# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION WASHINGTON, D.C. 20549

# FORM 10-Q

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

| | For the quarterly period ended       October 1, 2004
| | ----------------------------------------------------

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

| | For the transition period from ___________ to ____________
| | ----------------------------------------------------------

Commission File Number 0-23832

PSS WORLD MEDICAL, INC.(Exact name of Registrant as specified in its charter)

|                                                                                               |                                               
|---------------------------------------------------------------------------------------------- | ----------------------------------------------
|Florida (State or other jurisdiction of incorporation or organization)                         | 59-2280364(IRS Employer Identification Number)
|4345 Southpoint Blvd.          Jacksonville, Florida  (Address of principal executive offices) | 32216 (Zip code)                              
|Registrant's telephone number                                                                  | (904) 332-3000                                

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 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.

[X] Yes [ ] No

Indicate by check mark whether the registrant is an
 accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

[X] Yes [ ] No

The number of shares of common stock, par value $.01
 per share, of the registrant outstanding as of November 8, 2004 was 64,386,069 shares.

---

# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES

# OCTOBER 1, 2004

# TABLE OF CONTENTS

|Item |                                                                                       | Page
|---- | ------------------------------------------------------------------------------------- | ----
|    
|     | Information Regarding Forward-Looking Statements                                      | 3   
|    
|     | Part I--Financial Information                                                        
|    
|1.   | Financial Statements:                                                                
|    
|     | Consolidated Balance Sheets--October 1, 2004 and April 2, 2004                        | 6   
|    
|     | Consolidated Statements of Operations for the Three and Six Months Ended             
|     | October 1, 2004 and October 3, 2004                                                   | 7   
|    
|     | Consolidated Statements of Cash Flows for the Three and Six Months Ended             
|     | October 1, 2004 and October 3, 2004                                                   | 8   
|    
|     | Notes to Consolidated Financial Statements                                            | 9   
|    
|     | Report of Independent Registered Public Accounting Firm                               | 24  
|    
|2.   | Management's Discussion and Analysis of Financial Condition and Results of Operations | 25  
|    
|3.   | Quantitative and Qualitative Disclosures About Market Risk                            | 44  
|    
|4.   | Controls and Procedures                                                               | 45  
|    
|     | Part II--Other Information                                                           
|    
|1.   | Legal Proceedings                                                                     | 46  
|    
|2.   | Unregistered Sales of Equity Securities and Use of Proceeds                           | 46  
|    
|4.   | Submission of Matters to a Vote of Security Holders                                   | 46  
|    
|6.   | Exhibits and Reports on Form 8-K                                                      | 48  
|    
|     | Signature                                                                             | 49  

2

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# 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 Quarterly Report on
Form 10-Q, the Annual Report on Form 10-K for the fiscal year ended
April 2, 2004, Reports on Form 8-K, and reports to shareholders. 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 Quarterly Report on Form 10-Q that
involve risks and uncertainties include, without limitation:

- the Company's intent to vigorously defend against the claims from the latex glove product liability
litigation and the securities class action lawsuits, among others, which are described in Note 10,
Commitments and Contingencies;
- management's belief that the ultimate outcome of the various litigation matters described in Note 10,
Commitments and Contingencies, and various other litigation that have arisen in the normal course of
business will not have a material adverse effect on the Company's business, financial condition or
results of operations;
- management's belief that the elder care market is expected to continue benefiting from the increasing growth
rate of the elderly American population;
- management's belief that the physician market is expected to continue to benefit from the shift of
procedures and diagnostic testing in hospitals to alternate sites, particularly physician offices and
home care providers;
- management's belief that the recent changes to Medicare and Medicaid reimbursement rates and the
introduction of the Medicare/Medicaid prescription drug program that became effective beginning in the
U.S. government fiscal year 2004 will positively impact the financial condition of elder care providers
and financial strength of the elder care industry;
- management's belief that nursing home divestitures within the Elder Care Business may continue to impact
fiscal year 2005 as large, national chain customers may continue to divest underperforming facilities
and facilities located in states with high malpractice claims, insurance costs, and litigation exposure;
- management's expectation that gross profit as a percentage of net sales may decrease in future periods due
to an expected increased sales volume of pharmaceutical products and diagnostic equipment in the
Physician Business, which generate lower gross profit margins;
- management's expectation that gross profit as a percentage of net sales may increase in future periods as a
result of growth in ancillary billing services in the Elder Care Business;
- management's anticipation that rising fuel costs may negatively impact both the Physician Business' and the
Elder Care Business' cost to deliver or expected improvements in cost to deliver during fiscal year
2005;
- management's expectation that the results of the Internal Revenue Service ("IRS") audit of the Federal
income tax returns for fiscal years 2002 and 2003 will not have a material impact on our financial
condition or consolidated results of operations;

3

---

- 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 we may, from time-to-time, seek to retire our outstanding debt or equity through
cash purchases through open-market purchases, privately negotiated transactions, or otherwise and such
amounts involved may be material;
- the possibility that the Company may seek to issue additional debt or equity to meet its future liquidity
requirements;
- management's expectation that the implementation of the JD Edwards distribution modules at the Elder Care
Business distribution centers beginning in fiscal year 2005 and continuing into the first quarter of
fiscal year 2006 will be successfully completed without disrupting the operations of the business;
- management's expectation that the sales mix for the three months and nine months ended December 31, 2004
will be impacted by the British Health authorities blockage of Chiron Corporation's influenza vaccine
shipments; and
- management's belief that the proposed IRS settlement will result in a one-time reduction of provision for
income taxes, increasing diluted earnings per share by approximately $0.07.

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. The Companys future results could be adversely affected by a variety of
factors, including:

- pricing and customer credit-quality pressures due to reduced spending budgets by healthcare providers;
- the Company's dependence on sophisticated data processing systems that may impair business operations if
they fail to operate properly or not as anticipated;
- competitive pricing pressures related to the Company's sales to large nursing home chains and consolidating
provider groups;
- the loss of any of our significant distributorship agreements, the renegotiation of terms and conditions of
existing agreements, and the Company's reliance on current relationships with vendors;
- maintaining good relations with our employees including over 800 sales professionals;
- the concentration of revenues among a limited number of customers in the Elder Care Business and the loss of
a significant customer;
- the Company's level of indebtedness, which may limit its ability to obtain financing in the future and may
limit flexibility to react to market conditions;
- the potential interest and penalty exposure related to existing and future IRS audits;
- litigation and liability exposure for existing and potential claims;
- the Company's failure to execute its business plan and strategies for growth;
- the adoption of new accounting pronouncements or Securities and Exchange Commission rules and regulations,
including the proposed Emerging Issues Task Force Issue No. 04-08, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share;

4

---

- the Company's failure to ensure the effectiveness of internal controls over financial reporting under the
provisions of Sarbanes-Oxley and failure to receive an unqualified opinion with respect to these internal
controls from our independent registered public accounting firm;
- the Company's failure to comply with Federal and State regulations pertaining to filing claims for health care
reimbursement or changes in the interpretation of those requirements;
- the Company's inability to obtain certain medical supplies and pharmaceuticals due to vendor supply disruptions,
including influenza vaccines;
- operational disruptions due to natural disasters, particularly in regions susceptible to hurricanes; and
- the Company's failure to successfully integrate the operations of a long-term medical supply distributor,
which was acquired on October 7, 2004.

In addition, all forward-looking
statements are qualified by and should be read in conjunction with the risks described or
referred to in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations, under the heading Risk Factors
of the Annual Report on Form 10-K for the fiscal year ended April 2, 2004.

5

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# PART I FINANCIAL INFORMATION ITEM 1.   FINANCIAL
STATEMENTS

# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 1, 2004
AND APRIL 2, 2004(Dollars in Thousands, Except Share Data)

|ASSETS                                                                        
|------------------------------------------------------------------------------
|
|
|Current Assets:                                                               
|Cash and cash equivalents                                                     
|Accounts receivable, net                                                      
|Inventories                                                                   
|Employee advances                                                             
|Deferred tax assets                                                           
|Prepaid expenses and other                                                    
|                                                                              
|Total current assets                                                          
|                                                                              
|Property and equipment, net                                                   
|Other Assets:                                                                 
|Goodwill                                                                      
|Intangibles, net                                                              
|Deferred tax assets                                                           
|Other                                                                         
|                                                                              
|Total assets                                                                  
|                                                                              
|                                                                              
|LIABILITIES AND SHAREHOLDERS' EQUITY                                          
|                                                                              
|Current Liabilities:                                                          
|Accounts payable                                                              
|Revolving line of credit                                                      
|Accrued expenses                                                              
|Other                                                                         
|                                                                              
|Total current liabilities                                                     
|                                                                              
|Convertible senior notes                                                      
|Other noncurrent liabilities                                                  
|                                                                              
|Total liabilities                                                             
|                                                                              
|Commitments and contingencies (Notes 1, 7, 9 and 10)                          
|Shareholders' Equity:                                                         
|Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued
|and outstanding                                                               
|Common stock, $.01 par value; 150,000,000 shares authorized, 64,172,399 and   
|64,833,453 shares issued and outstanding at October 1, 2004 and April 2, 2004,
|respectively                                                                  
|Additional paid-in capital                                                    
|Accumulated deficit                                                           
|Unearned compensation                                                         
|Accumulated other comprehensive income (loss)                                 
|                                                                              
|Total shareholders' equity                                                    
|                                                                              
|Total liabilities and shareholders' equity                                    
|                                                                              

The accompanying notes
are an integral part of these consolidated statements

6

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# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX
MONTHS ENDED OCTOBER 1, 2004 AND OCTOBER 3, 2003 (Unaudited) (Dollars in Thousands,
Except Per Share Data)

|                                                   | For the Three Months Ended | For the Six Months Ended
|-------------------------------------------------- | -------------------------- | ------------------------
|
|Net sales                                          |                            |                         
|Cost of goods sold                                 |                            |                         
|                                                   |                            |                         
|Gross profit                                       |                            |                         
|General and administrative expenses                |                            |                         
|Selling expenses                                   |                            |                         
|                                                   |                            |                         
|Income from operations                             |                            |                         
|                                                   |                            |                         
|Other (expense) income:                            |                            |                         
|Interest expense                                   |                            |                         
|Interest and investment income                     |                            |                         
|Other income (expense)                             |                            |                         
|                                                   |                            |                         
|                                                   |                            |                         
|                                                   |                            |                         
|Income from continuing operations before provision |                            |                         
|for income taxes                                   |                            |                         
|Provision for income taxes                         |                            |                         
|                                                   |                            |                         
|                                                   |                            |                         
|Income from continuing operations                  |                            |                         
|Loss on disposal of discontinued operations (net   |                            |                         
|of benefit for income taxes of $--, $206,          |                            |                         
|$1,042, and $206, respectively)                    |                            |                         
|                                                   |                            |                         
|Net income                                         |                            |                         
|                                                   |                            |                         
|Earnings (loss) per share - Basic:                 |                            |                         
|Income from continuing operations                  |                            |                         
|Loss on disposal of discontinued operations .      |                            |                         
|                                                   |                            |                         
|Net income                                         |                            |                         
|                                                   |                            |                         
|Earnings (loss) per share - Diluted:               |                            |                         
|Income from continuing operations                  |                            |                         
|Loss on disposal of discontinued operations .      |                            |                         
|                                                   |                            |                         
|Net income                                         |                            |                         
|                                                   |                            |                         

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

7

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# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED OCTOBER 1, 2004 AND OCTOBER 3, 2003 (UNAUDITED) (Dollars in Thousands)

|                                                                         | For the Six Months Ended
|------------------------------------------------------------------------ | ------------------------
|
|Operating Activities:                                                    |                         
|Net income                                                               |                         
|Adjustments to reconcile net income to net cash provided by (used in)    |                         
|operating activities:                                                    |                         
|Loss on disposal of discontinued operations                              |                         
|Depreciation                                                             |                         
|Amortization of intangible assets                                        |                         
|Amortization of debt issuance costs                                      |                         
|Provision for doubtful accounts                                          |                         
|Provision for deferred income taxes                                      |                         
|Provision for deferred compensation                                      |                         
|Noncash compensation expense                                             |                         
|Loss on sales of property and equipment                                  |                         
|Changes in operating assets and liabilities:                             |                         
|Accounts receivable                                                      |                         
|Inventories                                                              |                         
|Prepaid expenses and other current assets                                |                         
|Other assets                                                             |                         
|Accounts payable                                                         |                         
|Accrued expenses and other liabilities                                   |                         
|                                                                         |                         
|Net cash provided by (used in) operating activities                      |                         
|                                                                         |                         
|Investing Activities:                                                    |                         
|Payment for business combinations                                        |                         
|Capital expenditures                                                     |                         
|Payment of transaction and settlement costs for sale of Imaging Business |                         
|Payments for non-competition agreements                                  |                         
|Payments for non-solicitation agreements                                 |                         
|Proceeds from sales of property and equipment                            |                         
|                                                                         |                         
|Net cash used in investing activities                                    |                         
|                                                                         |                         
|Financing Activities:                                                    |                         
|Net proceeds (payments) from the revolving line of credit                |                         
|Purchase of treasury shares                                              |                         
|Proceeds from issuance of common stock                                   |                         
|Proceeds from note receivable                                            |                         
|                                                                         |                         
|Net cash (used in) provided by financing activities                      |                         
|                                                                         |                         
|Net decrease in cash and cash equivalents                                |                         
|Cash and cash equivalents, beginning of period                           |                         
|                                                                         |                         
|Cash and cash equivalents, end of period                                 |                         
|                                                                         |                         
|Supplemental disclosures:                                                |                         
|Cash paid for:                                                           |                         
|Interest                                                                 |                         
|Income taxes, net                                                        |                         

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

8

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# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# (Unaudited)

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

1.     BACKGROUND
AND BASIS OF PRESENTATION

Nature of Operations

PSS World Medical, Inc. (the Company or
PSSI), a Florida corporation which began operations in 1983, is a specialty
marketer and distributor of medical products, equipment, and pharmaceutical related
products to alternate-site healthcare providers including physician offices, long-term
care facilities, and home care providers through 42 full-service distribution centers,
which serve all 50 states throughout the United States of America (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, titled 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 30
full-service distribution centers, 21 break-freight locations, and two redistribution
facilities serving physician offices in all 50 states.

The Elder Care Business, or the Gulf
South Medical Supply, Inc. subsidiary, is a leading 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 offers Medicare Part B billing services either on a fee
for service or a full assignment basis, and provides products reimbursable under Medicare
Part B. The Elder Care Business currently operates 12 full-service distribution
centers, two break-freight locations, and one ancillary billing service center serving
independent, regional, and national skilled nursing facilities, assisted living centers,
and home care providers in all 50 states.

Historically, the Company conducted
business under a third operating segment, the Imaging Business. On November 18,
2002, the Company completed the sale of the Imaging Business, or the Diagnostic Imaging,
Inc. subsidiary (DI), a distributor of medical diagnostic imaging supplies,
chemicals, equipment, and services to the acute and alternate-care markets in the U.S.
Refer to Note 11, Discontinued Operations,for further discussion.

Basis of Presentation

The accompanying unaudited
consolidated financial statements have been prepared in accordance with the rules and
regulations of the United States Securities and Exchange Commission (the SEC).
Accordingly, certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) have been omitted pursuant to SEC rules and
regulations. The consolidated financial statements reflect, in the opinion of management,
all adjustments necessary to present fairly the financial position and results of
operations for the periods indicated.

The accompanying consolidated
financial statements have been prepared in accordance with GAAP and include the
consolidated accounts of PSS World Medical, Inc. and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated balance sheet as of
April 2, 2004 has been derived from the Companys audited consolidated
financial statements for the fiscal year ended April 2, 2004. The financial
statements and related notes included in this report should be read in conjunction with
the Companys Annual Report on Form 10-K for the fiscal year ended April 2,
2004.

The Company reports its year-end
financial position, results of operations, and cash flows on the Friday closest to March 31.
Fiscal year 2005 consists of 52 weeks or 253 selling days whereas fiscal year
2004 consisted of 53 weeks or 258 selling days. The Company reports its
quarter-end financial position, results of operations, and cash flows on the Friday
closest to month-end for those quarters in which physical inventories are taken and on
the calendar month-end for those quarters in which physical inventories are not taken.
The following table summarizes the number of selling days in each period presented.

9

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|                       | For the Three Months Ended | For the Six Months Ended
|---------------------- | -------------------------- | ------------------------
|
|Number of selling days | 65                         | 67                      

The results of operations for the
interim periods covered by this report may not be indicative of operating results for the
full fiscal year or any other interim periods.

Non-solicitation Payments

Certain sales representatives
employed by the Physician Business have executed employment agreements in exchange for a
cash payment (Non-solicitation Payments). These employment agreements include
non-solicitation covenants, which state that the sales representative can neither solicit
nor accept business from certain of the Companys customers for a one-year period
subsequent to the date the sales representative ceases employment with the Company. The
costs of these Non-solicitation Payments made to sales representatives are capitalized
and amortized on a straight-line basis over their estimated useful life. The estimated
useful life is the expected employment period of the sales representative plus one year
for the non-solicitation period. If a sales representative terminated employment prior to
the end of the estimated useful life of the agreement, the remaining net book value of
the asset will be amortized over the one-year, non-solicitation period.

During the period the sales
representatives remain employed with the Company, the non-solicitation intangible asset
is evaluated for impairment in accordance with the provisions of Statement of Financial
Accounting Standards (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 occur and indicate that 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 non-solicitation
covenants, (ii) a decline in sales generated by a sales representative below the
amount that the non-solicitation was based upon, (iii) death, or (iv) full
retirement by the sales representative. In the event that 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.

Stock Repurchase Programs

On June 8, 2004, the Companys
Board of Directors approved a stock repurchase program authorizing the Company to
repurchase up to a maximum of 5% of its common stock, or approximately 3.2 million
common shares. These repurchases depend upon market conditions and other factors and are
to be made in the open market, in privately negotiated transactions, or otherwise. During
the six months ended October 1, 2004, the Company repurchased approximately 1.0 million
shares of common stock under this program at an average price of $9.91 per common
share. During the six months ended October 3, 2003, the Company repurchased
approximately 1.0 million shares of common stock under a previously approved stock
repurchase program at an average price of $5.92 per common share.

Reclassification

Certain amounts reported in prior
periods have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

In October 2004, the Emerging Issues Task Force (EITF) issued its consensus opinion
on EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share (EITF 04-8).
EITF 04-8 requires that contingently convertible debt instruments with embedded conversion features that are
contingent upon market price triggers be included in diluted earnings per share computations, if dilutive,
regardless if the contingency has been met. The effective date would be reporting periods ending on or after
December 15, 2004, and prior period earnings per share amounts presented for comparative purposes would be
restated to conform to this consensus. The Companys $150 million 2.25% convertible senior notes due 2024 have an
embedded conversion feature that is contingent upon a market price trigger. The annual impact to the Company, as the
consensus opinion is currently drafted, would be to increase the number of diluted shares outstanding by approximately
8.8 million shares and to increase earnings used in calculating diluted earnings per share by approximately $2.7 million (after tax)
related to interest expense on the convertibles notes.  Management is considering whether to elect to settle the principal amount of its convertible senior
notes in cash, which would substantially reduce the potential earnings per share impact of the provisions of EITF
04-8.

10

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2.     EARNINGS PER SHARE

Basic and diluted earnings per share
are presented in accordance with SFAS No. 128, Earnings Per Share. 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 year adjusted for the potential dilutive effect of stock options
using the treasury stock method and the conversion of the $150 million 2.25% convertible
senior notes if the conditions that would permit conversion have been satisfied. Common
equivalent shares are excluded from the computation in periods in which they have an
antidilutive effect.

The following table sets forth basic
and diluted earnings per share computational data for the three and six months ended
October 1, 2004 and October 3, 2003 (share amounts in thousands, except per
share data):

|                                      | For the Three Months Ended | For the Six Months Ended
|------------------------------------- | -------------------------- | ------------------------
|
|Income from continuing operations     |                            |                         
|Loss on disposal of discontinued      |                            |                         
|operations (net of benefit for        |                            |                         
|income taxes of $--, $206, $1,042,    |                            |                         
|and $206)                             |                            |                         
|                                      |                            |                         
|Net income                            |                            |                         
|                                      |                            |                         
|Earnings (loss) per share - Basic:    |                            |                         
|Income from continuing operations     |                            |                         
|Loss on disposal of discontinued      |                            |                         
|operations                            |                            |                         
|                                      |                            |                         
|Net income                            |                            |                         
|                                      |                            |                         
|Earnings (loss) per share -           |                            |                         
|Diluted:(a):                          |                            |                         
|Income from continuing operations     |                            |                         
|Loss on disposal of discontinued      |                            |                         
|operations                            |                            |                         
|                                      |                            |                         
|Net income                            |                            |                         
|                                      |                            |                         
|Weighted average shares outstanding:  |                            |                         
|Common shares                         |                            |                         
|Assumed exercise of stock options (b) |                            |                         
|Assumed vesting of restricted stock . |                            |                         
|                                      |                            |                         
|Diluted shares outstanding            |                            |                         
|                                      |                            |                         

| | (a) | The
effect of the assumed conversion of the $150 million convertible senior
               notes, which were issued in March 2004, has been excluded from
diluted                earnings per share for the three and six months ended October 1,
2004,                because none of the conditions that would permit conversion were
satisfied                during the period. 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. Once the notes become convertible, the                dilutive effect of the
convertible notes may be reflected in diluted earnings                per share by
application of the treasury stock method. By application of the                treasury
stock method, approximately 1.5 million shares would be included                in
the weighted average common shares outstanding used in computing diluted
               earnings per share at a contingent conversion price of $20.51.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | (b) | The
following table summarizes the options to purchase common stock that were
               outstanding and not included in the computation of diluted earnings per
share                for each of the periods presented because the options exercise
prices                exceeded the fair market value of the Companys common stock.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | For the Three Months Ended | For the Six Months Ended
|------------------------------------ | -------------------------- | ------------------------
|
|                                     |                            |                         
|Out-of-the money options outstanding | 2.0                        | 4.0                     

3.     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. The following table details the components of comprehensive income
for the periods presented.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | For the Three Months Ended | For the Six Months Ended
|-------------------------------------------- | -------------------------- | ------------------------
|
|Net income                                   |                            |                         
|Other comprehensive income, net of tax :     |                            |                         
|Unrealized (loss) gain on interest rate swap |                            |                         
|                                             |                            |                         
|Comprehensive income                         |                            |                         
|                                             |                            |                         

4.     STOCK-BASED COMPENSATION

The Company applies the
intrinsic-value recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for stock-based compensation plans. It is the Company's policy to only
issue stock options with an exercise price greater than or equal to the current market price of the underlying stock.
Accordingly, under APB Opinion No. 125, the Company does not  record compensation expense at the time an employee stock
option is issued.  The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). The following table illustrates the effect on net income and earnings per share if the fair-value-based method of accounting
prescribed by SFAS 123 had been applied to all outstanding and unvested awards in each period.

# 12

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|                                              | For the Three Months Ended | For the Six Months Ended
|--------------------------------------------- | -------------------------- | ------------------------
|
|Net income, as reported                       |                            |                         
|Stock-based employee compensation             |                            |                         
|expense included in reported net income,      |                            |                         
|net of related tax effects                    |                            |                         
|Total stock-based employee compensation       |                            |                         
|expense determined under fair value based     |                            |                         
|method all awards, net of related tax effects |                            |                         
|                                              |                            |                         
|Pro forma net income                          |                            |                         
|                                              |                            |                         
|Earnings per share - Basic:                   |                            |                         
|As reported                                   |                            |                         
|Pro forma                                     |                            |                         
|Earnings per share - Diluted:                 |                            |                         
|As reported                                   |                            |                         
|Pro forma                                     |                            |                         

5.     GOODWILL

The change in the carrying value of
goodwill during the six months ended October 1, 2004 is as follows:

|                                      | Physician
Business | Elder Care
Business | Total
|------------------------------------- | ------------------ | ------------------- | -----
|Balance as of April 2, 2004           |                    |                     | $    
|Acquisition earn-out payment          |                    |                     |      
|Purchase price allocation adjustments |                    |                     |      
|                                      |                    |                     |      
|Balance as of October 1, 2004         |                    |                     | $    
|                                      |                    |                     |      

The terms of one purchase
agreement provided for additional consideration to be paid (earn-out payment) if the
acquired entitys earnings before interest expense, provision for income taxes,
depreciation and amortization, as defined, exceeded a targeted level. During the six
months ended October 1, 2004, the Elder Care Business paid $1,685 under this
agreement and no further earn-out payments will be made.

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6.     INTANGIBLES

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

|                            | As of
|--------------------------- | -----
|
|
|Non-solicitation Payments:  |      
|                            |      
|Physician Business          |      
|                            |      
|Non-competition Agreements: |      
|Physician Business          |      
|Elder Care Business         |      
|Corporate Shared Services   |      
|                            |      
|                            |      
|                            |      
|Signing Bonuses:            |      
|Physician Business          |      
|Elder Care Business         |      
|                            |      
|                            |      
|                            |      
|Other Intangibles:          |      
|Physician Business          |      
|Elder Care Business         |      
|                            |      
|                            |      
|                            |      
|Total                       |      
|                            |      

Total amortization expense for
intangible assets for the three months ended October 1, 2004 and October 3,
2003 was $934 and $599, respectively. Total amortization expense for intangible assets
for the six months ended October 1, 2004 and October 3, 2003 was $1,771 and
$1,100, respectively. The estimated amortization expense for the next five fiscal years
is as follows:

|                          | 
|------------------------- | 
|Fiscal Year:              | 
|2005 (remaining 6 months) | 
|2006                      | 
|2007                      | 
|2008                      | 
|2009                      | 
|Thereafter                | 
|                          | 
|Total                     | 
|                          | 

14

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

|(in years)                    | October 1, 2004 | April 2, 2004
|----------------------------- | --------------- | -------------
|                             
|Non-solicitation Payments     |                 | 11.0         
|Non-competition Agreements    |                 | 5.2          
|Signing Bonuses               |                 | 4.3          
|Other Intangibles             |                 | 8.6          
|                              |                 |              
|Total weighted-average period |                 | 7.5          
|                              |                 |              

Future minimum payments required
under non-competition agreements at October 1, 2004 are as follows:

|                          | 
|------------------------- | 
|Fiscal Year:              | 
|2005 (remaining 6 months) | 
|2006                      | 
|2007                      | 
|2008                      | 
|2009                      | 
|Thereafter                | 
|                          | 
|Total                     | 
|                          | 

7.     DEBT

Debt consists of the following:

|                               | October 1, 2004 | April 2, 2004
|------------------------------ | --------------- | -------------
|2.25% convertible senior notes |                 | $150,000     
|Revolving line of credit       |                 | 25,000       
|                               |                 |              
|                               |                 | $175,000     
|                               |                 |              

2.25% Convertible Senior Notes

On March 8, 2004, the Company
sold $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 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

15

---

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, a division of McGraw Hill
Companies, Inc. and its successors (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. Once the notes become convertible, the dilutive
effect of the convertible notes may be reflected in diluted earnings per share by
application of the treasury stock method. By application of the treasury stock method, 1.5 million
shares would be included in the weighted average common shares outstanding used in
computing diluted net income per share at a contingent conversion price of $20.51.

Revolving Line of Credit

The Company maintains an asset-based
revolving line of credit by and among the Company, as borrower thereunder (the Borrower),
the subsidiaries of the Company, the lenders from time to time party thereto (the Lenders),
and Bank of America, N.A. (the Bank), as agent for the Lenders (the Credit
Agreement), which permits maximum borrowings of up to $200 million and matures
on March 31, 2008. Availability of borrowings depends upon a borrowing base
calculation consisting of accounts receivable and inventory, subject to satisfaction of
certain eligibility requirements. Borrowings under the revolving line of credit bear
interest at the Banks prime rate plus an applicable margin based on the Companys
funded debt to earnings before interest, taxes, depreciation, and amortization ( the
Leverage Ratio), or at LIBOR plus an applicable margin based on the Leverage
Ratio. Additionally, the Credit Agreement bears interest at a fixed rate of 0.375% for
any unused portion of the facility. 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 stock, (ii) selling or transferring
assets, (iii) making certain investments including acquisitions, (iv) incurring
additional indebtedness and liens, and (v) annual capital expenditures. Borrowings
under the revolving line of credit are anticipated to fund future requirements for
working capital, capital expenditures, and acquisitions, and to issue letters of credit.
Although the Credit Agreement expires on March 31, 2008, the revolving line of
credit is classified as a current liability in accordance with EITF No. 95-22, Balance
Sheet Classification of BorrowingsOutstanding under Revolving Credit Agreements
That Include both a Subjective Acceleration Clause and a Lock-BoxArrangement.The
Company is not obligated to repay or refinance amounts outstanding under the revolving
line of credit until fiscal year 2008.

As of October 1, 2004, the
Company had sufficient assets based on eligible accounts receivable and inventory to
borrow up to approximately $171.6 million under the revolving line of credit and had
outstanding borrowings of $25.0 million. The average daily interest rate, excluding
debt issuance costs and unused line fees, for the three months ended October 1, 2004
and October 3, 2003, was 3.64% and 4.13%, respectively. The average daily interest
rate, excluding debt issuance costs and unused line fees, for the six months ended October 1,
2004 and October 3, 2003, was 3.83% and 4.07%, 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 has been amended as follows:

- The First Amendment dated June 24, 2003 primarily finalized the syndication of the Credit Agreement to the
Lenders.
- The Second Amendment dated December 16, 2003 primarily increased the maximum borrowings under the Credit
Agreement from $150 million to $200 million. In addition, this amendment redefined the applicable margin
applied to the Bank's prime rate or LIBOR.
- The Third Amendment dated March 1, 2004 obtained the Lenders' approval to issue additional indebtedness in
the form of the convertible senior notes and to repurchase up to $42.0 million of the Company's common
stock, including any repurchases made subsequent to May 20, 2003. In addition, this amendment locked the
interest rate on the Credit Agreement at the Bank's prime rate or at LIBOR plus 2.00% for the period of
one year, concurrent with the Company's fiscal year 2005.
- The Fourth Amendment dated June 1, 2004 obtained the Lenders' approval to increase the aggregate amount of
permitted stock repurchases from $42.0 million to $55.0 million, which includes any stock repurchases made
subsequent to May 20, 2003.
- The Fifth Amendment dated October 1, 2004 obtained the Lenders' approval to (i) extend the term of the
agreement two years to March 31, 2008, (ii) increase the aggregate amount of permitted stock repurchases
from $55.0 million to $80.0 million, which includes any stock repurchases made subsequent to May 20, 2003,
(iii) increase the aggregate amount of permitted acquisitions from $50.0 million to $75.0 million, which
includes any acquisitions made subsequent to May 20, 2003, (iv) sets the applicable margin level for Base
Rate and LIBOR loans to -0.25% and 1.75%, respectively, for the period beginning October 1, 2004 and
ending March 26, 2005.

16

---

During the three months ended June 30,
2003, the Company entered into an interest rate swap agreement to hedge the variable
interest rate of its revolving line of credit. Under the terms of the interest rate swap
agreement, the Company makes payments based on the fixed rate and will receive interest
payments based on 1-month LIBOR. The changes in market value of this financial instrument
are 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 are recorded as reductions or additions to interest expense. In accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,SFAS
No. 138, Accounting for CertainDerivative 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,
the Companys interest rate swap agreement has been designated as a cash flow hedge
with changes in fair value recognized in accumulated other comprehensive income (loss) in
the accompanying consolidated balance sheets.

On July 19, 2004, the Company
elected to terminate $10 million of the $35 million (notional amount) interest rate swap
that was originally transacted on May 15, 2003. Accordingly, during the three months
ended October 1, 2004, the Company reclassified a gain of $61 from accumulated other
comprehensive income (loss) to interest expense related to the portion of the swap that
was terminated.

As of October 1, 2004, the swap
carries a notional principal amount of $25.0 million and effectively fixes the
interest rate on a portion of the revolving line of credit to 2.195%, prior to applying
the Leverage Ratio margin discussed above. The swap agreement expires on March 28,
2006 and settles monthly until expiration. At October 1, 2004 and April 2,
2004, the Company recorded an unrealized gain (loss), net of related tax effects, of $105
and ($40), respectively, for the estimated fair value of the swap agreement in
accumulated other comprehensive income (loss) in the accompanying consolidated balance
sheets.

17

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8.     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 upon which management regularly evaluates the
Company. These segments are managed separately because of different customers and
products. See Note 1, Background and Basis ofPresentation, 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. The following table presents financial information about the
Companys business segments:

|                                        | For the Three Months Ended | For the Six Months Ended
|--------------------------------------- | -------------------------- | ------------------------
|
|NET SALES:                              |                            |                         
|Physician Business                      |                            |                         
|Elder Care Business                     |                            |                         
|                                        |                            |                         
|Total net sales                         |                            |                         
|                                        |                            |                         
|INCOME FROM OPERATIONS:                 |                            |                         
|Physician Business                      |                            |                         
|Elder Care Business                     |                            |                         
|Corporate Shared Services               |                            |                         
|                                        |                            |                         
|Total income from operations            |                            |                         
|                                        |                            |                         
|DEPRECIATION:                           |                            |                         
|Physician Business                      |                            |                         
|Elder Care Business                     |                            |                         
|Corporate Shared Services               |                            |                         
|                                        |                            |                         
|Total depreciation                      |                            |                         
|                                        |                            |                         
|AMORTIZATION OF INTANGIBLE ASSETS:      |                            |                         
|Physician Business                      |                            |                         
|Elder Care Business                     |                            |                         
|Corporate Shared Services               |                            |                         
|                                        |                            |                         
|Total amortization of intangible assets |                            |                         
|                                        |                            |                         
|PROVISION FOR DOUBTFUL ACCOUNTS:        |                            |                         
|Physician Business                      |                            |                         
|Elder Care Business                     |                            |                         
|                                        |                            |                         
|Total provision for doubtful accounts   |                            |                         
|                                        |                            |                         
|INTEREST EXPENSE:                       |                            |                         
|Physician Business                      |                            |                         
|Elder Care Business                     |                            |                         
|Corporate Shared Services               |                            |                         
|                                        |                            |                         
|Total interest expense                  |                            |                         
|                                        |                            |                         

18

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|                                      | For the Three Months Ended | For the Six Months Ended
|------------------------------------- | -------------------------- | ------------------------
|
|PROVISION (BENEFIT) FOR INCOME TAXES: |                            |                         
|Physician Business                    |                            |                         
|Elder Care Business                   |                            |                         
|Corporate Shared Services             |                            |                         
|                                      |                            |                         
|Total provision for income taxes      |                            |                         
|                                      |                            |                         
|CAPITAL EXPENDITURES:                 |                            |                         
|Physician Business                    |                            |                         
|Elder Care Business                   |                            |                         
|Corporate Shared Services             |                            |                         
|                                      |                            |                         
|Total capital expenditures            |                            |                         
|                                      |                            |                         
|                                      |                            |                         

|                          | As of
|------------------------- | -----
|
|ASSETS:                   |      
|Physician Business        |      
|Elder Care Business       |      
|Corporate Shared Services |      
|                          |      
|Total assets              |      
|                          |      

9.     PURCHASE
BUSINESS COMBINATIONS

The following acquisitions were
accounted for under the purchase method of accounting in accordance with SFAS No. 141,
Business Acquisitions(SFAS 141);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. 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 2004

On September 4, 2003, the Elder
Care Business acquired certain assets and assumed certain liabilities of a long-term care
medical supply distributor. The aggregate purchase price was $13,639. The Company
obtained independent valuations of certain intangible assets and the final allocation of
the purchase price was finalized during the three months ended October 1, 2004. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.

19

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|                      | 
|--------------------- | 
|Accounts receivable   | 
|Inventory             | 
|Other current assets  | 
|Goodwill              | 
|Intangibles           | 
|                      | 
|Total assets acquired | 
|Current liabilities   | 
|                      | 
|Net assets acquired   | 
|                      | 

Goodwill of $5,698 was assigned to
the Elder Care Business and is expected to be nondeductible for tax purposes. Of the
$4,600 of acquired intangible assets, $700 and $3,900 was assigned to non-competition
agreements and customer relationships, respectively. The acquired intangible assets have
a weighted-average useful life of approximately 6.2 years.

10.     COMMITMENTS
AND CONTINGENCIES

Litigation

The Company, through its Elder Care
Business, its Physician Business, and/or predecessor companies, has been named as one of
many defendants in latex glove product liability claims in various federal and state
courts. The defendants are primarily distributors of certain brands of latex gloves. Most
of the cases have been settled by the Companys insurers, without expense to the
Company. Currently, one case remains in the state court of New Hampshire. Defense costs
are currently allocated by agreement between a consortium of insurers on a pro rata basis
for each case depending upon policy years and alleged years of exposure. All of the
insurance carriers are defending subject to a reservation of rights. The Company intends
to vigorously defend the proceedings; however, there can be no assurance that this
litigation will be ultimately resolved on terms that are favorable to the Company.

The Company and certain of its
current and former officers and directors are 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 action, which was filed in May 1998, is
pending in the United States District Court for the Middle District of Florida,
Jacksonville Division. The plaintiff seeks indeterminate damages, including costs and
expenses. The plaintiff initially alleged, for himself and for a purported class of
similarly situated stockholders who purchased the Companys stock between December 23,
1997 and May 8, 1998 that the defendants engaged in violations of certain provisions
of the Securities Exchange Act, and Rule 10b-5 promulgated thereunder. The
allegations were based upon 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, which resulted in earnings below analystsexpectations. In December 2002,
the Court granted the Companys motion to dismiss the plaintiffs second
amended complaint with prejudice with respect to the Section 10(b) claims. The plaintiffs
filed their third amended complaint in January 2003 alleging claims under Sections
14(a) and 20(a) of the Exchange Act on behalf of a putative class of all persons who were
shareholders of the Company as of March 26, 1998. In May 2003, the Court denied
the defendants motion to dismiss. By order dated February 18, 2004, the Court
granted plaintiffs motion for class certification. Court ordered mediation occurred
on June 10, 2004, during which the parties were not able to resolve their dispute.
The case is set for trial in October 2005. The Company intends to vigorously defend
the proceedings; however, there can be no assurance that this litigation will be
ultimately resolved on terms that are favorable to the Company.

The Company was named along with
certain present and former directors and officers as a defendant in ten related class
action complaints, the first of which was filed on July 13, 2001, in the United
States District Court for the Middle District of Florida. Those ten actions were
consolidated into a single action under the caption In Re PSS World Medical Inc.
Securities Litigation. The amended complaint was filed as a purported class action
on behalf of persons who purchased or acquired PSS World Medical, Inc. common stock at
various times during the period between October 26, 1999 and October 3, 2000
and alleged, among other things, violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs
alleged that the Company issued false and misleading statements and failed to disclose
material facts concerning, among other things, the Companys financial condition and
that because of the issuance of false and misleading statements and/or failure to
disclose material facts, the price of PSS World Medical, Inc. common stock was
artificially inflated during the class period. The Court granted the plaintiffs
motion for class certification in November 2002. The parties signed a settlement
agreement pursuant to which the Company has agreed to pay $6.75 million for the
benefit of the class members, of which $6.5 million was covered by the Companys
insurance policy. The settlement agreement has received court approval.

20

---

The Company has been named as a
defendant in a suit brought by three former and certain present employees of the Company,
entitled Angione, et al. v. PSS World Medical, Inc., which was filed on or about
June 4, 2002 in the U.S. District Court for the Central District of California,
Santa Ana Division. The court approved the transfer of venue, and the case is now pending
in the United States Court for the Middle District of Florida, Jacksonville Division. The
plaintiffs allege that the Company wrongfully classified its purchasers, operations
leader trainees, and accounts receivable representatives as exempt from the overtime
requirements imposed by the Fair Labor Standards Act and the California Wage Orders, and
they seek to recover back pay, interest, costs of suit, declaratory and injunctive
relief, and applicable statutory penalties. On February 21, 2003, the court
conditionally allowed the case to proceed as a collective action under the Fair Labor
Standards Act. An additional 59 plaintiffs opted into the proceeding, bringing the total
number of plaintiffs to 62. Two of the three original named plaintiffs also brought, but
subsequently have settled, individual claims for gender discrimination and retaliation
under Title VII of the Civil Rights Act of 1964 and the Equal Pay Act of 1963. As a
result of mediation in March 2004, the parties agreed on a framework for mediation
or arbitration in October 2004 on the issue of the plaintiffs attorneys
fees. The attorneys fee issue was resolved and the parties entered into
negotiations for resolution of the plaintiffsoutstanding wage claims. The parties
were able to reach agreement on the amount of wages to be paid to the plaintiffs. The
$2.9 million settlement payment, which has been accrued by the Company, was approved by the Court on November 5, 2004, and the
matter is concluded.

The Company is also a party to
various other 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.

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.

During July 2003, the Physician
Business entered into a five year agreement with a supplier to purchase a minimum number
of vials of influenza vaccines during the fiscal years 2004-2008. The pricing of the
vials of the vaccine is established on December 1 of each year. The Company must
notify the supplier of any reductions in the number of vials to be purchased by December 15.
Due to the influenza vaccine shortfall during calendar year 2004, the Physician Business
has been released from its purchase commitment for fiscal year 2005. The Physician
Business is committed to purchase approximately $26,340, $32,925, and $39,510 of
influenza vaccines during fiscal years 2006, 2007, and 2008, respectively.  These obligations
are contingent on the supplier's ability to deliver influenza vaccine during these periods and the amounts
are calculated using calendar year 2004 pricing.

If the Physician Business or the
Elder Care Business were to terminate a contract with a private label vendor for any
reason, the Company may be required to purchase the remaining inventory of private label
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 the ninety day period immediately preceding the date of
termination. As of October 1, 2004, the Company has not terminated any contracts with a
private label vendor that had a material impact to the Companys results of
operations and financial condition.

During fiscal year 2002, the Company
sold its International Business, which generated a capital loss carryforward. 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. Therefore, a valuation
allowance was recorded. However, based on recent Tax Court rulings, the Company has filed
a refund claim during the three months ended December 31, 2003 with the Internal
Revenue Service (IRS) to report an ordinary worthless stock deduction on the
sale of the International Business. The refund claim reflects a reclassification of the
nondeductible capital loss to a tax-deductible ordinary loss. The examiners denied this
claim as part of the audit of the federal income tax returns for the fiscal years ended
March 31, 2000 and March 30, 2001. The worthless stock deduction claim was
combined with the formal protest to the results of the audit and was submitted to

21

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the Appeals Office of the IRS.
During the three months ended October 1, 2004, the Appeals Office began reviewing the
claim and a tentative, verbal settlement with the IRS has been reached. The impending
settlement will be subject to approval from the Joint Committee. If a final settlement
can be reached and the Joint Committee subsequently approves the settlement agreement,
diluted earnings per share would be increased by approximately $0.07.

In June 2004, the Compensation
Committee of the Board of Directors approved an amendment to all outstanding stock
options granted to employees. The amendment provides for the acceleration of the vesting
of any unvested stock options as of April 1, 2005. Under current accounting rules,
the Company is required to recognize a 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. The maximum
stock-based compensation expense would be approximately $3.4 million if all holders
benefited from this provision with respect to outstanding options. However, the Company
has estimated this compensation expense to be approximately $0.1 million based on its
historical option forfeiture rate, and has recorded $0.1 million of related compensation expense.
Estimated compensation expense may be adjusted on a quarterly basis for actual experience and
changes in management assumptions.

11.     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, which offer attractive opportunities for growth and
profitability.

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).
The sale was completed pursuant to a Stock Purchase Agreement, dated as of October 28,
2002, among the Company, the Buyer, and Platinum, as amended on November 18, 2002
(the 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 (the Purchase Price).
The cash proceeds received during fiscal year 2003 were reduced by approximately $5,940
for transaction costs. In connection with the closing of the transaction, the Company and
the Buyer entered into a transitional services agreement, pursuant to which the Company
provided certain reimbursable services to the Buyer for a period of one year. This
agreement terminated during fiscal year 2004. The costs incurred related to providing
services under the transition services agreement were included in general and
administrative expenses and the reimbursement for these expenses were included in other
income in the accompanying statements of operations. During the three and six months
ended October 3, 2003, the Company recognized approximately $895 and $2,750,
respectively, of other income related to the transition services agreement.

The results of operations of the
Imaging Business and the estimated loss on disposal have been classified as discontinued
operations in accordance with SFAS 144. The estimated loss on disposal, which was
subject to change based on the final Purchase Price adjustments, was finalized during the
three months ended June 30, 2004. The accompanying financial statements have been
restated to conform to discontinued operations treatment for all historical periods
presented.

On March 14,
2003, the Company received a letter from the Buyer claiming a purchase price adjustment
of $32,257. The claimed purchase price adjustment was based on an accounting of the net
asset statement as of the closing date, which was delivered to the Buyer in January 2003.
Pursuant to the terms of the Stock Purchase Agreement, the matter was referred to an
independent accounting firm of national reputation for arbitration. Subsequent to March 14,
2003, the Buyer provided an adjusted claim to the arbitrator claiming a purchase price
adjustment of $28,222. Of this amount, the arbitrator ruled in favor of the Buyer for a
purchase price adjustment of $1,821. During the settlement process, management estimated
the net asset adjustment based on available information and revised its estimate on a
quarterly basis, if needed. Managements estimated net asset adjustment of
approximately $2,000 was recorded in prior periods. The pretax loss on disposal of
discontinued operations recorded during the six months ended October 1, 2004
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.
Accordingly, a cash payment of approximately $4,279 was made to the Buyer during the
second quarter of fiscal year 2005.

22

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The loss on disposal of discontinued
operations for the three and six months ended October 1, 2004 and October 3,
2003 is as follows:

|                                        | For the Three Months Ended | For the Six Months Ended
|--------------------------------------- | -------------------------- | ------------------------
|
|Pretax loss on disposal of discontinued |                            |                         
|operations                              |                            |                         
|Benefit for income taxes                |                            |                         
|                                        |                            |                         
|Loss on disposal of discontinued        |                            |                         
|operations                              |                            |                         
|                                        |                            |                         

12.     SUBSEQUENT EVENT

On October 7, 2004, the Elder
Care Business acquired certain assets and assumed certain liabilities of a long-term care
medical supply distributor. The maximum aggregate purchase price is approximately
$25,867, subject to certain adjustments as set forth in the Purchase Agreement, of which
$19,800 was paid in cash at the closing. Pursuant to the terms of the Purchase Agreement,
the remaining purchase price of up to $5,600 will be paid to the Seller by April 30,
2005 if minimum revenue thresholds are met and working capital balances as of the closing
date are validated. In connection with the transaction, the Company will also pay
approximately $1,100 for employee non-compete agreements.

23

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# Report of Independent
Registered Public Accounting Firm

The Board of Directors
and ShareholdersPSS World Medical, Inc.:

We have reviewed the consolidated
balance sheet of PSS World Medical, Inc. and subsidiaries as of October 1, 2004, the
related consolidated statements of operations for the three-month and six- month periods
ended October 1, 2004 and October 3, 2003, and the related statements of cash
flows for six-month periods ended October 1, 2004 and October 3, 2003. These
consolidated financial statements are the responsibility of the Companys management.

We conducted our reviews in
accordance with the standards of the Public Company Accounting Oversight Board (United
States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board (United
States), the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not
aware of any material modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with U.S. generally accepted
accounting principles.

We have previously audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheet of PSS World Medical, Inc. and subsidiaries as of
April 2, 2004, and the related consolidated statements of operations,
shareholders equity, and cash flows for the year then ended (not presented herein);
and in our report dated June 7, 2004, we expressed an unqualified opinion on those
consolidated financial statements. Our report referred to the adoption of Emerging Issues
Task Force No. 02-16, Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor, effective November 21, 2002, and Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No.4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, effective
March 29, 2003. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of April 2, 2004, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

Jacksonville, Florida November 8, 2004

24

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# ITEM 2.   
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 specialty marketer and distributor of medical products, equipment, and
pharmaceutical related products to alternate-site healthcare providers including physician
offices, long-term care facilities, and home care providers through 42 full-service
distribution centers, which serve all 50 states throughout the United States of America.
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 knowledge, unique arrangements
with product manufacturers, innovative information systems, 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 may selectively
make acquisitions to broaden its reach and leverage its infrastructure.

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. Historically, the
Company conducted business under a third operating segment, the Imaging Business. On
November 18, 2002, the Company completed the sale of the Imaging Business, or the
Diagnostic Imaging, Inc. subsidiary (DI), a distributor of medical diagnostic
imaging supplies, chemicals, equipment, and services to the acute and alternate-care
markets in the United States of America.

# THE INDUSTRY

According to industry estimates, the
market size of the medical supply and equipment, home care and office administered
pharmaceutical segments of the healthcare industry in the United States of America is
approximately $43 billion. This market is comprised of medical products, medical
equipment, and pharmaceutical products administered in an out-patient setting, which are
distributed to alternate-site healthcare providers, including physician offices, long-term
care and assisted living facilities, home healthcare providers and agencies, dental
offices, and other alternate-site providers, such as outpatient surgery centers,
podiatrists, and veterinarians. The Companys primary focus is the $20 billion
market for the distribution of medical products, medical equipment and office administered
pharmaceutical products to physician offices, long-term care and assisted living
facilities, and home healthcare providers and equipment dealers.

The medical products distribution
industry continues to experience growth due to the aging population, increased healthcare
awareness, the proliferation of medical technology and testing, new pharmacology
treatments, and expanded third-party insurance coverage. The elder care market is expected
to continue benefiting from the increasing growth rate of the elderly American population.
For example, the January 2000 U.S. Bureau of the Census estimates that the elderly
population in America will more than double by the year 2040. In 2000, four million
Americans age 85 years and older represented the segment of the population which is in the
greatest need of long-term care and elder care services. By the year 2040, this segment of
the population is projected to more than triple to over 14 million. The segment of
the population who is age 65 to 84 years is projected to more than double in the same time
period. The physician market is expected to continue to benefit from the shift of
procedures and diagnostic testing in hospitals to alternate sites, particularly physician
offices and home care providers. Furthermore, as the cosmetic surgery and elective
procedure markets continue to grow, physicians are increasingly performing more of these
procedures in their offices. Currently, the estimated growth rate for the future of the
physician and elder care markets is approximately 4.0% and 1.5%, respectively. As a result
of these market dynamics, the annual expenditures for healthcare services continue to
increase in the United States of America. As cited in The Centers for Medicaid and
Medicare Services (CMS), Office of the Actuary, National Health Statistics Group 2002
study, Trends and Indicators in the Changing Health Care Marketplace, total
national health care spending reached $1.3 trillion in 2000, or 13.2% of the
nations gross domestic product. Health care spending is projected to reach
$2.6 trillion in 2010, or 16.8% of the estimated gross domestic product.

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 the cost of a significant
portion of medical care in the United States of America. In recent years, federal and
state-imposed limits on reimbursement to hospitals, long-term care facilities, and other
healthcare providers have affected spending budgets in certain markets within the medical
products industry. The nursing home and home healthcare industry have been impacted by
these changes and a general economic downturn over the last few years. However, management
believes that the recent changes to Medicare and Medicaid reimbursement rates and the
introduction of the Medicare/Medicaid prescription drug program that became effective
beginning in the U.S. government fiscal year 2004 will positively impact the financial
condition of elder care providers and financial strength of the elder care industry.

25

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# OPERATING HIGHLIGHTS AND
TRENDS

The following tables set forth
certain financial information by business segment. All dollar amounts presented below are
in thousands unless otherwise indicated.

|                              | For the Three Months Ended | For the Six Months Ended
|----------------------------- | -------------------------- | ------------------------
|
|Net Sales:                    |                            |                         
|Physician Business            |                            |                         
|Elder Care Business           |                            |                         
|                              |                            |                         
|Total                         |                            |                         
|                              |                            |                         
|Net Sales Per Billing Day:(a) |                            |                         
|Physician Business            |                            |                         
|Elder Care Business           |                            |                         
|                              |                            |                         
|Total                         |                            |                         
|                              |                            |                         
|                              |                            |                         
|Income from Operations:       |                            |                         
|Physician Business            |                            |                         
|Elder Care Business           |                            |                         
|Corporate Shared Services     |                            |                         
|                              |                            |                         
|Total                         |                            |                         
|                              |                            |                         

|                             | Annualized
|---------------------------- | ----------
|
|Days Sales Outstanding:(b)   |           
|Physician Business           |           
|Elder Care Business          |           
|                             |           
|Days On Hand:(c)             |           
|Physician Business           |           
|Elder Care Business          |           
|                             |           
|Days in Accounts Payable:(d) |           
|Physician Business           |           
|Elder Care Business          |           
|                             |           
|Cash Conversion Days:(e)     |           
|Physician Business           |           
|Elder Care Business          |           
|                             |           
|Inventory Turnover:(f)       |           
|Physician Business           |           
|Elder Care Business          |           

26

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| | (a) | Net
sales per billing day are net sales divided by the number of selling days in
          the fiscal period. The three months ended October 1, 2004 and
          October 3, 2003 consisted of 65 and 67 days, respectively. The six months
          ended October 1, 2004 and October 3, 2003 consisted of 127 and 132
          days, respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | 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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | 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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# THREE MONTHS ENDED
OCTOBER 1, 2004 VERSUS THREE MONTHS ENDED OCTOBER 3, 2003

# NET SALES

|                    | For the Three Months Ended |  |  
|------------------- | -------------------------- |  | -
|
|                   
|Physician Business  |                            |  | $
|Elder Care Business |                            |  |  
|                    |                            |  |  
|Total               |                            |  | $
|                    |                            |  |  

The comparability of net sales
quarter over quarter is impacted by the number of selling days in each quarter. The three
months ended October 1, 2004 and October 3, 2003 consisted of 65 and 67 selling
days, respectively. The following table summarizes net sales per billing day results
quarter over quarter:

|                    | Net Sales Per Billing Day |  |  
|------------------- | ------------------------- |  | -
|
|                   
|Physician Business  |                           |  | $
|Elder Care Business |                           |  |  
|                    |                           |  |  
|Total               |                           |  | $
|                    |                           |  |  

27

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# Physician Business

The increase in net sales is
primarily attributable to (i) an increase in branded consumable product sales of
approximately $6.4 million, (ii) an increase in pharmaceutical product sales of
approximately $3.9 million, (iii) an increase in equipment sales of
approximately $1.1 million, and (iv) an increase in private label consumable
product sales of approximately $1.6 million, offset by a decrease in immunoassay
sales of approximately $1.1 million. Pharmaceutical product sales during the three
months ended October 1, 2004 were negatively impacted by the unavailability of the
influenza vaccines. As a result, managements original expectation of approximately
$44.0 million of influenza vaccine sales will be negatively impacted, which impacts diluted
earnings per share approximately $0.04. Excluding the impact of the influenza vaccines,
net sales continued to be positively impacted by revenue growth programs that are
discussed below. Influenza vaccine sales for the three months ended October 3, 2003 were
approximately $5.4 million.

Net sales continued to be positively
impacted by revenue growth programs that were launched in June 2003 and that focus on
consumable products, pharmaceutical products, and equipment. These programs include:

- Advantage Club - A customer membership club that enables customers to participate in exclusive promotions for
a broad selection of commonly used products.
- Rx Extreme - A comprehensive program offering pharmaceutical, vaccine and general injectibles products. The
term "Extreme" symbolizes the Physician Business' significant commitment to its sales force and customers to
become the leading provider of these products.
- Can-Do - An equipment marketing program that enables customers to access a broad portfolio of
industry-leading laboratory and diagnostic equipment, as well as certain exclusive products available only
through the Physician Business.

The following table compares the
product sales mix quarter over quarter:

|                          | For the Three Months Ended
|------------------------- | --------------------------
|
|                          |                           
|Consumable products       |                           
|Pharmaceutical products   |                           
|Equipment and Immunoassay |                           
|                          |                           
|Total                     |                           
|                          |                           

Over the last fiscal year, the
Physician Business sales mix changed due to managements focus on growing
pharmaceutical product sales by establishing the Rx Extreme revenue growth program.
Pharmaceutical product sales were positively impacted during the three months ended
October 1, 2004 as a result of expanding the Physician Business product
offering. Management expects the sales mix for the three months ended December 31, 2004
compared to the three months ended December 31, 2003 to continue to be impacted by
the British Health authorities blockage of Chiron Corporations influenza vaccine
shipments. The majority of influenza vaccine orders for fiscal year 2004 were delivered to
customers during the nine months ended December 31, 2003.

# Elder Care Business

The increase in net sales is primarily attributable to an increase of sales to skilled
nursing home facilities of approximately $4.6 million,  which includes a decrease in net sales to corporate-owned
facilities of approximately $3.5 million , and an increase in sales to home care facilities of $1.6 million.
Imbedded in the above change in sales to skilled nursing and home care facilities is an increase in ancillary
billing service fees of $2.1 million as a result of an acquisition consummated during fiscal year 2004.  The
growth in net sales to skilled nursing home facilities primarily resulted from new customers, acquisitions, and
increased penetration in existing customer facilities.  The decrease in net sales to corporate accounts (national
and regional nursing home facilities) is primarily attributable to national chain customers divesting nursing
home facilities.  Net sales during the three months ended October 1, 2004 decreased approximately $5.0 million as
a result of the loss of Integrated Health Services, Inc., a national chain customer, during fiscal year 2004.

28

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Net sales were impacted by the
continued implementation of the following innovative Elder Care customer specific solution
programs:

- ANSWERS, ANSWERS Housekeeping, ANSWERS Home Medical Equipment- Marketing programs that align improved
business processes in the nursing home operations and purchasing, with more efficient distribution
activities of the Elder Care Business. In addition to reducing distribution costs by encouraging more
efficient buying patterns, these programs provide opportunities for manufacturing partners to increase sales
volume of category-leading, name-brand products while providing customers the opportunity to purchase higher
quality products at reduced prices which improve patient care outcomes for the Elder Care customers.
- Partners in Efficiency-A product program designed to reduce customers' product procurement costs and
increase operating efficiencies in their businesses by committing to certain purchasing levels and
standardized ordering procedures.
- Fast Accurate Supply Technology- An ordering, bar-code scanning, inventory management software that utilizes
a Palm Pilot to track inventory on hand at the customer locations and facilitate the automated replenishment
of medical supplies.

The following table compares the
customer segment sales mix quarter over quarter:

|                                            | For the Three Months Ended
|------------------------------------------- | --------------------------
|
|                                            |                           
|Nursing home and assisted living facilities |                           
|Corporate accounts                          |                           
|Independent accounts                        |                           
|                                            |                           
|Subtotal                                    |                           
|Home care                                   |                           
|                                            |                           
|Total                                       |                           
|                                            |                           

The sales mix comparison quarter over
quarter has been impacted by managements increased focus during fiscal years 2004
and 2005 on growing independent and regional accounts to offset the impact of large,
national chain customer divestitures and on increasing sales to the home care market.
During fiscal year 2005, national nursing home chain customers may continue to divest
underperforming facilities and facilities located in states with high malpractice claims,
insurance costs, and litigation exposure. During fiscal year 2004, a dedicated sales force
to service home care customers was established and a new home care marketing program was
introduced.

Net sales quarter over quarter were
also positively impacted by business combinations consummated during fiscal year 2004. As
a result of these business combinations, approximately $6.6 million of additional net
sales were recognized during the three months ended October 1, 2004 compared to the
three months ended October 3, 2003.

# GROSS PROFIT

Gross profit for the three months
ended October 1, 2004 totaled $105.3 million, an increase of $7.2 million,
or 7.4%, from gross profit of $98.1 million for the three months ended
October 3, 2003. Gross profit as a percentage of net sales increased 60 basis points
to 28.9% during the three months ended October 1, 2004 from 28.3% during the three
months ended October 3, 2003.

# Physician Business

Gross profit dollars increased
primarily due to the growth in net sales discussed above as well as increased
profitability generated by procurement-to-pay process improvements. The Company believes
its strategy of centralizing the procurement and disbursements functions has resulted, and
will continue to result, in efficiencies and savings that will increase gross profit.
Gross profit as a percentage of net sales decreased slightly as a result of the increase
in sales of pharmaceutical products that generate lower gross margins compared to
consumable products. Gross profit as a percentage of net sales may continue to decrease in
future periods due to an expected increased sales volume of pharmaceutical products and
diagnostic equipment in the Physician Business, which generate lower gross profit margins.

29

---

# Elder Care Business

Gross profit dollars increased
primarily due to the growth in net sales discussed above. Gross profit as a percentage of
net sales increased primarily as a result of the replacement of revenues from lower margin
national accounts with higher margin regional and independent accounts. In addition,
providing ancillary billing services has positively impacted gross profit margin. Such
services typically generate higher gross profit margins. Gross profit as a percentage of
net sales may increase in future periods as a result of net sales growth in ancillary
billing services.

# GENERAL AND
ADMINISTRATIVE EXPENSES

|                             | For the Three Months Ended | 
|---------------------------- | -------------------------- | 
|
|
|                             |                            | 
|Physician Business(a)        |                            | 
|Elder Care Business(a)       |                            | 
|Corporate Shared Services(b) |                            | 
|                             |                            | 
|Total(b)                     |                            | 
|                             |                            | 

| | (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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------

# Physician Business

General and administrative expenses
as a percentage of net sales decreased 50 basis points quarter over quarter. This
percentage decrease is attributable to leveraging the net sales growth across various
fixed costs and the Companys focus on reducing its cost to deliver. Cost to deliver
represents all costs associated with the transportation and delivery of products to
customers. Cost to deliver as a percentage of net sales was 2.9% and 3.0% during the three
months ended October 1, 2004 and October 3, 2003, respectively. This percentage
decrease is a result of a decrease in freight costs due to negotiated lower freight rates,
route optimization of the Companys fleet, and optimization of shipments between
branches, offset by an increase in fuel costs. Management anticipates that rising fuel
costs may continue to negatively impact cost to deliver or expected improvements in cost
to deliver during fiscal year 2005.

There were relatively insignificant
changes in the other components of general and administrative expenses quarter over
quarter. However, incentive compensation increased approximately $0.9 million as a
result of improved profitability.

# Elder Care Business

General and administrative expenses
as a percentage of net sales increased 120 basis points quarter over quarter. Cost to
deliver as a percentage of net sales was 4.3% and 4.1% during the three months ended
October 1, 2004 and October 3, 2003, respectively. During fiscal year 2004,
management implemented various process improvements to reduce the cost to deliver.
However, increases in freight costs and rising fuel costs have offset the benefits of
these process improvement programs. Management anticipates that rising fuel costs may
negatively impact the cost to deliver or expected improvements in cost to deliver during
fiscal year 2005.

30

---

There were relatively insignificant
changes in the other components of general and administrative expenses quarter over
quarter. Such changes are primarily related to the acquisition of the ancillary billing
company during fiscal year 2004, including (i) increased salary expense of
approximately $0.9 million due to additional employees as a result of the business
combinations completed during fiscal year 2004 and (ii) increased amortization of
intangible assets of approximately $0.3 million as a result of these business
combinations.

# Corporate Shared Services

The increase in general and
administrative expenses is primarily attributable to (i) the $1.4 million reversal of
an operating tax charge reserve during the three months ended October 3, 2003,
(ii) an increase in incentive compensation of approximately $0.8 million which
primarily related to improved profitability and the adoption of the Shareholder Value Plan
during fiscal year 2003, (iii) an increase in professional fees of approximately
$0.4 million primarily related to costs incurred to comply with Section 404 of the
Sarbanes-Oxley Act, offset by (iv) a decrease in medical insurance costs of
approximately $0.9 million primarily related to improved medical claim experience
compared to the prior quarter, (v) a decrease in legal and professional fees of
approximately $0.7 million, (vi) a decrease in the cost of the private data
network of approximately $0.4 million as a result of reducing the number of service
center locations and the conversion to a virtual private network for data transmission,
and (vii) a decrease in business insurance expense of approximately $0.3 million
due to general rate decreases.

# SELLING EXPENSES

|                    | For the Three Months Ended | 
|------------------- | -------------------------- | 
|
|
|                    |                            | 
|Physician Business  |                            | 
|Elder Care Business |                            | 
|                    |                            | 
|Total               |                            | 
|                    |                            | 

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 40 basis points due to an increased sales volume of pharmaceutical
products, which generate lower gross profit margins. In addition, the decrease is
attributable to leveraging the net sales growth across certain fixed selling expenses.

# Elder Care Business

Selling expenses as a percentage of
net sales increased 10 basis points due to (i) the addition of higher margin business
that pays higher commission rates, (ii) the addition of corporate account executives
and sales representatives primarily in the home care market, and (iii) the increased
selling expenses associated with the ancillary billing company that was acquired during
fiscal year 2004.

31

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# INCOME FROM OPERATIONS

|                          | For the Three Months Ended | 
|------------------------- | -------------------------- | 
|
|
|                          |                            | 
|Physician Business        |                            | 
|Elder Care Business       |                            | 
|Corporate Shared Services |                            | 
|                          |                            | 
|Total Company             |                            | 
|                          |                            | 

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

# INTEREST EXPENSE

Interest expense for the three months
ended October 1, 2004 totaled $1.8 million, an increase of $0.5 million, or
35.0%, from interest expense of $1.3 million for the three months ended
October 3, 2003. During the three months ended October 1, 2004, approximately $1.2
million was attributable to interest expense and debt issuance costs related to the
Companys 2.25% convertible senior notes. In addition, the Company maintained a
portion of its revolving credit facility under an interest rate swap arrangement at a
fixed rate of 4.195% (consisting of an interest rate swap of 2.195% and a fixed credit
spread of 2.0%), which resulted in approximately $0.3 million of interest expense.
The notional value of the swap declined during the period from $35 million to $25 million
due to the Companys election to terminate $10 million of the swap during the period.
The remaining interest expense of $0.3 million is attributable to amortization of the
debt issuance costs, fees on the unused portion of the line of credit, and interest
payments on short-term working capital borrowings under the revolving credit agreement.
During the three months ended October 3, 2003, the Companys debt structure
consisted of variable rate borrowings under its revolving credit agreement. During this
period, the Company incurred approximately $1.0 million of interest expense due to
average outstanding borrowings of $99.9 million at a weighted average interest rate
of 4.13% and an additional $0.3 million of interest expense related to the
amortization of debt issuance costs.

# OTHER INCOME

Other income for the three months
ended October 1, 2004 totaled $0.3 million, a decrease of $0.8 million from
other income of $1.1 million for the three months ended October 3, 2003. The
decrease is primarily related to the $0.9 million of other income that was recorded
during the three months ended October 3, 2003 as a result of the transition services
agreement associated with the sale of the Imaging Business. This agreement was terminated
during fiscal year 2004.

# PROVISION FOR INCOME TAXES

Provision for income taxes was
$6.1 million for the three months ended October 1, 2004, an increase of
$0.7 million from the provision for income taxes of $5.4 million for the three
months ended October 3, 2003. The effective income tax rate was approximately 41.2%
and 39.4% for the three months ended October 1, 2004 and October 3, 2003,
respectively. The increase in the effective rate is primarily attributable to an increase
in unfavorable permanent adjustments offset by an increase in the projected annual income
from continuing operations before provision for income taxes. The change in the permanent
adjustments primarily relates to an increase in nondeductible amortization of intangible
assets recorded as a result of the Companys recent stock acquisitions and a decrease
in the value of cash surrender value of company-owned life insurance policies.

During the three months ended
December 31, 2003, the Internal Revenue Service (IRS) began fieldwork on
the audit of the federal income tax returns for the fiscal years ended March 29, 2002
and March 28, 2003. Management anticipates fieldwork for these tax years to be
completed during the third quarter of fiscal year 2005. Management does not anticipate the
results of the audit to have a material impact on the financial condition or consolidated
results of operations of the Company.

32

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During fiscal year 2002, the IRS
notified the Company that the federal 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 related to the fiscal years ended March 31, 2000 and March 30,
2001. The Company appealed certain findings, which primarily related to timing of tax
deductions, with the Appeals Office of the IRS.

During fiscal year 2002, the Company
sold its International Business, which generated a capital loss carryforward. 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. Therefore, a valuation
allowance was recorded. Based on recent Tax Court rulings, the Company filed a refund
claim with the IRS during the three months ended December 31, 2003, to report an
ordinary worthless stock deduction on the sale of the International Business. The filing
reflects a reclassification of the nondeductible capital loss to a tax-deductible ordinary
loss. The IRS denied this claim as part of the audit of the federal income tax returns for
the fiscal years ended March 31, 2000 and March 30, 2001.

The worthless stock deduction claim
has been reviewed by the Appeals Office of the IRS. During the six months ended
October 1, 2004, a tentative settlement with the IRS was reached. Management
currently estimates this proposed settlement will result in a one-time reduction of
provision for income taxes, increasing diluted earnings per share by approximately
$0.07.

# NET INCOME

Net income for the three months ended
October 1, 2004 totaled $8.8 million compared to net income of $8.0 million
for the three months ended October 3, 2003. Variances are due to the factors
discussed above.

# SIX MONTHS ENDED
OCTOBER 1, 2004 VERSUS SIX MONTHS ENDED OCTOBER 3, 2003

# NET SALES

|                    | For the Six Months Ended |  |  
|------------------- | ------------------------ |  | -
|
|                    |                          |  |  
|Physician Business  |                          |  | $
|Elder Care Business |                          |  |  
|                    |                          |  |  
|Total               |                          |  | $
|                    |                          |  |  

The comparability of net sales period over
period is impacted by the number of selling days in each quarter. The six months ended
October 1, 2004 and October 3, 2003 consisted of 127 and 132 selling days,
respectively. The following table summarizes net sales per billing day period over period:

|                    | Net Sales Per Billing Day |  |  
|------------------- | ------------------------- |  | -
|
|                   
|Physician Business  |                           |  | $
|Elder Care Business |                           |  |  
|                    |                           |  |  
|Total               |                           |  | $
|                    |                           |  |  

33

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# Physician Business

The increase in net sales is
primarily attributable to (i) an increase in branded consumable product sales of
approximately $13.9 million, (ii) an increase in pharmaceutical product sales of
approximately $13.2 million, (iii) an increase in equipment sales of
approximately $3.8 million, and (iv) an increase in private label consumable
product sales of approximately $3.1 million, offset by a decrease in immunoassay
sales of approximately $2.0 million. Pharmaceutical product sales during the six
months ended October 1, 2004 were negatively impacted by the unavailability of the
influenza vaccines. As a result, managements original expectation of approximately
$44.0 million of influenza vaccine sales will be negatively impacted, which impacts diluted
earnings per share approximately $0.04. Influenza vaccine sales for the six months ended
October 3, 2003 were approximately $5.4 million. Excluding the impact of the influenza
vaccines, net sales continued to be positively impacted by revenue growth programs that
are discussed above.

The following table compares the
product sales mix period over period:

|                          | For the Six Months Ended
|------------------------- | ------------------------
|
|                          |                         
|Consumable products       |                         
|Pharmaceutical products   |                         
|Equipment and Immunoassay |                         
|                          |                         
|Total                     |                         
|                          |                         

As discussed above, over the last
fiscal year, the Physician Business sales mix changed due to managements focus
on growing pharmaceutical product sales by establishing the Rx Extreme revenue
growth program. Pharmaceutical product sales were positively impacted during the six
months ended October 1, 2004 as a result of expanding the Physician Business
product offering. Management expects the sales mix for the nine months ended December 31,
2004 compared to the nine months ended December 31, 2003 to continue to be impacted
by the British Health authorities blockage of Chiron Corporations influenza vaccine
shipments. The majority of influenza vaccine orders for fiscal year 2004 were delivered to
customers during the nine months ended December 31, 2003.

# Elder Care Business

The increase in net sales is primarily attributable to an increase of sales to skilled
nursing home facilities of approximately $3.7 million,  which includes a decrease in net sales to corporate-owned
facilities of approximately $9.6 million , and an increase in sales to home care facilities of $3.8 million.
Imbedded in the above change in sales to skilled nursing and home care facilities is an increase in ancillary
billing service fees of $3.7 million as a result of an acquisition consummated during fiscal year 2004.  The
growth in net sales to skilled nursing home facilities primarily resulted from new customers, acquisitions,
increased penetration in existing customer facilities, and the introduction of new product lines.  The decrease
in net sales to corporate accounts (national and regional nursing home facilities) is primarily attributable to
national chain customers divesting nursing home facilities.  Net sales during the six months ended October 1,
2004 decreased approximately $10.0 million as a result of the loss of Integrated Health Services, Inc., a
national chain customer, during fiscal year 2004.

Net sales were impacted by the
continued implementation of the innovative Elder Care customer specific solution programs
discussed above.

34

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The following table compares the
customer segment sales mix period over period:

|                                 | For the Six Months Ended
|-------------------------------- | ------------------------
|
|                                 |                         
|Nursing home and assisted living |                         
|facilities:                      |                         
|Corporate accounts               |                         
|Independent accounts             |                         
|                                 |                         
|Subtotal                         |                         
|Home care                        |                         
|                                 |                         
|Total                            |                         
|                                 |                         

The sales mix comparison period over
period has been impacted by managements increased focus during fiscal years 2004 and
2005 on growing independent and regional accounts to offset the impact of large, national
chain customer divestitures and on increasing sales to the home care market.

Net sales period over period were
also positively impacted by business combinations consummated during fiscal year 2004. As
a result of these business combinations, approximately $13.2 million of additional
net sales were recognized during the six months ended October 1, 2004 compared to the
six months ended October 3, 2003.

# GROSS PROFIT

Gross profit for the six months ended
October 1, 2004 totaled $201.1 million, an increase of $15.1 million, or
8.1%, from gross profit of $186.0 million for the six months ended October 3,
2003. Gross profit as a percentage of net sales increased 60 basis points to 29.0% during
the six months ended October 1, 2004 from 28.4% during the six months ended
October 3, 2003.

# Physician Business

Gross profit dollars increased
primarily due to the growth in net sales discussed above as well as increased
profitability generated by procurement-to-pay process improvements. The Company believes
its strategy of centralizing the procurement and disbursements functions has resulted, and
will continue to result, in efficiencies and savings that will increase gross profit.
Gross profit as a percentage of net sales decreased slightly as a result of the increase
in sales of pharmaceutical products that generate lower gross margins compared to
consumable products. Gross profit as a percentage of net sales may continue to decrease in
future periods due to an expected increased sales volume of pharmaceutical products and
diagnostic equipment in the Physician Business, which generate lower gross profit margins.

# Elder Care Business

Gross profit dollars increased
primarily due to the growth in net sales discussed above. Gross profit as a percentage of
net sales increased primarily as a result of the replacement of revenues from lower margin
national accounts with higher margin regional and independent accounts. In addition,
providing ancillary billing services has positively impacted gross profit margin. Such
services typically generate higher gross profit margins. Gross profit as a percentage of
net sales may increase in future periods as a result of net sales growth in ancillary
billing services.

35

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# GENERAL AND
ADMINISTRATIVE EXPENSES

|                             | For the Six Months Ended | 
|---------------------------- | ------------------------ | 
|
|
|                             |                          | 
|Physician Business(a)        |                          | 
|Elder Care Business(a)       |                          | 
|Corporate Shared Services(b) |                          | 
|                             |                          | 
|Total(b)                     |                          | 
|                             |                          | 
|                             |                          | 

| | (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.
| | --- | ------------------------------------------------------------------------------------------------------------------------------

# Physician Business

General and administrative expenses
as a percentage of net sales decreased 110 basis points period over period. This
percentage decrease is attributable to leveraging the net sales growth across various
fixed costs and the Companys focus on reducing its cost to deliver. Cost to deliver
as a percentage of net sales was 3.0% and 3.2% during the six months ended October 1,
2004 and October 3, 2003, respectively. This percentage decrease is a result of a
decrease in freight costs due to negotiated lower freight rates, route optimization of the
Companys fleet, and optimization of shipments between branches, offset by an
increase in fuel costs.

There were relatively insignificant
changes in the other components of general and administrative expenses period over period.
However, incentive compensation increased approximately $0.7 million as a result of
improved profitability.

# Elder Care Business

General and administrative expenses
as a percentage of net sales increased 120 basis points period over period. Cost to
deliver as a percentage of net sales was 4.2% during the six months ended October 1,
2004 and October 3, 2003. During fiscal year 2004, management focused on reducing the
cost to deliver which resulted in a decrease in freight costs due to negotiated lower
freight rates, but this decrease was offset by an increase in fuel costs. Management
anticipates that rising fuel costs may negatively impact the cost to deliver or expected
improvements in cost to deliver during fiscal year 2005.

There were relatively insignificant
changes in the other components of general and administrative expenses period over period.
Such changes are primarily related to the acquisition of the ancillary billing company
during fiscal year 2004, including (i) increased salary expense of approximately
$1.5 million due to additional employees as a result of the business combinations
completed during fiscal year 2004 and (ii) increased amortization of intangible
assets of approximately $0.6 million as a result of these business combinations.

# Corporate Shared Services

The increase in general and
administrative expenses is primarily attributable to (i) the $1.4 million reversal of the
operating tax charge reserve during the three months ended October 3, 2003, (ii) an
increase in incentive compensation of approximately $1.2 million which primarily related
to improved profitability and the adoption of the Shareholder Value Plan during fiscal
year 2003, (iii) an increase in depreciation expense of approximately $0.7 million related
to the implementation of new enterprise resource planning (ERP) systems, (iv)
an increase in professional fees of approximately $0.8 million primarily related to costs
incurred to comply with Section 404 of the Sarbanes-Oxley Act, offset by (v) a
decrease in medical insurance costs of approximately $1.1 million primarily related
to improved medical claim experience compared to the prior period, (vi) a decrease in
the cost of the private data network of approximately $0.7 million as a result of
reducing the

36

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number of service center locations
and the conversion to a virtual private network for data transmission, (vii) a
decrease in legal and professional fees of approximately $0.5 million, and (viii) a
decrease in business insurance expense of approximately $0.3 million due to general
rate decreases.

# SELLING EXPENSES

|                    | For the Six Months Ended | 
|------------------- | ------------------------ | 
|
|
|                    |                          | 
|Physician Business  |                          | 
|Elder Care Business |                          | 
|                    |                          | 
|Total Company       |                          | 
|                    |                          | 

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 40 basis points due to an increased sales volume of pharmaceutical
products, which generate lower gross profit margins. In addition, the decrease is
attributable to leveraging the net sales growth across certain fixed selling expenses.

# Elder Care Business

Selling expenses as a percentage of
net sales increased 50 basis points due to (i) the addition of higher margin business
that pays higher commission rates, (ii) the addition of corporate account executives
and sales representatives primarily in the home care market, and (iii) the increased
selling expenses associated with the ancillary billing company that was acquired during
fiscal year 2004.

# INCOME FROM OPERATIONS

|                          | For the Six Months Ended | 
|------------------------- | ------------------------ | 
|
|
|                          |                          | 
|Physician Business        |                          | 
|Elder Care Business       |                          | 
|Corporate Shared Services |                          | 
|                          |                          | 
|Total Company             |                          | 
|                          |                          | 

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

37

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# INTEREST EXPENSE

Interest expense for the six months
ended October 1, 2004 totaled $3.8 million, an increase of $1.3 million, or
52.8%, from interest expense of $2.5 million for the six months ended October 3,
2003. During the six months ended October 1, 2004, approximately $2.3 million was
attributable to interest expense and debt issuance costs related to the Companys
2.25% convertible senior notes. In addition, the Company maintained a portion of its
revolving credit facility under an interest rate swap arrangement at a fixed rate of
4.195% (consisting of an interest rate swap of 2.195% and a fixed credit spread of 2.0%),
which resulted in $0.6 million of interest expense. During the six month period, the
notional value of the swap declined from $35 million to $25 million due to the
Companys election to terminate $10 million of the swap in July 2004. The remaining
interest expense of $0.9 million is attributable to amortization of the debt issuance
costs, fees on the unused portion of the line of credit, and interest payments on
short-term working capital borrowings under the revolving credit agreement. During the six
months ended October 3, 2003, the Companys debt structure consisted of variable
rate borrowings under its revolving credit agreement. During this period, the Company
incurred approximately $2.0 million of interest expense due to average outstanding
borrowings of $91.4 million at a weighted average interest rate of 4.07% and an
additional $0.5 million of interest expense related to the amortization of debt
issuance costs.

# OTHER INCOME

Other income for the six months ended
October 1, 2004 totaled $0.6 million, a decrease of $2.6 million from other
income of $3.2 million for the six months ended October 3, 2003. The decrease is
primarily related to the $2.8 million of other income that was recorded as a result
of the transition services agreement associated with the sale of the Imaging Business.
This agreement was terminated during fiscal year 2004.

# PROVISION FOR INCOME
TAXES

Provision for income taxes was
$10.1 million for the six months ended October 1, 2004, an increase of
$1.6 million from the provision for income taxes of $8.5 million for the six
months ended October 3, 2003. The effective income tax rate was approximately 40.8%
and 39.6% for the six months ended October 1, 2004 and October 3, 2003,
respectively. The increase in the effective rate is primarily attributable to an increase
in unfavorable permanent adjustments offset by an increase in the projected annual income
from continuing operations before provision for income taxes. The change in the permanent
adjustments primarily relates to an increase in nondeductible amortization of intangible
assets recorded as a result of the Companys recent stock acquisitions and the
decrease in the value of cash surrender value of company-owned life insurance policies.

# LOSS ON DISPOSAL OF
DISCONTINUED OPERATIONS

During the six months ended
October 1, 2004, the Company recorded a pretax loss on disposal of discontinued
operations of approximately $2.7 million, which primarily related to the final
arbitration settlement on the disputed net asset calculation between the Company and the
buyer of the Imaging Business. The initial claim was for a purchase price adjustment of
$32.3 million, based on an accounting of the net assets of the business as of the
closing date, and was later reduced to $28.2 million. The loss on disposal of
discontinued operations recorded during the six months ended October 1, 2004
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, (ii) interest of $0.4 million, and (iii) legal and
professional fees of $0.5 million, offset by a benefit for income taxes of
$1.0 million.

The Company recorded a deferred tax
asset of approximately $58.1 million at October 1, 2004, which represented the
tax effect of the actual loss generated as a result of the sale 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. Management estimates that this NOL will be carried forward
and applied against regular taxable income in future years. In future periods, the
provision for income taxes will be recorded in the statements of operations at the
appropriate effective tax rate based on income generated by the Company.

# NET INCOME

Net income for the six months ended
October 1, 2004 totaled $13.0 million compared to net income of
$12.6 million for the six months ended October 3, 2003. Net income for the six
months ended October 1, 2004 and October 3, 2003 included a charge of
$1.7 million and $0.3 million, net of the benefit for income taxes,
respectively, related to the loss on disposal of discontinued operations. Otherwise,
variances are due to the factors discussed above.

38

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# LIQUIDITY AND CAPITAL
RESOURCES Highlights

|                               | For the Three Months Ended | For the Six Months Ended
|------------------------------ | -------------------------- | ------------------------
|
|                               |                            |                         
|Cash Flow Information:         |                            |                         
|Net cash provided by (used in) |                            |                         
|operating activities           |                            |                         
|Net cash used in investing     |                            |                         
|activities                     |                            |                         
|Net cash (used in) provided by |                            |                         
|financing activities           |                            |                         
|                               |                            |                         
|Net decrease in cash and cash  |                            |                         
|equivalents                    |                            |                         
|                               |                            |                         

|                                | As of
|------------------------------- | -----
|
|                                |      
|Capital Structure:              |      
|Debt                            |      
|Less: Cash and cash equivalents |      
|                                |      
|Net debt                        |      
|Shareholders' equity            |      
|                                |      
|Total capital                   |      
|                                |      
|Operating Working Capital:      |      
|Accounts receivable             |      
|Inventories                     |      
|Accounts payable                |      
|                                |      
|Total                           |      
|                                |      

# Discussion of Cash Flows From Operating, Investing, and Financing Activities

The primary components of net cash
provided by (used in) operating activities consist of net income adjusted to reflect the
effect of non-cash expenses and changes in operating working capital. During the six months ended October 1, 2004,
cash flows from operating activities reflects the Company's utilization of $9.8 million (tax-effected) of net operating loss carryforwards to
offset current Federal and state tax liabilities.  As of October 1, 2004, the Company has $23.8 million (tax-effected) of net
operating loss carryforwards remaining and expects to utilize the remaining Federal net operating loss carryforwards,
as well as a portion of the remaining state net operating loss carryforwards through fiscal 2006.  In addition, during the six months ended October 1, 2004:

- Accounts receivable increased approximately $12.0 million. During the three months ended October 1, 2004,
net sales per billing day grew to $5.6 million, or 5.6%, over net sales per billing day of $5.3 million for
both the three months ended April 2, 2004, and June 30, 2004. Accordingly, the growth in accounts
receivable was in-line with the growth in net sales per billing day.

39

---

- Inventories increased approximately $13.5 million to support pharmaceutical sales growth in the Physician
Business, and further expansion into the durable medical equipment and homecare markets by the Elder Care
Business.
- Accounts payable increased approximately $14.5 million, which generally corresponds to the overall change in
inventory levels.

Overall, net cash provided by
operating activities during the six months ended October 1, 2004 was impacted by an
increase in overall operating profit and partially offset by operational working capital
needs to support net sales growth.

The primary components of net cash provided by (used in) operating activities consist
of net income adjusted to reflect the effect of non-cash expenses and changes in operating working capital.
During the six months ended October 3, 2003, cash flows from operating activities reflects the Companys
utilization of $6.2 million (tax-effected) of net operating loss carryforwards to offset current Federal and state tax
liabilities.  In addition, during the six months ended October 3, 2003:

- Accounts receivable increased approximately $30.7 million as a result of the successful sales growth
initiatives launched during the first quarter of fiscal year 2004 in the Physician and Elder Care
Businesses.
- Inventories increased approximately $15.5 million primarily to support pharmaceutical sales growth in the
Physician Business and as a result of expansion into the durable medical equipment and housekeeping markets
by the Elder Care Business.
- Accounts payable decreased approximately $2.4 million as a result of the Company's acceleration of payments
to selected vendors to take advantage of more favorable discount terms.

Net cash used in investing activities
was $20.7 million and $21.4 million during the six months ended October 1,
2004 and October 3, 2003, respectively. During the six months ended October 1,
2004 and October 3, 2003, capital expenditures totaled $10.7 million and
$6.3 million, respectively, of which approximately $7.7 million and
$3.6 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 as a result of the
Rationalization Programs were approximately $1.2 million and $1.3 million during fiscal
years 2004 and 2003, respectively. During the six months ended October 1, 2004, the
Company paid approximately $1.7 million to the prior owners of a company acquired
during fiscal year 2004 in accordance with an earn-out provision included in the purchase
agreement. During the six months ended October 3, 2003, the Elder Care Business
acquired certain assets and assumed certain liabilities of a long-term care medical supply
distributor for approximately $13.5 million. During the six months ended
October 1, 2004 and October 3, 2003, the cash proceeds from the sale of the
Imaging Business were reduced by approximately $4.9 million and $1.5 million,
respectively, as a result of the final ruling from the arbitrator regarding the disputed
net asset calculation and the payment of transaction costs. During the three months ended
October 1, 2004, the Physician Business paid approximately $2.8 million to sales
representatives for execution of non-solicitation agreements.

On October 7, 2004, the Elder
Care Business acquired certain assets and assumed certain liabilities of a long-term care
medical supply distributor. The maximum aggregate purchase price is approximately
$25,867, subject to certain adjustments as set forth in the Purchase Agreement, of which
$19,800 was paid in cash at the closing. Pursuant to the terms of the Purchase Agreement,
the remaining purchase price of up to $5,600 will be paid to the Seller by April 30,
2005 if minimum revenue thresholds are met and working capital balances as of the closing
date are validated. In connection with the transaction, the Company will also pay
approximately $1,100 for employee non-compete agreements.

Net cash used in financing activities
was $18.2 million during the six months ended October 1, 2004 compared to net
cash provided by financing activities of $24.8 million during the six months ended
October 3, 2003. Net cash used in financing activities during the six months ended
October 1, 2004 was primarily impacted by repaying $10.0 million of the
Companys revolving line of credit. In addition, the Company paid $9.9 million to
repurchase approximately 1.0 million shares of the Companys common stock at an
average price of $9.91 per common share and received proceeds from the exercise of
stock options of approximately $1.7 million. Net cash used in financing activities
during the six months ended October 3, 2003 was primarily impacted by
(i) increased borrowings under the revolving line of credit to fund the business
combination and the overall growth in the business and (ii) proceeds of approximately
$1.2 million from the former Chairman and Chief Executive Officer for the full
payment of one outstanding note receivable, offset by the repurchase of approximately
1.0 million shares of common stock at an average price of $5.92 per common share
totaling $5.6 million.

# Capital Resources

Senior management and the Board of
Directors determine the amount of capital resources that the Company maintains. Management
allocates resources to new long-term business commitments when returns, considering the
risks, look promising and when the resources available to support the existing business
are adequate.

40

---

The Companys two primary
sources of capital are the proceeds from the 2.25% convertible senior notes offering and
the revolving line of credit. These instruments furnish the financial resources to support
the business strategies and customer service levels in a time of rapid revenue growth. The
revolving line of credit, which is an asset-based agreement, uses the strength of the
Companys working capital as collateral to support necessary liquidity. Over the
long-term, the Companys priorities for use of capital are internal growth,
acquisitions, and repurchase of the Companys common stock.

On October 1, 2004, the Company
maintained a $200 million revolving line of credit. Availability of borrowings under
the revolving line of credit depends upon the amount of a borrowing base consisting of
accounts receivable and inventory, subject to satisfaction of certain eligibility
requirements. On October 1, 2004, the Company had sufficient assets based on eligible
accounts receivable and inventories to borrow up to $171.6 million under the
revolving line of credit and had outstanding borrowings of $25.0 million.

As discussed in Note 12, on October
7, 2004 the Elder Care Business acquired certain assets and assumed certain liabilities of
a long-term care medical supply distributor. The maximum aggregate purchase price is
approximately $25,867, subject to certain adjustments as set forth in the Purchase
agreement, of which $19,800 was paid in cash at the closing and was funded by cash on
hard. Pursuant to the terms of the Purchase Agreement, the remaining purchase price of up
to $5,600 will be paid to the Seller by April 30, 2005 if minimum revenue thresholds are
met and working capital balances as of the closing date are validated. In connection with
the transaction, the Company will also pay approximately $1,100 for employee non-compete
agreements.

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 (i) maintaining appropriate levels of
liquidity under its revolving line of credit and (ii) using cash flows from operating
activities. The Company expects 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. As of
October 1, 2004, the Company has not entered into any material working capital
commitments that require funding, other than those obligations disclosed in the future
minimum obligation table below.

# 2.25% Convertible Senior
Notes

On March 8, 2004, the Company
sold $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 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, a division of McGraw Hill
Companies, Inc. and its successors (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 $1,000
(one thousand) 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. Once the notes become convertible, the dilutive effect of the
convertible notes may be reflected in diluted earnings per share by application of the
treasury stock method. By application of the treasury stock method, 1.5 million
shares would be included in the weighted average common shares outstanding used in
computing diluted net income per share at a contingent conversion price of $20.51.

41

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# Revolving Line of Credit

The Company maintains an asset-based
revolving line of credit by and among the Company, as borrower thereunder (the
Borrower), the subsidiaries of the Company, the lenders from time to time
party thereto (the Lenders), and Bank of America, N.A. (the Bank),
as agent for the Lenders (the Credit Agreement), which permits maximum
borrowings of up to $200 million and matures on March 31, 2008. Availability of
borrowings depends upon a borrowing base calculation consisting of accounts receivable and
inventory, subject to satisfaction of certain eligibility requirements. Borrowings under
the revolving line of credit bear interest at the Banks prime rate plus an
applicable margin based on the Companys funded debt to earnings before interest,
taxes, depreciation, and amortization ( the Leverage Ratio), or at LIBOR plus
an applicable margin based on the Leverage Ratio. Additionally, the Credit Agreement bears
interest at a fixed rate of 0.375% for any unused portion of the facility. The average
daily interest rate, excluding debt issuance costs and unused line fees, for the three months ended
October 1, 2004 and October 3, 2003 was 3.64% and 4.13%, respectively. The
average daily interest rate, excluding debt issuance costs and unused line fees, for the
six months ended October 1, 2004 and October 3, 2003 was 3.83% and 4.07%,
respectively. 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 stock, (ii) selling or transferring assets, (iii) making
certain investments including acquisitions, (iv) incurring additional indebtedness
and liens, and (v) annual capital expenditures. Borrowings under the revolving line
of credit are anticipated to fund future requirements for working capital, capital
expenditures, and acquisitions, and to issue letters of credit.

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 has been amended as follows:

- The First Amendment dated June 24, 2003 primarily finalized the syndication of the Credit Agreement to the
   Lenders.
- The Second Amendment dated December 16, 2003 primarily increased the maximum borrowings under the Credit
Agreement from $150 million to $200 million. In addition, this amendment redefined the applicable margin
applied to the Bank's prime rate or LIBOR.
- The Third Amendment dated March 1, 2004 obtained the Lenders' approval to issue additional indebtedness in
the form of the convertible senior notes and to repurchase up to $42.0 million of the Company's common
stock, including any repurchases made subsequent to May 20, 2003. In addition, this amendment locked the
interest rate on the Credit Agreement at the Bank's prime rate or at LIBOR plus 2.00% for the period of one
year, concurrent with the Company's fiscal year 2005.
- The Fourth Amendment dated June 1, 2004 obtained the Lenders' approval to increase the aggregate amount of
permitted stock repurchases from $42.0 million to $55.0 million, which includes any stock repurchases made
subsequent to May 20, 2003.
- The Fifth Amendment dated October 1, 2004 obtained the Lenders' approval to (i) extend the term of the
agreement two years to March 31, 2008, (ii) increase the aggregate amount of permitted stock repurchases
from $55.0 million to $80.0 million, which includes any stock repurchases made subsequent to May 20, 2003,
(iii) increase the aggregate amount of permitted acquisitions from $50.0 million to $75.0 million, which
includes any acquisitions made subsequent to May 20, 2003, (iv) sets the applicable margin level for Base
Rate and LIBOR loans to -0.25% and 1.75%, respectively, for the period beginning October 1, 2004 and ending
March 26, 2005.

During the three months ended
June 30, 2003, the Company entered into an interest rate swap agreement to hedge the
variable interest rate of its revolving line of credit. Under the terms of the interest
rate swap agreement, the Company makes payments based on the fixed rate and will receive
interest payments based on 1-month LIBOR. The changes in market value of this financial
instrument are 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 are recorded as reductions or additions to interest expense. In
accordance with Statement of Financial Accounting Standards (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, the
Companys interest rate swap agreement has been designated as a cash flow hedge with
changes in fair value recognized in accumulated other comprehensive income in the
accompanying consolidated balance sheets.

On July 19, 2004, the Company elected
to terminate $10 million of the $35 million (notional amount) interest rate swap that was
originally transacted on May 15, 2003. Accordingly, during the three months ended October
1, 2004, the Company reclassified a gain of approximately $0.1 million from accumulated
other comprehensive income (loss) to interest expense related to the portion of the swap
that was terminated.

As of October 1, 2004, the swap
carries a notional principal amount of $25.0 million and effectively fixes the
interest rate on a portion of the revolving line of credit to 2.195%, prior to applying
the Leverage Ratio margin discussed above. The swap agreement expires on March 28,
2006 and settles monthly until expiration. At October 1, 2004 and April 2, 2004,
the Company recorded an unrealized gain (loss), net of related tax effects, of $105 and
($40), respectively, for the estimated fair value of the swap agreement in accumulated
other comprehensive income (loss) in the accompanying consolidated balance sheet.

42

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# Debt Rating

The Companys debt is rated by
nationally recognized rating agencies. 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. Ratings are always subject to change and there can be no
assurance that the Companys ratings will continue for any given period of time.

The Company maintains ratings with
two leading corporate and credit rating agencies: Standard and Poors and
Moodys Investor Services. On December 3, 2003, the Company received a revised
outlook from Standard and Poors from stable to positive. Additionally, Standard and
Poors affirmed its corporate credit and senior secured debt rating of BB-. The
Company maintains a stable outlook from Moodys Investor Services and a senior
implied rating of Ba3 and a long-term issuer rating of B1.

# Stock Repurchase Programs

On June 8, 2004, the
Companys Board of Directors approved a stock repurchase program authorizing the
Company to repurchase up to a maximum of 5% of its common stock, or approximately
3.2 million common shares. These repurchases depend upon market conditions and other
factors and are to be made in the open market, in privately negotiated transactions, or
otherwise. During the six months ended October 1, 2004, the Company repurchased
approximately 1.0 million shares of common stock under this program at an average
price of $9.91 per common share. During the six months ended October 3, 2003,
the Company repurchased approximately 1.0 million shares of common stock under a
previously approved stock repurchase program at an average price of $5.92 per common
share.

# Liquidity and Capital
Resource Outlook

Based on prevailing market
conditions, liquidity requirements, contractual restrictions, and other factors, the
Company may seek to retire 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.

# Future Minimum
Obligations

In the normal course of business, the
Company enters into obligations and commitments that require future contractual payments.
The commitments primarily result from repayment obligations for borrowings under the
revolving line of credit, as well as contractual lease payments for facility, vehicle, and
equipment leases, and contractual payments under non-competition agreements. 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 |  |  
|------------------------------ | ------------ |  | -
|
|                               |              |  |  
|Revolving line of credit(a)    |              |  | $
|2.25% convertible senior notes |              |  |  
|Operating leases:              |              | 
|Operating                      |              |  |  
|Restructuring                  |              |  |  
|Non-competition agreements     |              |  |  
|Purchase commitments(b), (c)   |              |  |  
|                               |              |  |  
|Total                          |              |  | $
|                               |              |  |  

43

---

| | (a) | The
revolving line of credit is classified as a current liability in accordance
          with Emerging Issues Task Force No. 95-22, Balance Sheet Classification
          of Borrowings Outstanding under Revolving Credit AgreementsThat Include
          both a Subjective Acceleration Clause and a Lock-Box Arrangement; however,
          the credit facility does not expire until March 31, 2008. The Company is
          not obligated to repay or refinance amounts outstanding under the revolving
line           of credit until fiscal year 2008.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | If
the Physician Business or the Elder Care Business were to terminate a           contract
with a private label vendor for any reason, the Company may be required           to
purchase the remaining inventory of private label 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 the ninety day period immediately preceding the date of
          termination. As of October 1, 2004, the Company has not terminated any
          contracts with a private label vendor that had a material impact to the
          Companys results of operations and financial condition.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | During
July 2003, the Physician Business entered into a five-year agreement           with
a supplier to purchase a minimum number of vials of influenza vaccines           during
fiscal years 2004-2008. The pricing of the vials of the vaccine is           established
on December 1 of each year. The Company must notify the           supplier of any
reductions in the number of vials to be purchased by      December 15 of each
year. Due to the influenza vaccine shortfall during      calendar year 2004, the
Physician Business has been released from its purchase      commitment during fiscal
year 2005. The Physician Business is committed to      purchase approximately $26.3 million,
$32.9 million, and    $39.5 million of influenza vaccines during fiscal
years 2006, 2007, and 2008, respectively.  These obligations are contingent on the supplier's ability to deliver influenza
vaccine during these periods and the amounts are calculated using calendar year 2004 pricing.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# APPLICATION OF CRITICAL
ACCOUNTING POLICIES

There has been no material change in
the Companys Critical Accounting Policies, as disclosed in the Annual Report on
Form 10-K for the fiscal year ended April 2, 2004 filed on June 14, 2004,
other than those discussed below.

# Impairment of  Non-soliciation Agreements Intangible Asset

During the three months ended October 1, 2004, the Company made non-solicitation payments to certain sales
representatives which will be tested annually or more frequently for impairment in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS 144).  SFAS 144 requires that long-lived
assets, such as 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 of non-solicitation 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 non-solicitation covenants, (ii) a decline in sales generated by a sales representative below the amount
that the non-solicitation was based upon, (iii) death, or (iv) full retirement by the sales representative.

# RECENT ACCOUNTING
PRONOUNCEMENTS

Refer to Note 1, Background
and Basis of Presentation, for a discussion of recent accounting pronouncements and
its impact on the Companys financial condition and results of operations.

# ITEM 3.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company believes there has been
no material change in its exposure to market risk from that discussed in Item 7A in
the Annual Report on Form 10-K for the fiscal year ended April 2, 2004.

44

---

# ITEM 4.  CONTROLS
AND PROCEDURES

Evaluation of disclosure controls
and procedures.The Companys management, with the participation of the
Companys Principal Executive Officer and Principal Financial Officer, have evaluated
the effectiveness of the Companys disclosure controls and procedures (as defined in
Exchange Act Rule 240.13a-15(c)) 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 have concluded that the Companys current
disclosure controls and procedures are effective.

Changes in internal controls.
There has been no significant change in the Companys internal control over financial
reporting identified in connection with the foregoing evaluation that occurred during the
last quarter and that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. However, during the
fiscal quarter ended April 2, 2004, the following change in the Companys
internal control over financial reporting was identified, which materially affected, or is
reasonably likely to materially affect, the Companys internal controls over
financial reporting:

| | During
the quarter ended April 2, 2004, the Elder Care Business began the implementation of
the JD Edwards XE® platform. As of October 1, 2004, two of the Elder Care
Business full-service distribution centers were converted to this new operating
system which has different and effective internal controls over financial reporting
compared to the effective controls of the old operating system. The implementation of
this new operating system at the remaining full-service distribution centers will
continue through fiscal year 2005 and is expected to be completed during the first
quarter of fiscal year 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

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# PART II 
OTHER INFORMATION

# ITEM 1.  LEGAL
PROCEEDINGS

See Note 10, Commitments and
Contingencies, of this Quarterly Report on Form 10-Q and Item 3 of the
Companys Annual Report on Form 10-K for the fiscal year ended on April 2, 2004.

# ITEM 2.  UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

# 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. The following table summarizes
the Companys repurchase activity during the three months ended October 1, 2004.

|Period                | Total Numberof SharesPurchased | Average PricePaid per Share | Total Numberof SharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms | Maximum Number(orApproximateDollar Value)of Shares thatMay Yet BePurchasedUnder thePlans orPrograms
|--------------------- | ------------------------------ | --------------------------- | ------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------
|                      |                                |                             |                                                                           |                                                                                                    
|July 1-July 31        |                                |                             |                                                                           | --                                                                                                 
|August 1-August 31    |                                |                             |                                                                           | 721,000                                                                                            
|September 1-October 1 |                                |                             |                                                                           | --                                                                                                 
|                      |                                |                             |                                                                           |                                                                                                    
|Total second quarter  |                                |                             |                                                                           | 721,000                                                                                            
|                      |                                |                             |                                                                           |                                                                                                    

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

|(a) | In
accordance with the Companys notice and proxy statement dated                July 8,
2004, the Company held its Annual Meeting of Stockholders on                August 19,
2004. Holders of 56,405,982 shares of the Companys common                stock were
present in person or by proxy representing approximately 87% of the                Companys
64,738,151 shares outstanding on the record date. The matters set                forth in
the paragraphs below were submitted to a vote of the Companys
               stockholders.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | The
following directors were elected to serve a three-year term of office until
               the 2007 Annual Meeting of Stockholders or until their successors have
been duly                elected and qualified. Of the 56,405,982 shares (1 vote per
share) of common                stock represented at the meeting, the directors were
elected by the following                votes:
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Votes Received |           |   
|------------------ | -------------- | --------- | --
|
|                   |                |           |   
|Melvin L. Hecktman | 53,304,657     | 3,101,325 | --
|Delores P. Kesler  | 53,022,044     | 3,383,938 | --
|David A. Smith     | 53,267,230     | 3,138,752 | --

46

---

Immediately following the annual
meeting, the directors of the Company consisted of the following:

Name

Charles
E. Adair      T. O'Neal Douglas      Melvin L. Hecktman
      Clark A. Johnson      Delores P. Kesler      Charles R.
Scott      David A. Smith

Following the annual meeting, the
Board of Directors voted to expand the Companys board and elected Stephen H.
Rogers as a new director, effective August 19, 2004.

|(c) | The
proposal to approve the PSS World Medical, Inc. 2004 Non-Employee Directors
               Compensation Plan, which was approved and recommended by the Companys
               Board of Directors, was approved by a majority of the shares voted. Of the
               56,405,982 shares (1 vote per share) of common stock represented at the
meeting,                the PSS World Medical, Inc. 2004 Non-Employee Directors
Compensation Plan was                approved by the following votes:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Votes Received |           |       
|----------------------------------------- | -------------- | --------- | ------
|
|                                          |                |           |       
|PSS World Medical, Inc. 2004 Non-Employee
|Directors Compensation Plan               | 37,073,078     | 5,610,225 | 53,173

47

---

# ITEM 6.  EXHIBITS
AND REPORTS ON FORM 8-K

(a)    
          Exhibits required by Item 601 of Regulation S-K:

|Exhibit
Number | Description                                                                                                                                                                                                                   
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |                                                                                                                                                                                                                               
|10.1*          | PSS World Medical, Inc. 2004 Non-Employee Directors Compensation Plan                                                                                                                                                         
|              
|10.2*          | PSS World Medical, Inc. Amended and Restated Leader's Deferral Plan, as amended through July 1, 2004                                                                                                                          
|              
|10.2a*         | PSS World Medical, Inc. Amended and Restated Leader's Stock Option Grant Program, as amended through July 1, 2004                                                                                                             
|              
|10.3*          | PSS World Medical, Inc. Amended and Restated Officer Deferred Compensation Plan, as amended through July 1, 2004                                                                                                              
|              
|10.3a*         | PSS World Medical, Inc. Amended and Restated Officer Stock Option Grant Program, as amended through July 1, 2004                                                                                                              
|              
|10.4*          | PSS World Medical, Inc. Amended and Restated ELITe Deferred Compensation Plan, as amended through July 1, 2004                                                                                                                
|              
|10.4a*         | PSS World Medical, Inc. Amended and Restated ELITe Stock Option Grant Program, as amended through July 1, 2004                                                                                                                
|              
|10.5           | 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
|              
|15             | Awareness Letter from KPMG LLP                                                                                                                                                                                                
|              
|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.                                                                                                                                                       

48

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# SIGNATURE

Pursuant to the requirements 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 November 10, 2004.

| | PSS WORLD MEDICAL, INC.                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                               
| | By: /s/ David M. Bronson    Name:   David M. Bronson    Title:    Executive Vice President and Chief Financial Officer                (Duly Authorized Officer and Principal Financial and                 Accounting Officer)