity and the consequences of actions, and is expected to follow the highest standards of honesty, fairness
and obedience to the law. No employee is to undertake any business activity that is, or gives the appearance of being, improper, illegal or immoral. Over the last several years, the Company has improved its compliance programs by strengthening and
broadening health, safety, and regulatory education training programs for its employees.

EXECUTIVE OVERVIEW

During the fiscal year ended March 30, 2007, the Company continued to grow in the markets it serves. Overall, consolidated sales grew by 7.5% during the fiscal
year. The Physician and Elder Care Businesses launched sales promotions to increase sales of its Select Medical Products brand (Select), which positively impacted the growth period over period. During fiscal year 2007,
Select brand product sales grew 20.9% and 13.8% in the Physician and Elder Care businesses, respectively. Additionally, the Company began executing its Physician and Elder Care business strategies by expanding its product offering to include
healthcare information technology solutions for physician offices and diversifying its customer base through expansion into the home health care market.

Income from operations increased approximately $10.1 million during the fiscal year ended March 30, 2007. This increase was primarily a result of the net sales growth discussed above as well as managements continued focus on
reducing operating costs as a percentage of net sales. Some of the programs impacting operating costs include (i) delivery and professional training and incentive programs, (ii) best practices programs for distribution centers (Blue
Ribbon), and (iii) leveraging investments in warehouse management and order processing systems. In addition, the Companys global sourcing initiatives, other purchasing efficiencies, and continued leveraging of the distribution and
corporate shared services infrastructure contributed to additional incremental profit margin improvement.

Cash flow from operations during the year
March 30, 2007 was approximately $63.5 million, which was primarily driven by the growth in profitability. During fiscal year 2007, the Company returned a portion of its cash flow from operations to shareholders through the repurchase of
approximately 2.1 million shares of its common stock for approximately $42.9 million.



35



---

##### Table of Contents

The following specific events impacted the Companys results of operations during fiscal years 2007, 2006, and 2005:

Global Sourcing Initiative

The Companys global
sourcing capabilities include monitoring quality assurance and controls, and aligning product availability with customer needs. During fiscal year 2007, the global sourcing initiative reached several major milestones, including the expansion of the
Global Sourcing network of direct manufacturers in seven countries, increasing the capacity of the redistribution infrastructure in the United States from 120,000 sq feet to 240,000 sq feet, designing and implementing a security assessment program
for our global manufacturers in compliance with the U.S. Customs Trade Partners Against Terrorism Act, and expansion of the Companys global sourcing team. At March 30, 2007, the Company maintained approximately $22.7 million of
globally-sourced product inventory, which represented approximately 600 SKUs and 80 product categories. These products were sourced from manufacturers throughout China, Thailand, Malaysia, India, Sweden, Cambodia, and the Philippines. During fiscal
year 2007, gross profit increased 7% company-wide due, in part, to the execution of the Companys global sourcing strategy. Management believes this initiative will continue to impact the Companys results of operations during fiscal year
2008.

Influenza Vaccine Product Sales

Influenza
vaccine product sales were approximately $48.6 million during the fiscal year ended March 30, 2007 compared to $12.6 million during the fiscal year ended March 31, 2006, but fell short of expectations due to an oversupply in the
market and the cancellation of customer orders due to a mild influenza season. In connection with these environmental issues and as part of the Companys periodic review of the carrying amount of inventory during the three months ended
December 29, 2006, management determined that a write-down of $7.1 million was required. The Company expects the industry oversupply to continue into next year, and therefore does not intend to participate in the influenza vaccine market
during its fiscal year 2008.

Fuel Costs

The
Companys operating costs are affected by changes in the cost of gasoline and diesel fuel. Product is delivered to customers either by the Company-leased delivery fleet or third-party carriers. During fiscal year 2006, significant increases in
the cost of fuel impacted the Companys cost to deliver and the operating costs of common carriers. Some of these common carriers passed these increases through to the Company in the form of a fuel surcharge. To partially offset this increase,
the Physician and Elder Care Businesses implemented a fuel surcharge on October 1, 2005, which is based on national fuel cost data and is increased or decreased every 60 days. While fuels costs decreased during fiscal year 2007, management
anticipates that rising fuel costs may continue to negatively impact gross margin, the cost to deliver, or expected improvements in cost to deliver in future periods; however, the fuel surcharge is expected to continue to offset a portion of this
negative impact.

Acquisition of Southern Anesthesia & Surgical, Inc.

On September 30, 2005, the Physician Business acquired all of the outstanding common stock of Southern Anesthesia & Surgical, Inc. (SAS), a South Carolina-based distributor of controlled and
non-controlled pharmaceuticals and medical supplies to office-based physicians who specialize in oral maxillofacial surgery, and surgery centers. SAS contributed approximately $43.3 million and $23.7 million of incremental net sales during
fiscal years 2007 and 2006, respectively. SAS expertise in the distribution of controlled pharmaceutical products strengthens the Physician Business product offerings, accelerates penetration into the pharmaceutical market segment, and
has increased the Physician Business overall competency and effectiveness in serving the pharmaceutical market.



36



---

##### Table of Contents

Acquisition of Clinical Support Services, Inc.

On October 31, 2005, the Elder Care Business acquired certain assets and assumed certain liabilities of Clinical Support Services, Inc. (CSSI), a California-based medical billing and recovery services
company offering services to facilities-based healthcare providers in California. CSSI generated approximately $2.8 million in revenue during the 12-month period prior to the acquisition date and contributed approximately $3.2 million and
$1.4 million of incremental net sales during fiscal years 2007 and 2006, respectively. During fiscal year 2007, CSSI was integrated into the Companys existing Medicare Part B billing operations based in Franklin, Tennessee.

Settlement of the Class Action Lawsuit

On
September 9, 2005, the Company and all other defendants reached an agreement with the plaintiff and the certified class of persons who held Company common stock on March 26, 1998 to settle all claims alleged in the class action lawsuit
entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-CV 502-J-32TEM. The settlement resulted in a one-time payment of $16.5 million into a settlement fund (the Settlement Fund) to be used,
among other things, to pay the fees and expenses of plaintiffs counsel, the costs of administering the Settlement Fund, and the plaintiffs. Approximately $12.7 million of the $16.5 million payment was covered by existing insurance
policies. The Company had previously established a $1.0 million pre-tax reserve to cover potential uninsured losses relating to this matter during the fiscal year ended April 1, 2005 and recorded a charge of approximately $2.8 million
during the fiscal year ended March 31, 2006 to cover the remaining liability related to the settlement and legal fees. As of December 30, 2005, all obligations to the plaintiffs related to this litigation matter had been satisfied by the
Company. During fiscal year 2007, the Company obtained a favorable settlement under separate litigation relating to this lawsuit resulting in a net gain of $1.8 million.

Hurricanes Katrina and Rita

During the second quarter of fiscal year 2006, Hurricanes Katrina and Rita struck
Florida and the Gulf Coast region of the United States, causing significant interruptions to both the Physician and Elder Care Businesses and damage to the Physician Business full-service distribution center located in New Orleans, Louisiana.
The Companys operations throughout the affected areas were negatively impacted by the hurricanes and their aftermath. Additionally, the Company experienced costs after the hurricanes, such as higher local fuel prices, increased freight
expenses, and employee assistance expenses.

During this period of disruption, the Company was successful in repositioning its assets and employees from
the New Orleans distribution center to other locations to maintain service levels to customers. The New Orleans distribution center re-opened during the fourth quarter of fiscal year 2006.

During the fiscal year ended March 31, 2006, the Company recorded an initial charge related to the hurricanes of approximately $2.3 million, ($1.9 million
at the Physician Business, $0.3 million at the Elder Care Business, and $0.1 million at Corporate Shared Services), primarily related to (i) estimated reserve for bad debts; (ii) estimated reserves for the inventory losses, net
of insurance recoveries, and (iii) employee assistance expenses. Approximately $1.2 million of the charge was included in general and administrative expenses and the remaining $1.1 million was recorded in cost of goods sold.
Management filed claims with insurance providers and ultimately recorded insurance recoveries related to damaged inventory of approximately $0.8 million and incremental expenses incurred of approximately $0.4 million. The Company received
$0.5 million and $0.7 million in insurance recoveries during fiscal year 2007 and fiscal year 2006, respectively.



37



---

##### Table of Contents

National Accounts (Elder Care Business)

Ownership changes of national chain customers have impacted net sales during fiscal year 2007. Additionally, nursing home divestitures have impacted net sales during fiscal year 2006, as large, national chain
customers divested facilities located in states with high malpractice claims, high insurance costs, and litigation exposure. These trends are expected to continue in future periods.

Effective June 23, 2005, Sava Senior Care LLC, formerly Mariner Health Care, discontinued their medical products supply contractual relationship with the Company. The Elder Care Business generated approximately
$27.0 million in revenues during the twelve-month period prior to discontinuing the relationship with Sava Senior Care LLC/Mariner Health Care.

On
September 12, 2005, the Elder Care Business decided not to renew its long-term distribution agreement with Beverly Enterprises, Inc. (Beverly) due to concerns with an anticipated change in ownership of Beverly. The Elder Care
Business generated approximately $2.2 million and $32.7 million in revenues from Beverly during the fiscal years ended March 30, 2007 and March 31, 2006, respectively.

Internal Revenue Service Audit Appeals Settlement

The Company filed a formal protest to appeal certain findings
resulting from the IRSs audit of the income tax returns for the fiscal years ended March 31, 2000 and March 30, 2001 (the IRS Report) with the Appeals Office of the IRS, which primarily related to timing of tax
deductions. In conjunction with filing the protest, the income tax return for the fiscal year 2002 was amended to report a worthless stock deduction for the treatment of the sale of the International Business (the Refund Claim). The
Refund Claim related to the income tax treatment of the sale of the International Business during fiscal 2002, which was originally reported as a capital loss carryforward. The Refund Claim reflected a reclassification of the capital loss to an
ordinary loss. At the time of sale, management believed it was more likely than not that the Company would be unable to use the capital loss before its expiration in fiscal year 2007 and, accordingly, a valuation allowance was recorded. Subsequent
to filing the income tax return for fiscal year 2002, Tax Court rulings were issued that suggested the Company could change the capital loss deduction to an ordinary loss deduction. Therefore, the Company filed the Refund Claim with the IRS during
the three months ended December 31, 2003. During the three months ended December 31, 2004, the Company and the Appeals Office of the IRS reached a settlement. This settlement, which was subject to final review and approval by the
Congressional Joint Committee on Taxation (Joint Committee), resulted in a reduction to the provision for income taxes during the fiscal year ended April 1, 2005 of approximately $5.6 million, of which approximately
$5.1 million represented the reversal of the valuation allowance. In October 2005, the Company received written notification that the Joint Committee has found no exception to the settlement agreement reached with the Appeals Office of the
IRS.

Settlement of Litigation

On February 8,
2005, the Company settled a lawsuit pursuant to which the opposing parties agreed to pay the Company $2.6 million to resolve all claims and counterclaims and received court approval. Accordingly, during fiscal year 2005, the Company recorded a
$2.6 million gain, which was offset by approximately $1.9 million of legal and professional fees and expenses incurred during this same period.

Recent Developments

On May 25, 2007, the Company signed a definitive agreement to acquire the stock of Activus Healthcare Solutions, Inc.
(Activus), a California based distributor of medical supplies and pharmaceuticals to office-based physicians and surgery centers. The final purchase price, subject to certain adjustments, is estimated to be $12.6 million, plus the
retirement of $2.6 million of debt. The acquisition is expected to close during the first quarter of fiscal year 2008 and will be accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations.



38



---

##### Table of Contents

RESULTS OF OPERATIONS

FISCAL YEAR ENDED MARCH 30, 2007 VERSUS MARCH 31, 2006

NET SALES



|                      |  |                           |         |                       |   |        |  |                       |         |               |   |     |  |      |   
|--------------------- |  | ------------------------- | ------- | --------------------- | - | ------ |  | --------------------- | ------- | ------------- | - | --- |  | ---- | --
|                      |  | For the Fiscal Year Ended |         |                       |  
|                      |  | March 30, 2007            |         | March 31, 2006        |   |        | 
|(dollars in millions) |  | Amount                    |         | AverageDaily NetSales |   | Amount |  | AverageDaily NetSales |         | PercentChange |  
|Physician Business    |  | $                         | 1,227.5 |                       | $ | 4.9    |  | $                     | 1,086.8 |               | $ | 4.3 |  | 12.9 | % 
|Elder Care Business   |  |                           | 514.1   |                       |   | 2.0    |  |                       | 532.6   |               |   | 2.1 |  | (3.5 | )%
|                      |  |                           |         |                       |   |        |  |                       |         |               |   |     |  |      |   
|Total Company         |  | $                         | 1,741.6 |                       | $ | 6.9    |  | $                     | 1,619.4 |               | $ | 6.4 |  | 7.5  | % 
|                      |  |                           |         |                       |   |        |  |                       |         |               |   |     |  |      |   

Physician Business

Net sales continued to be positively impacted by the Advantage Club, Rx Extreme, and Can-Do marketing programs launched to increase the sale of consumable products, pharmaceutical products, and equipment, respectively.

The following table summarizes the growth rate in product sales year over year.



|                           |  |                           |         |                |   |                |  |       |   
|-------------------------- |  | ------------------------- | ------- | -------------- | - | -------------- |  | ----- | --
|                           |  | For the Fiscal Year Ended |         |                |  
|                           |  | March 30, 2007            |         | March 31, 2006 |   | Percent Change | 
|Consumable products:       |  |                           |         |                |   |                |  |       |   
|Branded products           |  | $                         | 641.6   |                | $ | 592.2          |  | 8.4   | % 
|Select Medical Products   |  |                           | 114.9   |                |   | 95.0           |  | 20.9  | % 
|Pharmaceutical products    |  |                           | 237.7   |                |   | 202.2          |  | 17.6  | % 
|Influenza vaccine products |  |                           | 48.5    |                |   | 12.6           |  | 287.0 | % 
|Equipment                  |  |                           | 147.0   |                |   | 148.4          |  | (1.0  | )%
|Immunoassay product sales  |  |                           | 30.2    |                |   | 31.2           |  | (3.2  | )%
|Other                      |  |                           | 7.6     |                |   | 5.2            |  | 43.4  | % 
|                           |  |                           |         |                |   |                |  |       |   
|Total                      |  | $                         | 1,227.5 |                | $ | 1,086.8        |  | 12.9  | % 
|                           |  |                           |         |                |   |                |  |       |   

Branded product sales during fiscal year 2007 continued to be positively impacted by the Companys sales
growth initiatives. Select Brand product sales year over year increased due to the Companys focus on promoting its globally sourced, Select Brand products, which resulted in new customer sales as well as customer conversions from
Branded to Select Brand products. Sales of influenza vaccines increased year over year, but fell short of expectations due to an oversupply in the market and cancellation of orders by certain customers. In addition, pharmaceutical product
sales continued to be positively impacted by the Rx Extreme revenue growth program, and the acquisition of SAS, a company that primarily distributes controlled and non-controlled pharmaceutical products.

Elder Care Business

During fiscal year 2007, the Elder Care
Business implemented strategies to diversify its customer base through expansion in the home health care market and other non-facilities based care and equipment providers. Net sales were impacted by the continued utilization of the following
innovative Elder Care customer-specific solution programs: ANSWERS HK, ANSWERS Plus, P.I.E, F.A.S.T, and AccuSCAN.



39



---

##### Table of Contents

The following table summarizes the change in net sales by customer segment period over period.



|                                            |  |                           |       |                |   |                |  |      |   
|------------------------------------------- |  | ------------------------- | ----- | -------------- | - | -------------- |  | ---- | --
|                                            |  | For the Fiscal Year Ended |       |                |  
|                                            |  | March 30, 2007            |       | March 31, 2006 |   | Percent Change | 
|Nursing home and assisted living Facilities |  | $                         | 322.1 |                | $ | 356.8          |  | (9.7 | )%
|Hospice and home health care agencies       |  |                           | 141.6 |                |   | 129.0          |  | 9.7  | % 
|Billing services                            |  |                           | 12.2  |                |   | 10.2           |  | 19.3 | % 
|Other                                       |  |                           | 38.2  |                |   | 36.6           |  | 4.5  | % 
|                                            |  |                           |       |                |   |                |  |      |   
|Total                                       |  | $                         | 514.1 |                | $ | 532.6          |  | (3.5 | )%
|                                            |  |                           |       |                |   |                |  |      |   

The decline in net sales to nursing home and assisted living facilities is primarily due to the discontinuation of
service to certain national chain customers during fiscal year 2006, partially offset by increased penetration in existing customer facilities. Net sales decreased approximately $36.7 million during fiscal year 2007 as a result of the loss of
national chain customers.

The growth in net sales to providers of home health care services is a result of the Companys continued focus on
diversifying its revenue sources and customers. During fiscal year 2007, the Company implemented its strategic initiatives to increase sales to independent and regional nursing home accounts while increasing the account penetration and sales in the
hospice and home health care market, a strategy to mitigate the impact of large, national chain customer divestitures and focus on the growing home health care market.

GROSS PROFIT

Physician Business

Gross profit dollars for the Physician Business increased primarily due to the growth in net sales discussed above, in conjunction with the Companys continued focus on its global sourcing strategy. The
Companys global sourcing strategy is designed to improve the Physician Business cost competitiveness and increase its gross margins on certain products. During fiscal year 2007, the Company increased the number of globally sourced
products, from approximately 200 products to approximately 600 products. The increase in gross profit was partially offset by a write-down for excess influenza vaccine inventory of $7.1 million during the year. This inventory write-down was the
result of a lower-of-cost-or-market valuation on the Physician Business remaining influenza inventory at the end of the third quarter resulting from the cancellation of customer orders during the three months ended December 29, 2006 due
to an oversupply of the product in the market, and a mild influenza season. As a result of the write-down, cost of goods sold was increased by $7.1 million during the year ended March 30, 2007, which decreased net income $4.4 million.
(Refer to Note 2 and Critical Accounting Policies).

Elder Care Business

While gross profit dollars remained relatively consistent period over period, gross margin percentage increased year over year. This increase was primarily due to the execution of the Companys global sourcing
strategy, as discussed above, an increase in ancillary billing service revenues, which typically generate higher gross profit margins, and a change in the segments sales mix from sales to larger accounts that generated lower gross margins to
sales to smaller accounts that generate higher gross margins. Gross margin is expected to continue to increase in future periods as a result of these factors. In addition, the Companys global sourcing strategy is expected to continue to
improve the Elder Care Business cost competitiveness and increase its gross margins on certain products.



40



---

##### Table of Contents

GENERAL AND ADMINISTRATIVE EXPENSES



|                             |  |                           |       |                |                |   |        |   |                |  |      |                     |  |   |      |  
|---------------------------- |  | ------------------------- | ----- | -------------- | -------------- | - | ------ | - | -------------- |  | ---- | ------------------- |  | - | ---- | -
|                             |  | For the Fiscal Year Ended |       |                |                |  
|                             |  | March 30, 2007            |       |                | March 31, 2006 |   |        |   |               
|(dollars in millions)        |  | Amount                    |       | % of Net Sales |                |   | Amount |   | % of Net Sales |  |      | Increase (Decrease) | 
|Physician Business(a)        |  | $                         | 174.5 |                | 14.2           | % |        | $ | 162.4          |  | 14.9 | %                   |  | $ | 12.1 |  
|Elder Care Business(a)       |  |                           | 103.4 |                | 20.1           | % |        |   | 106.0          |  | 19.9 | %                   |  |   | (2.6 | )
|Corporate Shared Services(b) |  |                           | 22.8  |                | 1.3            | % |        |   | 18.9           |  | 1.2  | %                   |  |   | 3.9  |  
|                             |  |                           |       |                |                |   |        |   |                |  |      |                     |  |   |      |  
|Total Company(b)             |  | $                         | 300.7 |                | 17.3           | % |        | $ | 287.3          |  | 17.7 | %                   |  | $ | 13.4 |  
|                             |  |                           |       |                |                |   |        |   |                |  |      |                     |  |   |      |  



|(a) | General and administrative expenses as a percentage of net sales is calculated based on divisional net sales.
|--- | -------------------------------------------------------------------------------------------------------------

|(b) | General and administrative expenses as a percentage of net sales is calculated based on consolidated net sales.
|--- | ---------------------------------------------------------------------------------------------------------------

General and administrative expenses are primarily impacted by (i) compensation and employee benefit costs, (ii) cost to deliver, which represents all costs
associated with the transportation and delivery of products to customers, and (iii) shared departmental overhead costs.

Physician Business

While general and administrative expenses increased year over year, primarily due to the increase in net sales, general and administrative expenses as
a percentage of net sales decreased 70 basis points year over year. This improvement is attributable to (i) leveraging the net sales growth across various fixed costs and (ii) reducing the Companys cost to deliver product to
customers.

General and administrative expenses other than cost to deliver increased during the fiscal year ended March 30, 2007 primarily due to
(i) increased compensation expenses of approximately $1.5 million due to additional employees from the acquisition of SAS and general wage increases, (ii) increased bank service charges of approximately $0.9 million related to
fees paid to process payments made via credit cards by the Companys customers, (iii) an increase in the corporate overhead allocation from Corporate Shared Services (refer to discussion below under Corporate Shared Services) which
was primarily related to increased costs associated with the Companys global sourcing initiative and increased medical insurance costs, offset by a decrease in incentive compensation of $3.4 million related to the write-off of influenza
vaccine during fiscal year 2007.

Elder Care Business

General and administrative expenses decreased year over year, primarily related to decreases in cost to deliver as a result of (i) a shift from third party carriers to the Companys fleet of leased delivery vehicles,
(ii) optimizing routes and shipments between distribution centers under the Companys route optimization program, and (iii) a decrease in fuel costs over prior year.

General and administrative expenses other than cost to deliver increased slightly during the fiscal year ended March 30, 2007 primarily due to (i) increased depreciation expense of approximately
$1.6 million primarily related to the JD Edwards enterprise resource planning system, (ii) an increase in the corporate overhead allocation from Corporate Shared Services (refer to discussion below under Corporate Shared Services)
which was primarily related to increased costs associated with the Companys global sourcing initiative, offset by decreased bad debt expense of approximately $0.8 million primarily related to improved collections.

Corporate Shared Services

General and administrative expenses
increased during the fiscal year ended March 30, 2007 primarily due to (i) increased employee compensation and employee benefit expenses of approximately $7.7 million due to



41



---

##### Table of Contents

additional employees, general wage increases and increased bonus expense related to the Company achieving its incentive goals for the year, (ii) an
increase in lease expense of approximately $0.9 million due to a new regional distribution facility for globally-sourced product and the expansion of the Companys field support office during fiscal year 2007, offset by a favorable
net settlement of $1.8 million during fiscal year 2007 relating to the class action lawsuit filed in May 1998 and a decrease in legal fees of approximately $3.1 million associated with the class action lawsuit that was settled during
fiscal year 2006.

SELLING EXPENSES



|                       |  |                           |       |               |                |   |        |   |                |  |     |          |  |   |    
|---------------------- |  | ------------------------- | ----- | ------------- | -------------- | - | ------ | - | -------------- |  | --- | -------- |  | - | ---
|                       |  | For the Fiscal Year Ended |       |               |               
|                       |  | March 30, 2007            |       |               | March 31, 2006 |   |        |  
|(dollars in millions)  |  | Amount                    |       | % of NetSales |                |   | Amount |   | % of Net Sales |  |     | Increase
|Physician Business(a)  |  | $                         | 97.3  |               | 7.9            | % |        | $ | 88.3           |  | 8.1 | %        |  | $ | 9.0
|Elder Care Business(a) |  |                           | 19.5  |               | 3.8            | % |        |   | 19.3           |  | 3.6 | %        |  |   | 0.2
|                       |  |                           |       |               |                |   |        |   |                |  |     |          |  |   |    
|Total Company(b)       |  | $                         | 116.8 |               | 6.7            | % |        | $ | 107.6          |  | 6.6 | %        |  | $ | 9.2
|                       |  |                           |       |               |                |   |        |   |                |  |     |          |  |   |    



|(a) | Selling expenses as a percentage of net sales is calculated based on divisional net sales.
|--- | ------------------------------------------------------------------------------------------

|(b) | Selling expenses as a percentage of net sales is calculated based on consolidated net sales.
|--- | --------------------------------------------------------------------------------------------

Physician Business

Selling expenses are primarily impacted by commission expense, which are generally paid to sales
representatives based on gross profit dollars and gross profit as a percentage of net sales. The increase in selling expenses is consistent with the increase in net sales. Selling expense as a percentage of net sales decreased year over year, which
is primarily related to leveraging the net sales growth across certain fixed selling expenses.

Elder Care Business

Selling expenses are generally impacted by commission expense, which is based on gross profit dollars, cost-to-deliver, and profitability growth for the Elder Care
Business. Selling expenses increased slightly year over year on declining net sales. Net sales declined due to the discontinuation of two large national chain customers during fiscal year 2006, however, these accounts were not commission-based.
Excluding the impact of these accounts, selling expense as a percent of net sales decreased year over year. This decrease resulted from the implementation of a new sales representative compensation program during fiscal year 2007, which focused
on overall customer profitability rather than solely gross profit.

INCOME FROM OPERATIONS



|                          |  |                           |       |   |                |     |   |        |   |       |               |  |     |                    |  |   |      |  
|------------------------- |  | ------------------------- | ----- | - | -------------- | --- | - | ------ | - | ----- | ------------- |  | --- | ------------------ |  | - | ---- | -
|                          |  | For the Fiscal Year Ended |       |   |                |    
|                          |  | March 30, 2007            |       |   | March 31, 2006 |     |   |        |  
|(dollars in millions)     |  | Amount                    |       |   | % of NetSales  |     |   | Amount |   |       | % of NetSales |  |     | Increase(Decrease) | 
|Physician Business        |  | $                         | 84.1  |   |                | 6.9 | % |        | $ | 75.4  |               |  | 6.9 | %                  |  | $ | 8.7  |  
|Elder Care Business       |  |                           | 21.6  |   |                | 4.2 | % |        |   | 15.9  |               |  | 3.0 | %                  |  |   | 5.7  |  
|Corporate Shared Services |  |                           | (23.2 | ) |                |    |   |        |   | (18.9 | )             |  |    |                    |  |   | (4.3 | )
|                          |  |                           |       |   |                |     |   |        |   |       |               |  |     |                    |  |   |      |  
|Total Company             |  | $                         | 82.5  |   |                | 4.7 | % |        | $ | 72.4  |               |  | 4.5 | %                  |  | $ | 10.1 |  
|                          |  |                           |       |   |                |     |   |        |   |       |               |  |     |                    |  |   |      |  

Income from operations for each business segment changed due to the factors discussed above.



42



---

##### Table of Contents

INTEREST EXPENSE

The Companys debt structure during fiscal years 2007 and 2006 primarily consisted of the $150 million of 2.25% senior convertible notes and variable rate borrowings under its revolving line of credit (LOC)
agreement. The following table summarizes the various components of total interest expense and interest rates applicable to the borrowings outstanding under the LOC.



|                                       |  |                           |      |   |                |   |      |            |  |   |       |  
|-------------------------------------- |  | ------------------------- | ---- | - | -------------- | - | ---- | ---------- |  | - | ----- | -
|                                       |  | For the Fiscal Year Ended |      |   |                |  
|(dollars in millions)                  |  | March 30, 2007            |      |   | March 31, 2006 |   |      | (Decrease) | 
|Total interest expense                 |  | $                         | 5.3  |   |                | $ | 5.9  |            |  | $ | (0.6  | )
|Components of interest expense:        |  |                           |      |   |                |   |      |            |  |   |       |  
|Interest on borrowings                 |  | $                         | 4.2  |   |                | $ | 5.0  |            |  | $ | (0.8  | )
|Debt issuance costs                    |  | $                         | 1.4  |   |                | $ | 1.5  |            |  | $ | (0.1  | )
|Capitalized interest                   |  | $                         | (0.3 | ) |                | $ | (0.6 | )          |  | $ | (0.3  | )
|Weighted average interest rate-LOC(a)  |  |                           | 7.60 | % |                |   | 3.89 | %          |  |   |      |  
|Average daily borrowings under the LOC |  | $                         | 1.2  |   |                | $ | 27.1 |            |  | $ | (25.9 | )



|(a) | Weighted average interest rate excludes debt issuance costs and unused line fees.
|--- | ---------------------------------------------------------------------------------

There were no material borrowings under the LOC during the fiscal year ended March 30, 2007. During fiscal year 2006, borrowings under the LOC were affected by market interest rate increases resulting from actions by the Federal
Reserve Board. The Company mitigated the effect of these rate increases through a $25 million variable-to-fixed interest rate swap. The interest rate swap matured on March 28, 2006, effectively returning the borrowings under the LOC to a
variable rate. Upon maturity of the interest rate swap, the Company paid down the entire $25 million of borrowings covered by the notional amount of the interest rate swap.

OTHER INCOME



|                      |  |                           |     |                |   |            |  |   |                |   |  |       |   
|--------------------- |  | ------------------------- | --- | -------------- | - | ---------- |  | - | -------------- | - |  | ----- | --
|                      |  | For the Fiscal Year Ended |     |                |   |           
|(dollars in millions) |  | March 30, 2007            |     | March 31, 2006 |   | (Decrease) |  |   | Percent Change |  
|Total Company         |  | $                         | 2.0 |                | $ | 3.1        |  | $ | (1.1           | ) |  | (36.2 | )%

Other income during fiscal year 2006 includes $1.4 million of one-time distributions resulting from the
Companys ownership interest in a mutual holding company. The Companys membership resulted from the purchase of investments through the mutual holding company to fund Company obligations under its deferred compensation plan. When this
mutual holding company was sold, the liquidation of its assets resulted in a distribution to the Company, which was recognized as a gain. Excluding the effect of this distribution, other income remained consistent period over period.

PROVISION FOR INCOME TAXES



|                      |  |                           |      |                |                |   |        |   |                |  |      |          |  |   |    
|--------------------- |  | ------------------------- | ---- | -------------- | -------------- | - | ------ | - | -------------- |  | ---- | -------- |  | - | ---
|                      |  | For the Fiscal Year Ended |      |                |               
|                      |  | March 30, 2007            |      |                | March 31, 2006 |   |        |  
|(dollars in millions) |  | Amount                    |      | Effective Rate |                |   | Amount |   | Effective Rate |  |      | Increase
|Total Company         |  | $                         | 29.9 |                | 37.2           | % |        | $ | 25.8           |  | 36.9 | %        |  | $ | 4.1

The increase in the provision for income taxes and effective rate year over year is primarily attributable to an
increase in income from continuing operations and a decrease in favorable permanent adjustments. The decrease in permanent adjustments primarily relates to the change in the cash surrender value of company-owned life insurance policies.



43



---

##### Table of Contents

During fiscal year 2004, the IRS completed fieldwork on the audit of the Federal income tax returns for the fiscal years
ended March 29, 2002 and March 28, 2003. The Company appealed certain findings, which primarily related to timing of tax deductions, with the Appeals Office of the IRS. During the three months ended March 30, 2007, the Company and the
Appeals Office of the IRS reached a settlement. The resolution of these audits resulted in the IRS issuing the Company a net refund of $1,863 of overpayment credits which was used to reduce the amount of cash required to satisfy fiscal year 2007
estimated tax payment liabilities.

FISCAL YEAR ENDED MARCH 31, 2006 VERSUS FISCAL YEAR ENDED APRIL 1, 2005

NET SALES



|                      |  |                           |         |                       |   |        |  |                       |         |               |   |     |  |      |  
|--------------------- |  | ------------------------- | ------- | --------------------- | - | ------ |  | --------------------- | ------- | ------------- | - | --- |  | ---- | -
|                      |  | For the Fiscal Year Ended |         |                       |  
|                      |  | March 31, 2006            |         | April 1, 2005         |   |        | 
|(dollars in millions) |  | Amount                    |         | AverageDaily NetSales |   | Amount |  | AverageDaily NetSales |         | PercentChange |  
|Physician Business    |  | $                         | 1,086.8 |                       | $ | 4.3    |  | $                     | 959.0   |               | $ | 3.8 |  | 13.3 | %
|Elder Care Business   |  |                           | 532.6   |                       |   | 2.1    |  |                       | 514.8   |               |   | 2.0 |  | 3.5  | %
|                      |  |                           |         |                       |   |        |  |                       |         |               |   |     |  |      |  
|Total Company         |  | $                         | 1,619.4 |                       | $ | 6.4    |  | $                     | 1,473.8 |               | $ | 5.8 |  | 9.9  | %
|                      |  |                           |         |                       |   |        |  |                       |         |               |   |     |  |      |  

Physician Business

Net sales continued to be positively impacted by the Advantage Club, Rx Extreme, and Can-Do marketing programs that were launched in June 2003 to increase the sale of consumable products, pharmaceutical products, and equipment,
respectively. Net sales year over year were also positively impacted by a business combination consummated on September 30, 2005. As a result of this business combination, approximately $23.7 million of incremental net sales were
recognized during fiscal year 2006.

The following table summarizes the growth rate in product sales year over year.



|                           |  |                           |         |               |   |       |  |       |   
|-------------------------- |  | ------------------------- | ------- | ------------- | - | ----- |  | ----- | --
|                           |  | For the Fiscal Year Ended |         | PercentChange |  
|(dollars in millions)      |  | March 31, 2006            |         | April 1, 2005 |  
|Consumable products:       |  |                           |         |               |   |       |  |       |   
|Branded products           |  | $                         | 592.2   |               | $ | 535.8 |  | 10.5  | % 
|Select Medical Products   |  |                           | 95.0    |               |   | 83.5  |  | 13.8  | % 
|Pharmaceutical products    |  |                           | 202.2   |               |   | 164.7 |  | 22.8  | % 
|Influenza vaccine products |  |                           | 12.6    |               |   | 2.9   |  | 331.9 | % 
|Equipment                  |  |                           | 148.4   |               |   | 136.0 |  | 9.1   | % 
|Immunoassay product sales  |  |                           | 31.2    |               |   | 32.7  |  | (4.6  | )%
|Other                      |  |                           | 5.2     |               |   | 3.4   |  | 56.7  | % 
|                           |  |                           |         |               |   |       |  |       |   
|Total                      |  | $                         | 1,086.8 |               | $ | 959.0 |  | 13.3  | % 
|                           |  |                           |         |               |   |       |  |       |   

During fiscal year 2006, the Physician Business sales mix changed due to managements focus on growing
pharmaceutical product sales by establishing the Rx Extreme revenue growth program and acquiring SAS, a company that primarily distributes controlled and non-controlled pharmaceutical products. Pharmaceutical product sales during fiscal year
2006 were also impacted by customers purchasing generic products rather than branded products. Sales prices of generic pharmaceutical products are typically lower and gross margin is higher than the branded product sales.

Elder Care Business

The Elder Care Business began to implement
strategies to diversify its customer base through expansion into the home health care market and other non-facilities based care and equipment providers. The increase in net sales



44



---

##### Table of Contents

during fiscal year 2006 reflects the execution of these business strategies and industry trends. Net sales were also impacted by the continued utilization of
the following innovative Elder Care customer specific solution programs: ANSWERS HK, ANSWERS Plus, P.I.E, F.A.S.T, and AccuSCAN.

The
following table summarizes the growth rate in net sales by customer segment period over period.



|                                            |  |                           |       |               |   |       |  |       |   
|------------------------------------------- |  | ------------------------- | ----- | ------------- | - | ----- |  | ----- | --
|                                            |  | For the Fiscal Year Ended |       | PercentChange |  
|(dollars in millions)                       |  | March 31, 2006            |       | April 1, 2005 |  
|Nursing home and assisted living facilities |  | $                         | 356.8 |               | $ | 359.8 |  | (0.9  | )%
|Hospice and home health care agencies       |  |                           | 129.0 |               |   | 105.5 |  | 22.4  | % 
|Billing services                            |  |                           | 10.2  |               |   | 8.7   |  | 17.5  | % 
|Other                                       |  |                           | 36.6  |               |   | 40.8  |  | (10.3 | )%
|                                            |  |                           |       |               |   |       |  |       |   
|Total                                       |  | $                         | 532.6 |               | $ | 514.8 |  | 3.5   | % 
|                                            |  |                           |       |               |   |       |  |       |   

The growth in net sales to providers of home health care services is a result of the Companys continuing
focus to diversify its revenue sources and customers.

The decline in net sales to nursing home and assisted living facilities was primarily the result of
the discontinuation of a large national chain customers medical supply contractual relationship, effective June 23, 2005. Net sales during fiscal year 2006 decreased approximately $19.4 million as a result of the loss of this
national chain customer. This decrease was partially offset by growth in net sales to regional and independent skilled nursing home facilities, which primarily resulted from acquisitions, new customers, increased penetration in existing customer
facilities, and the introduction of new product lines. Approximately $20.0 million of incremental net sales were recognized during fiscal year 2006 as a result of acquisitions completed during fiscal years 2006 and 2005 (approximately
$18.6 million and $1.4 million as a result of the acquisitions completed during the three months ended December 31, 2004 and December 30, 2005, respectively).

The customer segment sales mix has been impacted by the implementation of strategic initiatives to increase sales to independent and regional nursing home facilities while increasing the account penetration and sales
in the home health care market; a strategy to mitigate the impact of large, national chain customer divestitures.

GROSS PROFIT



|                      |  |                           |       |                |               |   |        |   |                |  |      |          |  |   |     
|--------------------- |  | ------------------------- | ----- | -------------- | ------------- | - | ------ | - | -------------- |  | ---- | -------- |  | - | ----
|                      |  | For the Fiscal Year Ended |       |                |              
|                      |  | March 31, 2006            |       |                | April 1, 2005 |   |        |  
|(dollars in millions) |  | Amount                    |       | % of Net Sales |               |   | Amount |   | % of Net Sales |  |      | Increase
|Total Company         |  | $                         | 467.3 |                | 28.9          | % |        | $ | 423.4          |  | 28.7 | %        |  | $ | 43.9

Physician Business

Gross profit dollars increased primarily due to the growth in net sales discussed above. Gross profit as a percentage of net sales (gross margin) slightly decreased year over year, as a result of increased pharmaceutical
product, influenza vaccine, and equipment sales, which have lower gross margin than consumable product sales. Gross margin may decrease in future periods due to expected increased sales of pharmaceutical products and diagnostic equipment. However,
the Companys global sourcing strategy is expected to improve the Physician Business cost competitiveness and increase its gross margins on certain products.

Elder Care Business

Gross profit dollars increased primarily due to the growth in net sales discussed above. Gross
margin increased approximately 29 basis points during the fiscal year ended March 31, 2006 compared to the fiscal year ended



45



---

##### Table of Contents

April 1, 2005. This change is primarily due to (i) replacing sales to larger accounts that generated lower margins with sales to smaller accounts
that generate higher margins, (ii) an increase in ancillary billing service revenues, which typically generate higher gross profit margins, and (iii) an increase in sales of globally sourced products. Gross margin may continue to increase
in future periods as a result of net sales growth in ancillary billing services. In addition, the Companys global sourcing strategy is expected to improve the Elder Care Business cost competitiveness and increase its gross margins on
certain products.

GENERAL AND ADMINISTRATIVE EXPENSES



|                             |  |                           |       |                |               |   |        |   |                |  |      |          |  |   |      |  
|---------------------------- |  | ------------------------- | ----- | -------------- | ------------- | - | ------ | - | -------------- |  | ---- | -------- |  | - | ---- | -
|                             |  | For the Fiscal Year Ended |       |                |               |  
|                             |  | March 31, 2006            |       |                | April 1, 2005 |   |        |   |               
|(dollars in millions)        |  | Amount                    |       | % of Net Sales |               |   | Amount |   | % of Net Sales |  |      | Increase | 
|Physician Business(a)        |  | $                         | 162.4 |                | 14.9          | % |        | $ | 144.8          |  | 15.1 | %        |  | $ | 17.6 |  
|Elder Care Business(a)       |  |                           | 106.0 |                | 19.9          | % |        |   | 93.4           |  | 18.2 | %        |  |   | 12.6 |  
|Corporate Shared Services(b) |  |                           | 18.9  |                | 1.2           | % |        |   | 24.0           |  | 1.6  | %        |  |   | (5.1 | )
|                             |  |                           |       |                |               |   |        |   |                |  |      |          |  |   |      |  
|Total Company(b)             |  | $                         | 287.3 |                | 17.7          | % |        | $ | 262.2          |  | 17.8 | %        |  | $ | 25.1 |  
|                             |  |                           |       |                |               |   |        |   |                |  |      |          |  |   |      |  



|(a) | General and administrative expenses as a percentage of net sales is calculated based on divisional net sales.
|--- | -------------------------------------------------------------------------------------------------------------

|(b) | General and administrative expenses as a percentage of net sales is calculated based on consolidated net sales.
|--- | ---------------------------------------------------------------------------------------------------------------

General and administrative expenses are primarily impacted by (i) compensation costs, (ii) cost to deliver, which represents all costs associated with the
transportation and delivery of products to customers, and (iii) shared departmental operating costs.

Physician Business

General and administrative expenses as a percentage of net sales decreased 20 basis points year over year. This percentage decrease is attributable to
(i) leveraging the net sales growth across various fixed costs, (ii) management focusing on identifying ways to reduce its cost to deliver, and (iii) optimizing routes and shipments between distribution centers as well as leveraging
net sales growth across transportation and delivery costs. Cost to deliver decreased year over year. However, this decrease was negatively impacted by an increase in fuel costs related to the Companys fleet of leased delivery vehicles and fuel
surcharges from third-party carriers.

Other general and administrative expenses increased during the fiscal year ended March 31, 2006 primarily due
to (i) increased salary, incentive compensation, and payroll tax expenses of approximately $2.9 million due to additional employees as a result of the acquisition of SAS and general wage increases, (ii) increased amortization of
intangible assets of approximately $1.2 million as a result of nonsolicitation payments made to sales representatives and the acquisition of SAS, (iii) increased bank service charges of approximately $1.1 million related to payments
made via credit cards by the Companys customers, (iv) an increase in the corporate overhead allocation from Corporate Shared Services (refer to discussion below under Corporate Shared Services) which was primarily related to
increased costs associated with the Companys global sourcing initiative and increased medical insurance costs, offset by (v) decreased depreciation expense of approximately $1.7 million primarily related to revising the estimated
lives of certain computer hardware and software effective March 23, 2005 (refer to Critical Accounting Policies for a further discussion).

Elder
Care Business

General and administrative expenses as a percentage of net sales increased 170 basis points year over year. This percentage
increase is primarily related to an increase in cost to deliver as a result of (i) an increase in fuel costs attributable to the Companys fleet of leased delivery vehicles and fuel surcharges from third-party carriers, (ii) an
increase in warehouse costs associated with the redistribution facilities for globally sourced product, and (iii) an increase in warehouse costs associated with the conversion to the JD Edwards enterprise resource



46



---

##### Table of Contents

planning system. This percentage increase was also impacted by the decline in net sales as a result of the loss of a national chain customer without a
corresponding decrease in fixed distribution costs.

Other general and administrative expenses increased during the fiscal year ended March 31, 2006
primarily due to (i) increased salary, incentive compensation, and payroll tax expenses of approximately $1.0 million due to additional employees and general wage increases, (ii) increased depreciation expense of approximately
$0.8 million primarily related to the JD Edwards enterprise resource planning system, (iii) increased bad debt expense of approximately $0.6 million primarily related to two customers offset by an improved aging of accounts
receivable, (iv) increased amortization of intangible assets of approximately $0.6 million as a result of the acquisition consummated during the third quarter of fiscal year 2005, and (v) an increase in the corporate overhead
allocation from Corporate Shared Services (refer to discussion below under Corporate Shared Services) which was primarily related to increased costs associated with the Companys global sourcing initiative and increased medical insurance
costs.

Corporate Shared Services

General and
administrative expenses decreased during the fiscal year ended March 31, 2006 primarily due to (i) the reversal of the allowance for doubtful accounts of approximately $3.2 million related to an outstanding note receivable from the
former chairman and chief executive officer of the Company, (ii) a decrease in professional fees of approximately $2.2 million primarily related to the initial implementation of Section 404 of the Sarbanes-Oxley Act
(SOX 404) during fiscal year 2005 and professional fees associated with the IRS settlement during fiscal year 2005, offset by (iii) increased legal fees of approximately $2.8 million associated with the class action
lawsuit that was settled during fiscal year 2006, (iv) increased medical insurance costs of approximately $1.0 million, and (v) increased depreciation of approximately $0.6 million primarily related to the new capital leases
executed during fiscal year 2006. Fiscal year 2006 strategic initiatives increased general and administrative expenses, which in turn impacted the corporate overhead allocation to the divisions. These strategic initiatives included: global product
sourcing, expansion of the corporate headquarters facility, increased training of employees, continued enhancement and implementation of various modules of the JD Edwards XE®, and various information technology related projects.

SELLING EXPENSES



|                       |  |                           |       |               |               |   |        |   |                |  |     |          |  |   |    
|---------------------- |  | ------------------------- | ----- | ------------- | ------------- | - | ------ | - | -------------- |  | --- | -------- |  | - | ---
|                       |  | For the Fiscal Year Ended |       |               |              
|                       |  | March 31, 2006            |       |               | April 1, 2005 |   |        |  
|(dollars in millions)  |  | Amount                    |       | % of NetSales |               |   | Amount |   | % of Net Sales |  |     | Increase
|Physician Business(a)  |  | $                         | 88.3  |               | 8.1           | % |        | $ | 81.6           |  | 8.6 | %        |  | $ | 6.7
|Elder Care Business(a) |  |                           | 19.3  |               | 3.6           | % |        |   | 18.0           |  | 3.5 | %        |  |   | 1.3
|                       |  |                           |       |               |               |   |        |   |                |  |     |          |  |   |    
|Total Company(b)       |  | $                         | 107.6 |               | 6.6           | % |        | $ | 99.6           |  | 6.8 | %        |  | $ | 8.0
|                       |  |                           |       |               |               |   |        |   |                |  |     |          |  |   |    



|(a) | Selling expenses as a percentage of net sales is calculated based on divisional net sales.
|--- | ------------------------------------------------------------------------------------------

|(b) | Selling expenses as a percentage of net sales is calculated based on consolidated net sales.
|--- | --------------------------------------------------------------------------------------------

Overall, the change in selling expenses is primarily attributable to an increase in commission expense due to the growth in net sales discussed above. Commissions are generally paid to sales representatives based on
gross profit dollars and gross profit as a percentage of net sales.

Physician Business

Selling expenses as a percentage of net sales decreased year over year, which is primarily attributable to acquiring SAS. SAS does not utilize a sales force to
distribute its products; therefore, commissions are not currently paid on its sales. Excluding the effect of SAS sales, selling expenses as a percentage of net sales



47



---

##### Table of Contents

decreased year over year, which is primarily related to leveraging the net sales growth across certain fixed selling expenses. A portion of the decrease is
also attributable to the change in the sales mix. Equipment and pharmaceutical product sales, including influenza vaccine product sales, as a percentage of total sales increased each period. Commission rates on equipment and pharmaceutical product
sales are generally lower as these sales generate lower gross profit margins.

Elder Care Business

Selling expenses increased year over year as a result of the addition of sales management personnel and general wage increases for the sales management team. In
addition, selling expenses increased due to a change in sales mix; sales to larger accounts that generated lower margins were replaced with sales to smaller accounts that generate higher margins. A new compensation program for sales representatives
is being implemented during fiscal year 2007, which will focus on overall customer profitability rather than gross profit.

INCOME FROM OPERATIONS



|                          |  |                           |       |   |               |     |   |        |   |       |               |  |     |                    |  |   |      |  
|------------------------- |  | ------------------------- | ----- | - | ------------- | --- | - | ------ | - | ----- | ------------- |  | --- | ------------------ |  | - | ---- | -
|                          |  | For the Fiscal Year Ended |       |   |               |    
|                          |  | March 31, 2006            |       |   | April 1, 2005 |     |   |        |  
|(dollars in millions)     |  | Amount                    |       |   | % of NetSales |     |   | Amount |   |       | % of NetSales |  |     | Increase(Decrease) | 
|Physician Business        |  | $                         | 75.4  |   |               | 6.9 | % |        | $ | 62.0  |               |  | 6.5 | %                  |  | $ | 13.4 |  
|Elder Care Business       |  |                           | 15.9  |   |               | 3.0 | % |        |   | 23.6  |               |  | 4.6 | %                  |  |   | (7.7 | )
|Corporate Shared Services |  |                           | (18.9 | ) |               |    |   |        |   | (24.0 | )             |  |    |                    |  |   | 5.1  |  
|                          |  |                           |       |   |               |     |   |        |   |       |               |  |     |                    |  |   |      |  
|Total Company             |  | $                         | 72.4  |   |               | 4.5 | % |        | $ | 61.6  |               |  | 4.2 | %                  |  | $ | 10.8 |  
|                          |  |                           |       |   |               |     |   |        |   |       |               |  |     |                    |  |   |      |  

Income from operations for each business segment changed due to the factors discussed above.

INTEREST EXPENSE

The Companys debt structure during fiscal
years 2006 and 2005 consisted of the $150 million of 2.25% senior convertible notes and variable rate borrowings under its LOC agreement. The following table summarizes the various components of total interest expense and interest rates
applicable to the borrowings outstanding under the LOC.



|                                       |  |                           |      |   |               |   |      |                     |  |   |               |   |  |       |   
|-------------------------------------- |  | ------------------------- | ---- | - | ------------- | - | ---- | ------------------- |  | - | ------------- | - |  | ----- | --
|                                       |  | For the Fiscal Year Ended |      |   |               |   |      |                     | 
|(dollars in millions)                  |  | March 31, 2006            |      |   | April 1, 2005 |   |      | Increase (Decrease) |  |   | PercentChange |  
|Total interest expense                 |  | $                         | 5.9  |   |               | $ | 6.9  |                     |  | $ | (1.0          | ) |  | (14.2 | )%
|Components of interest expense:        |  |                           |      |   |               |   |      |                     |  |   |               |   |  |       |   
|Interest on borrowings                 |  | $                         | 5.0  |   |               | $ | 5.4  |                     |  | $ | (0.4          | ) |  | (7.2  | )%
|Debt issuance costs                    |  | $                         | 1.5  |   |               | $ | 1.9  |                     |  | $ | (0.4          | ) |  | (23.2 | )%
|Capitalized interest                   |  | $                         | (0.6 | ) |               | $ | (0.4 | )                   |  | $ | 0.2           |   |  | 29.4  | % 
|Weighted average interest rate-LOC(a)  |  |                           | 3.89 | % |               |   | 4.09 | %                   |  |   |              |   |  |      |   
|Average daily borrowings under the LOC |  | $                         | 27.1 |   |               | $ | 34.3 |                     |  | $ | (7.2          | ) |  | (20.8 | )%



|(a) | Weighted average interest rate excludes debt issuance costs and unused line fees.
|--- | ---------------------------------------------------------------------------------

During fiscal year 2006, borrowings under the LOC were affected by market interest rate increases resulting from actions by the Federal Reserve Board; however, these increases were mitigated by a $25 million variable-to-fixed interest
rate swap and reductions to credit spreads and unused line fees under the recent amendment to the LOC agreement. As a result, the Companys weighted average interest rate decreased slightly year over year.

The $25 million variable-to-fixed interest rate swap matured on March 28, 2006. This agreement effectively fixed the interest rate on a portion of the
revolving line of credit to 4.195% (consisting of a fixed interest rate of 2.195% and a credit spread of 2.00%) for a notional amount of $35 million for four months during fiscal year



48



---

##### Table of Contents

2005. In July 2004, the Company terminated $10 million in notional amount of the interest rate swap. The amended interest rate swap arrangement
established an interest rate at 3.945% (consisting of a fixed interest rate of 2.195% and a credit spread of 1.75%) for a notional amount of $25 million for eight months and three months of fiscal years 2005 and 2006, respectively. In
July 2005, the Company amended the LOC agreement, which established an interest rate of 3.445% (consisting of a fixed interest rate of 2.195% and a credit spread of 1.25%) for a notional amount of $25 million for twelve months.

OTHER INCOME



|                      |  |                           |     |               |   |                |  |   |     |  |       |  
|--------------------- |  | ------------------------- | --- | ------------- | - | -------------- |  | - | --- |  | ----- | -
|                      |  | For the Fiscal Year Ended |     |               |   | Percent Change | 
|(dollars in millions) |  | March 31, 2006            |     | April 1, 2005 |   | Increase       | 
|Total Company         |  | $                         | 3.1 |               | $ | 1.2            |  | $ | 1.9 |  | 154.9 | %

Other income during fiscal year 2006 includes $1.4 million of one-time distributions resulting from the
Companys membership interest in the liquidation of a mutual holding company.

PROVISION FOR INCOME TAXES



|                      |  |                           |      |                |               |   |        |   |                |  |      |          |  |   |    
|--------------------- |  | ------------------------- | ---- | -------------- | ------------- | - | ------ | - | -------------- |  | ---- | -------- |  | - | ---
|                      |  | For the Fiscal Year Ended |      |                |              
|                      |  | March 31, 2006            |      |                | April 1, 2005 |   |        |  
|(dollars in millions) |  | Amount                    |      | Effective Rate |               |   | Amount |   | Effective Rate |  |      | Increase
|Total Company         |  | $                         | 25.8 |                | 36.9          | % |        | $ | 16.8           |  | 29.9 | %        |  | $ | 9.0

The increase in the provision for income taxes and the increase in the effective rate year over year are primarily
attributable to the IRS Appeals settlement during fiscal year 2005 discussed above in the Executive Overview section. This settlement reduced the provision for income taxes for the fiscal year ended April 1, 2005 by approximately
$5.6 million. The increase in the effective rate was partially offset by an increase in income from continuing operations before provision for income taxes and a decrease in permanent adjustments. The decrease in permanent adjustments primarily
relates to a favorable adjustment attributable to an increase in the cash surrender value of company-owned life insurance policies.

During the three
months ended December 31, 2004, the IRS completed fieldwork on the audit of the Federal income tax returns for the fiscal years ended March 29, 2002 and March 28, 2003. The Company appealed certain findings, which primarily related to
timing of tax deductions, with the Appeals Office of the IRS.

LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS

The loss on disposal of discontinued operations of approximately $0.4 million recorded during the fiscal year ended April 1, 2005 represented (i) a
true-up of managements estimated net asset adjustment to the actual net asset adjustment as indicated in the arbitrators final ruling of $1.8 million and (ii) interest of $0.4 million, offset by (iii) a reversal of a
tax reserve of approximately $1.0 million and (iv) a benefit for income taxes of $0.8 million.

NET INCOME



|                      |  |                           |  |               |  |               |  |      
|--------------------- |  | ------------------------- |  | ------------- |  | ------------- |  | -----
|                      |  | For the Fiscal Year Ended |  |               |  | PercentChange
|(dollars in millions) |  | March 31, 2006            |  | April 1, 2005 |  | Increase      | 
|Total Company         |  | $44.3                     |  | $39.0         |  | $5.3          |  | 13.6%

Net income for the fiscal year ended April 1, 2005 included a reduction in the provision for income taxes of
approximately $5.6 million related to the IRS settlement and a charge of $0.4 million, net of the benefit for income taxes, related to the loss on disposal of discontinued operations. Otherwise, variances are due to the factors discussed
above.



49



---

##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources Highlights

Cash flows from operations are primarily impacted by segment
profitability and operational working capital. Management monitors operational working capital cash flows through the following metrics:



|                             |  |                   |   |  |      |   |  |      |  
|---------------------------- |  | ----------------- | - |  | ---- | - |  | ---- | -
|                             |  | Fiscal Year Ended |  
|                             |  | 2007              |   |  | 2006 |   |  | 2005 |  
|Days Sales Outstanding:(a)   |  |                   |   |  |      |   |  |      |  
|Physician Business           |  | 41.8              |   |  | 41.2 |   |  | 42.6 |  
|Elder Care Business          |  | 52.0              |   |  | 58.8 |   |  | 59.9 |  
|                             |  |                   |  
|Days On Hand:(b)             |  |                   |   |  |      |   |  |      |  
|Physician Business           |  | 48.4              |   |  | 47.3 |   |  | 45.2 |  
|Elder Care Business          |  | 56.6              |   |  | 44.0 |   |  | 35.3 |  
|                             |  |                   |  
|Days in Accounts Payable:(c) |  |                   |   |  |      |   |  |      |  
|Physician Business           |  | 44.0              |   |  | 43.0 |   |  | 42.0 |  
|Elder Care Business          |  | 28.2              |   |  | 27.3 |   |  | 25.0 |  
|                             |  |                   |  
|Cash Conversion Days:(d)     |  |                   |   |  |      |   |  |      |  
|Physician Business           |  | 46.2              |   |  | 45.5 |   |  | 45.8 |  
|Elder Care Business          |  | 80.4              |   |  | 75.5 |   |  | 70.2 |  
|                             |  |                   |  
|Inventory Turnover:(e)       |  |                   |   |  |      |   |  |      |  
|Physician Business           |  | 7.4               | x |  | 7.6  | x |  | 8.0  | x
|Elder Care Business          |  | 6.4               | x |  | 8.2  | x |  | 10.2 | x



| | (a) | Days sales outstanding (DSO) is average accounts receivable divided by average daily net sales. Average accounts receivable is the sum of accounts receivable, net of the
allowance for doubtful accounts, at the beginning and end of the most recent four quarters divided by five. Average daily net sales are net sales for the most recent four quarters divided by 360.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Days on hand (DOH) is average inventory divided by average daily cost of goods sold (COGS). Average inventory is the sum of inventory at the beginning and
end of the most recent four quarters divided by five. Average daily COGS is COGS for the most recent four quarters divided by 360.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Days in accounts payable (DIP) is average accounts payable divided by average daily COGS. Average accounts payable is the sum of accounts payable at the beginning and
end of the most recent five quarters divided by five.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Cash conversion days is the sum of DSO and DOH, less DIP.
| | --- | ---------------------------------------------------------

| | (e) | Inventory turnover is 360 divided by DOH.
| | --- | -----------------------------------------



50



---

##### Table of Contents

In addition to the cash flow metrics described above, the Company carefully monitors other components of liquidity,
including the following:



|                             |  |                |          |   |                |   |          |  
|---------------------------- |  | -------------- | -------- | - | -------------- | - | -------- | -
|                             |  | As of          |         
|(dollars in thousands)       |  | March 30, 2007 |          |   | March 31, 2006 |  
|Capital Structure:           |  |                |          |   |                |   |          |  
|Bank debt                    |  | $              | 1,500    |   |                | $ |         |  
|Other debt                   |  |                | 1,413    |   |                |   | 1,364    |  
|Convertible senior notes     |  |                | 150,000  |   |                |   | 150,000  |  
|Cash and cash equivalents    |  |                | (46,658  | ) |                |   | (23,867  | )
|                             |  |                |          |   |                |   |          |  
|Net debt                     |  |                | 106,255  |   |                |   | 127,497  |  
|Shareholders equity         |  |                | 380,861  |   |                |   | 348,813  |  
|                             |  |                |          |   |                |   |          |  
|Total capital                |  | $              | 487,116  |   |                | $ | 476,310  |  
|                             |  |                |          |   |                |   |          |  
|                             |  |               
|Operational Working Capital: |  |                |          |   |                |   |          |  
|Accounts receivable          |  | $              | 222,776  |   |                | $ | 208,964  |  
|Inventories                  |  |                | 174,130  |   |                |   | 173,458  |  
|Accounts payable             |  |                | (131,330 | ) |                |   | (139,227 | )
|                             |  |                |          |   |                |   |          |  
|                             |  | $              | 265,576  |   |                | $ | 243,195  |  
|                             |  |                |          |   |                |   |          |  

Cash Flows from Operating Activities

The primary components of net cash provided by operating activities consist of net income adjusted to reflect the effect of non-cash expenses and changes in operational working capital. Net cash provided by operating
activities during fiscal year 2007, 2006, and 2005 was impacted by increases in overall operating profit which were partially offset by operational working capital needs of approximately $28.6 million, $5.3 million, and $44.2 million to
support net sales growth. The Companys net operational working capital levels were impacted in fiscal year 2007 and 2006 by its global sourcing initiatives, which generally require longer supply chain lead times and different payment terms.
Management expects this impact to continue as globally sourced inventory increases in future years. The Company continues to focus on efforts to increase cash collections from customers, reduce inventory levels without impacting customer service
levels as well as manage the cash disbursements process.

Cash flows from operating activities during fiscal years 2007, 2006, and 2005 reflect the
Companys utilization of $3.6 million (tax effected), $13.1 million (tax-effected), and $19.7 million (tax-effected), respectively, of net operating loss (NOL) carryforwards to offset cash payments due for Federal and
state tax liabilities based on estimated taxable income. The NOL carryforwards were generated primarily during fiscal year 2003 as a result of the disposition of the Imaging Business. Under the terms of the stock purchase agreement, the Company made
a joint election with the buyer to treat the transaction as a sale of assets in accordance with §338(h)(10) of the Internal Revenue Code. As of March 30, 2007, the Company has fully utilized its Federal NOL carryforwards and expects to
utilize the remaining state NOL carryforwards prior to their expiration date.

Cash flows from operating activities were also impacted by cash payments
made to and refunds received from Federal and state taxes.

During the fiscal year 2007 and 2006, the Company paid cash taxes, net of refunds, of
approximately $13.0 million and $11.2 million, respectively, which primarily related to federal and state estimated tax payments. During fiscal years 2005, the Company paid cash taxes, net of refunds, of approximately $2.0 million,
which primarily related to federal alternative minimum tax payments.



51



---

##### Table of Contents

Cash Flows from Investing Activities

Payments under business combination agreements, net of cash acquired, were $2.9 million, $37.6 million, and $24.4 million during fiscal years 2007, 2006, and 2005, respectively. Refer to Note 3,
Purchase Business Combinations, for further discussion on acquisitions made during fiscal years 2006 and 2005. During the first quarter of fiscal year 2008, the Company expects to make the final estimated payment under remaining business
combination agreements of $1.4 million at March 30, 2007. The Company expects to continue to make strategic business acquisitions to grow market share, which will impact its cash flows from investing activities.

Capital expenditures totaled $17.3 million, $17.0 million, and $25.9 million during fiscal years 2007, 2006, and 2005, respectively, of which
approximately $9.2 million, $12.2 million, and $16.9 million, respectively, related to development and enhancement of the Companys ERP system, electronic commerce platforms, and supply chain integration. Capital expenditures
related to the distribution center expansions were approximately $4.1 million, $1.0 million, and $3.5 million during fiscal years 2007, 2006, and 2005, respectively. Capital expenditures are estimated to be approximately
$21.1 million during fiscal year 2008. Such expenditures are expected to be funded by cash flow from operations as well as borrowings under the Companys revolving line of credit facility.

During fiscal years 2007, 2006, and 2005, the Company paid approximately $1.1 million, $3.3 million, and $6.8 million to sales representatives for
execution of nonsolicitation agreements. These agreements include nonsolicitation covenants, which state that the sales representative can neither solicit nor accept business from certain of the Companys customers for a stated period of time
subsequent to the date the sales representative ceases employment with the Company. (Refer to Application of Critical Accounting Policies for a further discussion regarding nonsolicitation agreements.)

During fiscal year 2005, the Company made an initial equity investment of $1.0 million in Tiger Medical. During the fourth quarter of fiscal year 2007, the Company
modified the agreement, which effectively amended language relating to the Companys future buy-out provisions and its ownership interest in Tiger Medical (Refer to Note 4, Variable Interest Entity, for a further discussion of Tiger
Medical.)

Cash Flows from Financing Activities

During fiscal years 2007 and 2005, the Company repurchased approximately $42.9 million and $9.9 million of the Companys common stock, respectively. The share repurchases represented approximately 2.1 million and
1.0 million shares, respectively. There were no repurchases in fiscal year 2006. At March 30, 2007, approximately 3.5 million common shares were available for repurchase under an authorized program.

The Company recognized excess tax benefits from share-based compensation arrangements of $5.6 million during fiscal year 2007. Prior to the adoption of SFAS
No. 123(R), Share-Based Payment, an amendment of FASB No. 123 (SFAS 123(R)), the Company presented the excess tax benefit of stock option exercises as operating cash flows. Upon adoption of SFAS 123(R) on April 1,
2006, excess tax benefits resulting from tax deductions in excess of compensation cost recognized for those options are classified in financing activities. Excess tax benefits recognized in operating activities during fiscal years 2006 and 2005 were
$6.3 million and $2.2 million, respectively.

During fiscal year 2006, the Company repaid the outstanding borrowings under the revolving line of
credit. Management expects that cash flows from operations will fund future working capital needs, capital expenditures, and other investing and financing activities, excluding business combinations.

Capital Resources

The Companys two primary sources of capital
are the proceeds from the 2.25% convertible senior notes offering and the $200 million revolving line of credit, which may be increased to $250 million at the Companys discretion. These instruments provide the financial resources to
support the business strategies of customer



52



---

##### Table of Contents

service and revenue growth. The revolving line of credit, which is an asset-based agreement, uses the Companys operational working capital assets as
collateral to support necessary liquidity. The Companys long-term priorities for use of capital are internal growth, acquisitions, and repurchase of the Companys common stock.

The 2.25% convertible senior notes may be converted into shares of the Companys common stock prior to March 15, 2019, during any calendar quarter that the
closing sale price of the Companys common stock for at least 20 of the 30 consecutive trading days ending the day prior to such quarter is greater than 120% of the applicable conversion price of $17.10 per share (or $20.51 per share)
(Contingent Conversion Trigger). The ability of note holders to convert is assessed on a quarterly basis and is dependent on the trading price of the Companys stock during the last 30 trading days of each quarter. The Contingent
Conversion Trigger was not met during the three months ended March 30, 2007, therefore, the notes may not be converted during the Companys first quarter of fiscal year 2008. Accordingly, at March 30, 2007, the notes are classified as
Long Term Debt in the Consolidated Balance Sheets. As of March 30, 2007, the fair value of the convertible senior notes was approximately $193.9 million and the value of the shares, if converted, was approximately $185.5 million. If
presented, the Company believes it has adequate liquidity under the Credit Agreement to settle the principle balance of the notes. (Refer to Note 10, Debt, for a detailed discussion regarding the convertible senior notes.)

At March 30, 2007, there were no outstanding borrowings under the revolving line of credit. After reducing the availability of borrowings for letter of credit
commitments, the Company had sufficient assets based on eligible accounts receivable and inventories to borrow up to $199.6 million (excluding the additional increase of $50 million) under the revolving line of credit. (Refer to
Note 10, Debt, for a detailed discussion regarding the revolving line of credit.)

As the Companys business grows, its cash and working
capital requirements will also continue to increase. The Company normally meets its operating requirements by maintaining appropriate levels of liquidity under its revolving line of credit and using cash flows from operating activities. The Company
expects the overall growth in the business will be funded through a combination of cash flows from operating activities, borrowings under the revolving line of credit, capital markets, and/or other financing arrangements. As of March 30, 2007,
the Company has not entered into any material working capital commitments that require funding, other than the items discussed below and the obligations included in the future minimum obligation table below.

Based on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors, the Company may seek to retire a portion of its outstanding
equity through cash purchases and/or reduce its debt. The Company may also seek to issue additional debt or equity to meet its future liquidity requirements. Such transactions may occur in the open market, privately negotiated transactions, or
otherwise. The amounts involved may be material.

Debt Rating

The Companys debt is rated by a nationally recognized rating agency, Standard and Poors Ratings Services (S&P). Companies that have assigned ratings at the top end of the range have, in the opinion of the rating
agency, the strongest capacity for repayment of debt or payment of claims, while companies at the bottom end of the range have the weakest capability. On August 10, 2006, S&P upgraded the Companys credit rating from BB- to
BB and revised the ratings outlook from positive to stable. Additionally, on August 11, 2006, S&P upgraded the Companys $150 million senior convertible notes rating from B to B+. Agency ratings
are always subject to change, and there can be no assurance that a ratings agency will continue to rate the Company or its debt, and/or maintain its current ratings. Management cannot predict the effect that a negative change in debt ratings will
have on the Companys liquidity.

Off-Balance Sheet Arrangements

The Companys most significant off-balance sheet financing arrangements as of March 30, 2007 are



53



---

##### Table of Contents

non-cancelable operating lease agreements, primarily for warehouse and equipment rentals, and outstanding letters of credit. As of March 30, 2007,
minimum obligations under operating lease agreements are $92.7 million and outstanding letters of credit are $0.4 million. The Company does not participate in any off-balance sheet arrangements involving unconsolidated subsidiaries that provide
financing or potentially expose the Company to unrecorded financial obligations.

Future Minimum Obligations

In the normal course of business, the Company enters into obligations and commitments that require future contractual payments. The following table presents, in
aggregate, scheduled payments under contractual obligations for the Physician Business, the Elder Care Business, and Corporate Shared Services (in thousands):



|                                      |  |              |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|------------------------------------- |  | ------------ | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------- |  | - | -------
|                                      |  | Fiscal Years |        |      |   |       
|in thousands                          |  | 2008         |        | 2009 |   | 2010   |  | 2011 |        | 2012 |   | Thereafter |  | Total
|Revolving line of credit(a)           |  | $            | 500    |      | $ | 500    |  | $    | 500    |      | $ | 125        |  | $     |       |  | $ |        |  | $ | 1,625  
|2.25% convertible senior notes(b),(e) |  |              | 3,375  |      |   | 3,375  |  |      | 3,375  |      |   | 3,375      |  |       | 3,375  |  |   | 190,500 |  |   | 207,375
|Operating lease obligations(c)        |  |              | 25,433 |      |   | 20,979 |  |      | 15,914 |      |   | 11,909     |  |       | 9,184  |  |   | 9,316   |  |   | 92,735 
|Capital lease obligations(b)          |  |              | 797    |      |   | 472    |  |      | 144    |      |   | 91         |  |       |       |  |   |        |  |   | 1,504  
|Purchase commitments(d), (f)          |  |              | 14,127 |      |   | 1,505  |  |      | 753    |      |   |           |  |       |       |  |   |        |  |   | 16,385 
|Outstanding purchase price(g)         |  |              | 1,400  |      |   |       |  |      |       |      |   |           |  |       |       |  |   |        |  |   | 1,400  
|                                      |  |              |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        
|Total                                 |  | $            | 45,632 |      | $ | 26,831 |  | $    | 20,686 |      | $ | 15,500     |  | $     | 12,559 |  | $ | 199,816 |  | $ | 321,024
|                                      |  |              |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |         |  |   |        



| | (a) | The Company did not have any outstanding borrowings under the revolving line of credit at March 30, 2007. Management expects that cash flows from operations will fund future
working capital needs, capital expenditures, and other investing and financing activities, excluding business combinations. Therefore, the amounts included in the table above represent unused line fees. Actual interest expense may differ due to
changes in the level of borrowings.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Amounts include interest expense.
| | --- | ---------------------------------



| | (c) | Amounts represent contractual obligations for operating leases of the Company as of March 30, 2007. Currently, it is managements intent to either renegotiate existing
leases or execute new leases upon the expiration date of such agreements.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | If the Physician Business or the Elder Care Business were to terminate a contract with a vendor of its Select Medical Products brand (Select) for any reason,
the Company may be required to purchase the remaining inventory of Select products from the vendor, provided that, in no event would the Company be required to purchase quantities of such products which exceed the aggregate amount of such
products ordered by the Company in a negotiated time period immediately preceding the date of termination. As of March 30, 2007, the Company has not terminated a contract with a Select vendor that will require the Company to purchase the
vendors remaining Select inventory.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | The 2.25% convertible senior notes may be converted into shares of the Companys common stock prior to March 15, 2019, during any calendar quarter that
the closing sale price of the Companys common stock for at least 20 of the 30 consecutive trading days ending the day prior to such quarter is greater than 120% of the applicable conversion price of $17.10 per share (or $20.51 per share)
(Contingent Conversion Trigger). The ability of note holders to convert is assessed on a quarterly basis and is dependent on the trading price of the Companys stock during the last 30 trading days of each quarter. The Contingent
Conversion Trigger was not met during the three months ended
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



54



---

##### Table of Contents

| | March 30, 2007, therefore, the notes may not be converted during the Companys first quarter of fiscal year 2008.
| | -----------------------------------------------------------------------------------------------------------------



| | (f) | During February 2006, the Company entered into an agreement to purchase a minimum number of latex and vinyl gloves through January 31, 2008. The pricing of the latex
gloves may be periodically adjusted and is based on the price of raw latex as traded on the Malaysian Rubber Exchange. The pricing of the vinyl gloves may also be periodically adjusted and is based on the weighted price of two raw materials, Poly
vinyl chloride (PVC) and Dioctylphthalate (DOP), as published on www.icis.com. These purchase commitments are valued at approximately $10.4 million at March 30, 2007 and are based on managements estimate of current pricing.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | Amounts represent estimated additional consideration, including interest, to be paid to the sellers of previously acquired businesses, net of any amounts payable to the Company for
indemnity claims that arise under the purchase agreement.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to make certain estimates,
judgments, and assumptions that affect the reported amounts of assets and liabilities, including the disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during
the periods presented. The Company periodically evaluates the accounting policies and estimates it uses to prepare its financial statements, which are then reviewed by the Companys audit committee. Managements estimates are based on
historical experience and other assumptions considered reasonable with the relevant facts and circumstances. Based on the uncertainty inherent in such estimates, actual results may differ.

The critical accounting policies and estimates are those policies that relate to estimates that require the Companys management to make assumptions about matters
that are highly uncertain at the time the estimate is made and could have a material impact on the Companys results due to changes in the estimates or the use of different estimates that could reasonably have been used. Additionally, the
Company includes those accounting policies whose initial application had a material impact on the Companys financial presentation, unless the policys application resulted solely from the issuance of new accounting literature. The
discussion below applies to each of the Companys reportable segments (Physician Business, Elder Care Business, and Corporate Shared Services), unless otherwise noted.

Revenue Recognition

The Company recognizes revenue from the sale of consumable products, equipment, software
solutions and other services. Revenue from the sale of consumable products is recognized when products are shipped by a third-party common carrier or delivered by the Companys vehicle since at that time there is persuasive evidence that an
arrangement exists, the price is fixed and determinable, and the collection of the resulting accounts receivable is reasonably assured. Revenue from the sale of equipment is generally recognized when the equipment is shipped, unless there are
multiple deliverables, in which case revenue is recognized when all obligations to the customer are fulfilled. Obligations to the customer are typically satisfied when installation and training are complete.

During fiscal year 2007, the Physician Business increased its sales in software solutions, which included sales of third party proprietary software. As a result, the
Company began applying the provisions of Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent(EITF 99-19) in determining whether it is appropriate to record
either (i) the gross amount of product sales in revenue and related costs in cost of goods sold or (ii) the net amount earned as a commission in revenue (net reporting). This determination requires management to evaluate the
terms of relevant supplier contracts and other criteria, including determining the primary obligor in a transaction and which party bears general inventory risk, among



55



---

##### Table of Contents

other factors. Based on this evaluation, management determined that certain transactions relating to the sale of third party proprietary software required
net reporting. Net sales, gross margins, and operating margins may be impacted in future periods to the extent the Companys revenues expand into areas that require net reporting of revenue in accordance with EITF 99-19.

The Companys revenue recognition processes involve establishing sales allowances for estimated returns, damaged goods, and other revenue adjustments. These
estimates are based on historical experience and the facts known at the date of preparation of the financial statements. Sales allowances are recorded as a reduction of revenue for estimated product and equipment returns and other revenue
adjustments. Management estimates product returns and other revenue adjustments using historical data adjusted for significant changes in volume and business conditions. In the last three years, the Companys sales allowances have reduced its
gross revenue by less than 1.0%. If actual adjustments significantly exceeded estimated amounts, it would result in materially lower revenue and net income balances in one or more periods.

Allowance for Doubtful Accounts

The Company maintains allowances
for doubtful accounts for estimated losses resulting from the inability to collect outstanding amounts due from its customers. The allowances include specific amounts for those accounts that are likely to be uncollectible, such as bankruptcies, and
general allowances for those accounts that management currently believes to be collectible but later become uncollectible. Estimates are used to determine the allowances for doubtful accounts and are based on historical collection experience,
current economic trends, credit-worthiness of customers, and changes in customer payment terms. The percentage of each aging category that is reserved is determined by analyzing historical write-offs and current trends in the credit quality of the
customer base. Management performs ongoing credit evaluations by reviewing the customers current financial information. Adjustments to credit limits and allowances for bad debts are made based upon payment history and the customers
current credit worthiness. If the financial condition of the Companys customers were to deteriorate or improve, allowances may be adjusted which will impact general and administrative expenses and accounts receivable. Over the past three
years, the Companys allowance for doubtful accounts has represented between 1% and 2% of the Physician Business gross accounts receivable balance and between 7% and 10% of the Elder Care business gross accounts receivable balance.

Inventories

In order to state inventories (medical
products, medical equipment, and other related products) at the lower of cost (determined using the first-in, first-out (FIFO) method) or market (net realizable value), the Company maintains an allowance for excess or slow moving
inventory based on the expectation that some inventory will become obsolete and be sold for less than cost or become unsaleable altogether. The allowance is estimated based on factors such as historical trends, current market conditions and
managements assessment of when the inventory would likely be sold and the quantities and prices at which the inventory would likely be sold in the normal course of business. Changes in product specifications, customer product preferences or
the loss of a customer could result in unanticipated impairment in net realizable value that may have a material impact on cost of goods sold, gross margin and net income. Obsolete or damaged inventory is disposed of or written down to net
realizable value on a quarterly basis. Additional adjustments, if necessary, are made based on managements specific review of inventory on-hand.

As
part of the Companys periodic review of the carrying amount of inventory during the three months ended December 29, 2006, management determined that a write-down of $7.1 million was required for excess influenza vaccine inventory
resulting from the cancellation of customer orders during the third quarter of fiscal year 2007 due to an oversupply of the product in the market, and a mild influenza season. In addition to these factors, management based its decision on the
likelihood of locating alternate markets for the product and the viability of the product based on its limited life span. During the fourth quarter of fiscal year 2007, the Company sold a marginal amount of its excess influenza inventory, resulting
in a remaining write-down of $7.0 million at



56



---

##### Table of Contents

March 30, 2007. As a result of the write-down, cost of goods sold were increased by $7.0 million during the fiscal year ended March 30, 2007,
or $4.4 million net of tax.

Vendor Rebates

The
Company receives transaction-based and performance-based rebates from third party suppliers. Such rebates are classified as either (i) a reduction to cost of goods sold, (ii) a reduction of cost, or (iii) an increase to net sales in
the accompanying statements of operations.

Transaction-based rebates are generally associated with a specific customer contract and are recognized as a
reduction to cost of goods sold at the time the transaction occurs. Management establishes a reserve for uncollectible transaction-based vendor rebates based on managements judgment after considering the status of current outstanding rebate
claims, historical denial experience with suppliers, and any other pertinent available information.

Performance-based rebates are recognized based on a
systematic estimation of the consideration to be received relative to the transaction that marks the progress of the Company toward earning vendor rebates, provided the collection of the amounts is, in the judgment of management, reasonably assured.
The factors the Company considers in estimating performance-based rebates include forecasted inventory purchases or sales volumes, in conjunction with vendor rebate contract terms, which generally provide for increasing rebates based on either
increased purchase or sales volume. Performance-based rebates are recognized in income only if the related inventory has been sold.

Although the Company
believes its judgments, estimates and/or assumptions related to vendor rebates are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect the Companys financial results.

Income Taxes

The liability method is used for determining income
taxes, under which current and deferred tax assets and liabilities are recorded in accordance with enacted tax laws and rates. Under this method, the amounts of deferred tax assets and liabilities at the end of each period are determined using the
tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
In determining the need for valuation allowances, management considers and makes judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These estimates and judgments include some
degree of uncertainty and changes in these estimates and assumptions could require management to adjust the valuation allowances for deferred tax assets. The ultimate realization of the deferred tax assets generally depends on the generation of
sufficient taxable income in the applicable taxing jurisdictions. The Company had deferred income tax assets of $38.4 million and $38.6 million at March 30, 2007 and March 31, 2006, respectively. There were no valuation allowances as
of March 30, 2007 and March 31, 2006, as management believes it will ultimately utilize the Companys deferred tax assets.

The
Companys tax filings are periodically subjected to audit by the Internal Revenue Service (IRS) and other taxing authorities, which may result in assessments of additional taxes that are resolved with the authorities or potentially
through the courts. Resolution of these situations inevitably includes some degree of uncertainty; accordingly, the Company provides taxes only for the amounts management believes will ultimately result from these proceedings. Management does not
believe it is possible to reasonably estimate the potential impact of changes to the assumptions and estimates identified because the resulting change to the tax liability, if any, is dependent on numerous factors, which cannot be reasonably
estimated. These include, among others, (i) the amount and nature of additional taxes potentially asserted by Federal, state, and local tax authorities; (ii) the willingness of Federal, state, and local tax authorities to negotiate a fair
settlement through an administrative



57



---

##### Table of Contents

process; and (iii) the impartiality of the Federal, state, and local courts. Managements experience has been that the estimates and assumptions
used to provide for future tax assessments have proven to be appropriate. However, past experience is only a guide, and the potential exists, however limited, that the tax resulting from the resolution of current and potential future tax
controversies may differ materially from the amount accrued.

During the three months ended December 31, 2004, the provision for income taxes was
reduced approximately $5.6 million as a result of a settlement agreement between the Company and the Appeals Office of the IRS. (Refer to Note 11, Income Taxes, for a further discussion.) The settlement agreement was subject to
final review and approval by the Congressional Joint Committee on Taxation (the Joint Committee). In October 2005, the Company received written notification that the Joint Committee has found no exception to the settlement agreement
reached with the Appeals Office of the IRS.

Estimating Useful Lives of Property and Equipment

Property and equipment is recorded at cost and is depreciated on a straight-line basis over the following estimated useful lives.



|                                        |  |              
|--------------------------------------- |  | -------------
|                                        |  | Useful Life  
|Equipment                               |  | 2 to 15 years
|Capitalized internal-use software costs |  | 5 to 15 years
|Computer hardware and software          |  | 3 to 15 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives. Management
must use judgment in determining the estimated useful lives of its assets. Changes in circumstances, such as technological advances, changes to the Companys business model, changes in the Companys business strategy, or changes in the
planned use of property and equipment, could result in the actual useful lives differing from the Companys current estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened or
extended, the Company would depreciate the net book value in excess of the estimated salvage value over its revised remaining useful life.

During fiscal
year 2005, management reviewed the estimated useful lives of certain computer hardware and software in connection with completing the implementation of the JD Edwards enterprise resource planning (ERP) system. Based on this review,
management revised the estimated useful lives of certain assets after considering (i) the Companys historical use of its prior ERP systems, (ii) future plans for the JD Edwards ERP system, (iii) expected enhancements, and
(iv) expected ongoing product support, enhancements, and maintenance commitments from the supplier. Management believed this change in estimate was appropriate given the Companys commitment to and invested capital in the customization and
future use of the JD Edwards ERP platform. As a result, the remaining estimated useful lives of certain computer hardware and software with a carrying value of approximately $27.4 million were extended on March 23, 2005 to coincide with
the expected service life of the assets in accordance with Accounting Principles Board Opinion No. 20, Accounting Changes. The weighted average remaining useful life of the assets prior to the change in estimate was approximately
80 months and the change in estimate lengthened the estimated useful lives by approximately 40 months. This change in estimate decreased depreciation expense $1.0 million, net of tax, or approximately $0.01 of diluted earnings per
share, for the fiscal year ended March 30, 2007 and $1.1 million, net of tax, or approximately $0.02 of diluted earnings per share, for the fiscal year ended March 31, 2006.

Notes Receivable

Notes receivable consist of amounts owed to the
Company and are stated at cost, which approximates fair value. The Companys outstanding notes receivable are exposed to credit risk and valuation allowances are established for estimated losses resulting from non-collection of outstanding
amounts. The valuation allowances include specific amounts for those notes considered uncollectible and general allowances for delinquent notes. Specific



58



---

##### Table of Contents

allowances are provided for unsecured notes deemed uncollectible based on facts and circumstances known to management, such as the financial condition of the
note holder. Estimates are used to determine the general valuation allowances and are generally based on historical collection results, the current status of the notes, and the credit-worthiness of the note holders. Management reviews the adequacy
of the valuation allowances for notes receivable on a periodic basis and adjustments are made, if needed, based on current facts and circumstances known at the valuation date.

The Company has two notes receivable (the Loans), which bear interest at the applicable Federal rate for long-term obligations, outstanding from its former chairman and chief executive officer. One Loan is
unsecured and the other Loan is secured by a split-dollar life insurance policy. Management reviews the realization of the Loans on a quarterly basis based on current facts and circumstances known at the valuation date.

As part of the Companys periodic review of the carrying amount of the Loans during the three months ended September 27, 2002, management and the Board of
Directors determined that an allowance for doubtful accounts of $2.9 million was required on the unsecured Loan after communication with the former chairman and chief executive officer regarding his financial condition and other due diligence
procedures performed by management. Subsequently, during the three months ended July 1, 2005, new facts and circumstances were obtained by management and the Board of Directors that indicated the former chairman and chief executive
officers financial condition had improved. In addition, the Company received a payment of approximately $0.3 million during this period for past due interest. These factors, as well as direct communication with the former chairman and
chief executive officer during this period, led to a determination by management and the Board of Directors that the allowance for doubtful accounts was no longer required for the unsecured loan. Therefore, general and administrative expenses were
reduced $2.9 million during the three months ended July 1, 2005, which increased net income $1.8 million.

Legal Contingencies

The Company is party to various legal and administrative proceedings and claims arising in the normal course of business. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, if information prior to the issuance of the financial statements indicates it is probable that an asset had been impaired or a liability had been
incurred at the date of the financial statements and the amount of the loss can be estimated, an accrual for a loss contingency is established. If no accrual is made for a loss contingency because one or both of these conditions are not met, or if
an exposure to loss exists in excess of the amount accrued, disclosure of the contingency is made when there is at least a reasonable possibility a loss or an additional loss may have been incurred. Management does not believe the outstanding legal
proceedings at March 30, 2007, will have a material adverse effect on the Companys consolidated financial position. It is possible, however, that future results of operations for any particular period could be materially affected by
changes in managements assumptions related to the anticipated or actual outcome of any outstanding legal proceedings.

During fiscal year 2006, the
Company settled a class-action lawsuit pursuant to which the Company was required to pay $3.8 million, of which approximately $1.0 million was accrued for during fiscal year 2005, to cover the uninsured losses and professional fees to
resolve all claims. During fiscal year 2005, the Company settled a lawsuit pursuant to which the Company was required to pay approximately $2.9 million to resolve all claims. In addition, the Company settled a lawsuit pursuant to which the
opposing parties agreed to pay the Company $2.6 million to resolve all claims and counterclaims.

Impairment of Goodwill, Intangibles, and Other
Long-Lived Assets

The Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities
assumed based on their estimated fair values. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in the valuation of acquired intangible assets include,
but are not limited to: (i) expected future cash flows from existing



59



---

##### Table of Contents

customer contracts and relationships; (ii) assumptions relating to the impact of noncompete agreements on business operations; (iii) assumptions
related to the impact on the timing of expected future cash flows; (iv) retention of customers and key business leaders; and (v) the risk inherent in investing in intangible assets. These estimates are inherently uncertain and
unpredictable. Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumption, estimates, or other actual results.

Under SFAS No. 142, Goodwill and Other Intangible Assets(SFAS 142), goodwill and indefinite-lived intangible assets are not amortized, but
instead must be tested for impairment annually or whenever events or changes in circumstances indicate the carrying amount may be impaired. Goodwill and indefinite-lived intangible assets are reviewed for impairment at each reporting unit annually
on the last day of each fiscal year, which is the Friday closest to March 31. Goodwill and indefinite-lived intangible assets were not impaired during fiscal years 2007, 2006, and 2005.

The impairment and disposal of long-lived assets is accounted for in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS 144). SFAS 144 requires that long-lived assets, such as property and equipment and intangible assets subject to amortization, be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Certain factors which may occur and indicate that an impairment exists include, but are not limited to: (i) significant underperformance relative to historical or projected future
operating results; (ii) significant changes in the manner of the use of the underlying assets; and (iii) significant adverse industry or market economic trends. Nonsolicitation payments made to certain sales representatives are tested
annually or more frequently for impairment in accordance with SFAS 144. Certain factors which may occur and indicate that an impairment of the nonsolicitation agreements exists include, but are not limited to: (i) a change in a
states legal system that would impact any legal opinion relied upon when assessing enforceability of the nonsolicitation covenants, (ii) a decline in gross profit generated by a sales representative below the amount that the
nonsolicitation was based upon, (iii) death of a sales representative, or (iv) full retirement by the sales representative.

In the event that
the carrying value of assets are determined to be unrecoverable, the Company would estimate the fair value of the assets or reporting unit and record an impairment charge for the excess of the carrying value over the fair value. In conducting the
impairment test, the Company determines the fair value of its reporting units using valuation techniques which can include a discounted cash flow analysis that requires management to make assumptions regarding estimated future cash flows, revenues,
earnings, and other factors, including discount rates, to determine the fair value of these respective assets. The application of different assumptions about such matters as estimated future cash flows or discount rates, or the testing for
impairment at a different level of the organization or on a different organization structure, could produce materially different results. Management does not believe there were any circumstances which indicated that the carrying value of an asset
might not be recoverable during fiscal year 2007.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and Related Implementation Issues (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in a companys financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 is effective as of the beginning of fiscal years commencing after December 15, 2006. As such, FIN 48 will be
effective during the three months ended June 29, 2007. The Company is currently evaluating the effects of implementing this new standard.

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This



60



---

##### Table of Contents

standard applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements.
SFAS No. 157 will become effective for the Company in fiscal year 2009. The Company is currently assessing the impact of SFAS No. 157.

In
September 2006, the SEC staff issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. This guidance indicates that the materiality of a
misstatement must be evaluated using both the rollover and iron curtain approaches. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year,
while the rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. SAB No. 108 is effective for the Companys fiscal year 2007 annual consolidated financial statements.
The adoption of SAB No. 108 did not have a material effect on the Companys consolidated financial statements.

Refer to Note 2, Summary
of Significant Accounting Policies, of the consolidated financial statements for a discussion regarding the potential impact of Statement of Financial Accounting Standards No. 128(R), Earnings Per Share, an amendment of FASB Statement
No. 128 (SFAS 128(R)), if adopted.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------

Market Risk

The Companys objective in managing market risk exposures is to identify and limit the potential impact of changes in
interest rates, commodity availability, and access of capital on earnings and cash flow. The following assessment of the Companys market risk does not include uncertainties that are either nonfinancial or nonquantifiable, such as political
uncertainty, economic uncertainty, impact of future tax legislation, and credit risks.

Interest Rate Risk.The
Companys primary interest rate exposure relates to cash and cash equivalents and fixed and variable rate debt. During fiscal year 2006, the Companys debt obligations consisted of (i) $150 million convertible senior notes with a
fixed rate of 2.25% and (ii) variable rate borrowings under the revolving line of credit, which bear interest at the banks prime rate plus an applicable margin based on availability of borrowings, or at LIBOR plus an applicable margin
based on availability of borrowings. Availability of borrowings depends upon a borrowing base calculation consisting of accounts receivable and inventory, subject to satisfaction of certain eligibility requirements less any outstanding letters of
credit.

Changes in interest rates affect interest payments under the Companys variable rate revolving line of credit agreement. During fiscal years
2005 and 2006, the Company maintained an interest rate swap agreement that matured on March 28, 2006, with a notional amount during the period that covered a portion of variable rate borrowings and which effectively fixed the notional amount
covered by the swap at a borrowing rate of 2.195% plus a credit spread. On March 30, 2007, the Company had no outstanding borrowings under the revolving line of credit and $150 million outstanding in fixed rate convertible senior notes.
Although the Companys outstanding debt is primarily fixed, a hypothetical interest rate increase of 100 basis points would affect annual interest expense by $1.5 million based on borrowings outstanding at March 30, 2007.

Changes in interest rates also affect rates of return on the Companys cash equivalents and short-term investments, which generally consist of money market
accounts. A hypothetical decrease in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $0.1 million per year for every $10.0 million of short-term investments. Due to
the short-term nature of the Companys investments, typically less than 90-day maturities, the impact of a similar 100 basis point change in interest rates would have an immaterial impact on the carrying value of an investment.

Currency Risk.  The Companys currency rate exposures relate to products that are globally sourced from manufacturers primarily in Southeast
Asia. Currently, the Company has negotiated settlement of payments to



61



---

##### Table of Contents

manufacturers in U.S. dollars. However, over time, local country currency fluctuations may increase or decrease the negotiated cost that the Company must pay
for these products. In addition, the Company may in future periods negotiate settlement of payments to manufacturers in the local currency of the country providing a product which would then subject the Company to foreign currency risk. Based on
current global purchases, a hypothetical 1% change in the currency exchange rates would not have a material impact on the Companys consolidated results of operations.

Commodity Risk.  The Companys primary commodity exposures relate to fluctuations in the price of gasoline and diesel fuel and the procurement of certain medical supplies in which the product
cost is dependent upon the price of raw materials, primarily latex and vinyl.

The Companys direct fuel exposure relates to fluctuations in fuel
costs that affect the Company-leased delivery fleet or third-party carrier delivery charges. Significant increases in the cost of gasoline and diesel fuel have impacted, and may continue to impact, the Companys gross margin, cost to deliver,
and the operating costs of common carriers. Some of these common carriers have passed these increases through to the Company in the form of a fuel surcharge, which has had an adverse effect on the Companys results of operations. The Company
implemented a fuel surcharge during fiscal year 2006 to offset a portion of the increased cost of gasoline and diesel fuel. There can be no assurance that the Company will be able to fully pass along further significant increases in fuel costs to
its customers due to the competitive nature of the medical supply distribution industry.

The Company purchases latex and vinyl gloves in which the pricing
of the gloves is based on the price of raw wet latex as traded on the Malaysian Rubber Exchange and the weighted price of two raw materials, Poly vinyl chloride (PVC) and Dioctylphthalate (DOP), as published on www.icis.com. Based on current
purchasing levels, a hypothetical 1% change in the price of these raw materials would not have a material impact on the Companys consolidated results of operations.



62



---

##### Table of Contents

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                      |  |     
|--------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                      |  | Page
|                                                                                                                      | 
|Report of Independent Registered Public Accounting Firm                                                               |  | F-2 
|                                                                                                                      | 
|Consolidated Balance SheetsMarch 30, 2007 and March 31, 2006                                                         |  | F-3 
|                                                                                                                      | 
|Consolidated Statements of Operations for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005           |  | F-4 
|                                                                                                                      | 
|Consolidated Statements of Shareholders Equity for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005 |  | F-5 
|                                                                                                                      | 
|Consolidated Statements of Cash Flows for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005           |  | F-6 
|                                                                                                                      | 
|Notes to Consolidated Financial Statements                                                                            |  | F-7 
|                                                                                                                      | 
|Schedule IIValuation and Qualifying Accounts for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005   |  | F-43



F-1



---

##### Table of Contents

R
EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

PSS World Medical, Inc.:

We have audited the accompanying consolidated
balance sheets of PSS World Medical, Inc. and subsidiaries (the Company) as of March 30, 2007 and March 31, 2006, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the years in the
three-year period ended March 30, 2007. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
PSS World Medical, Inc. and subsidiaries as of March 30, 2007 and March 31, 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended March 30, 2007, in conformity with U.S.
generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123R, Share-Based Payment, effective April 1, 2006.

We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States), the effectiveness of Companys internal control over financial reporting as of March 30, 2007, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 25, 2007 expressed an unqualified opinion on managements assessment of, and the effective operation of, internal control over
financial reporting.

/s/ KPMG LLP

May 25, 2007

Jacksonville, Florida

Certified Public Accountants



F-2



---

##### Table of Contents

P
SS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 30, 2007 AND MARCH 31, 2006

(Dollars in Thousands, Except Share Data)



|                                                                                                                                                                         |  |      |         |      |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | - | -------
|ASSETS                                                                                                                                                                  
|                                                                                                                                                                         |  | 2007 |         | 2006
|Current Assets:                                                                                                                                                          |  |      |         |      |   |        
|Cash and cash equivalents                                                                                                                                                |  | $    | 46,658  |      | $ | 23,867 
|Accounts receivable, net                                                                                                                                                 |  |      | 222,776 |      |   | 208,964
|Inventories                                                                                                                                                              |  |      | 174,130 |      |   | 173,458
|Deferred tax assets, net                                                                                                                                                 |  |      | 8,776   |      |   | 12,959 
|Prepaid expenses and other                                                                                                                                               |  |      | 34,434  |      |   | 33,827 
|                                                                                                                                                                         |  |      |         |      |   |        
|Total current assets                                                                                                                                                     |  |      | 486,774 |      |   | 453,075
|                                                                                                                                                                         |  |     
|Property and equipment, net                                                                                                                                              |  |      | 88,627  |      |   | 87,663 
|Other Assets:                                                                                                                                                            |  |      |         |      |   |        
|Goodwill                                                                                                                                                                 |  |      | 107,366 |      |   | 105,521
|Intangibles, net                                                                                                                                                         |  |      | 29,758  |      |   | 34,345 
|Other                                                                                                                                                                    |  |      | 62,450  |      |   | 56,371 
|                                                                                                                                                                         |  |      |         |      |   |        
|Total assets                                                                                                                                                             |  | $    | 774,975 |      | $ | 736,975
|                                                                                                                                                                         |  |      |         |      |   |        
|                                                                                                                                                                        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                    
|Current Liabilities:                                                                                                                                                     |  |      |         |      |   |        
|Accounts payable                                                                                                                                                         |  | $    | 131,330 |      | $ | 139,227
|Accrued expenses                                                                                                                                                         |  |      | 37,224  |      |   | 34,499 
|Revolving line of credit and current portion of long-term debt                                                                                                           |  |      | 2,238   |      |   | 509    
|Other                                                                                                                                                                    |  |      | 11,440  |      |   | 13,639 
|                                                                                                                                                                         |  |      |         |      |   |        
|Total current liabilities                                                                                                                                                |  |      | 182,232 |      |   | 187,874
|Long-term debt, excluding current portion                                                                                                                                |  |      | 150,675 |      |   | 150,855
|Other noncurrent liabilities                                                                                                                                             |  |      | 61,207  |      |   | 49,433 
|                                                                                                                                                                         |  |      |         |      |   |        
|Total liabilities                                                                                                                                                        |  |      | 394,114 |      |   | 388,162
|                                                                                                                                                                         |  |      |         |      |   |        
|Commitments and contingencies (Notes 2, 4, 8, 10, 11, 12, 13, 14, and 16)                                                                                                |  |      |         |      |   |        
|Shareholders Equity:                                                                                                                                                    |  |      |         |      |   |        
|Preferred stock, $0.01 par value; 1,000,000 shares authorized, no shares issued and outstanding                                                                          |  |      |        |      |   |       
|Common stock, $0.01 par value; 150,000,000 shares authorized, 67,179,475 and 67,476,682 shares issued and outstanding at March 30, 2007
and March 31, 2006, respectively |  |      | 668     |      |   | 674    
|Additional paid-in capital                                                                                                                                               |  |      | 300,014 |      |   | 318,441
|Retained earnings                                                                                                                                                        |  |      | 80,179  |      |   | 29,698 
|                                                                                                                                                                         |  |      |         |      |   |        
|Total shareholders equity                                                                                                                                               |  |      | 380,861 |      |   | 348,813
|                                                                                                                                                                         |  |      |         |      |   |        
|Total liabilities and shareholders equity                                                                                                                               |  | $    | 774,975 |      | $ | 736,975
|                                                                                                                                                                         |  |      |         |      |   |        

The accompanying notes are an integral part of these consolidated financial statements.



F-3



---

##### Table of Contents

P
SS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 30, 2007, MARCH 31, 2006, AND APRIL 1, 2005

(Dollars in Thousands, Except Per Share Data)



|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                  |  | 2007 |           |   | 2006 |   |           | 2005 | 
|Net sales                                                                         |  | $    | 1,741,639 |   |      | $ | 1,619,417 |      |  | $ | 1,473,769 |  
|Cost of goods sold                                                                |  |      | 1,241,629 |   |      |   | 1,152,092 |      |  |   | 1,050,414 |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Gross profit                                                                      |  |      | 500,010   |   |      |   | 467,325   |      |  |   | 423,355   |  
|General and administrative expenses                                               |  |      | 300,700   |   |      |   | 287,308   |      |  |   | 262,205   |  
|Selling expenses                                                                  |  |      | 116,823   |   |      |   | 107,608   |      |  |   | 99,591    |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Income from operations                                                            |  |      | 82,487    |   |      |   | 72,409    |      |  |   | 61,559    |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Other (expense) income:                                                           |  |      |           |   |      |   |           |      |  |   |           |  
|Interest expense                                                                  |  |      | (5,346    | ) |      |   | (5,884    | )    |  |   | (6,856    | )
|Interest and investment income                                                    |  |      | 1,194     |   |      |   | 423       |      |  |   | 217       |  
|Other income                                                                      |  |      | 2,006     |   |      |   | 3,146     |      |  |   | 1,234     |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Other expense                                                                     |  |      | (2,146    | ) |      |   | (2,315    | )    |  |   | (5,405    | )
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Income from continuing operations before provision for income taxes               |  |      | 80,341    |   |      |   | 70,094    |      |  |   | 56,154    |  
|Provision for income taxes                                                        |  |      | 29,860    |   |      |   | 25,837    |      |  |   | 16,770    |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Income from continuing operations                                                 |  |      | 50,481    |   |      |   | 44,257    |      |  |   | 39,384    |  
|Loss on disposal of discontinued operations (net of income tax benefit of $1,849) |  |      |          |   |      |   |          |      |  |   | (412      | )
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Net income                                                                        |  | $    | 50,481    |   |      | $ | 44,257    |      |  | $ | 38,972    |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per shareBasic:                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Income from continuing operations                                                 |  | $    | 0.75      |   |      | $ | 0.67      |      |  | $ | 0.61      |  
|Loss on disposal of discontinued operations                                       |  |      |          |   |      |   |          |      |  |   | (0.01     | )
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Net income                                                                        |  | $    | 0.75      |   |      | $ | 0.67      |      |  | $ | 0.60      |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Earnings (loss) per shareDiluted:                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Income from continuing operations                                                 |  | $    | 0.73      |   |      | $ | 0.66      |      |  | $ | 0.60      |  
|Loss on disposal of discontinued operations                                       |  |      |          |   |      |   |          |      |  |   | (0.01     | )
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Net income                                                                        |  | $    | 0.73      |   |      | $ | 0.66      |      |  | $ | 0.59      |  
|                                                                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Weighted average common shares outstanding, Basic                                 |  |      | 67,219    |   |      |   | 65,643    |      |  |   | 64,547    |  
|Weighted average common shares outstanding, Diluted                               |  |      | 69,325    |   |      |   | 66,887    |      |  |   | 65,607    |  







The accompanying notes are an integral part of these consolidated financial
statements.



F-4



---

##### Table of Contents

P
SS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

FOR THE YEARS ENDED MARCH 30, 2007, MARCH 31, 2006, AND APRIL 1, 2005

(Dollars in Thousands, Except Share Data)



|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------ | - |  | -------------------------- | --- | - | ---------------------------------------- | - | ------- | ------------------------------------------- |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                                                 |  | Common Stock |   |  | Additional Paid-In Capital |     |   | Accumulated (Deficit)/ Retained Earnings |   |         | AccumulatedOtherComprehensive (Loss) Income |  |   | Totals  |  
|                                                                 |  | Shares       |   |  | Amount                     |     |   |                                          |   |        
|Balance at April 2, 2004                                         |  | 64,833,453   |   |  | $                          | 648 |   |                                          | $ | 292,111 |                                             |  | $ | (53,531 | ) |  | $ | (40  | ) |  | $ | 239,188 |  
|Net income                                                       |  |             |   |  |                            |    |   |                                          |   |        |                                             |  |   | 38,972  |   |  |   |     |   |  |   | 38,972  |  
|Unrealized gain on interest rate swap, net of income tax benefit |  |             |   |  |                            |    |   |                                          |   |        |                                             |  |   |        |   |  |   | 271  |   |  |   | 271     |  
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|Total comprehensive income                                       |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   | 39,243  |  
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|Purchase of treasury shares                                      |  | (1,000,600   | ) |  |                            | (10 | ) |                                          |   | (9,908  | )                                           |  |   |        |   |  |   |     |   |  |   | (9,918  | )
|Exercise of stock options and related income tax benefit         |  | 936,757      |   |  |                            | 9   |   |                                          |   | 7,603   |                                             |  |   |        |   |  |   |     |   |  |   | 7,612   |  
|Issuance of restricted stock, net of forfeitures                 |  | 191,892      |   |  |                            | 2   |   |                                          |   | (2      | )                                           |  |   |        |   |  |   |     |   |  |   |        |  
|Vesting of restricted stock and related income tax benefit       |  |             |   |  |                            |    |   |                                          |   | 601     |                                             |  |   |        |   |  |   |     |   |  |   | 601     |  
|Employee benefits and other                                      |  | 180          |   |  |                            |    |   |                                          |   | 92      |                                             |  |   |        |   |  |   |     |   |  |   | 92      |  
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at April 1, 2005                                         |  | 64,961,682   |   |  |                            | 649 |   |                                          |   | 290,497 |                                             |  |   | (14,559 | ) |  |   | 231  |   |  |   | 276,818 |  
|Net income                                                       |  |             |   |  |                            |    |   |                                          |   |        |                                             |  |   | 44,257  |   |  |   |     |   |  |   | 44,257  |  
|Unrealized loss on interest rate swap, net of income tax benefit |  |             |   |  |                            |    |   |                                          |   |        |                                             |  |   |        |   |  |   | (231 | ) |  |   | (231    | )
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|Total comprehensive income                                       |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   | 44,026  |  
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|Exercise of stock options and related income tax benefit         |  | 2,373,358    |   |  |                            | 24  |   |                                          |   | 26,566  |                                             |  |   |        |   |  |   |     |   |  |   | 26,590  |  
|Issuance of restricted stock, net of forfeitures                 |  | 127,430      |   |  |                            | 1   |   |                                          |   | (192    | )                                           |  |   |        |   |  |   |     |   |  |   | (191    | )
|Vesting of restricted stock and related income tax benefit       |  |             |   |  |                            |    |   |                                          |   | 1,135   |                                             |  |   |        |   |  |   |     |   |  |   | 1,135   |  
|Employee benefits and other                                      |  | 14,212       |   |  |                            |    |   |                                          |   | 435     |                                             |  |   |        |   |  |   |     |   |  |   | 435     |  
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at March 31, 2006                                        |  | 67,476,682   |   |  |                            | 674 |   |                                          |   | 318,441 |                                             |  |   | 29,698  |   |  |   |     |   |  |   | 348,813 |  
|Net income                                                       |  |             |   |  |                            |    |   |                                          |   |        |                                             |  |   | 50,481  |   |  |   |     |   |  |   | 50,481  |  
|Purchase of treasury shares                                      |  | (2,126,728   | ) |  |                            | (21 | ) |                                          |   | (42,878 | )                                           |  |   |        |   |  |   |     |   |  |   | (42,899 | )
|Exercise of stock options and related income tax benefit         |  | 1,597,668    |   |  |                            | 16  |   |                                          |   | 22,214  |                                             |  |   |        |   |  |   |     |   |  |   | 22,230  |  
|Issuance of restricted stock, net of forfeitures                 |  | (277,991     | ) |  |                            | (2  | ) |                                          |   | 2       |                                             |  |   |        |   |  |   |     |   |  |   |        |  
|Vesting of restricted stock and related income tax benefit       |  | 95,563       |   |  |                            | 1   |   |                                          |   | 2,001   |                                             |  |   |        |   |  |   |     |   |  |   | 2,002   |  
|Employee benefits and other                                      |  | 9,487        |   |  |                            |    |   |                                          |   | 234     |                                             |  |   |        |   |  |   |     |   |  |   | 234     |  
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at March 30, 2007                                        |  | 66,774,681   |   |  | $                          | 668 |   |                                          | $ | 300,014 |                                             |  | $ | 80,179  |   |  | $ |     |   |  | $ | 380,861 |  
|                                                                 |  |              |   |  |                            |     |   |                                          |   |         |                                             |  |   |         |   |  |   |      |   |  |   |         |  



The accompanying notes are an
integral part of these consolidated financial statements.



F-5



---

##### Table of Contents

P
SS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 30, 2007, MARCH 31, 2006, AND APRIL 1, 2005

(Dollars in Thousands)



|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                    |  | 2007 |         |   | 2006 |   |         | 2005 | 
|Cash Flows From Operating Activities:                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                                          |  | $    | 50,481  |   |      | $ | 44,257  |      |  | $ | 38,972  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Loss on disposal of discontinued operations                                                                         |  |      |        |   |      |   |        |      |  |   | 412     |  
|(Benefit) provision for deferred income taxes                                                                       |  |      | (1,661  | ) |      |   | 24,743  |      |  |   | 17,371  |  
|Depreciation                                                                                                        |  |      | 16,750  |   |      |   | 13,932  |      |  |   | 14,241  |  
|Amortization of intangible assets                                                                                   |  |      | 5,908   |   |      |   | 6,298   |      |  |   | 4,537   |  
|Provision for doubtful accounts                                                                                     |  |      | 4,533   |   |      |   | 5,642   |      |  |   | 5,081   |  
|Noncash compensation expense                                                                                        |  |      | 5,086   |   |      |   | 1,648   |      |  |   | 652     |  
|Amortization of debt issuance costs                                                                                 |  |      | 1,434   |   |      |   | 1,473   |      |  |   | 1,918   |  
|Provision for deferred compensation                                                                                 |  |      | 2,021   |   |      |   | 946     |      |  |   | 816     |  
|Loss on sales of property and equipment                                                                             |  |      | 191     |   |      |   | 296     |      |  |   | 153     |  
|(Reversal of) provision for notes receivable                                                                        |  |      |        |   |      |   | (3,233  | )    |  |   | 187     |  
|Other                                                                                                               |  |      |        |   |      |   | (2,733  | )    |  |   |        |  
|Changes in operating assets and liabilities, net of effects from business combinations and discontinued operations: |  |      |         |   |      |   |         |      |  |   |         |  
|Accounts receivable, net                                                                                            |  |      | (18,142 | ) |      |   | 4,235   |      |  |   | (26,322 | )
|Inventories                                                                                                         |  |      | (672    | ) |      |   | (35,382 | )    |  |   | (30,926 | )
|Prepaid expenses and other current assets                                                                           |  |      | 1,664   |   |      |   | (13,757 | )    |  |   | (6,167  | )
|Other assets                                                                                                        |  |      | (3,490  | ) |      |   | (11,428 | )    |  |   | (4,876  | )
|Accounts payable                                                                                                    |  |      | (9,822  | ) |      |   | 25,826  |      |  |   | 13,026  |  
|Accrued expenses and other liabilities                                                                              |  |      | 9,260   |   |      |   | 5,207   |      |  |   | 7,185   |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                                           |  |      | 63,541  |   |      |   | 67,970  |      |  |   | 36,260  |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Cash Flows From Investing Activities:                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Payments for business combinations, net of cash acquired of $0, $259, and $355, respectively                        |  |      | (2,869  | ) |      |   | (37,595 | )    |  |   | (24,367 | )
|Capital expenditures                                                                                                |  |      | (17,266 | ) |      |   | (17,007 | )    |  |   | (25,931 | )
|Payments for nonsolicitation agreements                                                                             |  |      | (1,060  | ) |      |   | (3,330  | )    |  |   | (6,750  | )
|Payments for noncompetition agreements                                                                              |  |      |        |   |      |   | (245    | )    |  |   | (591    | )
|Payments for signing bonuses                                                                                        |  |      | (127    | ) |      |   | (210    | )    |  |   |        |  
|Proceeds from sale of property and equipment                                                                        |  |      | 34      |   |      |   | 35      |      |  |   | 23      |  
|Other                                                                                                               |  |      |        |   |      |   | 2,051   |      |  |   |        |  
|Payment of transaction and settlement costs for the sale of Imaging Business                                        |  |      |        |   |      |   |        |      |  |   | (4,854  | )
|Payment for investment in variable interest entity                                                                  |  |      |        |   |      |   |        |      |  |   | (1,000  | )
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                                               |  |      | (21,288 | ) |      |   | (56,301 | )    |  |   | (63,470 | )
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Cash Flows From Financing Activities:                                                                               |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from exercise of stock options                                                                             |  |      | 16,963  |   |      |   | 20,302  |      |  |   | 5,489   |  
|Excess tax benefits from share-based compensation arrangements                                                      |  |      | 5,599   |   |      |   |        |      |  |   |        |  
|Net repayments under the revolving line of credit                                                                   |  |      |        |   |      |   | (25,000 | )    |  |   | (10,000 | )
|Payment of debt issuance costs                                                                                      |  |      |        |   |      |   | (520    | )    |  |   |        |  
|Payment under capital lease obligations                                                                             |  |      | (625    | ) |      |   | (347    | )    |  |   |        |  
|Purchase of treasury shares                                                                                         |  |      | (42,899 | ) |      |   |        |      |  |   | (9,918  | )
|Proceeds from borrowings                                                                                            |  |      | 1,500   |   |      |   |        |      |  |   |        |  
|Proceeds from borrowings related to variable interest entity                                                        |  |      |        |   |      |   |        |      |  |   | 599     |  
|Other                                                                                                               |  |      |        |   |      |   | (125    | )    |  |   |        |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                                                               |  |      | (19,462 | ) |      |   | (5,690  | )    |  |   | (13,830 | )
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                                                |  |      | 22,791  |   |      |   | 5,979   |      |  |   | (41,040 | )
|Cash and cash equivalents, beginning of year                                                                        |  |      | 23,867  |   |      |   | 17,888  |      |  |   | 58,928  |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                                                              |  | $    | 46,658  |   |      | $ | 23,867  |      |  | $ | 17,888  |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Supplemental Disclosures:                                                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Cash paid for:                                                                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Interest                                                                                                            |  | $    | 4,172   |   |      | $ | 5,013   |      |  | $ | 5,484   |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Income taxes, net                                                                                                   |  | $    | 13,027  |   |      | $ | 11,225  |      |  | $ | 1,969   |  
|                                                                                                                    |  |      |         |   |      |   |         |      |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



F-6



---

##### Table of Contents

P
SS WORLD MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 30, 2007, MARCH 31, 2006, AND APRIL 1, 2005

(Dollars and Shares in Thousands, Except Per Share Data, Unless Otherwise Noted)



|1. | NATURE OF OPERATIONS
|-- | --------------------

PSS World Medical, Inc. (the
Company or PSSI), a Florida corporation which began operations in 1983, is a national distributor of medical products, equipment, and pharmaceutical related products to alternate-site healthcare providers including physician
offices, long-term care and assisted living facilities, and home health care providers through 41 full-service distribution centers, which serve all 50 states throughout the United States (U.S.). The Company currently conducts
business through two operating segments, the Physician Business and the Elder Care Business. These strategic segments serve a diverse customer base. A third reporting segment, Corporate Shared Services, includes allocated and unallocated costs of
corporate departments that provide services to the operating segments.

The Physician Business, or the Physician Sales & Service division, is a
leading distributor of medical supplies, diagnostic equipment, and pharmaceutical related products to primary care office-based physicians in the U.S. The Physician Business currently operates 29 full-service distribution centers,
29 break-freight locations, and 4 redistribution facilities serving physician offices in all 50 states.

The Elder Care Business, or the Gulf
South Medical Supply, Inc. division, is a national distributor of medical supplies and related products to the long-term and elder care industry in the U.S. In addition, the Elder Care Business provides Medicare Part B reimbursable products and
billing services, either on a fee-for-service or a full-assignment basis. The Elder Care Business currently operates 12 full-service distribution centers, 5 break-freight locations, 5 ancillary service centers, and
3 redistribution facilities serving independent, regional, and national skilled nursing facilities, assisted living centers, and home health care providers in all 50 states.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

Basis of
Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) and include the accounts of PSS World Medical, Inc. and its wholly-owned subsidiaries. The Company holds an interest in a variable interest entity (VIE) that is consolidated by the Company as it determined that it
will, as the primary beneficiary, absorb the majority of the VIEs expected losses and/or expected residual returns. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company reports its year-end financial position, results of operations, and cash flows on the Friday closest to March 31. Fiscal years 2007, 2006, and 2005 each
consisted of 52 weeks.

Use of Estimates

The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of



F-7



---

##### Table of Contents

inventories, property and equipment, goodwill, and intangibles; allowances for doubtful accounts receivables and notes receivables, and vendor rebate
receivables; valuation allowances for deferred income taxes; liabilities for loss contingencies; and valuations associated with business combinations. Actual results could differ from the estimates and assumptions used in preparing the consolidated
financial statements.

Fair Value of Financial Instruments

The carrying amounts of the Companys financial instruments, including cash and cash equivalents, short-term trade receivables, and accounts payable approximate their fair values due to the short-term nature of these assets and
liabilities. The carrying value of the Companys 2.25% convertible senior notes at March 30, 2007 and March 31, 2006 was $150,000 and the fair value, which is estimated using quoted market prices, was approximately $193,900 and
$181,700, respectively.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of demand deposits with financial institutions and highly liquid investment grade instruments having maturities of three months or less at the date of purchase. Cash and cash equivalents are
stated at cost, which approximates market value.

Accounts Receivable

Trade accounts receivable consist of amounts owed to the Company and are stated at cost, which approximates fair value due to the short-term nature of the asset. The Companys outstanding accounts receivable are
exposed to credit risk and valuation allowances are established for estimated losses resulting from non-collection of outstanding amounts due from customers. The valuation allowances include specific amounts for those accounts that are deemed likely
to be uncollectible, such as customer bankruptcies and disputed amounts, and general allowances for accounts that management currently believes to be collectible but that may later become uncollectible. Estimates are used to determine the valuation
allowances and are generally based on historical collection results, current economic trends, credit-worthiness of customers, and changes in customer payment terms.

The Physician Business trade accounts receivable consist of many individual accounts; none of which is individually significant to the Company. The Physician Business had allowances for doubtful accounts of
approximately $2,662, and $2,751 at March 30, 2007 and March 31, 2006, respectively. During fiscal years 2007, 2006, and 2005, bad debt expense was less than 1% of net sales.

The Elder Care Business trade accounts receivable have a number of large, national chain customer accounts that are significant to its business. Approximately 16%, 19%, and 21%, of the Elder Care Business
net sales for the fiscal years ended March 30, 2007, March 31, 2006, and April 1, 2005, respectively, represent sales to its largest five customers. As of March 30, 2007 and March 31, 2006, the outstanding accounts
receivable balances of these customers represented approximately 11% and 9% of accounts receivable, net of allowance for doubtful accounts, respectively. The Elder Care Business had allowances for doubtful accounts of approximately $6,024, and
$7,747 at March 30, 2007 and March 31, 2006, respectively. During fiscal years 2007, 2006, and 2005, bad debt expense was less than 1% of net sales.

Over the past three years, the Companys allowance for doubtful accounts has represented 1% to 2% of the Physician Business gross accounts receivable balance and 7% to 10% of the Elder Care business gross accounts
receivable balance.

Inventories

Inventories consist
of medical products, medical equipment, and other related products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as net



F-8



---

##### Table of Contents

realizable value. The net realizable value of excess and slow moving inventory is determined using judgment as to when inventory will be sold and the
quantities and prices at which inventory will be sold in the normal course of business. Obsolete or damaged inventory is disposed of or written down to net realizable value on a quarterly basis. Additional adjustments, if necessary, are made based
on managements specific review of each full-service distribution centers inventory on-hand.

As part of the Companys periodic review of
the carrying amount of inventory during the three months ended December 29, 2006, management determined that a write-down of $7,058 was required for excess influenza vaccine inventory resulting from the cancellation of customer orders due
to an oversupply of the product in the market, and a mild influenza season. In addition to these factors, management based its decision on the likelihood of locating alternate markets for the product and the viability of the product based on its
limited life span. During the fourth quarter of fiscal year 2007, the Company sold a marginal amount of its excess influenza inventory, resulting in a remaining write-down of $7,027 at March 30, 2007. As a result of the write-down, cost of
goods sold were increased by $7,027 during the fiscal year ended March 30, 2007, or $4,364 net of tax.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives of the
respective classes of assets.



|                                        |  |              
|--------------------------------------- |  | -------------
|                                        |  | Useful Life  
|Equipment                               |  | 2 to 15 years
|Capitalized internal-use software costs |  | 5 to 15 years
|Computer hardware and software          |  | 3 to 15 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Management
is required to use judgment in determining the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Companys business model, changes in the Companys business strategy, or changes
in the planned use of property and equipment could result in the actual useful lives differing from the Companys current estimates. In those cases where the Company determines the useful life of property and equipment should be shortened or
extended, the Company depreciates the net book value in excess of the estimated salvage value over its revised remaining useful life.

During
fiscal year 2005, management reviewed the estimated useful lives of certain computer hardware and software in connection with completing the implementation of the JD Edwards enterprise resource planning (ERP) system. Based on
this review, management revised the estimated useful lives of certain assets after considering (i) the Companys historical use of its prior ERP systems, (ii) future plans for the JD Edwards ERP system, (iii) expected
enhancements, and (iv) expected ongoing product support, enhancements, and maintenance commitments from the vendor. Management believed this change in estimate was appropriate given the Companys commitment to and invested capital in the
customization and future use of the JD Edwards ERP platform. As a result, the remaining estimated useful lives of certain computer hardware and software with a carrying value of approximately $27,434 were extended on March 23, 2005 to coincide
with the expected service life of the assets in accordance with Accounting Principles Board (APB) Opinion No. 20, Accounting Changes. The weighted average remaining useful life of the assets prior to the change in estimate
was approximately 80 months and the change in estimate lengthened the estimated useful lives by approximately 40 months. This change in estimate decreased depreciation expense $1,033, net of tax, or approximately $0.01 of diluted earnings
per share, for the fiscal year ended March 30, 2007 and $1,063, net of tax, or approximately $0.02 of diluted earnings per share, for the fiscal year ended March 31, 2006.

The Company capitalizes the following costs associated with developing internal-use computer software: (i) external direct costs of materials and services consumed in developing or obtaining internal-use computer
software; (ii) certain payroll and payroll-related costs for Company employees who are directly associated with



F-9



---

##### Table of Contents

the development of internal-use software, to the extent of time spent directly on the project; and (iii) interest costs incurred while developing
internal-use computer software. Internal-use software costs capitalized subsequent to March 23, 2005 are amortized over the estimated useful lives of the software, ranging from 5 to 15 years. Statement of Financial Accounting
Standards (SFAS) No. 34, Capitalization of Interest Cost, requires the capitalization of interest cost as a part of the historical cost of acquiring certain assets, such as assets that are constructed or produced for a
companys own use. The amount of capitalized interest during fiscal years 2007, 2006, and 2005 was $262, $606, and $469, respectively.

Gains or
losses upon retirement or disposal of property and equipment are recorded in other income in the accompanying consolidated statements of operations. Normal repair and maintenance costs that do not substantially extend the life of the property and
equipment are expensed as incurred.

Goodwill

Goodwill represents the excess of the cost of an acquired company over the fair value of identifiable assets and liabilities acquired. In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets(SFAS 142), goodwill is reviewed for impairment annually as of the last day of the fiscal year. An interim review is performed between annual tests whenever events or changes in circumstances indicate the carrying amount of the
goodwill may be impaired. Because the estimated fair value of the reporting units exceeded the carrying amount of the goodwill, there was no impairment at March 30, 2007 and March 31, 2006.

Intangibles

SFAS 142 requires that intangible assets with
finite useful lives be amortized over their respective estimated useful lives. Amortization is computed using the straight-line method over the following estimated useful lives.



|                           |  |              
|-------------------------- |  | -------------
|                           |  | Useful Life  
|Customer Relationships     |  | 7 to 20 years
|Nonsolicitation Agreements |  | 4 to 21 years
|Noncompetition Agreements  |  | 3 to 6 years 
|Signing Bonuses            |  | 1 to 5 years 
|Other Intangibles          |  | 4 to 5 years 

Nonsolicitation Agreements

Certain sales representatives employed by the Physician and Elder Care Businesses have executed employment agreements in exchange for a cash payment (Nonsolicitation Agreements). These employment
agreements include nonsolicitation covenants, which state that the sales representative can neither solicit nor accept business from certain of the Companys customers for a stated period of time subsequent to the date the sales representative
ceases employment with the Company. The costs associated with these Nonsolicitation Agreements are capitalized and amortized on a straight-line basis over its estimated useful life, plus the stated nonsolicitation period. If a sales representative
terminates employment prior to the end of the estimated useful life of the agreement, the remaining net book value of the asset is amortized over the stated nonsolicitation period.

During the period the sales representatives remain employed with the Company, the nonsolicitation intangible asset is evaluated for impairment in accordance with the provisions of SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires the Company to test for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Certain factors which may indicate an impairment exists include, but are not limited to: (i) a change in a states legal system that would impact any legal opinion relied upon when assessing enforceability of
the nonsolicitation covenants, (ii) a decline in gross profit generated by a sales representative



F-10



---

##### Table of Contents

below the amount that the nonsolicitation was based upon, (iii) death, or (iv) full retirement by the sales representative. In the event the
carrying value of the assets are determined to be unrecoverable, the Company would estimate the fair value of the assets and record an impairment charge for the excess of the carrying value over the fair value. There were no material impairment
charges at March 30, 2007 or March 31, 2006.

Impairment of Long-Lived Assets

Long-lived assets, other than goodwill and indefinite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the
carrying amount may not be recoverable in accordance with SFAS 144. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual
disposition of the asset. The impairment loss is measured as the amount by which the carrying amount of the long-lived asset exceeds fair value.

The
Company evaluates the recoverability of indefinite-lived intangible assets annually in accordance with SFAS 142. An interim review may be performed more frequently, if events or changes in circumstances, such as a decline in sales, earnings, or
cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired.

There were no impairment charges at March 30, 2007 or March 31, 2006.

Accounts Payable

Outstanding checks in excess of cash balances available for a legal right of offset are reclassified to accounts payable. Amounts reclassified to accounts payable were
approximately $27,600 and $25,600 at March 30, 2007 and March 31, 2006, respectively.

Insurance Coverage

The Company has a self-funded program for employee and dependent health insurance. This program includes an administrator, a large provider network, and stop loss
reinsurance to cover individual claims in excess of $200 per person, and up to $2,000 catastrophic loss maximum per lifetime benefit per person. Claims incurred but not reported are recorded based on estimates of claims provided by the third party
administrator and are included in accrued expenses in the accompanying consolidated balance sheets.

The Company maintains a primary casualty insurance
program for its automobile liability, employers liability, and general liability risks, which in general provides limits of up to $2,000, $1,000, and $2,000, respectively. In addition, the Company maintains workers compensation policies which have
statutory limits that are based on state regulations. The primary program contains a deductible of $250 per occurrence for each line of coverage, subject to a primary aggregate stop loss of approximately $6,250 for the current plan year. In
addition, the Company maintains an umbrella/excess liability program to cover occurrences in excess of the underlying primary limits.

Contingent Loss
Accruals

In determining the accrual necessary for probable loss contingencies as defined by SFAS No. 5, Accounting for Contingencies, the
Company includes estimates for professional fees, such as legal, accounting, and consulting, and other related costs to be incurred, unless such fees and related costs are not probable of being incurred or are not reasonably estimatable.



F-11



---

##### Table of Contents

Income Taxes

Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax consequences attributable to temporary differences between the financial statement carrying amounts and the respective tax
bases in existing assets and liabilities. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred
or services have been rendered, the selling price is fixed or determinable, and collectibility of the resulting accounts receivable is reasonably assured. The Company assesses collectibility based upon a thorough evaluation of current and
prospective customers credit history and ability to pay. The Company establishes and adjusts credit terms and limits to reflect customer credit worthiness based upon this evaluation. Customer credit evaluations are updated periodically and for
specific events or circumstances such as deterioration in the aging of account balances, bankruptcy filings, or notice of financial difficulties.

Consolidated sales allowances are immaterial and generally represent less than 1.0% of gross sales.

Physician Business. The Physician Business has two primary sources of revenue: the sale of consumable products and the sale of equipment. Revenue from the sale of consumable products is recognized when products are shipped or
delivered since at that time there is persuasive evidence that an arrangement exists, the price is fixed and determinable, and the collection of the resulting accounts receivable is reasonably assured. Revenue from the sale of single deliverable
equipment is generally recognized when the equipment is shipped, unless there are multiple deliverables, in which case revenue is recognized when all obligations to the customer are fulfilled. Obligations to the customer are typically satisfied when
installation and training are complete.

During fiscal year 2007, the Physician Business increased its sales in software solutions, which
included sales of third party proprietary software. As a result, the Company began applying the provisions of Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent(EITF 99-19) in determining whether it is appropriate to record either (i) the gross amount of product sales in revenue and related costs in cost of goods sold or (ii) the net amount earned as a commission in revenue.
This determination requires management to evaluate the terms of relevant supplier contracts and other criteria, including determining the primary obligor in a transaction and which party bears general inventory risk, among other factors. Based on
this evaluation, management determined that certain transactions relating to the sale of third party proprietary software required net reporting. Net sales, gross margins, and operating margins may be impacted in future periods to the extent the
Companys revenues expand into areas that require net reporting of revenue in accordance with EITF 99-19.

Customers have the
right to return consumable products and equipment. Sales allowances are recorded as a reduction of revenue for potential product returns and estimated billing errors. Management analyzes sales allowances quarterly using historical data adjusted for
significant changes in volume and business conditions, as well as specific identification of significant returns or billing errors.

Elder Care Business.  The Elder Care Business has four primary sources of revenue: the sale of consumable products to skilled nursing home facilities, assisted living facilities, and home health care providers; the sale of
consumable products to Medicare eligible customers; the sale of equipment; and service fees earned for providing Medicare Part B billing services.



F-12



---

##### Table of Contents

Revenue from the sale of consumable products to skilled nursing home facilities, assisted living
facilities, and home health care providers is recognized when products are shipped or delivered. Revenue for these products is recorded upon shipment since at that time there is persuasive evidence that an arrangement exists, the price is fixed and
determinable, and the collection of the resulting accounts receivable is reasonably assured.

Revenue from providing Medicare Part B
billing services on a full-assignment basis is recognized during the period the supplies being provided to Medicare eligible patients are consumed and Medicare is billed. Revenue is recorded at the amounts expected to be collected from Medicare,
other third-party payers, and directly from customers. Revenue for Medicare reimbursement is recorded based on government-determined reimbursement prices for Medicare-covered items. Medicare reimburses 80% of the government-determined reimbursement
prices for reimbursable supplies and the remaining balance is billed either to third-party payers or directly to customers. Reimbursement from Medicare is subject to review by appropriate government regulators. Revenue from providing Medicare
Part B billing services on a fee-for-service basis is recognized when billing services are rendered to the customer.

Revenue from the
sale of single deliverable equipment is generally recognized when the equipment is shipped, unless there are multiple deliverables, in which case revenue is recognized when all obligations to the customer are fulfilled.

Customers have the right to return consumable products and equipment. Sales allowances are recorded as a reduction of revenue for (i) potential
product and equipment returns, (ii) revenue adjustments related to actual usage of products by eligible Medicare Part B patients, and (iii) Medicare Part B reimbursement denials, and billing errors. Management analyzes product
returns quarterly using historical data adjusted for significant changes in volume and business conditions, as well as specific identification of significant returns. Management analyzes billing errors on at least a semi-annual basis using
historical data or a sampling methodology as well as specific identification of significant billing errors. Management analyzes revenue adjustments related to estimated usage of products by eligible Medicare Part B patients and Medicare
Part B reimbursement denials using historical actual cash collection and actual adjustments to gross revenue for a certain period of time. Additional allowances are recorded for any significant specific adjustments known to management.

Vendor Rebates

The Company receives
transaction-based and performance-based rebates from third party suppliers. Such rebates are classified as either (i) a reduction to cost of goods sold, (ii) a reduction of cost, or (iii) an increase to net sales in the accompanying
statements of operations.

Transaction-based rebates are generally associated with a specific customer contract and are recognized as a reduction to cost
of goods sold at the time the transaction occurs. Management establishes a reserve for uncollectible transaction-based vendor rebates based on managements judgment after considering the status of current outstanding rebate claims, historical
denial experience with suppliers, and any other pertinent available information.

In accordance with Emerging Issues Task Force (EITF)
No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, performance-based rebates are recognized based on a systematic estimation of the consideration to be received relative to the
transaction that marks the progress of the Company toward earning vendor rebates, provided the collection of the amounts is, in the judgment of management, reasonably assured. The factors the Company considers in estimating performance-based rebates
include forecasted inventory purchases or sales volumes, in conjunction with vendor rebate contract terms, which generally provide for increasing rebates based on either increased purchases or sales volume. Performance-based rebates are recognized
in income only if the related inventory has been sold.



F-13



---

##### Table of Contents

The following table summarizes the financial statement impact of transaction-based and performance-based vendor rebates
recognized by the Company and each of its segments during fiscal years 2007, 2006, and 2005.



|                                    |  |                    |         |                     |   |               |  |      |        |      |   |        |  |      |        |      |   |        |  |   |         |  |   |         |  |   |        
|----------------------------------- |  | ------------------ | ------- | ------------------- | - | ------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------- |  | - | ------- |  | - | -------
|                                    |  | Physician Business |         | Elder Care Business |   | Total Company
|                                    |  | 2007               |         | 2006                |   | 2005          |  | 2007 |        | 2006 |   | 2005   |  | 2007 |        | 2006 |   | 2005  
|Net sales                           |  | $                  | 4,618   |                     | $ | 3,181         |  | $    | 2,165  |      | $ |       |  | $    |       |      | $ |       |  | $ | 4,618   |  | $ | 3,181   |  | $ | 2,165  
|Cost of goods sold                  |  |                    | 92,512  |                     |   | 69,894        |  |      | 55,568 |      |   | 85,126 |  |      | 80,112 |      |   | 78,153 |  |   | 177,638 |  |   | 150,006 |  |   | 133,721
|General and administrative expenses |  |                    | 6,930   |                     |   | 5,568         |  |      | 5,656  |      |   | 991    |  |      | 832    |      |   | 916    |  |   | 7,921   |  |   | 6,400   |  |   | 6,572  
|                                    |  |                    |         |                     |   |               |  |      |        |      |   |        |  |      |        |      |   |        |  |   |         |  |   |         |  |   |        
|Total                               |  | $                  | 104,060 |                     | $ | 78,643        |  | $    | 63,389 |      | $ | 86,117 |  | $    | 80,944 |      | $ | 79,069 |  | $ | 190,177 |  | $ | 159,587 |  | $ | 142,458
|                                    |  |                    |         |                     |   |               |  |      |        |      |   |        |  |      |        |      |   |        |  |   |         |  |   |         |  |   |        

Transaction-based and performance-based rebate contracts are negotiated
periodically with vendors.

Shipping and Handling Costs

Shipping and handling costs billed to customers are included in net sales and totaled approximately $8,716, $7,726, and $6,019, for fiscal years 2007, 2006, and 2005, respectively. Shipping and handling costs incurred by the Company, which
are included in general and administrative expenses, totaled approximately $89,968, $87,094, and $77,633, for fiscal years 2007, 2006, and 2005, respectively.

Derivative Financial Instruments

Derivative financial instruments are used principally in the management of the Companys interest
rate exposure and are recorded in the accompanying balance sheets at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are
recognized as a charge or credit to earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income and are recognized in
the consolidated statements of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized as a charge or credit to earnings. Derivative instruments not designated as hedges
are marked-to-market at the end of each accounting period with the results included in earnings. The Company held a position in an interest rate swap during fiscal years 2006 and 2005 that was designated as a cash flow hedge and matured on
March 28, 2006. There were no derivative instruments held by the Company at March 30, 2007.

Earnings Per Share

Basic and diluted earnings per share are presented in accordance with SFAS No. 128, Earnings Per Share(SFAS 128). Basic earnings per share
is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common and common equivalent shares
outstanding during the period adjusted for the potential dilutive effect of stock options using the treasury stock method and the conversion of the convertible senior notes. Common equivalent shares are excluded from the computation in periods in
which they have an antidilutive effect.



F-14



---

##### Table of Contents

The following table sets forth computational data for the denominator in the basic and diluted earnings per share
calculation for fiscal years ended March 30, 2007, March 31, 2006, and April 1, 2005:



|                                                                                             |  |        |  |        |  |       
|-------------------------------------------------------------------------------------------- |  | ------ |  | ------ |  | ------
|in thousands                                                                                 |  | 2007   |  | 2006   |  | 2005  
|Denominator-Weighted average shares outstanding used in computing basic earnings per share   |  | 67,219 |  | 65,643 |  | 64,547
|Assumed exercise of stock options(a)                                                         |  | 934    |  | 1,088  |  | 1,017 
|Assumed vesting of restricted stock                                                          |  | 102    |  | 108    |  | 43    
|Assumed conversion of 2.25% convertible senior notes                                         |  | 1,070  |  | 48     |  |      
|                                                                                             |  |        |  |        |  |       
|Denominator-Weighted average shares outstanding used in computing diluted earnings per share |  | 69,325 |  | 66,887 |  | 65,607
|                                                                                             |  |        |  |        |  |       



|(a) | Options to purchase approximately 188, 779, and 1,801 shares of common stock that were outstanding during fiscal years
2007, 2006, and 2005, respectively, were not included in the computation of diluted earnings per share for each of the respective periods because the options exercise prices exceeded the average fair market value of the Companys common
stock for each fiscal year.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share(EITF 04-8) and the Companys stated policy to settle the principal amount of the convertible notes in cash, the Company is not required to include any shares underlying the convertible notes in its
diluted weighted average shares outstanding until the average stock price per share for the period exceeds the $17.10 (conversion price for the convertible senior notes). At such time, only the number of shares that would be issuable (under the
treasury stock method of accounting for share dilution) are included, which is based upon the amount by which the average stock price exceeds the conversion price. The average price of the Companys common stock during fiscal years 2007 and
2006 exceeded the conversion price of $17.10. As such, 1,070 and 48 potential common shares, respectively, were included in the calculation of diluted weighted average shares outstanding.

The diluted weighted average shares outstanding may be further impacted if SFAS No. 128(R), Earnings Per Share, an amendment of FASB Statement No. 128
(SFAS 128(R)) is adopted. SFAS 128(R) may eliminate the Companys ability to rely upon its stated policy to settle the principal amount of the Companys convertible senior notes in cash, which allows the Company to
exclude the stock representing the principal balance from dilutive average shares outstanding. If SFAS 128(R) becomes effective, earnings per share will be calculated under the if-converted method. Under this method, the number of
diluted weighted average shares outstanding will include approximately 8.8 million shares and earnings used to calculate diluted earnings per share would increase approximately $2.7 million (after tax) annually for the add-back of interest
expense on the convertible senior notes.

Stock-Based Compensation

Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS 123(R)) using the modified prospective transition method, and
therefore, has not restated results for prior periods. Prior to the adoption of SFAS 123(R), the Company elected to account for stock-based awards using the intrinsic-value recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. The intrinsic value method of accounting resulted in compensation expense to the extent option exercise prices were set below the current market price of the underlying
stock on the date of grant. Compensation expense was not previously recognized in net income, as all stock options granted had an exercise price equal to the market value of the underlying stock on the date of grant.

There was no impact to the Companys statements of operations for outstanding stock options on April 1, 2006 as a result of adopting SFAS 123(R) because
on June 7, 2004, the Compensation Committee of the Board of Directors approved an amendment to all outstanding stock options granted to employees. This amendment



F-15



---

##### Table of Contents

accelerated the vesting of all unvested stock options outstanding as of April 1, 2005, which was prior to the effective date of SFAS 123(R). The
Company took this action to reduce compensation expense in future periods in light of SFAS 123(R). Under SFAS 123(R), the Company estimated that a compensation charge of approximately $2,833, net of tax, would have been recorded in future
periods if the vesting of the stock options were not accelerated. As a result of the acceleration, the Company recognized contingent compensation expense equal to the difference between the fair market value of the common stock on the modification
date and the option exercise price for the estimated number of options that, absent the acceleration, would have expired unexercisable as a result of the termination of the holders employment prior to the original vesting dates of the options.
As of March 30, 2007, the maximum stock-based compensation expense would be approximately $739 if all holders benefited from this amendment with respect to outstanding options. Since June 7, 2004, the date the options were modified, the
Company has estimated and recognized compensation expense of approximately $201 based on its historical option forfeiture rate. This liability may be adjusted in future periods based on actual experience and changes in management assumptions.

Upon issuance of restricted stock prior to the adoption of SFAS 123(R), unearned compensation was charged to shareholders equity for the fair
value of the restricted stock on the date of grant based on the number of shares granted and the quoted market price of the Companys common stock, with stock-based compensation expense recognized on a straight-line basis over the awards
vesting period ranging from one to five years. To the extent restricted stock was forfeited prior to vesting, the previously recognized expense was reversed as a reduction to stock-based compensation expense on the forfeiture date. However, upon
adoption of SFAS 123(R), compensation expense is recognized for all equity-based awards net of estimated forfeitures over the awards entire vesting period. SFAS 123(R) requires forfeitures to be estimated at the time of grant and
adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates. When estimating forfeitures, the Company considers voluntary termination behaviors as well as trends of actual equity based awards forfeited. The
Company recorded a reduction of compensation expense of approximately $197 during the fiscal year ended March 30, 2007 to comply with the forfeiture provisions of SFAS 123(R).

Prior to the adoption of SFAS 123(R), the Company presented the excess tax benefit of stock option exercises as cash flows from operating activities. Upon adoption of SFAS 123(R), excess tax benefits
resulting from tax deductions in excess of compensation cost recognized for those options are classified as cash flows from financing activities. Although total cash flows are not impacted by the adoption of SFAS 123(R) and remain unchanged
from what would have been reported under prior accounting standards, cash flows from operating activities were reduced by $5,599 and cash flows from financing activities were increased by $5,599 during the fiscal year ended March 30, 2007.



F-16



---

##### Table of Contents

Fair Value DisclosuresPrior to adopting SFAS 123(R)

Prior to fiscal year 2007 the Company accounted for equity-based awards in accordance with APB No. 25, and related interpretations. Except for costs related to
restricted shares and restricted share units, compensation expense was not recognized in net income, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. The following table summarizes
relevant information as if the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure(SFAS 148),had been applied to all outstanding and unvested stock-based awards in each period.



|                                                                                                                                    |  |      |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                                    |  | 2006 |        |   | 2005 |  
|Net income, as reported                                                                                                             |  | $    | 44,257 |   |      | $ | 38,972 |  
|Stock-based employee compensation expense included in reported net income, net of related tax effects                               |  |      | 721    |   |      |   | 405    |  
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |      | (721   | ) |      |   | (5,797 | )
|                                                                                                                                    |  |      |        |   |      |   |        |  
|Pro forma net income                                                                                                                |  | $    | 44,257 |   |      | $ | 33,580 |  
|                                                                                                                                    |  |      |        |   |      |   |        |  
|Earnings per shareBasic:                                                                                                           |  |      |        |   |      |   |        |  
|As reported                                                                                                                         |  | $    | 0.67   |   |      | $ | 0.60   |  
|Pro forma                                                                                                                           |  | $    | 0.67   |   |      | $ | 0.52   |  
|Earnings per shareDiluted:                                                                                                         |  |      |        |   |      |   |        |  
|As reported                                                                                                                         |  | $    | 0.66   |   |      | $ | 0.59   |  
|Pro forma                                                                                                                           |  | $    | 0.66   |   |      | $ | 0.51   |  

The fair value of stock options granted was estimated as of the date of grant using a Black-Scholes option-pricing
model with the following weighted-average assumptions.



|                                 |  |           |  
|-------------------------------- |  | --------- | -
|                                 |  | 2005(a)   |  
|Expected dividend yield          |  |          |  
|Expected stock price volatility  |  | 53.3      | %
|Risk-free interest rate          |  | 3.44-3.81 | %
|Expected life of options (years) |  | 5         |  



|(a) | Fiscal year 2006 is not presented, as the vesting of all outstanding options was accelerated as of April 1, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------

Based on these assumptions, the estimated fair value of options granted for fiscal years 2005 were approximately $178. The per share weighted average fair value of stock
options granted during fiscal years 2005 was $5.34.

Comprehensive Income

Comprehensive income represents all changes in equity of an enterprise that result from recognized transactions and other economic events during the period. Other comprehensive income refers to revenues, expenses,
gains, and losses that under GAAP are included in comprehensive income but excluded from net income, such as the unrealized gain or loss on the interest rate swap.



F-17



---

##### Table of Contents

Statements of Cash Flows

The Companys non-cash operating, investing, and financing activities during fiscal years 2007, 2006, and 2005 were as follows:



|                                                               |  |      |        |   |      |   |        |      |  |   |         |  
|-------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|Inflow (Outflow)                                               |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Noncash Operating Activities:                                  |  |      |        |   |      |   |        |      |  |   |         |  
|Excess tax benefits from share based compensation arrangements |  | $    |       |   |      | $ | 6,262  |      |  | $ | 2,217   |  
|Cash surrender value benefit plan asset                        |  |      | (1,925 | ) |      |   |       |      |  |   |        |  
|Cash surrender value benefit plan liability                    |  |      | 1,925  |   |      |   |       |      |  |   |        |  
|Noncash Investing Activities:                                  |  |      |        |   |      |   |        |      |  |   |         |  
|Business combinations:                                         |  |      |        |   |      |   |        |      |  |   |         |  
|Fair value of assets acquired                                  |  |      | (312   | ) |      |   | (8,846 | )    |  |   | (13,686 | )
|Liabilities assumed                                            |  |      | 1,485  |   |      |   | 6,551  |      |  |   | 7,223   |  
|Capital lease assets                                           |  |      | (674   | ) |      |   | (1,672 | )    |  |   |        |  
|Investment in variable interest entity:                        |  |      |        |   |      |   |        |      |  |   |         |  
|Other intangibles                                              |  |      |       |   |      |   |       |      |  |   | (225    | )
|Other assets                                                   |  |      | 240    |   |      |   |       |      |  |   | (240    | )
|Other long-term liabilities                                    |  |      | (240   | ) |      |   |       |      |  |   | 240     |  
|Noncash Financing Activities:                                  |  |      |        |   |      |   |        |      |  |   |         |  
|Capital lease obligations                                      |  |      | 674    |   |      |   | 1,672  |      |  |   |        |  

Reclassification

Certain amounts reported in prior years have been reclassified to conform to the fiscal year 2007 presentation.

Recent Accounting Pronouncements

In July 2006, the FASB issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and Related Implementation Issues (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a companys
financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for a tax position
taken or expected to be taken in a tax return. FIN 48 is effective as of the beginning of fiscal years commencing after December 15, 2006. As such, FIN 48 will be effective during the three months ended June 29, 2007. The Company
is currently evaluating the effects of implementing this new standard.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This standard applies under other accounting pronouncements that require or permit fair value
measurements, but does not require any new fair value measurements. SFAS No. 157 will become effective for the Company in fiscal year 2009. The Company is currently assessing the impact of SFAS No. 157.

In September 2006, the SEC staff issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements. This guidance indicates that the materiality of a misstatement must be evaluated using both the rollover and iron curtain approaches. The iron curtain approach quantifies a misstatement based on the effects of correcting
the misstatement existing in the balance sheet at the end of the current year, while the rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. SAB No. 108 is effective for
the Companys fiscal year 2007 annual consolidated financial statements. The adoption of SAB No. 108 did not have a material effect on the Companys consolidated financial statements.



F-18



---

##### Table of Contents

|3. | PURCHASE BUSINESS COMBINATIONS
|-- | ------------------------------

The following acquisitions were
accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Acquisitions; accordingly, the operations of the acquired companies have been included in the Companys results of operations
subsequent to the date of acquisition. The assets acquired and liabilities assumed were recorded at their estimated fair values at the date of the acquisition as determined by management based on information currently available and independent
valuations. Supplemental unaudited pro forma information, assuming these acquisitions were made at the beginning of the immediate preceding period, is not presented as the results would not differ materially from the amounts reported in the
accompanying consolidated statements of operations.

Fiscal Year 2006

On September 30, 2005, the Physician Business acquired all of the outstanding common stock of Southern Anesthesia & Surgical, Inc. (SAS). SAS distributes controlled and non-controlled
pharmaceuticals and medical supplies to office-based physicians and surgery centers in all 50 states. SAS expertise in the distribution of controlled pharmaceutical products increased the Physician Business overall competency and
effectiveness in serving the physician market.

The maximum aggregate purchase price, which was subject to certain adjustments as set forth in the purchase
agreement, was approximately $32,243 (net of cash acquired). Subsequent to closing, the purchase price was reduced and a cash payment of approximately $1,568 was received from the seller based on the actual working capital of SAS at closing compared
to the target working capital defined in the purchase agreement. Of the aggregate purchase price, approximately $31,170 was paid during fiscal year 2006. A payment of $1,500 was made during the fiscal year ended March 30, 2007. The remaining
$1,400 will be paid during fiscal year 2008. Under the terms of the stock purchase agreement, the Company made a joint election with the seller to treat the transaction as a purchase of assets in accordance with Section 338(h)(10) of the
Internal Revenue Code.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.



|                        |  |   |       
|----------------------- |  | - | ------
|Cash                    |  | $ | 259   
|Accounts receivable     |  |   | 1,448 
|Inventory               |  |   | 3,892 
|Other current assets    |  |   | 162   
|Goodwill                |  |   | 17,621
|Intangibles             |  |   | 13,076
|Other noncurrent assets |  |   | 1,514 
|                        |  |   |       
|Total assets acquired   |  |   | 37,972
|Current liabilities     |  |   | 6,291 
|Noncurrent liabilities  |  |   | 2,079 
|                        |  |   |       
|Net assets acquired     |  | $ | 29,602
|                        |  |   |       

Goodwill of $17,621 was assigned to the Physician Business and is expected to be deductible for tax purposes.
Based on the final purchase price allocation, acquired intangible assets were approximately $13,076, of which $6,200, $1,046, $300, and $130 was assigned to customer relationships, nonsolicitation agreements, noncompetition agreements, and other
intangibles, respectively. These acquired intangible assets had a weighted-average useful life of approximately 10.8 years as of the date of acquisition. The remaining $5,400 of acquired intangible assets was assigned to the SAS trade name,
which has an indefinite life and will not be amortized.



F-19



---

##### Table of Contents

On October 31, 2005, the Elder Care Business acquired certain assets and assumed certain liabilities of
Clinical Support Services, Inc. (CSSI), a California-based medical billing and recovery services company offering services to facilities-based healthcare providers in California. During fiscal year 2007, CSSI was integrated into the
existing Medicare Part B billing operations based in Franklin, Tennessee.

The maximum aggregate purchase price, which was subject to certain
adjustments as set forth in the purchase agreement, was approximately $4,475, of which approximately $1,187 and $3,288 were paid during fiscal year 2007 and 2006, respectively. There are no further payments required under the purchase agreement.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.



|                        |  |   |      
|----------------------- |  | - | -----
|Cash                    |  | $ |     
|Inventory               |  |   | 74   
|Other current assets    |  |   | 24   
|Goodwill                |  |   | 1,462
|Intangibles             |  |   | 2,111
|Other noncurrent assets |  |   | 21   
|                        |  |   |      
|Total assets acquired   |  |   | 3,692
|Current liabilities     |  |   | 404  
|                        |  |   |      
|Net assets acquired     |  | $ | 3,288
|                        |  |   |      

Goodwill of $1,462 was assigned to the Elder Care Business and is expected to be deductible for tax purposes.
Based on the final purchase price allocation, acquired intangible assets were approximately $2,111, of which $971, $640, and $500 was assigned to customer relationships, noncompetition agreements, and signing bonuses, respectively. These acquired
intangible assets had a weighted-average useful life of approximately 5.5 years as of the date of acquisition.

Fiscal Year 2005

On October 7, 2004, the Elder Care Business acquired certain assets and assumed certain liabilities of a long-term care medical supply distributor and ancillary
billing service provider. The aggregate purchase price, which was subject to certain adjustments as set forth in the purchase agreement, was approximately $26,830 (net of cash acquired) of which approximately $22,682 was paid during fiscal year
2005. Pursuant to the terms of the purchase agreement, a cash payment of approximately $4,148 was made to the seller during fiscal year 2006 as certain minimum revenue thresholds were met in future periods.

The Company obtained independent valuations of certain intangible assets and the final allocation of the purchase price was finalized during the three months ended
September 30, 2005. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.



|                        |  |   |       
|----------------------- |  | - | ------
|Cash                    |  | $ | 355   
|Accounts receivable     |  |   | 7,742 
|Inventory               |  |   | 3,320 
|Other current assets    |  |   | 2,193 
|Goodwill                |  |   | 14,070
|Intangibles             |  |   | 7,544 
|Other noncurrent assets |  |   | 30    
|                        |  |   |       
|Total assets acquired   |  |   | 35,254
|Current liabilities     |  |   | 8,069 
|                        |  |   |       
|Net assets acquired     |  | $ | 27,185
|                        |  |   |       



F-20



---

##### Table of Contents

Goodwill of $14,070 was assigned to the Elder Care Business and is expected to be deductible for tax purposes. Acquired
intangible assets were $7,544, of which $6,400, $623, and $521 was assigned to customer relationships, signing bonuses, and nonsolicitation agreements, respectively. The acquired intangible assets had a weighted-average useful life of approximately
6.7 years as of the date of acquisition.



|4. | VARIABLE INTEREST ENTITY
|-- | ------------------------

PSS World Medical, Inc., and its wholly
owned subsidiary, World Med Shared Services, Inc. (collectively the Company), entered into a Sourcing Services Agreement, dated as of January 19, 2005 (the Agreement), with Tiger Specialty Sourcing Limited, Tiger
Shanghai Specialty Sourcing Co. Ltd., and its principals (collectively Tiger Medical). Subject to the terms and conditions of the Agreement, the Company has agreed to purchase certain medical and other products from Chinese suppliers and
manufacturers using the exclusive sourcing services of Tiger Medical.

Pursuant to the terms of the Agreement, the Company acquired a minority interest in
Tiger Medical on January 25, 2005 for $1,000. In return for its initial equity investment, the Company appointed two individuals to serve on the five-member board of directors of both Tiger Specialty Sourcing Limited and Tiger Shanghai
Specialty Sourcing Co. Ltd. Under the original agreement, the Company ultimately had the right to increase its ownership interest in Tiger Medical to 100% during fiscal years 2006 through 2009 if certain performance targets were achieved.
Additionally, if at any time during the term of the Agreement, the Company achieved the agreed-upon cost of goods savings target in any twelve-month period prior to achieving the agreed-upon sales target, then either party has the right to trigger
an early buy-out of Tiger Medical by the Company. On March 26, 2007, the agreement was modified, which removed the early buy-out provisions. The Company did not make any cash payments during fiscal years 2007 or 2006 to increase its ownership
interest in Tiger Medical.

The Companys interest in Tiger Medical is considered to be a VIE as defined by Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised 2003), Consolidation of Variable Interest Entities-an Interpretation of Accounting Research Bulletin No. 51.The Company is considered the primary beneficiary as Tiger Medical
provides sourcing services exclusively to the Company. Therefore, the financial statements of Tiger Medical are consolidated with the Companys financial statements. The Company acquired its interest in Tiger Medical for $1,000 and the
realization of this investment is dependent on the product cost savings to the Company. The Company is not obligated on any of the indebtedness of Tiger Medical nor is the Company obligated to fund any operating losses of Tiger Medical. Therefore,
the $1,000 acquisition price is the only amount at risk as of March 31, 2007. The accompanying consolidated balance sheet as of March 30, 2007 and March 31, 2006 included approximately $166 and $400 of cash, respectively, and $599 of
long-term debt due to the principals of Tiger Medical. The impact of consolidating the statement of operations of Tiger Medical with the Companys statement of operations for the fiscal years ended March 30, 2007 and March 31, 2006
was immaterial.



|5. | NOTES RECEIVABLE
|-- | ----------------

As of March 30, 2007, the Company has two
notes receivable (the Loans) from its former chairman and chief executive officer, which bear interest at the applicable Federal rate for long-term obligations (5.21% and 4.52% at March 30, 2007 and March 31, 2006,
respectively).

The first loan (the unsecured loan), which was issued in September 1997 and amended during fiscal year 2003, matures on
September 16, 2007 (Maturity Date). Principal payments are not required under the agreement until the Maturity Date. Interest payments due prior to May 2003 are deferred until the Maturity Date and interest payments are
required at least annually after May 2003. Interest accrued during the period from December 31, 1997 to April 30, 2003 of approximately $561 was forgiven on December 31, 2005 as certain covenants under a noncompetition agreement
were complied with through December 31, 2005. The terms of the agreement provide for forgiveness of the outstanding principal in the event of a change in control; however, the accrued interest



F-21



---

##### Table of Contents

becomes payable immediately. Although the Company maintains an insurance policy on the life of the former chairman and chief executive officer, the proceeds
of which would be used to repay the outstanding principal and interest upon his death, this loan is not collaterized.

The second loan, which was issued in
January 2001, matures on the earlier of (i) the death of the former chairman and chief executive officer or (ii) the termination of a split-dollar agreement (Loan 2 Maturity Date). This loan bears interest annually
during the period from January 1, 2001 until the Loan 2 Maturity Date. Payments of both principal and interest are due upon maturity. A split-dollar life insurance policy on the former chairman and chief executive officer secures this
note.

Management reviews the realization of the Loans on a quarterly basis based on current facts and circumstances known at the valuation date.

As part of the Companys periodic review of the carrying amount of the Loans during the three months ended September 27, 2002, management and
the Board of Directors determined that an allowance for doubtful accounts of $2,939 was required on the unsecured Loan after communication with the former chairman and chief executive officer regarding his financial condition and other due diligence
procedures performed by management. Subsequently, during the three months ended July 1, 2005, new facts and circumstances were obtained by management and the Board of Directors that indicated the former chairman and chief executive
officers financial condition had improved. In addition, the Company received a payment of approximately $279 during this period for past due interest. These factors as well as direct communication with the former chairman and chief executive
officer during this period led to a determination by management and the Board of Directors that the allowance for doubtful accounts was no longer required for the unsecured loan. Therefore, general and administrative expenses were reduced $2,939
during the three months ended July 1, 2005, which increased net income $1,825.

The following table indicates the balance sheet classification of the
gross amount of the outstanding principal and accrued interest for the Loans at March 30, 2007 and March 31, 2006:



|                           |  |                      |       |                 |   |    
|-------------------------- |  | -------------------- | ----- | --------------- | - | ---
|                           |  | OutstandingPrincipal |       | AccruedInterest
|As of March 31, 2006:      |  |                      |       |                 |   |    
|Prepaid expenses and other |  | $                    |      |                 | $ | 118
|Other noncurrent assets    |  |                      | 3,734 |                 |   | 275
|                           |  |                      |       |                 |   |    
|Total                      |  | $                    | 3,734 |                 | $ | 393
|                           |  |                      |       |                 |   |    
|As of March 30, 2007:      |  |                      |       |                 |   |    
|Prepaid expenses and other |  | $                    | 2,737 |                 | $ | 125
|Other noncurrent assets    |  |                      | 997   |                 |   | 324
|                           |  |                      |       |                 |   |    
|Total                      |  | $                    | 3,734 |                 | $ | 449
|                           |  |                      |       |                 |   |    

The Company received interest payments of $128 and $279 during fiscal years 2007 and 2006, respectively. Interest
income, included in interest and investment income in the accompanying consolidated statements of operations, for fiscal years 2007, 2006, and 2005, was approximately $184, $177, and $187, respectively. As of March 30, 2007, there were no past
due principal or interest payments outstanding under the Loans.



F-22



---

##### Table of Contents

|6. | PROPERTY AND EQUIPMENT
|-- | ----------------------

Property and equipment are summarized as
follows:



|                                       |  |      |         |   |      |   |         |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                       |  | 2007 |         |   | 2006 |  
|Land                                   |  | $    | 9       |   |      | $ | 9       |  
|Computer hardware under capital leases |  |      | 1,836   |   |      |   | 1,672   |  
|Office equipment under capital leases  |  |      | 510     |   |      |   |        |  
|Leasehold improvements                 |  |      | 11,886  |   |      |   | 9,215   |  
|Equipment                              |  |      | 26,303  |   |      |   | 24,067  |  
|Computer hardware and software         |  |      | 118,679 |   |      |   | 108,527 |  
|                                       |  |      |         |   |      |   |         |  
|                                       |  |      | 159,223 |   |      |   | 143,490 |  
|Accumulated depreciation               |  |      | (70,596 | ) |      |   | (55,827 | )
|                                       |  |      |         |   |      |   |         |  
|Property and equipment, net            |  | $    | 88,627  |   |      | $ | 87,663  |  
|                                       |  |      |         |   |      |   |         |  

Depreciation expense, which includes amortization of capital leases, is included in general and administrative
expenses in the accompanying consolidated statements of operations, and approximated $16,750, $13,932, and $14,241, for fiscal years 2007, 2006, and 2005, respectively.



|7. | GOODWILL
|-- | --------

The change in the carrying value of goodwill for the
fiscal years ended March 30, 2007 and March 31, 2006 is as follows:



|                                      |  |                   |        |   |                   |   |                         |  |       |     |  |   |        
|------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ----------------------- |  | ----- | --- |  | - | -------
|                                      |  | PhysicianBusiness |        |   | ElderCareBusiness |   | CorporateSharedServices |  | Total
|Balance as of April 1, 2005           |  | $                 | 9,788  |   |                   | $ | 75,080                  |  | $     | 749 |  | $ | 85,617 
|Purchase business combinations        |  |                   | 16,982 |   |                   |   | 1,496                   |  |       |    |  |   | 18,478 
|Purchase price allocation adjustments |  |                   | 639    |   |                   |   | 787                     |  |       |    |  |   | 1,426  
|                                      |  |                   |        |   |                   |   |                         |  |       |     |  |   |        
|Balance as of March 31, 2006          |  |                   | 27,409 |   |                   |   | 77,363                  |  |       | 749 |  |   | 105,521
|Purchase business combinations        |  |                   | 52     |   |                   |   |                        |  |       |    |  |   | 52     
|Purchase price allocation adjustments |  |                   | (182   | ) |                   |   | 1,975                   |  |       |    |  |   | 1,793  
|                                      |  |                   |        |   |                   |   |                         |  |       |     |  |   |        
|Balance as of March 30, 2007          |  | $                 | 27,279 |   |                   | $ | 79,338                  |  | $     | 749 |  | $ | 107,366
|                                      |  |                   |        |   |                   |   |                         |  |       |     |  |   |        



F-23



---

##### Table of Contents

|8. | INTANGIBLES, NET
|-- | ----------------

The following table summarizes the gross
carrying amount and accumulated amortization for existing intangible assets by business segment and major asset class.



|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|----------------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ------- | --- |  | ------------------- | ------ | ----------------------- | - | ------ | --- | - | ------- | - |  | - | ------
|                                                |  | As of              
|                                                |  | March 30, 2007      |        | March 31, 2006         
|                                                |  | GrossCarryingAmount |        | AccumulatedAmortization |   |         | Net |  | GrossCarryingAmount |        | AccumulatedAmortization |   |        | Net
|INTANGIBLES SUBJECT TO AMORTIZATION             |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Customer Relationships:                         |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Physician Business                              |  | $                   | 8,165  |                         | $ | (2,346  | )   |  | $                   | 5,819  |                         | $ | 8,112  |     | $ | (1,695  | ) |  | $ | 6,417 
|Elder Care Business                             |  |                     | 13,762 |                         |   | (5,824  | )   |  |                     | 7,938  |                         |   | 13,762 |     |   | (3,858  | ) |  |   | 9,904 
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|                                                |  |                     | 21,927 |                         |   | (8,170  | )   |  |                     | 13,757 |                         |   | 21,874 |     |   | (5,553  | ) |  |   | 16,321
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Nonsolicitation Agreements:                     |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Physician Business                              |  |                     | 12,034 |                         |   | (3,387  | )   |  |                     | 8,647  |                         |   | 11,169 |     |   | (1,792  | ) |  |   | 9,377 
|Elder Care Business                             |  |                     | 467    |                         |   | (249    | )   |  |                     | 218    |                         |   | 516    |     |   | (144    | ) |  |   | 372   
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|                                                |  |                     | 12,501 |                         |   | (3,636  | )   |  |                     | 8,865  |                         |   | 11,685 |     |   | (1,936  | ) |  |   | 9,749 
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Noncompetition Agreements:                      |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Physician Business                              |  |                     | 1,542  |                         |   | (1,149  | )   |  |                     | 393    |                         |   | 1,513  |     |   | (836    | ) |  |   | 677   
|Elder Care Business                             |  |                     | 1,160  |                         |   | (701    | )   |  |                     | 459    |                         |   | 1,160  |     |   | (472    | ) |  |   | 688   
|Corporate Shared Services                       |  |                     | 24     |                         |   | (13     | )   |  |                     | 11     |                         |   | 441    |     |   | (424    | ) |  |   | 17    
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|                                                |  |                     | 2,726  |                         |   | (1,863  | )   |  |                     | 863    |                         |   | 3,114  |     |   | (1,732  | ) |  |   | 1,382 
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Signing Bonuses:                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Physician Business                              |  |                     | 1,369  |                         |   | (957    | )   |  |                     | 412    |                         |   | 1,470  |     |   | (854    | ) |  |   | 616   
|Elder Care Business                             |  |                     | 764    |                         |   | (456    | )   |  |                     | 308    |                         |   | 1,079  |     |   | (517    | ) |  |   | 562   
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|                                                |  |                     | 2,133  |                         |   | (1,413  | )   |  |                     | 720    |                         |   | 2,549  |     |   | (1,371  | ) |  |   | 1,178 
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Other Intangibles:                              |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Elder Care Business                             |  |                     | 538    |                         |   | (493    | )   |  |                     | 45     |                         |   | 538    |     |   | (385    | ) |  |   | 153   
|Corporate Shared Services                       |  |                     | 226    |                         |   | (118    | )   |  |                     | 108    |                         |   | 225    |     |   | (63     | ) |  |   | 162   
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|                                                |  |                     | 764    |                         |   | (611    | )   |  |                     | 153    |                         |   | 763    |     |   | (448    | ) |  |   | 315   
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Total intangible assets subject to amortization |  |                     | 40,051 |                         |   | (15,693 | )   |  |                     | 24,358 |                         |   | 39,985 |     |   | (11,040 | ) |  |   | 28,945
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|INTANGIBLES NOT SUBJECT TO AMORTIZATION         |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Tradename:                                      |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Physician Business                              |  |                     | 5,400  |                         |   |        |     |  |                     | 5,400  |                         |   | 5,400  |     |   |        |   |  |   | 5,400 
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Total unamortized intangible assets             |  |                     | 5,400  |                         |   |        |     |  |                     | 5,400  |                         |   | 5,400  |     |   |        |   |  |   | 5,400 
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       
|Total intangible assets                         |  | $                   | 45,451 |                         | $ | (15,693 | )   |  | $                   | 29,758 |                         | $ | 45,385 |     | $ | (11,040 | ) |  | $ | 34,345
|                                                |  |                     |        |                         |   |         |     |  |                     |        |                         |   |        |     |   |         |   |  |   |       

Total amortization expense for intangible assets for the fiscal years ended March 30, 2007, March 31,
2006, and April 1, 2005, was $5,908, $6,298, and $4,537, respectively.



F-24



---

##### Table of Contents

The estimated amortization expense for the next five fiscal years is as follows:



|             |  |   |       
|------------ |  | - | ------
|Fiscal Year: |  |   |       
|2008         |  | $ | 5,354 
|2009         |  |   | 4,612 
|2010         |  |   | 4,011 
|2011         |  |   | 3,090 
|2012         |  |   | 1,798 
|Thereafter   |  |   | 5,493 
|             |  |   |       
|Total        |  | $ | 24,358
|             |  |   |       

The remaining weighted-average amortization period, in total and by major asset class, is as follows:



|                              |  |                |  |               
|----------------------------- |  | -------------- |  | --------------
|(in years)                    |  | March 30, 2007 |  | March 31, 2006
|Customer relationships        |  | 6.7            |  | 7.4           
|Nonsolicitation Agreements    |  | 7.9            |  | 8.1           
|Noncompetition Agreements     |  | 2.9            |  | 3.3           
|Signing Bonuses               |  | 1.7            |  | 2.4           
|Other Intangibles             |  | 1.5            |  | 2.2           
|                              |  |                |  |               
|Total weighted-average period |  | 6.8            |  | 7.2           
|                              |  |                |  |               

Future minimum payments required under noncompetition agreements at March 30, 2007 are $99.



|9. | ACCRUED EXPENSES
|-- | ----------------

Accrued expenses at March 30, 2007 and
March 31, 2006 were as follows:



|                                     |  |      |        |      |   |       
|------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                     |  | 2007 |        | 2006
|Accrued payroll                      |  | $    | 13,611 |      | $ | 12,120
|Accrued incentive compensation costs |  |      | 10,435 |      |   | 9,596 
|Other                                |  |      | 13,178 |      |   | 12,783
|                                     |  |      |        |      |   |       
|Accrued expenses                     |  | $    | 37,224 |      | $ | 34,499
|                                     |  |      |        |      |   |       



|10. | DEBT
|--- | ----

Outstanding debt consists of the following, in order of
priority:



|                                        |  |                |         |                |   |        
|--------------------------------------- |  | -------------- | ------- | -------------- | - | -------
|                                        |  | As of         
|                                        |  | March 30, 2007 |         | March 31, 2006
|2.25% convertible senior notes          |  | $              | 150,000 |                | $ | 150,000
|Capital lease obligations               |  |                | 1,413   |                |   | 1,364  
|Other bank debt                         |  |                | 1,500   |                |   |       
|                                        |  |                |         |                |   |        
|Total debt                              |  |                | 152,913 |                |   | 151,364
|Less: Current portion of long-term debt |  |                | 2,238   |                |   | 509    
|                                        |  |                |         |                |   |        
|Long-term debt                          |  | $              | 150,675 |                | $ | 150,855
|                                        |  |                |         |                |   |        

2.25% Convertible Senior Notes

During fiscal year 2004, the Company issued $150 million principal amount of 2.25% convertible senior notes, which mature on March 15, 2024. Interest on the notes is payable semiannually in arrears on
March 15 and September 15 of each year. Contingent interest is also payable during any six-month interest period, beginning



F-25



---

##### Table of Contents

with the six-month interest period commencing on March 15, 2009, if the average trading price of the notes for the five trading days ending on the
second trading day immediately preceding such six-month interest period equals or exceeds 120% of the principal amount of the notes. The amount of contingent interest payable per note in respect of any six-month interest period is equal to 0.25% of
the average trading price of a note for the trading period referenced above.

The notes may be converted into shares of the Companys common stock
under the following circumstances: (i) prior to March 15, 2019, during any calendar quarter that the closing sale price of the Companys common stock for at least 20 of the 30 consecutive trading days ending the day prior to such
quarter is greater than 120% of the applicable conversion price of $17.10 per share; (ii) if on any date after March 15, 2019, the closing sale price of the Companys common stock is greater than 120% of the then applicable
conversion price; (iii) during the five consecutive business day period following any five consecutive trading day period in which the trading price for a note for each day of that trading period is less than 98% of the closing sale price of
the Companys common stock on such corresponding trading day multiplied by the applicable conversion rate, provided that if the price of the Companys common stock issuable upon conversion is between 100% and 120% of the applicable
conversion price, then holders will be entitled to receive upon conversion only the value of the principal amount of the notes converted plus accrued and unpaid interest, including contingent interest, if any; (iv) if the Company has called the
notes for redemption; (v) during any period in which the Companys long-term issuer rating assigned by Moodys Investor Services (Moodys) is at or below Caa1 or the corporate credit rating assigned by
Standard & Poors Ratings Services (S&P) is at or below B-, or if the Company is no longer rated by at least one of S&P or Moodys; or (vi) upon the occurrence of specified corporate transactions described
in the indenture governing the notes. The initial conversion rate is 58.4949 shares of common stock per each $1 (in thousands) principal amount of notes and is equivalent to an initial conversion price of $17.10 per share. The conversion rate is
subject to adjustment if certain events occur, such as stock dividends or other distributions of cash, securities, indebtedness or assets; stock splits and combinations; issuances of rights or warrants; tender offers; or repurchases. Upon
conversion, the Company has the right to deliver, in lieu of common stock, cash or a combination of cash and common stock. The Companys stated policy is to satisfy the Companys obligation upon a conversion of the notes first, in cash, in
an amount equal to the principal amount of the notes converted and second, in shares of the Companys common stock, to satisfy the remainder, if any, of the Companys conversion obligation.

The ability of note holders to convert is assessed on a quarterly basis and is dependent on the trading price of the Companys stock during the last 30 trading days
of each quarter. The Contingent Conversion Trigger was not met during the three months ended March 30, 2007, therefore, the notes may not be converted during the Companys first quarter of fiscal year 2008. Accordingly, at March 30,
2007, the notes are classified as Long Term Debt in the Consolidated Balance Sheets. As of March 30, 2007, the fair value of the convertible senior notes was approximately $193.9 million and the value of the shares, if converted, was
approximately $185.5 million.

Revolving Line of Credit

The Company maintains an asset-based revolving line of credit (the Credit Agreement), which matures on June 30, 2010 and is classified as a current liability in accordance with EITF No. 95-22, Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement.The Credit Agreement permits maximum borrowings of up to $200 million, which may be
increased to $250 million at the Companys discretion. Availability of borrowings (Availability) depends upon a borrowing base calculation consisting of accounts receivable and inventory, subject to satisfaction of certain
eligibility requirements less any outstanding letters of credit. Borrowings under the revolving line of credit bear interest at the banks prime rate plus an applicable margin based on Availability, or at LIBOR plus an applicable margin based
on Availability. Additionally, the Credit Agreement bears interest at a fixed rate of 0.25% for any unused portion of the facility.



F-26



---

##### Table of Contents

Under the Credit Agreement, the Company and its subsidiaries are subject to certain covenants, including but not limited
to, limitations on (i) paying dividends and repurchasing the Companys common stock, (ii) selling or transferring assets, (iii) making certain investments including acquisitions, (iv) incurring additional indebtedness and
liens, and (v) annual capital expenditures. However, these covenants may not apply if the Company maintains sufficient Availability under the credit facility.

Borrowings under the revolving line of credit are anticipated to fund future requirements for working capital, capital expenditures, acquisitions, and the issuance of letters of credit. As of March 30, 2007, the Company has outstanding
letters of credit totaling $374.

There were no outstanding borrowings under the revolving line of credit as of March 30, 2007 and March 31,
2006. After reducing Availability for outstanding borrowings and letter of credit commitments, the Company has sufficient assets based on eligible accounts receivable and inventory to borrow up to $199.6 million (excluding the additional
increase of $50 million) under the revolving line of credit. Outstanding borrowings during the fiscal year ended March 30, 2007 bore interest at the banks prime rate plus an applicable margin. Daily borrowings were insignificant. The
average daily interest rate, excluding debt issuance costs and unused line fees, for the fiscal years ended March 30, 2007, March 31, 2006, and April 1, 2005, was 7.60%, 3.89%, and 4.09%, respectively.

From time-to-time, the Company has amended the Credit Agreement to meet specific business objectives and requirements. The Credit Agreement, originally dated
May 20, 2003, was amended on July 1, 2005. This amendment (i) extended the term of the agreement to June 30, 2010, (ii) created a feature to increase the maximum borrowings to $250 million at the discretion of the
Company, (iii) increased the advance rates for accounts receivable and inventory, (iv) eased the covenant restrictions described above when excess Availability is greater than $50 million, (v) implemented a fixed charge coverage
ratio covenant when Availability is less than $40 million, (vi) set the determination of applicable margin level for Base Rate loans and LIBOR loans to Availability rather than a funded debt to earnings before interest, taxes, depreciation
and amortization ratio, (vii) reduced the unused line fee from 0.375% to 0.25%, and (viii) increased the letter of credit sub-facility from $15 million to $20 million.

During fiscal year 2004, the Company entered into an interest rate swap agreement that matured on March 28, 2006. The purpose of this swap agreement was to hedge
the variable interest rate of its revolving line of credit. The notional amount of the swap originally was $35 million and was reduced to $25 million on July 19, 2004. The interest rate swap effectively fixed the interest rate on a
portion of the revolving line of credit to 2.195%, plus an applicable margin as determined by the Credit Agreement. This interest rate swap was designated as a cash flow hedge in accordance with the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities,SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133,and SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.Therefore, changes in fair value were recognized in accumulated other comprehensive income in the accompanying consolidated balance sheets. Under the terms of the interest rate
swap agreement, the Company made monthly payments based on the fixed rate and received interest payments based on 1-month LIBOR. The changes in market value of this financial instrument were highly correlated with changes in market value of the
hedged item both at inception and over the life of the agreement. Amounts received or paid under the interest rate swap agreement were recorded as reductions or additions to interest expense. During fiscal years 2006 and 2005, the Company recorded
an unrealized (loss) gain, net of related tax effects, for the estimated fair value of the swap agreement in accumulated other comprehensive income of ($231) and $271, respectively.



F-27



---

##### Table of Contents

Capital Lease Obligations

The Company leases certain computer hardware and office equipment at an aggregate annual rental of approximately $797. The equipment is capitalized at its fair market value, which approximates the present value of the future minimum lease
payments, and is amortized over the useful life of the asset. The following table is a schedule by year of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments as of March 30,
2007.



|                                            |  |   |      
|------------------------------------------- |  | - | -----
|Fiscal Year:                                |  |   |      
|2008                                        |  | $ | 797  
|2009                                        |  |   | 472  
|2010                                        |  |   | 144  
|2011                                        |  |   | 91   
|2012                                        |  |   |     
|                                            |  |   |      
|Total minimum lease payments                |  |   | 1,504
|Less: amount representing interest          |  |   | 91   
|                                            |  |   |      
|Present value of net minimum lease payments |  | $ | 1,413
|                                            |  |   |      



|11. | INCOME TAXES
|--- | ------------

The provision for income taxes from continuing
operations is detailed below:



|                                   |  |      |        |   |      |   |        |  |   |        |  
|---------------------------------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------ | -
|                                   |  | 2007 |        |   | 2006 |   | 2005   | 
|Current tax provision (benefit):   |  |      |        |   |      |   |        |  |   |        |  
|Federal                            |  | $    | 28,054 |   |      | $ | 946    |  | $ | (533   | )
|State                              |  |      | 3,467  |   |      |   | 148    |  |   | (68    | )
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Total current provision (benefit)  |  |      | 31,521 |   |      |   | 1,094  |  |   | (601   | )
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Deferred tax (benefit) provision:  |  |      |        |   |      |   |        |  |   |        |  
|Federal                            |  |      | (1,478 | ) |      |   | 22,021 |  |   | 15,392 |  
|State                              |  |      | (183   | ) |      |   | 2,722  |  |   | 1,979  |  
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Total deferred (benefit) provision |  |      | (1,661 | ) |      |   | 24,743 |  |   | 17,371 |  
|                                   |  |      |        |   |      |   |        |  |   |        |  
|Total income tax provision         |  | $    | 29,860 |   |      | $ | 25,837 |  | $ | 16,770 |  
|                                   |  |      |        |   |      |   |        |  |   |        |  

A reconciliation of the total income tax provision as presented in the consolidated statements of operations is as
follows:



|                                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                                       |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Benefit for income taxes recorded in stockholders equity:                                             |  |      |        |   |      |   |        |      |  |   |        |  
|Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes |  | $    | (5,599 | ) |      | $ | (6,262 | )    |  | $ | (2,217 | )
|Unrealized (loss) gain on interest rate swap recognized for financial reporting purposes               |  |      |       |   |      |   | (141   | )    |  |   | 167    |  
|                                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|                                                                                                       |  |      | (5,599 | ) |      |   | (6,403 | )    |  |   | (2,050 | )
|Provision for income taxes from continuing operations                                                  |  |      | 29,860 |   |      |   | 25,837 |      |  |   | 16,770 |  
|Benefit for income taxes recorded as a reduction to goodwill                                           |  |      |       |   |      |   | (97    | )    |  |   | (1,522 | )
|Benefit for income taxes from loss on disposal of discontinued operations                              |  |      |       |   |      |   |       |      |  |   | (1,849 | )
|                                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Total income tax provision                                                                             |  | $    | 24,261 |   |      | $ | 19,337 |      |  | $ | 11,349 |  
|                                                                                                       |  |      |        |   |      |   |        |      |  |   |        |  



F-28



---

##### Table of Contents

The difference between income tax computed at the Federal statutory rate and the actual tax provision is shown below:



|                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                    |  | 2007 |        |   | 2006 |   |        | 2005 | 
|Income from continuing operations before provision for income taxes |  | $    | 80,341 |   |      | $ | 70,094 |      |  | $ | 56,154 |  
|                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Tax provision at the 35% statutory rate                             |  |      | 28,119 |   |      |   | 24,533 |      |  |   | 19,654 |  
|                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Increase (decrease) in taxes:                                       |  |      |        |   |      |   |        |      |  |   |        |  
|State income tax, net of Federal benefit                            |  |      | 2,135  |   |      |   | 1,913  |      |  |   | 1,241  |  
|Meals and entertainment                                             |  |      | 546    |   |      |   | 573    |      |  |   | 432    |  
|State net operating loss impairment                                 |  |      |       |   |      |   |       |      |  |   | 130    |  
|Officer life insurance                                              |  |      | (812   | ) |      |   | (1,566 | )    |  |   | (384   | )
|Reversal of valuation allowance and IRS tax settlement              |  |      |       |   |      |   | (312   | )    |  |   | (5,133 | )
|Other, net                                                          |  |      | (128   | ) |      |   | 696    |      |  |   | 830    |  
|                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Total increase (decrease) in taxes                                  |  |      | 1,741  |   |      |   | 1,304  |      |  |   | (2,884 | )
|                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Total income tax provision                                          |  | $    | 29,860 |   |      | $ | 25,837 |      |  | $ | 16,770 |  
|                                                                    |  |      |        |   |      |   |        |      |  |   |        |  
|Effective tax rate                                                  |  |      | 37.2   | % |      |   | 36.9   | %    |  |   | 29.9   | %
|                                                                    |  |      |        |   |      |   |        |      |  |   |        |  

At March 30, 2007 and March 31, 2006, the Company recorded an income tax payable of $912 and an income
tax receivable of $12,566, respectively, related to current income tax filings and Internal Revenue Service (IRS) audit settlements.

Deferred
income taxes for fiscal years 2007 and 2006 reflect the impact of temporary differences between the financial statement and tax basis of assets and liabilities. The tax effect of temporary differences, which create deferred tax assets and
liabilities, at March 30, 2007 and March 31, 2006 are detailed below:



|                                                        |  |      |         |   |      |   |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                        |  | 2007 |         |   | 2006 |  
|Deferred tax assets:                                    |  |      |         |   |      |   |         |  
|Deferred compensation                                   |  | $    | 20,192  |   |      | $ | 16,209  |  
|Net operating loss and tax credit carryforwards         |  |      | 2,989   |   |      |   | 8,899   |  
|Allowance for doubtful accounts and sales returns       |  |      | 6,176   |   |      |   | 6,286   |  
|Accrued incentive compensation                          |  |      | 1,942   |   |      |   |        |  
|Other accrued expenses                                  |  |      | 2,379   |   |      |   | 2,511   |  
|Inventory uniform cost capitalization                   |  |      | 2,732   |   |      |   | 2,036   |  
|Inventory obsolescence                                  |  |      | 1,817   |   |      |   | 1,185   |  
|Restructuring and other nonrecurring costs and expenses |  |      |        |   |      |   | 357     |  
|Charitable contribution carryover                       |  |      |        |   |      |   | 251     |  
|Other                                                   |  |      | 128     |   |      |   | 865     |  
|                                                        |  |      |         |   |      |   |         |  
|Gross deferred tax assets                               |  |      | 38,355  |   |      |   | 38,599  |  
|Valuation allowance                                     |  |      |        |   |      |   |        |  
|                                                        |  |      |         |   |      |   |         |  
|Deferred tax assets, net of valuation allowance         |  |      | 38,355  |   |      |   | 38,599  |  
|                                                        |  |      |         |   |      |   |         |  
|Deferred tax liabilities:                               |  |      |         |   |      |   |         |  
|Excess of tax depreciation over book depreciation       |  |      | (12,576 | ) |      |   | (12,456 | )
|Capitalized software development costs                  |  |      | (1,248  | ) |      |   | (6,222  | )
|Interest on convertible debt instrument                 |  |      | (9,402  | ) |      |   | (6,178  | )
|Excess of tax amortization over book amortization       |  |      | (3,374  | ) |      |   | (1,554  | )
|Other                                                   |  |      | (814    | ) |      |   | (1,599  | )
|                                                        |  |      |         |   |      |   |         |  
|Gross deferred tax liabilities                          |  |      | (27,414 | ) |      |   | (28,009 | )
|                                                        |  |      |         |   |      |   |         |  
|Deferred tax assets, net                                |  | $    | 10,941  |   |      | $ | 10,590  |  
|                                                        |  |      |         |   |      |   |         |  



F-29



---

##### Table of Contents

The deferred tax accounts at March 30, 2007 and March 31, 2006 include current deferred income tax assets of
$8,776 and $12,959, respectively; non-current deferred income tax assets of $2,165 and $0, respectively, included in other assets; and non-current deferred income tax liabilities of $0 and $2,369, respectively, included in other noncurrent
liabilities. Management believes that the deferred tax assets as of March 30, 2007 will be realizable to offset the projected future taxable income.

At March 30, 2007 the Company has state net operating loss (NOL) carryforwards for income tax purposes of approximately $7,391 (pre-tax), which expire from 2008 to 2023. Management has concluded that it is more likely than not
that the tax benefits related to the net operating losses will be realized and hence no valuation allowance has been provided.

The Company is subject to
periodic review by Federal, state, and local tax authorities in the ordinary course of business. During fiscal year 2002, the IRS notified the Company that the income tax returns for the fiscal years ended March 31, 2000 and March 30, 2001
would be examined. During the three months ended December 31, 2003, fieldwork was completed and the Company received the IRSs report of findings (the IRS Report). The Company filed a formal protest to appeal certain findings
with the Appeals Office of the IRS, which primarily related to timing of tax deductions. In conjunction with filing the protest, the income tax return for the fiscal year 2002 was amended to report a worthless stock deduction for the treatment of
the sale of the International Business (the Refund Claim).

The Refund Claim related to the income tax treatment of the sale of the
International Business during fiscal 2002, which was originally reported as a capital loss carryforward. The Refund Claim reflected a reclassification of the capital loss to an ordinary loss. At the time of sale, management believed it was more
likely than not that the Company would be unable to use the capital loss before its expiration in fiscal year 2007 and, accordingly, a valuation allowance was recorded. Subsequent to filing the income tax return for fiscal year 2002, Tax Court
rulings were issued that suggested the Company could change the capital loss deduction to an ordinary loss deduction. Therefore, the Company filed the Refund Claim with the IRS during the three months ended December 31, 2003. During the three
months ended December 31, 2004, the Company and the Appeals Office of the IRS reached a settlement. This settlement, which was subject to final review and approval by the Congressional Joint Committee on Taxation (Joint Committee),
resulted in a reduction to the provision for income taxes during the fiscal year ended April 1, 2005 of approximately $5,558 (including a state income tax benefit of $425). Approximately $5,071 of this amount represented the reversal of the
valuation allowance. In October 2005, the Company received written notification that the Joint Committee has found no exception to the settlement agreement reached with the Appeals Office of the IRS. The Companys results of operations
during fiscal year 2006 were not materially impacted as a result of the written notification from the Joint Committee.

During the three months ended
December 31, 2004, the IRS completed fieldwork on the audit of the Federal income tax returns for the fiscal years ended March 29, 2002 and March 28, 2003. The Company appealed certain findings, which primarily related to timing of
tax deductions, with the Appeals Office of the IRS. During the three months ended March 30, 2007, the Company and the Appeals Office of the IRS reached a settlement. The resolution of these audits resulted in the IRS issuing the Company a net
refund of $1,863 of overpayment credits which was used to reduce the amount of cash required to satisfy fiscal year 2007 estimated tax payment liabilities.



|12. | SHAREHOLDERS EQUITY
|--- | --------------------

Stock Repurchase Programs

On June 8, 2004, the Companys Board of Directors approved a stock repurchase program authorizing the Company, depending upon market
conditions and other factors, to repurchase up to a maximum of 5% of its



F-30



---

##### Table of Contents

common stock, or approximately 3.2 million common shares, in the open market, in privately negotiated transactions, or otherwise. On December 6,
2006, the Companys Board of Directors amended the stock repurchase plan by approving the repurchase of an additional 5%, or approximately 3.4 million common shares, in the open market, in privately negotiated transactions, or otherwise.
The following table presents repurchase activity during fiscal years 2007, 2006 and 2005, as well as remaining shares under the stock repurchase program:



|                                                            |  |                  |  
|----------------------------------------------------------- |  | ---------------- | -
|(in thousands)                                              |  | Number of Shares |  
|Shares approved for repurchaseJune 8, 2004                 |  | 3,248            |  
|Shares approved for repurchaseDecember 6, 2006             |  | 3,393            |  
|                                                            |  |                  |  
|Total shares approved                                       |  | 6,641            |  
|                                                            | 
|Shares Repurchased:                                         |  |                  |  
|Fiscal Year 2005                                            |  | (1,001           | )
|Fiscal Year 2006                                            |  | (14              | )
|Fiscal Year 2007                                            |  | (2,127           | )
|                                                            |  |                  |  
|Remaining shares available for repurchase at March 30, 2007 |  | 3,499            |  
|                                                            |  |                  |  

During fiscal year 2005, the Company repurchased approximately 1.0 million shares of common stock under
this program at an average price of $9.91 per common share for approximately $9,918. During fiscal year 2007, the Company repurchased approximately 2.1 million shares of common stock under this program at an average price of $20.17 per
common share for approximately $42,899.

Equity Incentive Plans

The Company has equity incentive plans for the benefit of certain officers, directors, and employees. The Compensation Committee of the Board of Directors has discretion to make grants under these plans in the form of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted stock, performance units, dividend equivalents, other stock-based awards, or other rights or interests relating to common stock or cash.

On June 7, 2006, the Board of Directors approved the PSS World Medical, Inc. 2006 Incentive Plan (the 2006 Plan), a stock incentive plan under
which equity may be granted to the Companys officers, directors, and employees. The 2006 Plan became effective as of August 24, 2006, the date on which shareholders approved the plan. The 2006 Plan replaced the
1999 Long-Term Incentive Plan and the 1999 Broad-Based Employee Stock Plan (collectively, the Prior Plans). Grants under the 2006 Plan may be made in the form of incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, restricted or deferred stock units, performance awards, dividend equivalents, performance-based cash awards, and other stock-based awards. Subject to adjustment as provided in the plan, the aggregate number of
shares of common stock reserved and available for issuance pursuant to awards granted under the 2006 Plan is approximately 2,176 as of March 30, 2007.

In addition to the 2006 Plan, the Company maintains the 2004 Non-Employee Directors Compensation Plan (the 2004 Directors Plan), which permits the grant of restricted stock to the Companys non-employee
directors. Subject to adjustment as provided in the plan, the aggregate number of shares of common stock reserved and available for issuance pursuant to awards granted under the 2004 Directors Plan is approximately 348 as of March 30,
2007. It is the Companys policy to issue shares of common stock upon exercise of stock options or the grant of restricted stock from those shares reserved for issuance under the stock incentive plans.

The Company also has the following stock incentive plans under which new awards are no longer granted: 1999 Long-Term Incentive Plan, 1994 Long-Term Stock
Plan, Amended and Restated Directors Stock Plan,



F-31



---

##### Table of Contents

1997 Gulf South Medical Supply Plan, Amended and Restated 1994 Long-Term Incentive Plan, 1992 Gulf South Medical Supply Plan, and
1999 Broad-Based Employee Stock Plan. Awards outstanding under these plans may still be exercised in accordance with their terms.

Prior to fiscal
year 2005, the Company primarily awarded stock options with an original term of 5 to 10 years under these equity incentive plans. On June 7, 2004, the Compensation Committee of the Board of Directors approved an amendment to all outstanding
stock options granted to employees. This amendment accelerated the vesting of all unvested stock options outstanding as of April 1, 2005, which was prior to the effective date of SFAS 123(R). As such, all outstanding options under the
plans became exerciseable. Since the acceleration, there have been no new stock option grants, as the Company primarily uses restricted stock for equity compensation.

Outstanding stock-based awards granted under equity incentive plans are as follows:



|                                     |  |                |  |                |  |              
|------------------------------------ |  | -------------- |  | -------------- |  | -------------
|(in thousands)                       |  | March 30, 2007 |  | March 31, 2006 |  | April 1, 2005
|Stock options(a)                     |  | 2,366          |  | 3,985          |  | 6,666        
|Restricted stock(b)                  |  | 405            |  | 286            |  | 208          
|Deferred stock units(a)              |  | 9              |  | 6              |  |             
|                                     |  |                |  |                |  |              
|Total outstanding stock-based awards |  | 2,780          |  | 4,277          |  | 6,874        
|                                     |  |                |  |                |  |              



|(a) | Amounts are excluded from shares of common stock issued and outstanding.
|--- | ------------------------------------------------------------------------

|(b) | Amounts as of March 30, 2007 are included in share of common stock issued and outstanding on the face of the balance sheet, but are not considered outstanding for accounting
purposes under SFAS 123(R) until restrictions lapse.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123
(Revised 2004), Share-Based Payment, (SFAS 123(R)) using the modified prospective transition method, and therefore, has not restated results for prior periods. SFAS 123(R) requires companies to recognize the cost of
employee services received in exchange for awards of equity instruments in the financial statements based on the grant date fair value of those awards. Previously, SFAS No. 123, Accounting for Stock-Based Compensation, encouraged, but
did not require, that stock-based compensation be recognized as an expense in companies financial statements. Prior to the adoption of SFAS 123(R), the Company elected to account for stock-based awards using the intrinsic-value
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The intrinsic value method of accounting resulted in compensation expense to the extent option exercise
prices were set below the current market price of the underlying stock on the date of grant. Compensation expense was not previously recognized in net income, as all stock options granted had an exercise price equal to the market value of the
underlying stock on the date of grant.

There was no impact to the Companys statements of operations for outstanding stock options on April 1,
2006 as a result of adopting SFAS 123(R) because on June 7, 2004, the Compensation Committee of the Board of Directors approved an amendment to all outstanding stock options granted to employees. This amendment accelerated the vesting of
all unvested stock options outstanding as of April 1, 2005, which was prior to the effective date of SFAS 123(R). The Company took this action to reduce compensation expense in future periods in light of SFAS 123(R). Under
SFAS 123(R), the Company estimated that a compensation charge of approximately $2,833, net of tax, would have been recorded in future periods if the vesting of the stock options were not accelerated. As a result of the acceleration, the Company
recognized contingent compensation expense equal to the difference between the fair market value of the common stock on the modification date and the option exercise price for the estimated number of options that, absent the acceleration, would have
expired unexercisable as a result of the termination of the holders employment prior to the original vesting dates of the options. As of March 30, 2007, the maximum stock-based compensation expense would be approximately $739 if all
holders benefited from this amendment with respect to outstanding options. Since June 7, 2004, the date the options were modified, the Company has estimated and recognized compensation expense of approximately $201 based on its historical
option forfeiture rate. This liability may be adjusted in future periods based on actual experience and changes in management assumptions.



F-32



---

##### Table of Contents

Upon issuance of restricted stock prior to the adoption of SFAS 123(R), unearned compensation was charged to
shareholders equity for the market value of the restricted stock, with stock-based compensation expense recognized on a straight-line basis over the awards vesting period ranging from one to five years. To the extent restricted stock was
forfeited prior to vesting, the previously recognized expense was reversed as a reduction to stock-based compensation expense on the forfeiture date. However, upon adoption of SFAS 123(R), compensation expense is recognized for all equity-based
awards net of estimated forfeitures over the awards vesting period. SFAS 123(R) requires forfeitures to be estimated at the time of grant and adjusted, if necessary in subsequent periods if actual forfeitures differ from those estimates.
When estimating forfeitures, the Company considers voluntary termination behaviors as well as trends of actual equity based awards forfeited. The Company recorded a reduction of compensation expense of approximately $197 during the fiscal year ended
March 30, 2007 to comply with the forfeiture provisions of SFAS 123(R).

Prior to the adoption of SFAS 123(R), the Company presented the
excess tax benefit of stock option exercises as operating cash flows. Upon adoption of SFAS 123(R), excess tax benefits resulting from tax deductions in excess of compensation cost recognized for those options are classified as cash flows from
financing activities. Although total cash flows are not impacted by the adoption of SFAS 123(R) and remain unchanged from what would have been reported under prior accounting standards, cash flows from operating activities were reduced by
$5,599 and cash flows from financing activities were increased by $5,599 during the fiscal year ended March 30, 2007.

Stock Option Awards

The following table summarizes the number of common shares to be issued upon exercise of outstanding options and the number of common shares remaining
available for future issuance under the existing stock incentive plans at March 30, 2007:



|                                                       |  |                                                                     |  |                                                           
|------------------------------------------------------ |  | ------------------------------------------------------------------- |  | ----------------------------------------------------------
|(in thousands)                                         |  | Number of securitiesto be issued uponexercise ofoutstanding options |  | Number of securitiesremaining availablefor future issuance
|Equity compensation plans approved by shareholders:    |  |                                                                     |  |                                                           
|1999 Long-Term Incentive Plan(a)                       |  | 1,284                                                               |  |                                                          
|1994 Long-Term Stock Plan(a)                           |  | 386                                                                 |  |                                                          
|Amended and Restated Directors Stock Plan(a)          |  | 264                                                                 |  |                                                          
|1997 Gulf South Medical Supply Plan(a)                 |  | 106                                                                 |  |                                                          
|PSS World Medical, Inc. 2006 Incentive Plan(b)         |  |                                                                    |  | 2,176                                                     
|2004 Non-Employee Directors Compensation Plan(c)       |  |                                                                    |  | 348                                                       
|                                                       |  |                                                                     |  |                                                           
|                                                       |  | 2,040                                                               |  | 2,524                                                     
|Equity compensation plan not approved by shareholders: |  |                                                                     |  |                                                           
|1999 Broad-Based Employee Stock Plan(a)                |  | 326                                                                 |  |                                                          
|                                                       |  |                                                                     |  |                                                           
|Total                                                  |  | 2,366                                                               |  | 2,524                                                     
|                                                       |  |                                                                     |  |                                                           



|(a) | These plans are terminated; however, options remain outstanding at March 30, 2007 which are exercisable.
|--- | --------------------------------------------------------------------------------------------------------

|(b) | This plan superceded the 1999 Long-Term Incentive Plan and the 1999 Broad-Based Employee Stock Plan and was approved by shareholders on August 24, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | This plan superceded the Amended and Restated Directors Stock Plan and was approved by shareholders during fiscal year 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------



F-33



---

##### Table of Contents

The following table summarizes the stock option activity during the period from April 2, 2004 to March 30,
2007:



|                           |  |        |   |  |                                 |       |                                |     |                         |   |       
|-------------------------- |  | ------ | - |  | ------------------------------- | ----- | ------------------------------ | --- | ----------------------- | - | ------
|                           |  | Shares |   |  | Weighted Average Exercise Price |       | WeightedAverageContractualTerm |     | AggregateIntrinsicValue
|Balance, April 2, 2004     |  | 7,690  |   |  | $                               | 9.46  |                                |     |                         |   |       
|Granted                    |  | 35     |   |  | $                               | 10.72 |                                |     |                         |   |       
|Exercised                  |  | (937   | ) |  | $                               | 5.86  |                                |     |                         |   |       
|Forfeited                  |  | (122   | ) |  | $                               | 9.69  |                                |     |                         |   |       
|                           |  |        |   |  |                                 |       |                                |     |                         |   |       
|Balance, April 1, 2005     |  | 6,666  |   |  | $                               | 9.97  |                                | 3.6 |                         | $ | 15,264
|Granted                    |  |       |   |  |                                 |      |                                |     |                         |   |       
|Exercised                  |  | (2,373 | ) |  | $                               | 8.55  |                                |     |                         |   |       
|Forfeited                  |  | (308   | ) |  | $                               | 15.07 |                                |     |                         |   |       
|                           |  |        |   |  |                                 |       |                                |     |                         |   |       
|Balance, March 31, 2006    |  | 3,985  |   |  | $                               | 10.42 |                                | 3.1 |                         | $ | 36,100
|Granted                    |  |       |   |  |                                 |      |                                |     |                         |   |       
|Exercised                  |  | (1,598 | ) |  | $                               | 10.62 |                                |     |                         |   |       
|Forfeited                  |  | (21    | ) |  | $                               | 8.90  |                                |     |                         |   |       
|                           |  |        |   |  |                                 |       |                                |     |                         |   |       
|Balance, March 30, 2007(a) |  | 2,366  |   |  | $                               | 10.30 |                                | 2.8 |                         | $ | 25,962
|                           |  |        |   |  |                                 |       |                                |     |                         |   |       



|(a) | This balance represents stock options that are both outstanding and exercisable since the vesting of unvested stock
options outstanding as of April 1, 2005 was accelerated on June 7, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The aggregate intrinsic value in the table above
represents the total pretax intrinsic value (the difference between the Companys closing stock price of $21.14 on the last trading day of the Companys fiscal year end and the exercise price, multiplied by the number of outstanding stock
options) that would have been received by the option holders had all option holders exercised their options on March 30, 2007. This amount changes over time based on changes in the fair market value of the Companys stock.

The total intrinsic value of stock options exercised during fiscal year March 30, 2007 and March 31, 2006 was $14,619 and $16,936, respectively. Cash received
from stock option exercises during the fiscal year ended March 30, 2007 and March 31, 2006 was approximately $16,963 and $20,302, respectively. The actual tax benefit realized for the tax deductions from stock option exercises totaled
approximately $5,266 and $6,289 during the fiscal year ended March 30, 2007 and March 31, 2006, respectively.



F-34



---

##### Table of Contents

Restricted Stock Awards

The following table summarizes the restricted stock activity during the period from April 2, 2004 to March 30, 2007:



|                        |  |        |   |  |                                       |      
|----------------------- |  | ------ | - |  | ------------------------------------- | -----
|                        |  | Shares |   |  | Weighted Average Grant DateFair
Value
|Balance, April 2, 2004  |  | 24     |   |  | $                                     | 7.35 
|Granted                 |  | 197    |   |  | $                                     | 10.74
|Vested                  |  | (8     | ) |  | $                                     | 6.52 
|Forfeited               |  | (5     | ) |  | $                                     | 10.72
|                        |  |        |   |  |                                       |      
|Balance, April 1, 2005  |  | 208    |   |  | $                                     | 10.50
|Granted                 |  | 155    |   |  | $                                     | 14.55
|Vested                  |  | (64    | ) |  | $                                     | 10.59
|Forfeited               |  | (13    | ) |  | $                                     | 11.88
|                        |  |        |   |  |                                       |      
|Balance, March 31, 2006 |  | 286    |   |  | $                                     | 12.62
|Granted                 |  | 237    |   |  | $                                     | 19.73
|Vested                  |  | (103   | ) |  | $                                     | 11.73
|Forfeited               |  | (15    | ) |  | $                                     | 14.01
|                        |  |        |   |  |                                       |      
|Balance, March 30, 2007 |  | 405    |   |  | $                                     | 16.96
|                        |  |        |   |  |                                       |      

Total compensation expense for restricted stock grants during the fiscal years ended March 30, 2007,
March 31, 2006, and April 1, 2005, was $1,744, $1,161, and $507, respectively, with related income tax benefits of $661, $440 and $192, respectively. The total fair value of shares vested during the fiscal year ended March 30, 2007
was $2,023.

Scheduled vesting for outstanding restricted stock is as follows:



|                    |  |                
|------------------- |  | ---------------
|                    |  | Number ofShares
|Fiscal Year:        |  |                
|2008                |  | 146            
|2009                |  | 141            
|2010                |  | 61             
|2011                |  | 57             
|2012 and thereafter |  |               
|                    |  |                
|Total               |  | 405            
|                    |  |                

The estimated compensation expense for the next five fiscal years for all outstanding restricted stock grants is
expected to be recognized over a weighted average period of 2.8 years and is as follows:



|             |  |   |      
|------------ |  | - | -----
|Fiscal Year: |  |   |      
|2008         |  | $ | 1,859
|2009         |  |   | 1,276
|2010         |  |   | 990  
|2011         |  |   | 429  
|2012         |  |   |     
|             |  |   |      
|Total        |  | $ | 4,554
|             |  |   |      



F-35



---

##### Table of Contents

|13. | EMPLOYEE BENEFIT PLANS
|--- | ----------------------

PSS World Medical, Inc. Savings Plan

The PSS World Medical, Inc. Savings Plan (the Plan) provides an opportunity for tax-deferred savings, enabling eligible employees to
invest in a variety of mutual funds or to acquire an interest in the common stock of the Company. Employees become eligible to participate in the Plan upon the completion of 30 days of service. Employees may elect to defer up to 85% but not
less than 1% of their compensation to the Plan, subject to certain limitations imposed by the Internal Revenue Code. The Company matches an amount equal to the lesser of (i) 50% of the employee deferrals up to 6% of their compensation or
(ii) $1,200. This match can be invested in various mutual funds or the common stock of the Company at the discretion of the participant and vests over a six-year period. During the fiscal year ended March 30, 2007, March 31, 2006, and
April 1, 2005, the Company contributed approximately $1,626, $1,516, and $1,377, respectively, to the Plan under this matching arrangement. The Plan owned approximately 1.8 million, 2.0 million, and 2.3 million shares of the
Companys common stock at March 30, 2007, March 31, 2006, and April 1, 2005, respectively.

During fiscal year 2007, the plan was
amended to formally comply with IRS regulations released in December 2004. The amendment modified existing provisions of the plan as follows: i) added provisions for receiving a hardship withdrawal, which included the payment of burial or funeral
expenses and the repair of damage to a principal residence and ii) placed a restriction on certain contributions relating to the Actual Deferral Percentage (ADP) test. These amendments were effective for the plan year beginning April 1, 2006.

Employee Stock Purchase Plan

The Company also has an
employee stock purchase plan available to all employees with at least six months of service. The plan allows eligible employees to purchase Company stock acquired in the open market through after-tax payroll deductions.

Deferred Compensation Program

The Company offers a deferred
compensation program (the Program) to qualified executives, management, and sales representatives. The Program consists of a deferred compensation plan and also previously consisted of a stock option program. Under the deferred
compensation plan, participants can elect to defer up to 100% of their total compensation; however, the Company matching contribution program only applies to deferrals of up to 10% or 15% of the participants compensation. The Companys
matching contribution ranges from 10% to 125% of the participants deferral. Participant contributions are always 100% vested. The Companys matching contribution vests in 20% increments beginning after participating in the plan for 4
years and becomes fully vested after participating in the plan for 8 years. The stock option program was amended on July 1, 2004 to reflect that stock options would not be granted after July 1, 2004, but the program will otherwise remain
in effect to govern the terms of any stock options granted prior to July 1, 2004. As discussed in Note 2, Summary of Significant Accounting Policies, the vesting of all unvested stock options outstanding as of April 1, 2005 was
accelerated.

At age 60, or at age 55 with ten years of participation in the Program, the retirement benefit is distributed to participants in five equal
annual installments, or in a lump sum payment if the vested account balance is less than $25. The retirement benefit is distributed in a lump sum upon death and over five years upon disability. In the event of termination of employment, 100% of the
participants vested balance will be distributed in five equal installments or in a lump-sum payment if the vested account balance is less than $25. In the event of a change in control, if the successor terminates the plan, all participants
become 100% vested in their accounts, including the Companys matching contributions, discretionary Company contributions, and allocated return thereon. The Company has purchased corporate-owned, life insurance policies for certain participants
in the Program to fund the future payments related to the deferred compensation liability.



F-36



---

##### Table of Contents

During fiscal years 2007, 2006, and 2005, the Company matched approximately $1,728, $2,417, and $1,681, respectively, of
employee deferrals. The cash surrender value of the corporate-owned, life insurance policies, which is recorded in other long-term assets in the accompanying consolidated balance sheets, was approximately $54,333 and $42,493, at March 30, 2007
and March 31, 2006, respectively. In addition, the deferred compensation liability, which is recorded in other non-current liabilities in the accompanying consolidated balance sheets, was approximately $52,762 and $42,185 at March 30, 2007
and March 31, 2006, respectively.

Directors Deferred Compensation Plan

Effective January 1, 2004, the Company offers a deferred compensation plan to non-employee members of the Board of Directors. Participants may elect to defer up to 100% receipt of their annual retainer, meeting
fees, other directors fees, and other cash compensation and invest their deferrals in a variety of investment options. A participants deferred compensation account balance will be distributed, at the election of the participant, in a
single lump sum payment following the participants termination of service on the board of directors, or in up to ten annual installments. The deferred compensation account balance will be distributed in a lump sum payment upon the death of the
participant, or in the event of a change in control of the Company.

Long-Term Executive Cash-Based Incentive Plans

During fiscal year 2003, the Compensation Committee of the Board of Directors approved a cash-based performance award program under the 1999 Long-Term Incentive Plan,
known as the Shareholder Value Plan (SVP). The SVP provides incentive to executives to enhance shareholder value through the achievement of earnings per share goals outlined in the Companys three-year strategic plan. The first
performance period under the SVP was the 30-month period from October 1, 2002 to March 31, 2005. The pay-out for the first performance period was approximately $8,451, which was accrued as of April 1, 2005 and paid in cash during the
first quarter of fiscal year 2006.

During fiscal year 2006, the Compensation Committee approved the 2006 Shareholder Value Plan
(2006 SVP). The performance period under the 2006 SVP is the 36-month period from April 2, 2005 to March 28, 2008. Target awards under the 2006 SVP are calculated as three times the participants base salary
times an award factor ranging from 15% to 55% in effect at the inception of the performance period for all officer levels and performance goals are based on planned cumulative earnings per share. Participants have the opportunity to earn from 50% to
150% of their target award, based on planned cumulative earnings per share. The planned cumulative earnings per share measured for performance under the plan includes the after-tax effect of the compensation costs related to the 2006 SVP. The
Company accrued approximately $5,000 of compensation cost as of March 30, 2007, of which $2,000 was accrued as of March 31, 2006. The Company expects the target payout to be approximately $8,100.



|14. | OPERATING LEASE COMMITMENTS
|--- | ---------------------------

The Company leases various facilities
and equipment under operating leases. Certain lease commitments provide that the Company pays taxes, insurance, and maintenance expenses related to the leased assets. Many of the Companys leases contain predetermined fixed escalations of the
minimum rentals during the initial term. For these leases, the Company has recognized the related rental expense on a straight-line basis and has recorded the difference between the expense charged to income and amounts payable under the leases as
other non-current liabilities in the accompanying balance sheets.



F-37



---

##### Table of Contents

Rent expense, including common area maintenance, for operating leases approximated $24,499, $22,559, and $21,034, for
fiscal years 2007, 2006, and 2005, respectively. As of March 30, 2007, future minimum payments, including estimated common area maintenance, by fiscal year and in the aggregate, required under non-cancelable operating leases are as
follows:



|             |  |   |       
|------------ |  | - | ------
|Fiscal Year: |  |   |       
|2008         |  | $ | 25,433
|2009         |  |   | 20,979
|2010         |  |   | 15,914
|2011         |  |   | 11,909
|2012         |  |   | 9,184 
|Thereafter   |  |   | 9,316 
|             |  |   |       
|Total        |  | $ | 92,735
|             |  |   |       



|15. | SEGMENT INFORMATION
|--- | -------------------

The Companys reportable segments are
strategic businesses that offer different products to different segments of the healthcare industry, and are the basis which management regularly evaluates the Company. These segments are managed separately because of different customers and
products. See Note 1, Nature of Operations, for descriptive information about the Companys operating segments. The Company primarily evaluates the operating performance of its segments based on net sales and income from operations.
Corporate Shared Services allocates amounts to the two operating segments for shared operating costs and interest expense. The allocation of shared operating costs is generally proportional to the revenues of each operating segment. Interest expense
is allocated based on (i) an internally calculated carrying value of historical capital used to acquire or develop the operating segments operations and (ii) budgeted operating cash flow. The following tables present financial
information about the Companys business segments:



|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                        |  | 2007 |           |   | 2006 |   |           | 2005 | 
|NET SALES:                              |  |      |           |   |      |   |           |      |  |   |           |  
|Physician Business                      |  | $    | 1,227,520 |   |      | $ | 1,086,820 |      |  | $ | 959,017   |  
|Elder Care Business                     |  |      | 514,119   |   |      |   | 532,597   |      |  |   | 514,752   |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total net sales                         |  | $    | 1,741,639 |   |      | $ | 1,619,417 |      |  | $ | 1,473,769 |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|NET SALES BY PRODUCT TYPE:              |  |      |           |   |      |   |           |      |  |   |           |  
|Consumable products                     |  | $    | 1,247,541 |   |      | $ | 1,196,190 |      |  | $ | 1,116,472 |  
|Pharmaceutical products                 |  |      | 302,892   |   |      |   | 231,119   |      |  |   | 183,710   |  
|Equipment                               |  |      | 165,659   |   |      |   | 170,961   |      |  |   | 156,687   |  
|Billing services                        |  |      | 12,215    |   |      |   | 10,240    |      |  |   | 8,716     |  
|Customer freight charges                |  |      | 8,714     |   |      |   | 7,726     |      |  |   | 6,019     |  
|Vendor incentive income                 |  |      | 4,618     |   |      |   | 3,181     |      |  |   | 2,165     |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total net sales                         |  | $    | 1,741,639 |   |      | $ | 1,619,417 |      |  | $ | 1,473,769 |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|INCOME FROM OPERATIONS:                 |  |      |           |   |      |   |           |      |  |   |           |  
|Physician Business                      |  | $    | 84,112    |   |      | $ | 75,394    |      |  | $ | 61,971    |  
|Elder Care Business                     |  |      | 21,640    |   |      |   | 15,891    |      |  |   | 23,572    |  
|Corporate Shared Services               |  |      | (23,265   | ) |      |   | (18,876   | )    |  |   | (23,984   | )
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total income from operations            |  | $    | 82,487    |   |      | $ | 72,409    |      |  | $ | 61,559    |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|DEPRECIATION:                           |  |      |           |   |      |   |           |      |  |   |           |  
|Physician Business                      |  | $    | 7,847     |   |      | $ | 7,458     |      |  | $ | 9,139     |  
|Elder Care Business                     |  |      | 4,036     |   |      |   | 2,446     |      |  |   | 1,639     |  
|Corporate Shared Services               |  |      | 4,867     |   |      |   | 4,028     |      |  |   | 3,463     |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total depreciation                      |  | $    | 16,750    |   |      | $ | 13,932    |      |  | $ | 14,241    |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|AMORTIZATION OF INTANGIBLE ASSETS:      |  |      |           |   |      |   |           |      |  |   |           |  
|Physician Business                      |  | $    | 3,079     |   |      | $ | 2,838     |      |  | $ | 1,642     |  
|Elder Care Business                     |  |      | 2,712     |   |      |   | 3,238     |      |  |   | 2,736     |  
|Corporate Shared Services               |  |      | 117       |   |      |   | 222       |      |  |   | 159       |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  
|Total amortization of intangible assets |  | $    | 5,908     |   |      | $ | 6,298     |      |  | $ | 4,537     |  
|                                        |  |      |           |   |      |   |           |      |  |   |           |  



F-38



---

##### Table of Contents

|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                           |  | 2007 |         |   | 2006 |   |         | 2005 | 
|PROVISIONS FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:     |  |      |         |   |      |   |         |      |  |   |         |  
|Physician Business                                         |  | $    | 1,382   |   |      | $ | 1,535   |      |  | $ | 1,605   |  
|Elder Care Business                                        |  |      | 3,151   |   |      |   | 4,107   |      |  |   | 3,476   |  
|Corporate Shared Services                                  |  |      | 0       |   |      |   | (3,233  | )    |  |   | 187     |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Total provision for doubtful accounts and notes receivable |  | $    | 4,533   |   |      | $ | 2,409   |      |  | $ | 5,268   |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|INTEREST EXPENSE:                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Physician Business                                         |  | $    | 4,101   |   |      | $ | 4,130   |      |  | $ | 3,328   |  
|Elder Care Business                                        |  |      | 7,840   |   |      |   | 7,445   |      |  |   | 7,000   |  
|Corporate Shared Services                                  |  |      | (6,595  | ) |      |   | (5,691  | )    |  |   | (3,472  | )
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Total interest expense                                     |  | $    | 5,346   |   |      | $ | 5,884   |      |  | $ | 6,856   |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|PROVISION FOR INCOME TAXES:                                |  |      |         |   |      |   |         |      |  |   |         |  
|Physician Business                                         |  | $    | 30,885  |   |      | $ | 27,076  |      |  | $ | 23,393  |  
|Elder Care Business                                        |  |      | 5,274   |   |      |   | 3,161   |      |  |   | 6,607   |  
|Corporate Shared Services                                  |  |      | (6,299  | ) |      |   | (4,400  | )    |  |   | (13,230 | )
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Total provision for income taxes                           |  | $    | 29,860  |   |      | $ | 25,837  |      |  | $ | 16,770  |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|CAPITAL EXPENDITURES:                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Physician Business                                         |  | $    | 4,531   |   |      | $ | 1,954   |      |  | $ | 2,687   |  
|Elder Care Business                                        |  |      | 447     |   |      |   | 1,499   |      |  |   | 4,336   |  
|Corporate Shared Services                                  |  |      | 12,288  |   |      |   | 13,554  |      |  |   | 18,908  |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Total capital expenditures                                 |  | $    | 17,266  |   |      | $ | 17,007  |      |  | $ | 25,931  |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|                                                           |  |      |        
|                                                           |  | 2007 |         |   | 2006 |   |         |      | 
|ASSETS:                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Physician Business                                         |  | $    | 413,646 |   |      | $ | 389,206 |      |  |   |         |  
|Elder Care Business                                        |  |      | 266,472 |   |      |   | 266,006 |      |  |   |         |  
|Corporate Shared Services                                  |  |      | 94,857  |   |      |   | 81,763  |      |  |   |         |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  
|Total assets                                               |  | $    | 774,975 |   |      | $ | 736,975 |      |  |   |         |  
|                                                           |  |      |         |   |      |   |         |      |  |   |         |  



|16. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

Settlement of Litigation

In May 1998, the Company and certain of its current and former officers and directors were named as defendants in a securities class action
lawsuit entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-CV 502-J-32TEM. The lawsuit alleged that the defendants engaged in violations of Sections 14(a) and 20(a) of the Securities Exchange Act and SEC
Rule 14a-9. The allegations referenced a decline in the Companys stock price following an announcement by the Company in May 1998 regarding the Gulf South Medical Supply, Inc. merger. On September 9, 2005, the parties filed a Joint
Motion for Preliminary Approval of Class Action Settlement, which reflected the settlement reached by all the parties to the litigation for a cash payment of approximately $16,500, of which approximately $12,700 was recovered through existing
insurance policies. A hearing on the Joint Motion for Preliminary Approval of Class Action Settlement was held on October 7, 2005. The final fairness hearing was held on December 20, 2005. The Court entered the Final Judgment and Order of
Dismissal with Prejudice on December 20, 2005. During the three months ended December 30, 2005, the Company made payments totaling approximately $3,800 to cover the uninsured losses and professional fees relating to this matter. As a
result of these payments and the final fairness hearing, all obligations to the plaintiffs related to this litigation matter have been satisfied by the Company as of December 30, 2005. During fiscal year 2007, the Company obtained a favorable
settlement under separate litigation relating to this lawsuit resulting in a net gain of $1,778.



F-39



---

##### Table of Contents

Other Litigation Matters

The Company is party to various legal and administrative proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, the Company, after consultation with outside legal counsel,
believes that the outcome of such other proceedings or claims which are pending or known to be threatened will not have a material adverse effect on the Companys consolidated financial position, liquidity, or results of operations.

The Company has various insurance policies, including product liability insurance, covering risks and in amounts it considers adequate. In many cases in which the
Company has been sued in connection with products manufactured by others, the Company is provided indemnification by the manufacturer. There can be no assurance that the insurance coverage maintained by the Company is sufficient or will be available
in adequate amounts or at a reasonable cost, or that indemnification agreements will provide adequate protection for the Company.

Purchase Commitments

During February 2006, the Company entered into an agreement to purchase a minimum number of latex and vinyl gloves through January 31, 2008.
The pricing of the latex gloves may be periodically adjusted and is based on the price of raw latex as traded on the Malaysian Rubber Exchange. The pricing of the vinyl gloves may also be periodically adjusted and is based on the weighted price of
two raw materials, Poly vinyl chloride (PVC) and Dioctylphthalate (DOP), as published on www.icis.com. These purchase commitments are valued at approximately $10,420 at March 30, 2007 and are based on managements estimate of current
pricing.

During September 2006, the Company entered into an agreement to purchase a minimum number of chemistry systems through December 31, 2007.
This purchase commitment is valued at $1,875 at March 30, 2007, and is based on managements best estimate of current pricing.

Additionally,
during October 2006, the Company entered into an exclusive distributor agreement with another supplier to purchase a minimum number of chemistry analyzers through September 29, 2007. To maintain its primary exclusive distributor appointment,
the Company must notify the supplier of product mix changes for the following twelve-month period within 30 days of the agreement term. However, in no event shall such amount be less than 35 analyzers. As of March 31, 2007, this purchase
commitment was valued at approximately $4,085.

Commitments and Other Contingencies

The Company has employment agreements with certain executive officers which provide that in the event of their termination or resignation, under certain conditions, the Company may be required to pay severance to the
executive officers in amounts ranging from one-fourth to two times their base salary and target annual bonus. In the event that a termination or resignation follows or is in connection with a change in control, the Company may be required to pay
severance to the executive officers in amounts ranging from three-fourths to three times their base salary and target annual bonus. The Company may also be required to continue welfare benefit plan coverage for the executive officers following a
termination or resignation for a period ranging from three months to three years.

If the Physician Business or the Elder Care Business were to terminate a
contract with a vendor of its Select Medical Products brand (Select) for any reason, the Company may be required to purchase the remaining inventory of Select products from the vendor, provided that, in no event would
the Company be required to purchase quantities of such products which exceed the aggregate amount of such products ordered by the Company in a negotiated time period immediately preceding the date of termination. As of March 30, 2007, the
Company has not terminated a contract with a Select vendor which would require the Company to purchase the vendors remaining inventory.



F-40



---

##### Table of Contents

|17. | DISCONTINUED OPERATIONS
|--- | -----------------------

On September 26, 2002, the
Companys Board of Directors adopted a plan to dispose of the Imaging Business, reflecting a strategic decision by management to focus the Companys efforts on its Physician and Elder Care Businesses. Accordingly, the results of operations
of the Imaging Business and the loss on disposal of discontinued operations were classified as discontinued operations in accordance with SFAS 144. On November 18, 2002, the Company completed the sale of DI to Imaging
Acquisition Corporation (the Buyer), a wholly owned subsidiary of Platinum Equity, LLC, a private equity firm (Platinum) through a Stock Purchase Agreement. Under the Stock Purchase Agreement, the purchase price was $45,000
less (i) an adjustment for any change in net asset value from the initial net asset value target date and (ii) an adjustment for any change in the net cash from the initial net cash target date (collectively Purchase Price).

On March 14, 2003, the Company received a letter from the Buyer claiming a Purchase Price adjustment of $32,257. Pursuant to the terms of the Stock
Purchase Agreement, the matter was referred to an independent accounting firm of national reputation for arbitration. During the three months ended June 30, 2004, the arbitrator ruled in favor of the Buyer for a purchase price adjustment of
$1,821. As a result of the final ruling from the arbitrator, the Company paid approximately $4,279 of settlement costs to the Buyer during fiscal year 2005.

The following table details the loss on disposal of discontinued operations for fiscal years 2007, 2006, and 2005.



|                                                                            |  |                           |   |                |   |               |  |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------- | - | -------------- | - | ------------- |  | - | ------ | -
|                                                                            |  | For the Fiscal Year Ended |  
|                                                                            |  | March 30, 2007            |   | March 31, 2006 |   | April 1, 2005 | 
|Loss on disposal of discontinued operations before benefit for income taxes |  | $                         |  |                | $ |              |  | $ | (2,261 | )
|Benefit for income taxes                                                    |  |                           |  |                |   |              |  |   | 1,849  |  
|                                                                            |  |                           |   |                |   |               |  |   |        |  
|Loss on disposal of discontinued operations                                 |  | $                         |  |                | $ |              |  | $ | (412   | )
|                                                                            |  |                           |   |                |   |               |  |   |        |  

The pre-tax loss on disposal of discontinued operations for the fiscal year ended April 1, 2005 represented
(i) a true-up of managements estimated net asset adjustment to the actual net asset adjustment as indicated in the arbitrators final ruling of $1,821, (ii) interest of $458, and (iii) legal and professional fees of $471,
offset by a reversal of the remaining accrued loss on disposal of $489 in order to true-up managements estimated legal and professional fees based on actual payments made.



|18. | SUBSEQUENT EVENT
|--- | ----------------

On May 25, 2007, the Company signed a definitive
agreement to acquire the stock of Activus Healthcare Solutions, Inc. (Activus), a California based distributor of medical supplies and pharmaceuticals to office-based physicians and surgery centers. The final purchase price, subject to
certain adjustments, is estimated to be $12.6 million, plus the retirement of $2.6 million of debt. The acquisition is expected to close during the first quarter of fiscal year 2008 and will be accounted for using the purchase method of accounting
in accordance with SFAS No. 141, Business Combinations.



|19. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|--- | -------------------------------------------

The following tables
present summarized unaudited quarterly results of operations for fiscal years 2007 and 2006. The Company believes all necessary adjustments have been included in the amounts stated below to present fairly the following selected information when read
in conjunction with the consolidated financial statements of the Company. Future quarterly operating results may fluctuate depending on a number of factors, including the number of selling days in a quarter, the timing of business combinations, and
changes in customers



F-41



---

##### Table of Contents

buying patterns of supplies, equipment, and pharmaceutical products. Results of operations for any particular quarter are not necessarily indicative of
results of operations for a full year or any other quarter.

The quarterly results of operations during the three months ended December 29, 2006
fluctuated as a result of recognizing approximately $33,326 of influenza vaccine sales, offset by a write-down of $7,058 for excess influenza vaccine inventory (Refer to Item 7. Managements Discussion and Analysis, for a
further discussion).



|                           |  |                  |         |    |   |         |  |    |         |       |   |         |  |   |          
|-------------------------- |  | ---------------- | ------- | -- | - | ------- |  | -- | ------- | ----- | - | ------- |  | - | ---------
|                           |  | Fiscal Year 2007
|                           |  | Q1               |         | Q2 |   | Q3      |  | Q4 |         | Total
|Net sales(A)               |  | $                | 413,135 |    | $ | 427,059 |  | $  | 458,421 |       | $ | 443,024 |  | $ | 1,741,639
|Gross profit               |  |                  | 119,902 |    |   | 123,856 |  |    | 123,235 |       |   | 133,017 |  |   | 500,010  
|Net income                 |  |                  | 10,955  |    |   | 12,775  |  |    | 11,120  |       |   | 15,631  |  |   | 50,481   
|                           |  |                  |         |    |  
|Earnings per shareBasic   |  | $                | 0.16    |    | $ | 0.19    |  | $  | 0.17    |       | $ | 0.23    |  | $ | 0.75     
|Earnings per shareDiluted |  | $                | 0.16    |    | $ | 0.18    |  | $  | 0.16    |       | $ | 0.23    |  | $ | 0.73     
|                           | 
|                           |  | Fiscal Year 2006
|                           |  | Q1               |         | Q2 |   | Q3      |  | Q4 |         | Total
|Net sales                  |  | $                | 387,129 |    | $ | 385,819 |  | $  | 423,781 |       | $ | 422,688 |  | $ | 1,619,417
|Gross profit               |  |                  | 110,475 |    |   | 112,307 |  |    | 120,074 |       |   | 124,469 |  |   | 467,325  
|Net income                 |  | $                | 8,140   |    | $ | 10,785  |  | $  | 12,421  |       | $ | 12,911  |  | $ | 44,257   
|Earnings per shareBasic   |  | $                | 0.13    |    | $ | 0.16    |  | $  | 0.19    |       | $ | 0.19    |  | $ | 0.67     
|Earnings per shareDiluted |  | $                | 0.12    |    | $ | 0.16    |  | $  | 0.19    |       | $ | 0.19    |  | $ | 0.66     



|(A) | Quarterly net sales have been adjusted from previously reported amounts. During the fourth quarter of fiscal year 2007,
the Company properly reclassified certain transactions from cost of sales to net sales. Such adjustments were deemed immaterial on quarterly net sales, but have been retroactively restated in this schedule to improve comparability.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-42



---

##### Table of Contents

P
SS WORLD MEDICAL, INC. AND SUBSIDIARIES

SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED MARCH 30, 2007, MARCH 31, 2006, AND APRIL 1, 2005

(Dollars in Thousands)



|                                            |  |                                |        |                              |   |        |              |  |                          |       |  |   |       
|------------------------------------------- |  | ------------------------------ | ------ | ---------------------------- | - | ------ | ------------ |  | ------------------------ | ----- |  | - | ------
|Valuation Allowance for Accounts Receivable |  | Balance at Beginning of Period |        | Provision Charged to Expense |   |        | Write-offs   |  | Balance at End of Period
|Fiscal year ended April 1, 2005             |  | $                              | 10,020 |                              | $ | 5,081  |              |  | $                        | 5,496 |  | $ | 9,605 
|Fiscal year ended March 31, 2006            |  |                                | 9,605  |                              |   | 5,642  |              |  |                          | 4,749 |  |   | 10,498
|Fiscal year ended March 30, 2007            |  | $                              | 10,498 |                              | $ | 4,533  |              |  | $                        | 6,345 |  | $ | 8,686 
|                                            |  |                                |        |                             
|Valuation Allowance for Notes Receivable    |  | Balance at Beginning of Period |        | Provision Charged to Expense |   |        | Write-offs   |  | Balance at End of Period
|Fiscal year ended April 1, 2005             |  | $                              | 3,607  |                              | $ | 187    |              |  | $                        |      |  | $ | 3,794 
|Fiscal year ended March 31, 2006            |  |                                | 3,794  |                              |   | (3,233 | )            |  |                          | 561   |  |   |      
|Fiscal year ended March 30, 2007            |  | $                              |       |                              | $ |       |              |  | $                        |      |  | $ |      
|                                            |  |                                |        |                             
|Valuation Allowance for Income Taxes        |  | Balance at Beginning of Period |        | Provision Charged to Expense |   |        | Utilizations |  | Balance at End of Period
|Fiscal year ended April 1, 2005             |  | $                              | 5,552  |                              | $ | (5,214 | )            |  | $                        |      |  | $ | 338   
|Fiscal year ended March 31, 2006            |  |                                | 338    |                              |   | (338   | )            |  |                          |      |  |   |      
|Fiscal year ended March 30, 2007            |  | $                              |       |                              | $ |       |              |  | $                        |      |  | $ |      



F-43



---

##### Table of Contents

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

None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Disclosure Controls and Procedures

The Companys management, with the participation of the Companys Principal Executive Officer and Principal Financial Officer, has evaluated
the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e) and 240.15d-15(e)) as of the end of the period covered by this report (the Evaluation Date). Based on the
evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the evaluation date, the Companys disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (the Exchange Act) and are effective in ensuring that information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is accumulated and communicated to the Companys management, including the Companys Principal Executive Officer and Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

(a)  Managements Annual Report on Internal Control Over Financial Reporting

The Companys management is responsible for establishing and maintaining effective internal controls over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended.

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Companys internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Companys assets that could have a material effect on the Companys
financial statements.

Management, with the participation of the Companys principal executive and principal financial officers, assessed the
effectiveness of the Companys internal control over financial reporting as of March 30, 2007. This assessment was performed using the criteria established under the Internal Control-Integrated Framework established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

Internal control over financial reporting cannot provide absolute assurance of
achieving financial reporting objectives because of its inherent limitations, including the possibility of human error or circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can
provide only reasonable assurance with respect to financial statement preparation and reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



63



---

##### Table of Contents

Based on the assessment performed using the criteria established by COSO, management has concluded that the Company
maintained effective internal control over financial reporting as of March 30, 2007.

KPMG LLP, the independent registered public accounting firm that
audited the financial statements included in this Annual Report on Form 10-K for the fiscal year ended March 30, 2007, has issued an audit report on managements assessment of the Companys internal control over financial
reporting. Such report appears immediately below.

(b)  Attestation Report of the Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

PSS World Medical, Inc.:

We have audited management's assessment, included in the accompanying Managements Annual
Report on Internal Control over Financial Reporting, that PSS World Medical, Inc. and subsidiaries (the Company), maintained effective internal control over financial reporting as of March 30, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Companys management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, management's assessment that PSS World Medical, Inc. maintained effective internal control over
financial reporting as of March 30, 2007, is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).Also, in our opinion, PSS World Medical, Inc. maintained, in all material respects,



64



---

##### Table of Contents

effective internal control over financial reporting as of March 30, 2007, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PSS World Medical, Inc. and subsidiaries as of March 30, 2007 and March 31, 2006, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the years in the three-year period ended March 30, 2007, and our report dated May 25, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

May 25, 2007

Jacksonville, Florida

Certified Public Accountants

(c)  Changes in Internal Control Over Financial Reporting

There were no changes in the Companys internal control over financial reporting that occurred during the three months ended March 30, 2007 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.



65



---

##### Table of Contents

PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|-------- | ------------------------------------------------------

The
information called for by this Item 10 regarding the Companys directors and executive officers and the Companys corporate governance is incorporated herein by reference to the Company's definitive proxy statement, to be filed with
the SEC pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the Exchange Act), relating to the Companys fiscal year 2007 Annual Meeting of Shareholders under the
caption Directors and Executive OfficerandCommittees of the Board of Directors.

The Company has adopted a Code of
Ethics that applies to the Chief Executive Officer, Chief Financial Officer and Corporate Controller. The Company provides public access to its Code of Ethics, which may be viewed free of charge on the Companys web site
www.pssworldmedical.com. The Company intends to post amendments to or waivers from its Code of Ethics (to the extent applicable to the Companys Chief Executive Officer, Chief Financial Officer, or Corporate Controller) on its web site.

Information required by this item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is hereby incorporated by reference
to the Section entitled Section 16(a) Beneficial Ownership Reporting Compliance.

There have been no changes to the procedures by which
stockholders may recommend nominees to the Companys Board of Directors since the Companys last disclosure of such procedures, which appeared in the Companys definitive 2006 Proxy Statement filed pursuant to Regulation 14A on
July 25, 2006.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------

The information called for by this
Item 11 is incorporated herein by reference to the Company's definitive proxy statement, to be filed with the SEC pursuant to Regulation 14A of the Exchange Act, relating to the Companys fiscal year 2007 Annual Meeting of Shareholders
under the caption Executive Compensation.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- | ----------------------------------------------------------------------------------------------

The information called for by this Item 12 is incorporated herein by reference to the Company's definitive proxy statement, to be filed with the SEC pursuant to Regulation 14A of the Exchange Act, relating
to the Companys fiscal year 2007 Annual Meeting of Shareholders under the caption Security Ownership of Certain Beneficial Owners and Management.



66



---

##### Table of Contents

Equity Compensation Plan Information

The Company maintains several stock incentive plans (the Plans) for the benefit of employees, officers, and directors. The following table summarizes the potential dilution that could occur from past and
future equity grants for all Plans.



|                                                             |  |                                                                                         |  |                                                                          |       |                                                                                                                                      |           |    
|------------------------------------------------------------ |  | --------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | ------------------------------------------------------------------------------------------------------------------------------------ | --------- | ---
|Plan Category                                                |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted averageexercise price ofoutstanding options,warrants and rights |       | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding
securitiesreflected in column(a)) |          
|                                                             |  | (a)                                                                                     |  | (b)                                                                      |       | (c)                                                                                                                                  |          
|Equity compensation plans approved by security holders       |  | 2,040,000                                                                               |  | $                                                                        | 10.70 |                                                                                                                                      | 2,524,000 | (2)
|                                                             |  |                                                                                         | 
|Equity compensation plan not approved by security holders(1) |  | 326,000                                                                                 |  | $                                                                        | 7.81  |                                                                                                                                      |          |    
|                                                             |  |                                                                                         |  |                                                                          |       |                                                                                                                                      |           |    
|Total                                                        |  | 2,366,000                                                                               |  | $                                                                        | 10.30 |                                                                                                                                      | 2,524,000 |    
|                                                             |  |                                                                                         |  |                                                                          |       |                                                                                                                                      |           |    



| | (1) | The 1999 Broad-Based Employee Stock Plan is the only equity compensation plan that is not approved by shareholders. Under this plan, 2,600,000 shares of the Company's common
stock were originally reserved for issuance to employees and consultants. The Compensation Committee of the Board of Directors has discretion to make grants under this plan in the form of nonqualified stock options, restricted stock, or unrestricted
stock awards. The exercise price of options granted shall be at least the fair market value of the Company's common stock on the date of grant. Unless otherwise specified by the Compensation Committee, options become fully vested and exercisable
three years from the date of grant. Restricted stock awards, which generally vest over a three-year period, may not be sold or transferred until the completion of such periods of service or achievement of such conditions as specified by the
Compensation Committee. Upon a change in control of the Company, all stock awards shall become fully vested and exercisable, and all restrictions on restricted stock awards shall lapse.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | All of these shares are available for issuance pursuant to awards of restricted stock, unrestricted stock, or performance awards.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|-------- | -------------------------------------------------------------------------

The information called for by this Item 13 is incorporated herein by reference to the Company's definitive proxy statement, to be filed with the SEC pursuant to Regulation 14A of the Exchange Act, relating to the Companys fiscal
year 2007 Annual Meeting of Shareholders under the caption Certain Relationships and Related TransactionsandDirector Independence.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|-------- | --------------------------------------

The information called for
by this Item 14 is incorporated herein by reference to the Company's definitive proxy statement, to be filed with the SEC pursuant to Regulation 14A of the Exchange Act, relating to the Companys fiscal year 2007 Annual Meeting of
Shareholders under the caption Independent Registered Public Accounting Firm.



67



---

##### Table of Contents

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------

(a)(1) The following
financial statements are included in Item 8 of this report:



|                                                                                                                      |  |     
|--------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                      |  | Page
|Report of Independent Registered Public Accounting Firm.                                                              |  | F-2 
|Consolidated Balance SheetsMarch 30, 2007 and March 31, 2006                                                         |  | F-3 
|Consolidated Statements of Operations for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005           |  | F-4 
|Consolidated Statements of Shareholders Equity for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005 |  | F-5 
|Consolidated Statements of Cash Flows for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005           |  | F-6 
|Notes to Consolidated Financial Statements                                                                            |  | F-7 

(a)(2) The following supplemental schedule is included in this report:



|                                                                                                                    |  |     
|------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                    |  | Page
|Schedule IIValuation and Qualifying Accounts for the Years Ended March 30, 2007, March 31, 2006, and April 1, 2005 |  | F-43

(a)(3) Exhibits required by Item 601 of Regulation S-K:



|               |  |                                                                                                                                                                         
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                             
|               | 
|3.1            |  | Amended and Restated Articles of Incorporation, dated as of March 15, 1994. (4)                                                                                         
|               | 
|3.1a           |  | Articles of Amendment to Articles of Incorporation, dated as of September 24, 2001. (8)                                                                                 
|               | 
|3.1b           |  | Articles of Amendment to Articles of Incorporation, dated as of November 9, 2001. (8)                                                                                   
|               | 
|3.2            |  | Amended and Restated Bylaws, dated as of August 26, 2005. (28)                                                                                                          
|               | 
|4.1            |  | Registration Rights Agreement, dated as of March 8, 2004, by and among the Company, Goldman, Sachs & Co., Banc of America Securities LLC and Lehman Brothers Inc.
(18)  
|               | 
|4.2            |  | Indenture, dated as of March 8, 2004, by and between the Company and Wachovia Bank, N.A., as Trustee. (18)                                                              
|               | 
|4.3            |  | Form of 2.25% Convertible Senior Note due 2024. (18)                                                                                                                    
|               | 
|4.4            |  | Shareholder Protection Rights Agreement, dated as of April 20, 1998, between the Company and Continental Stock Transfer & Trust Company, as Rights Agent. (5)           
|               | 
|4.5a           |  | Amendment to Shareholder Protection Rights Agreement, dated as of June 21, 2000, between the Company and Continental Stock Transfer & Trust Company as Rights Agent.
(6)
|               | 
|4.5b           |  | Amendment to Shareholder Protection Rights Agreement, dated as of April 12, 2002, between the Company and First Union National Bank, as Successor Rights Agent. (9)     
|               | 
|10.1*          |  | Incentive Stock Option Plan, dated as of May 14, 1986. (1)                                                                                                              
|               | 
|10.2*          |  | Amended and Restated Directors Stock Plan. (15)                                                                                                                         
|               | 
|10.3*          |  | Amended and Restated 1994 Long-Term Incentive Plan. (3)                                                                                                                 



68



---

##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                     
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                         
|               | 
|10.4*          |  | Amended and Restated 1994 Long-Term Stock Plan. (15)                                                                                                                                                                                                                                
|               | 
|10.5*          |  | 1994 Employee Stock Purchase Plan. (2)                                                                                                                                                                                                                                              
|               | 
|10.6*          |  | 1994 Amended Incentive Stock Option Plan. (1)                                                                                                                                                                                                                                       
|               | 
|10.7*          |  | 1999 Long-term Incentive Plan (Amended and Restated as of July 25, 2001). (15)                                                                                                                                                                                                      
|               | 
|10.8*          |  | 1999 Broad-Based Employee Stock Plan. (15)                                                                                                                                                                                                                                          
|               | 
|10.9*          |  | Shareholder Value Plan (Portions omitted pursuant to a request for confidential treatment-Separately filed with the SEC). (24)                                                                                                                                                      
|               | 
|10.10*         |  | Description of Executive Officer Annual Incentive Bonus Program. (28)                                                                                                                                                                                                               
|               | 
|10.11          |  | Distributorship Agreement between Abbott Laboratories and the Company (Portions omitted pursuant to a request for confidential treatmentSeparately filed with the SEC).
(16)                                                                                                       
|               | 
|10.12*         |  | Amended and Restated Savings Plan. (10)                                                                                                                                                                                                                                             
|               | 
|10.12a*        |  | First Amendment to the Amended and Restated Savings Plan. (12)                                                                                                                                                                                                                      
|               | 
|10.12b*        |  | Second Amendment to the Amended and Restated Savings Plan. (14)                                                                                                                                                                                                                     
|               | 
|10.12c*        |  | Third Amendment to the Amended and Restated Savings Plan. (15)                                                                                                                                                                                                                      
|               | 
|10.12d*        |  | Fourth Amendment to the Amended and Restated Savings Plan. (16)                                                                                                                                                                                                                     
|               | 
|10.12e*        |  | Fifth Amendment to the Amended and Restated Savings Plan. (17)                                                                                                                                                                                                                      
|               | 
|10.12f*        |  | Sixth Amendment to the Amended and Restated Savings Plan. (23)                                                                                                                                                                                                                      
|               | 
|10.12g*        |  | Seventh Amendment to the Amended and Restated Savings Plan.                                                                                                                                                                                                                         
|               | 
|10.13          |  | Amended and Restated Credit Agreement, dated as of May 20, 2003, by and among the Company, each of the Companys subsidiaries therein named, the Lenders from time to time party
thereto, Bank of America, N.A., as Agent, and Banc of America Securities LLC, as Arranger. (15)    
|               | 
|10.13a         |  | Second Amendment to Credit Agreement, dated as of December 16, 2003, by and among the Company, each of the Companys subsidiaries therein named, the Lenders from time to time party
thereto, Bank of America, N.A., as Agent, and Banc of America Securities LLC, as Arranger. (17)
|               | 
|10.13b         |  | Third Amendment to Credit Agreement, dated as of March 1, 2004, among the Company, each of the Companys subsidiaries therein named, the Lenders party to the amendment, and Bank of
America, N.A., as agent for the Lenders. (18)                                                  
|               | 
|10.13c         |  | Fourth Amendment to Credit Agreement, dated as of June 1, 2004, among the Company, each of the Companys subsidiaries therein named, the Lenders party to the amendment, and Bank of
America, N.A., as agent for the Lenders. (20)                                                  
|               | 
|10.13d         |  | Fifth Amendment to Credit Agreement, dated as of October 1, 2004, among the Company, each of the Companys subsidiaries therein named, the Lenders party to the amendment, and Bank
of America, N.A., as agent for the Lenders. (21)                                                
|               | 
|10.13e         |  | Sixth Amendment to Credit Agreement, dated as of June 30, 2005, among the Company, each of the Companys subsidiaries therein named, the Lenders party to the amendment, and Bank of
America, N.A., as agent for the Lenders. (27)                                                  



69



---

##### Table of Contents

|               |  |                                                                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                  
|               | 
|10.14*         |  | Employment Agreement, dated as of April 1, 1998, by and between the Company and Jeffrey H. Anthony. (23)                                                                                     
|               | 
|10.14a*        |  | Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and Jeffrey H. Anthony. (23)                                                                       
|               | 
|10.15*         |  | Employment Agreement, dated as of April 1, 2003, by and between the Company and David M. Bronson. (14)                                                                                       
|               | 
|10.16*         |  | Employment Agreement, dated as of August 16, 2005, by and between the Company and Gary A. Corless. (25)                                                                                      
|               | 
|10.17*         |  | Employment Agreement, dated as of April 1, 2004, by and between the Company and Kevin P. English. (19)                                                                                       
|               | 
|10.18*         |  | Employment Agreement, dated as of January 1, 2002, by and between the Company and Bradley J. Hilton. (23)                                                                                    
|               | 
|10.19*         |  | Employment Agreement, dated as of April 1, 2001, by and between the Company and Mary M. Jennings. (23)                                                                                       
|               | 
|10.20*         |  | Employment Agreement, dated as of February 21, 2000, by and between the Company and David D. Klarner. (23)                                                                                   
|               | 
|10.20a*        |  | Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and David D. Klarner. (23)                                                                         
|               | 
|10.21*         |  | Employment Agreement, dated as of April 1, 2003, by and between the Company and Gary J. Nutter. (17)                                                                                         
|               | 
|10.22*         |  | Employment Agreement, dated as of April 1, 2000, by and between the Company and David H. Ramsey. (23)                                                                                        
|               | 
|10.23*         |  | Employment Agreement, dated as of April 1, 1998, by and between the Company and John F. Sasen, Sr. (7)                                                                                       
|               | 
|10.23a*        |  | Amendment to Employment Agreement, dated as of April 17, 2000, by and between the Company and John F. Sasen, Sr. (7)                                                                         
|               | 
|10.24*         |  | Employment Agreement, dated as of July 10, 2003, by and between the Company and David A. Smith. (15)                                                                                         
|               | 
|10.25*         |  | Employment Agreement, dated as of November 19, 2002, by and between the Company and Robert C. Weiner. (23)                                                                                   
|               | 
|10.26*         |  | Severance Agreement, dated as of March 21, 2001, by and between the Company and Patrick C. Kelly. (7)                                                                                        
|               | 
|10.26a*        |  | Amendment to Severance Agreement, dated as of October 30, 2002, by and between the Company and Patrick C. Kelly. (14)                                                                        
|               | 
|10.27          |  | Stock Purchase Agreement, dated as of October 28, 2002, among PSS World Medical, Inc., Imaging Acquisition Corporation, and Platinum Equity, LLC. (11)                                       
|               | 
|10.27a         |  | Amendment to Stock Purchase Agreement, dated as of November 18, 2002, among PSS World Medical, Inc., Diagnostic Imaging, Inc., Imaging Acquisition Corporation and Platinum Equity, LLC.
(13)



70



---

##### Table of Contents

|               |  |                                                                                                                                                                      
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                          
|               | 
|10.28*         |  | PSS World Medical, Inc. Amended and Restated Officer Deferred Compensation Plan, as amended through July 1, 2004. (21)                                               
|               | 
|10.28a*        |  | Amendment No. 1 to the PSS World Medical, Inc. Amended and Restated Officer Deferred Compensation Plan, as amended through July 1, 2004. (26)                        
|               | 
|10.28b*        |  | PSS World Medical, Inc. Amended and Restated Officer Stock Option Grant Program, as amended through July 1, 2004. (21)                                               
|               | 
|10.29*         |  | PSS World Medical, Inc. Amended and Restated ELITe Deferred Compensation Plan, as amended through July 1, 2004. (21)                                                 
|               | 
|10.29a*        |  | Amendment No. 1 to the PSS World Medical, Inc. Amended and Restated ELITe Deferred Compensation Plan, as amended through July 1, 2004. (26)                          
|               | 
|10.29b*        |  | PSS World Medical, Inc. Amended and Restated ELITe Stock Option Grant Program, as amended through July 1, 2004. (21)                                                 
|               | 
|10.30*         |  | PSS World Medical, Inc. Amended and Restated Leaders Deferral Plan, as amended through July 1, 2004. (21)                                                           
|               | 
|10.30a*        |  | Amendment No. 1 to the PSS World Medical, Inc. Amended and Restated Leaders Deferral Plan, as amended through July 1, 2004. (26)                                    
|               | 
|10.30b*        |  | PSS World Medical, Inc. Leaders Stock Option Grant Program, as amended through July 1, 2004. (21)                                                                   
|               | 
|10.31*         |  | PSS World Medical, Inc. Directors Deferred Compensation Plan. (19)                                                                                                  
|               | 
|10.32*         |  | PSS World Medical, Inc. 2004 Non-Employee Directors Deferred Compensation Plan. (21)                                                                                
|               | 
|10.32a*        |  | Amendment No. 1 to the PSS World Medical, Inc. Amended and Restated 2004 Non-Employee Directors Deferred Compensation Plan, as amended through August 24, 2006.
(29)
|               | 
|10.33*         |  | Form of Restricted Stock Award Agreement. (25)                                                                                                                       
|               | 
|12             |  | Computation of Consolidated Ratios of Earnings to Fixed Charges.                                                                                                     
|               | 
|21             |  | List of Subsidiaries of PSS World Medical, Inc. (25)                                                                                                                 
|               | 
|23             |  | Consent of Independent Registered Public Accounting Firm.                                                                                                            
|               | 
|31.1           |  | Rule 13a-14(a) Certification of the Chief Executive Officer.                                                                                                         
|               | 
|31.2           |  | Rule 13a-14(a) Certification of the Chief Financial Officer.                                                                                                         
|               | 
|32.1           |  | Section 1350 Certification of the Chief Executive Officer.                                                                                                           
|               | 
|32.2           |  | Section 1350 Certification of the Chief Financial Officer.                                                                                                           
|               | 
|               |  | * Represents a management contract or compensatory plan or arrangement.                                                                                              



71



---

##### Table of Contents

|     |  |  |  |                                                                                                                   
|---- |  |  |  | ------------------------------------------------------------------------------------------------------------------
|     |  |  |  | Footnote References                                                                                               
|(1)  |  |  |  | Incorporated by Reference to the Companys Registration Statement on Form S-1, Registration No. 33-76580.         
|(2)  |  |  |  | Incorporated by Reference to the Companys Registration Statement on Form S-8, Registration No. 33-80657.         
|(3)  |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.     
|(4)  |  |  |  | Incorporated by Reference to the Companys Current Report on Form 8-K, filed April 8, 1998.                       
|(5)  |  |  |  | Incorporated by Reference to the Companys Current Report on Form 8-K, filed April 22, 1998.                      
|(6)  |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.     
|(7)  |  |  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for the year ended March 30, 2001.          
|(8)  |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended September 28, 2001.
|(9)  |  |  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for the year ended March 29, 2002.          
|(10) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended June 28, 2002.     
|(11) |  |  |  | Incorporated by Reference to the Companys Current Report on Form 8-K, filed October 30, 2002.                    
|(12) |  |  |  | Incorporated by Reference to the Companys Current Report on Form 10-Q, for the quarter ended September 27, 2002. 
|(13) |  |  |  | Incorporated by Reference to the Companys Current Report on Form 8-K, filed November 20, 2002.                   
|(14) |  |  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for the year ended March 28, 2003.          
|(15) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.     
|(16) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended October 3, 2003.   
|(17) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2003. 
|(18) |  |  |  | Incorporated by Reference to the Companys Current Report on Form 8-K, filed March 9, 2004.                       
|(19) |  |  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for the year ended April 2, 2004.           
|(20) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.     
|(21) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended October 1, 2004.   
|(22) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2004. 
|(23) |  |  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for the year ended April 1, 2005.           
|(24) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended July 1, 2005.      
|(25) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
|(26) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended December 30, 2005. 
|(27) |  |  |  | Incorporated by Reference to the Companys Current Report on Form 8-K, filed July 7, 2005.                        
|(28) |  |  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for the year ended March 31, 2006.          
|(29) |  |  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q for the quarter ended September 29, 2006.



72



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 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, in the City of Jacksonville, State of Florida, on May 25, 2007.



PSS WORLD MEDICAL, INCBy:

/s/ David M. BronsonDavid M. Bronson Executive Vice President and Chief Financial Officer (Principal Financial Officer/Principal Accounting Officer)


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



|                                          |  |                                                                                                                 |  |             
|----------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------
|Signatures                                |  | Title                                                                                                           |  | Date        
|                                          |  |                                                                                                                
|/s/ David A. Smith David A. Smith         |  | President, Chief Executive Officer, and Chairman of the Board of Directors                                      |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ Charles E. Adair Charles E. Adair     |  | Director                                                                                                        |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ Alvin R. Carpenter Alvin R. Carpenter |  | Director                                                                                                        |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ T. ONeal Douglas T. ONeal Douglas   |  | Director                                                                                                        |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ Melvin L. Hecktman Melvin L. Hecktman |  | Director                                                                                                        |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ Delores P. Kesler Delores P. Kesler   |  | Director                                                                                                        |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ Stephen H. Rogers Stephen H. Rogers   |  | Director                                                                                                        |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ Jeffrey C. Crowe Jeffrey C. Crowe     |  | Director                                                                                                        |  | May 25, 2007
|                                          |  |                                                                                                                
|/s/ David M. Bronson David M. Bronson     |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer/Principal Accounting Officer) |  | May 25, 2007



73