UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549  FORM10-Q  x
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended
        December29, 2006
  o
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from ___________ to ____________
  Commission File Number0-23832  PSS WORLD MEDICAL, INC. (Exact name of Registrant as specified in its charter)  Florida
        59-2280364(State or other jurisdiction
        (IRS Employerof incorporation or organization)
        Identification Number)4345 Southpoint Blvd.Jacksonville, Florida
        32216(Address of principal executive offices)
        (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.  xYesoNo  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  Large accelerated filerx
        Accelerated filero
        Non-accelerated filero
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  oYesxNo  The number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of February 2, 2007 was 67,381,357 shares.  PSS WORLD MEDICAL, INC. AND SUBSIDIARIES  DECEMBER29, 2006  TABLE OF CONTENTS Item
        
        PageInformation Regarding Forward-Looking Statements
        3PartIFinancial Information1.
        Financial Statements:Unaudited Condensed Consolidated Balance Sheets December 29, 2006 and March 31, 2006
        5Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 29, 2006 and December 30, 2005
        6Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 29, 2006 and December 30, 2005
        7Unaudited Notes to Condensed Consolidated Financial Statements
        82.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        243.
        Quantitative and Qualitative Disclosures About Market Risk
        374.
        Controls and Procedures
        37PartII--Other Information1.
        Legal Proceedings
        371A.
        Risk Factors
        382.
        Unregistered Sales of Equity Securities and Use of Proceeds
        386.
        Exhibits
        39Signature
        40
  2  CAUTIONARY STATEMENTS Forward-Looking Statements Management may from time-to-time make written or oral 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 March 31, 2006, Reports on Form 8-K, and reports to shareholders that are forward-looking statements within the meaning, and subject to the protections of the Private Securities Litigation Reform Act of 1995. 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, assumes, should, indicates, projects, targets 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: 
        Managements belief that the ultimate outcome of the various legal and administrative proceedings and claims 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 effective tax rate may fluctuate due to changes in the market return on underlying investments of company-owned life insurance policies;
 
        Managements expectation that the results of the Internal Revenue Service audit of the Federal income tax returns for fiscal years 2002 and 2003 will not have a material impact on the Companys financial condition or results of operations;
 
        Managements belief that the Companys global sourcing strategy is expected to improve its cost competitiveness and increase its gross margins on certain products;
 
        Managements expectation to continue to make acquisitions in the future and managements belief that the benefits of acquisitions will offset the time and expense related to implementing the acquisition and integrating the target and will result in increased profits for the Company;
 
        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 expectation that cash flows from operations will fund future working capital needs, capital expenditures, and other investing and financing activities, excluding business combinations;
 
        Managements expectation that the Company may seek to retire its outstanding equity through cash purchases and/or reduce its debt and may also seek to issue additional debt or equity to meet its future liquidity requirements;
 
        Managements intent to either renegotiate existing leases or execute new leases upon the expiration date of such agreements;
 
        Managements belief that the majority of the remaining state NOL carryforwards will be utilized during fiscal year 2007;
 
        Managements expectation that the liability recognized for accelerating the vesting of all unvested stock options may be adjusted in future periods based on actual experience and changes in management assumption;
  3  
        Managements expectation that net sales, gross margins, and operating margins may be impacted in future periods to the extent the Companys revenues expand into areas that require net reporting of revenue in accordance with EITF 99-19Reporting Revenue Gross as a Principal versus Net as an Agent;
 
        Managements belief that changes in circumstances such as technological advances, changes to the Companys business model, changes in the Companys business strategy, or changes in the planned use of property and equipment could result in the actual useful lives differing from the Companys current estimates; and
 
        Managements belief that it would have adequate liquidity under the Credit Agreement to settle the principle balance of the Convertible Senior notes, if presented for redemption.
 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, management is identifying important factors that could affect the Companys financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements about the Companys goals or expectations. The Companys future results could be adversely affected by a variety of factors, including those discussed in Item 1A-Risk Factorsin the Companys 2006 Form 10-K. In addition, all forward-looking statements that are made by or attributable to the Company are qualified in their entirety by and should be read in conjunction with this cautionary notice and the risks described or referred to in
Item 1A-Risk Factorsof the Companys 2006 Form 10-K. The Company has no obligation to and does not undertake to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements are made.  4  PARTI--FINANCIAL INFORMATION ITEM1. FINANCIAL STATEMENTS  PSS WORLD MEDICAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETSDECEMBER 29, 2006 AND MARCH 31, 2006
(Dollars in Thousands, Except Share and Per Share Data) ASSETS  December 29,
        March31,2006
        
        2006Current Assets:Cash and cash equivalents
        $  54,904
        
        $  23,867Accounts receivable, net of allowance for doubtful accounts of $9,843and $10,498 as of December 29, 2006 and March 31, 2006, respectively
        219,822
        
        208,964Inventories
        186,193
        
        173,458Deferred tax assets
        7,379
        
        12,959Prepaid expenses and other
        37,329
        
        33,827Total current assets
        505,627
        
        453,075Property and equipment, net of accumulated depreciation of $66,888 and $55,827as of December 29, 2006 and March 31, 2006, respectively
        85,885
        
        87,663Other Assets:Goodwill
        
        106,971
        
        105,521Intangibles, net
        31,186
        
        34,345Other
        
        58,063
        
        56,371Total assets
        $787,732
        
        $736,975
  LIABILITIES AND SHAREHOLDERS EQUITY  Current Liabilities:Accounts payable
        $162,338
        
        $139,227Accrued expenses
        31,670
        
        34,499Current portion of long-term debt
        152,154
        
        509Other
        
        10,730
        
        13,639Total current liabilities
        356,892
        
        187,874Long-term debt, excluding current portion
        460
        
        150,855Other noncurrent liabilities
        62,302
        
        49,433Total liabilities
        419,654
        
        388,162Commitments and contingencies (Notes 1, 2, 4, 5, and 7)Shareholders Equity:Preferred stock, $0.01 par value; 1,000,000 shares authorized, no sharesissued and Outstanding
        -
        
        -Common stock, $0.01 par value; 150,000,000 shares authorized, 67,151,236and 67,476,682 shares issued and outstanding at December 29, 2006 andMarch 31, 2006, Respectively
        667
        
        674Additional paid in capital
        302,863
        
        318,441Retained earnings
        64,548
        
        29,698Total shareholders equity
        368,078
        
        348,813Total liabilities and shareholders equity
        $787,732
        
        $736,975
  The accompanying notes are an integral part of these unaudited condensed consolidated statements.  5    PSS WORLD MEDICAL, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER29, 2006 AND DECEMBER30, 2005 (Dollars in Thousands, Except Share and Per Share Data)     For the Three Months Ended
        
        For the Nine Months EndedDecember 29,
        
        December 30,
        
        December 29,
        
        December 30,2006
        
        2005
        
        2006
        
        2005Net sales
        $458,613
        
        $423,781
        
        $1,299,204
        
        $1,196,729Cost of goods sold
        335,378
        
        303,707
        
        932,211
        
        853,874Gross profit
        123,235
        
        120,074
        
        366,993
        
        342,855General and administrative expenses
        75,222
        
        72,053
        
        222,277
        
        211,670Selling expenses
        30,140
        
        27,469
        
        86,516
        
        79,459Income from operations
        17,873
        
        20,552
        
        58,200
        
        51,726Other (expense) income:Interest expense
        (1,320)
        
        (1,561)
        
        (4,062)
        
        (4,428)Interest and investment income
        426
        
        75
        
        809
        
        285Other income, net
        517
        
        435
        
        1,415
        
        2,642(377)
        
        (1,051)
        
        (1,838)
        
        (1,501)Income before provision for income taxes
        17,496
        
        19,501
        
        56,362
        
        50,225Provision for income taxes
        6,376
        
        7,080
        
        21,512
        
        18,880Net income
        $  11,120
        
        $  12,421
        
        $    34,850
        
        $    31,345Basic earnings per common share
        $      0.17
        
        $      0.19
        
        $        0.52
        
        $        0.48Diluted earnings per common share
        $      0.16
        
        $      0.19
        
        $        0.50
        
        $        0.47Weighted average common shares outstanding, Basic
        67,054
        
        65,779
        
        67,272
        
        65,344Weighted average common shares outstanding,        Diluted
        69,458
        
        66,931
        
        69,294
        
        66,469
            The accompanying notes are an integral part of these unaudited condensed consolidated statements.  6  PSS WORLD MEDICAL, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER29, 2006 AND DECEMBER30, 2005 (Dollars in Thousands) Nine Months EndedDecember29, 2006
        December30, 2005Cash Flows From Operating Activities:Net income
        $34,850
        $31,345Adjustments to reconcile net income to net cash provided by    operating activities:Depreciation
        12,454
        10,458Amortization of intangible assets
        4,445
        4,427Provision for deferred income taxes
        4,097
        18,880Provision for doubtful accounts
        3,396
        5,059Provision for deferred compensation
        1,701
        847Noncash compensation expense
        1,500
        1,183Amortization of debt issuance costs
        1,075
        1,115Loss on sales of property and equipment
        39
        261Reversal of provision for note receivables
        --
        (3,233)Other
        --
        (2,463)Changes in operating assets and liabilities:Accounts receivable
        (14,051)
        6,122Inventories
        (12,734)
        (29,330)Prepaid expenses and other current assets
        (1,193)
        (4,426)Other assets
        (1,394)
        (13,444)Accounts payable
        23,111
        28,069Accrued expenses and other liabilities
        3,600
        (3,373)Net cash provided by operating activities
        60,896
        51,497Cash Flows From Investing Activities:Capital expenditures
        (10,551)
        (12,404)Payments for business combination, net of cash acquired
        (2,475)
        (38,125)Payments on nonsolicitation agreements
        (1,064)
        (2,561)Other
        15
        1,748Net cash used in investing activities
        (14,075)
        (51,342)Cash Flows From Financing Activities:Proceeds from the exercise of common stock options
        7,365
        8,931Excess tax benefits from share-based compensation arrangements
        3,179
        --Proceeds from borrowings
        1,500
        --Purchase of common stock
        (27,413)
        --Payments under capital lease obligations
        (415)
        (205)Proceeds from note receivable
        --
        279Net proceeds under the revolving line of credit
        --
        246Payment of debt issuance costs
        --
        (520)Other
        --
        (123)Net cash (used in) provided by financing activities
        (15,784)
        8,608Net increase decrease in cash and cash equivalents
        31,037
        8,763Cash and cash equivalents, beginning of period
        23,867
        17,888Cash and cash equivalents, end of period
        $54,904
        $26,651Supplemental disclosures:Cash paid for:Interest
        $2,334
        $2,827Income taxes, net
        $6,090
        $5,272
  The accompanying notes are an integral part of these unaudited condensed consolidated statements.  7  PSS WORLD MEDICAL, INC. AND SUBSIDIARIES UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER29, 2006 AND DECEMBER30, 2005 (Dollars in Thousands, Except Share and Per Share Data, Unless Otherwise Noted) 1.
        BASIS OF PRESENTATION
 The accompanying unaudited condensed 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 generally accepted accounting principles in the United States (GAAP) have been omitted pursuant to the SEC rules and regulations. The condensed 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 preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The accompanying condensed 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 as well as a variable interest entity for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated balance sheet as of March 31, 2006 has been derived from the Companys audited consolidated financial statements for the fiscal year ended March 31, 2006. 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 March 31, 2006. The Company reports its year-end financial position, results of operations, and cash flows as of the Friday closest to March 31. Fiscal years 2007 and 2006 consist of 52 weeks or 253 selling days. The Company reports its quarter-end financial position, results of operations, and cash flows as of the Friday closest to month-end. The three and nine months ended December 29, 2006 and December 30, 2005 each consisted of 62 and 189 selling days, respectively. 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. Inventories Inventories consist of medical products, medical equipment, and other related products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as net realizable value. The net realizable value of excess and slow moving inventory is determined using judgment as to when the inventory will be sold and the quantities and prices at which the inventory will be sold in the normal course of business. Obsolete or damaged inventory is disposed of or written down to net realizable value on a quarterly basis. Additional adjustments, if necessary, are made based on managements specific review of each full-service distribution centers inventory on-hand. As part of the Companys periodic review of the carrying amount of inventory during the three months ended December 29, 2006, management determined that a valuation allowance of $7,058 was required on excess influenza vaccine inventory resulting from the cancellation of customer orders due to an oversupply of the product in the market, and, to date, a mild influenza season.  In addition to these factors, management based its decision on the likelihood of locating alternate markets for the product and the viability of the product based on its limited life span.  As a result of the valuation allowance, cost of goods sold were increased by $7,058 during the three and nine months ended December 29, 2006, or $4,383 net of tax.  8  Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives of the respective classes of assets. Useful LifeEquipment
        2 to 15 yearsCapitalized internal-use software costs
        5 to 15 yearsComputer hardware and software
        3 to 15 years
 Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Management is required to use judgment in determining the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Companys business model, changes in the Companys business strategy, or changes in the planned use of property and equipment could result in the actual useful lives differing from the Companys current estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened or extended, the Company would depreciate the net book value in excess of the estimated salvage value over its revised remaining useful life. During fiscal year 2005, management reviewed the estimated useful lives of certain computer hardware and software in connection with completing the implementation of the JD Edwards enterprise resource planning (ERP) system. Based on this review, management revised the estimated useful lives of certain assets after considering (i) the Companys historical use of its prior ERP systems, (ii) future plans for the JD Edwards ERP system, (iii) expected enhancements, and (iv) expected ongoing product support, enhancements, and maintenance commitments from the vendor. Management believed this change in estimate was appropriate given the Companys commitment to and invested capital in the customization and future use of the JD Edwards ERP platform. As a result, the remaining estimated useful lives of certain computer hardware and software with a
carrying value of approximately $27,434 were extended on March 23, 2005 to coincide with the expected service life of the assets in accordance with Accounting Principles Board (APB) Opinion No. 20,Accounting Changes. The weighted average remaining useful life of the assets prior to the change in estimate was approximately 80 months and the change in estimate lengthened the estimated useful lives by approximately 40 months. This change in estimate decreased depreciation expense $797, net of tax, or approximately $0.01 of basic and diluted earnings per share, for the nine months ended December 29, 2006 and $1,063, net of tax, or approximately $0.02 of basic and diluted earnings per share, for the fiscal year ended March 31, 2006. Computer hardware and software that is capitalized subsequent to this change in estimate will continue to be depreciated over a period ranging from
3 to 10 years. The Company capitalizes the following costs associated with developing internal-use computer software:  (i) external direct costs of materials and services consumed in developing or obtaining internal-use computer software; (ii) certain payroll and payroll-related costs for Company employees who are directly associated with the development of internal-use software, to the extent of the time spent directly on the project; and (iii) interest costs incurred while developing internal-use computer software. Internal-use software costs capitalized subsequent to March 23, 2005 are being amortized over the estimated useful lives of the software, ranging from 5 to 10 years. Statement of Financial Accounting Standards (SFAS) No. 34,Capitalization of Interest Cost,requires the capitalization of interest cost as a part of the historical cost of acquiring certain assets, such as assets that are constructed or produced for a companys own use. The amount of capitalized interest during the nine months ended December 29, 2006 and December 30, 2005 was approximately $194 and $478, respectively. Gains or losses upon retirement or disposal of property and equipment are recorded in other income in the accompanying consolidated statements of operations. Normal repair and maintenance costs that do not substantially extend the life of the property and equipment are expensed as incurred.  9  Accounts Payable Outstanding checks in excess of cash balances available for a legal right of offset are reclassified to accounts payable. Amounts reclassified to accounts payable were approximately $24,138 and $25,600 at December 29, 2006 and March 31, 2006, respectively. Stock Repurchase Program On June 8, 2004, the Companys Board of Directors approved a stock repurchase program authorizing the Company, depending upon market conditions and other factors, to repurchase up to a maximum of 5% of its common stock, or approximately 3.2 million common shares, in the open market, in privately negotiated transactions, or otherwise. On December 6, 2006, the Companys Board of Directors amended the stock repurchase plan by approving the repurchase of an additional 5%, or approximately 3.4 million common shares, in the open market, in privately negotiated transactions, or otherwise. The following table presents repurchase activity during fiscal years 2005 and 2006 as well as remaining shares under the stock repurchase program: (in thousands)
        Number of SharesShares approved for repurchase  June 8, 2004
        3,248Shares approved for repurchase  December 6, 2006
        3,393Total shares approved
        6,641Repurchases - Fiscal Year 2005
        (1,001)Repurchases - Fiscal Year 2006
        (14)Repurchases - Nine Months Ended December 29, 2006
        (1,376)Remaining shares available for repurchase at December 29, 2006
        4,250
 During fiscal year 2005, the Company repurchased approximately 1.0 million shares of common stock under this program at an average price of $9.91 per common share for approximately $9,918. During the nine months ended December 29, 2006, the Company repurchased approximately 1.4 million shares of common stock under this program at an average price of $19.92 per common share for approximately $27,413. Statements of Cash Flows The Companys supplemental disclosures for the nine months ended December 29, 2006 and December 30, 2005 were as follows: Nine Months EndedDecember29, 2006
        December30, 2005Noncash Operating Activities-Tax benefits related to stock option plans
        $    --
        $ 2,908Noncash Investing Activities-Business combinations:Fair value of assets acquired
        (187)
        (8,847)Liabilities assumed
        1,185
        6,561Capital lease assets
        (163)
        (1,672)Noncash Financing Activities-Capital lease obligations
        $  163
        $ 1,672
 Reclassification Certain amounts reported in prior years have been reclassified to conform to the current year presentation.  10   Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue No. 05-1,Accounting for the Conversion of an Instrument That Became Convertible upon the Issuers Exercise of a Call Option(EITF 05-1). EITF 05-1 requires that the issuance of equity securities to settle a debt instrument that would not otherwise be convertible, but would become convertible upon the issuers exercise of a call option, be accounted for as a debt conversion if the debt contained a substantive conversion feature as of its issuance date. Under this accounting treatment, no gain or loss is recognized related to the equity securities issued to settle the debt instrument. Absent this substantive conversion feature, the issuance would be accounted for as a
debt extinguishment, where the fair value of the equity securities issued would be considered a component of the reacquisition price of the debt. The provisions of EITF 05-01 are effective for all conversions that result from the exercise of call options in interim and annual reporting periods beginning after June 28, 2006. Under the terms of the Companys 2.25% convertible senior notes indenture (the Notes), the Company may call its debt only on or after March 19, 2009. Upon exercise of this call option, the Notes become convertible, at the option of the holder, even if the Notes were not otherwise convertible. 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. If such an election were made, there would be no accounting impact resulting from adopting EITF 05-1 for the principal amount of the notes. The provisions of EITF 05-01 would apply, however, to any portion of the debt that would be settled through the issuance of common stock. In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, and Related Implementation Issues(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 is effective as of the beginning of fiscal years commencing after December 15, 2006. As such, FIN 48 will be effective during the first quarter of the Companys fiscal year 2008. The Company is currently evaluating the
effects of implementing this new standard. In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Quantifying Financial Statement Misstatements.  SAB 108 states that registrants should use both a balance sheet approach and income statement approach when quantifying and evaluating the materiality of a misstatement. The SAB provides guidance on correcting errors under this dual approach, as well as transition guidance for correcting previously immaterial errors that are now considered material based on the approach in the SAB. Management has determined that it will apply the guidance contained in SAB 108, beginning with the Companys financial statements for the year ending  March 30, 2007. 2.
        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 and independent valuations.  11  Physician Business (Fiscal Year 2006) On September 30, 2005, the Physician Business acquired all of the outstanding common stock of Southern Anesthesia & Surgical, Inc. (SAS). SAS distributes controlled and non-controlled pharmaceuticals and medical supplies to office-based physicians and surgery centers in all 50 states. The maximum aggregate purchase price, which was subject to certain adjustments as set forth in the purchase agreement, was approximately $32,243 (net of cash acquired). Subsequent to closing, the purchase price was reduced and a cash payment of approximately $1,568 was received from the seller based on the actual working capital of SAS at closing compared to the target working capital defined in the purchase agreement. Of the aggregate purchase price, approximately $31,170 was paid during fiscal year 2006, of which $30,783 was paid during the nine months ended December 30, 2005.  A payment of $1,500, was made during the nine months ended December 29, 2006 with an additional $1,400 paid by the Company subsequent to quarter end. Under the terms of the stock purchase agreement, the Company made a joint election with the seller to treat the transaction as a purchase of assets in
accordance with Section 338(h)(10) of the Internal Revenue Code. Elder Care Business (Fiscal Year 2006) On October 31, 2005, the Elder Care Business acquired certain assets and assumed certain liabilities of Clinical Support Services, Inc. (CSSI), a California-based medical billing and recovery services company offering services to facilities-based healthcare providers in California. CSSI was integrated into the existing Medicare Part B billing operations. The maximum aggregate purchase price, which was subject to certain adjustments as set forth in the purchase agreement, was approximately $4,475. Of the aggregate purchase price, approximately $3,288 was paid during fiscal year 2006, of which $3,193 was paid during the nine months ended December 30, 2005. An additional payment of $797 was paid during the nine months ended December 29, 2006. Additional purchase price of approximately $390 may be paid to the sellers if certain minimum net revenue thresholds are met in the fourth quarter of fiscal year 2007. Elder Care Business (Fiscal Year 2005) On October 7, 2004, the Elder Care Business acquired certain assets and assumed certain liabilities of a long-term care medical supply distributor and ancillary billing service provider. The aggregate purchase price, which was subject to certain adjustments as set forth in the purchase agreement, was approximately $26,830 (net of cash acquired) of which approximately $22,682 was paid during fiscal year 2005. Pursuant to the terms of the purchase agreement, a cash payment of approximately $4,148 was made to the seller during the nine months ended December 30, 2005 as certain minimum revenue thresholds were met.  12  3.
        EARNINGS PER SHARE
 Basic and diluted earnings per share are presented in accordance with SFAS No. 128,Earnings Per Share. Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period adjusted for the potential dilutive effect of stock options and restricted stock using the treasury stock method and the share impact from the convertible senior notes. Common equivalent shares are excluded from the computation in periods in which they have an antidilutive effect. The following table sets forth computational data for the denominator in the basic and diluted earnings per common share calculation for the three and nine months ended December 29, 2006 and December 30, 2005:  For the Three Months Ended
        
        For the Nine Months EndedDecember 29,
        
        December 30,
        
        December 29,
        
        December 30,(in thousands)
        2006
        
        2005
        
        2006
        
        2005Denominator-Weighted average sharesoutstanding used in computing basicearnings per common share
        67,054
        
        65,779
        
        67,272
        
        65,344Assumed exercise of stock options (a)
        943
        
        1,092
        
        974
        
        1,052Assumed vesting of restricted stock
        90
        
        60
        
        101
        
        73Assumed conversion of 2.25%convertible senior notes
        1,371
        
        --
        
        947
        
        --Denominator-Weighted average sharesoutstanding used in computing dilutedearnings per common share
        69,458
        
        66,931
        
        69,294
        
        66,469(a)     Options to purchase approximately 188 and 1,014 shares of common stock that were outstanding at December 29, 2006 and December 30, 2005, respectively, were not included in the computation of diluted earnings per share for each of the respective periods because the options exercise prices exceeded the average fair market value of the Companys common stock and would be antidilutive.
 In accordance with EITF Issue No. 04-8,The Effect of Contingently Convertible Debt on Diluted Earnings Per Share(EITF 04-8) and the Companys stated policy to settle the principal amount of the convertible notes in cash, the Company is not required to include any shares underlying the convertible notes in its diluted weighted average shares outstanding until the average stock price per share for the period exceeds $17.10 (conversion price for the convertible senior notes). At such time, only the number of shares that would be issuable (under the treasury stock method of accounting for share dilution) are included, which is based upon the amount by which the average stock price exceeds the conversion price. The average price of the Companys common stock during the three and nine months ended December 29,
2006 exceeded the conversion price. As such, 1,371 and 947 potential common shares, respectively, were included in the calculation of diluted weighted average shares outstanding. The ratification of SFAS No. 128(R),Earnings Per Share, an amendment of FASB Statement No.128(SFAS 128(R)) may further impact the diluted weighted average shares outstanding. If ratified, SFAS 128(R) would eliminate the provisions of SFAS 128 that allows an entity to rebut the presumption that contracts with the option of settling in either cash or stock will be settled in stock. Therefore, SFAS 128(R) may eliminate the Companys ability to rely upon its stated policy to settle the principal amount of the Companys convertible senior notes in cash. If SFAS 128(R) becomes effective, earnings per share will be calculated under the if-converted method. Under this method, the number of diluted weighted average shares
outstanding will include approximately 8.8 million additional shares and earnings used to calculate diluted earnings per share would increase approximately $2.7 million (after tax) annually for the add-back of interest expense on the convertible senior notes. The Company may at its discretion elect to settle the principal amount of its convertible senior notes in cash in accordance with the terms of the indenture. If such election is made by giving notice to bondholders, a range of approximately 0 to 1.5 million shares (refer to table below) will be included in the weighted average common shares outstanding used in computing diluted earnings per share in accordance with the provisions of EITF 04-08. The table below discloses the effect of increases in the Companys stock price on the amount of shares to be included in the earnings per share calculation using the treasury stock method in accordance with EITF 04-8. The market price of the Companys common stock must be at or above $20.51 (market trigger price) for at least 20 of the 30 consecutive trading days in order for holders to exercise their conversion rights. The table assumes normal conversion for the convertible senior notes based on the Companys stated policy in which the principal amount will be paid in cash, and the excess up to the conversion value will be paid in shares of the Companys stock as follows (share amounts in thousands).  13   Average Price of the Companys Common Stock
        Potential
Share
Increase$17.10
        --$17.96
        422$18.85
        817$19.80
        1,198$20.51
        1,461
 The table above also discloses the effect of increases in the Companys stock price on the amount of shares to be included in the earnings per share calculation in accordance with SFAS 128(R), if adopted, only if the Company gives notice to the bondholders that the principal amount of the notes will be paid in cash, and the excess up to the conversion value will be paid in shares of the Companys stock. 4.
        STOCK-BASED COMPENSATION
 Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123 (Revised 2004),Share-Based Payment, (SFAS 123(R)) using the modified prospective transition method, and therefore, has not restated results for prior periods. SFAS 123(R) requires companies to recognize the cost of employee services received in exchange for awards of equity instruments in the financial statements based on the grant date fair value of those awards. Previously, SFAS No. 123,Accounting for Stock-Based Compensation, encouraged, but did not require, that stock-based compensation be recognized as an expense in companies financial statements. Prior to the adoption of SFAS 123(R), the Company elected to account for stock-based awards using the intrinsic-value
recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. The intrinsic value method of accounting resulted in compensation expense to the extent option exercise prices were set below the current market price of the underlying stock on the date of grant. Compensation expense was not previously recognized in net income, as all stock options granted had an exercise price equal to the market value of the underlying stock on the date of grant. There was no impact to the Companys statements of operations for outstanding stock options on April 1, 2006 as a result of adopting SFAS 123(R) because on June 7, 2004, the Compensation Committee of the Board of Directors approved an amendment to all outstanding stock options granted to employees. This amendment accelerated the vesting of all unvested stock options outstanding as of April 1, 2005, which was prior to the effective date of SFAS 123(R). The Company took this action to reduce compensation expense in future periods in light of SFAS 123(R). Under SFAS 123(R), the Company estimated that a compensation charge of approximately $2,833, net of tax, would have been recorded in future periods if the vesting of the stock options were not accelerated. As a result of the acceleration, the Company recognized contingent compensation expense equal to
the difference between the fair market value of the common stock on the modification date and the option exercise price for the estimated number of options that, absent the acceleration, would have expired unexercisable as a result of the termination of the holders employment prior to the original vesting dates of the options. As of December 29, 2006, the maximum stock-based compensation expense would be approximately $757 if all holders benefited from this amendment with respect to outstanding options. Since June 7, 2004, the date the options were modified, the Company has estimated and recognized compensation expense of approximately $187 based on its historical option forfeiture rate. This liability may be adjusted in future periods based on actual experience and changes in management assumptions. Upon issuance of restricted stock prior to the adoption of SFAS 123(R), unearned compensation was charged to shareholders equity for the market value of the restricted stock, with stock-based compensation expense recognized on a straight-line basis over the awards vesting period ranging from one to five years. To the extent restricted stock was forfeited prior to vesting, the previously recognized expense was reversed as a reduction to stock-based compensation expense on the forfeiture date. However, upon adoption of SFAS 123(R), compensation expense is recognized for all equity-based awards net of estimated forfeitures over the awards vesting period. SFAS 123(R) requires forfeitures to be estimated at the time of grant and adjusted, if necessary in subsequent periods if actual forfeitures differ from those estimates. When estimating forfeitures, the Company
considers voluntary termination behaviors as well as trends of actual equity based awards forfeited.  14  The Company recorded a reduction of compensation expense of approximately $197 during the nine months ended December 29, 2006 to comply with the forfeiture provisions of SFAS 123(R). Prior to the adoption of SFAS 123(R), the Company presented the excess tax benefit of stock option exercises as operating cash flows. Upon adoption of SFAS 123(R), excess tax benefits resulting from tax deductions in excess of compensation cost recognized for those options are classified as cash flows from financing activities. Although total cash flows are not impacted by the adoption of SFAS 123(R) and remain unchanged from what would have been reported under prior accounting standards, cash flows from operating activities were reduced by $3,179 and cash flows from financing activities were increased by $3,179 during the nine months ended December 29, 2006. Equity Incentive Plans On June 7, 2006, the Board of Directors approved the PSS World Medical, Inc. 2006 Incentive Plan (the 2006 Plan), a stock incentive plan under which equity may be granted to the Companys officers, directors, and employees. The 2006 Plan became effective as of August 24, 2006, the date on which shareholders approved the plan. The 2006 Plan replaced the 1999 Long-Term Incentive Plan and the 1999 Broad-Based Employee Stock Plan (collectively, the Prior Plans). Grants under the 2006 Plan may be made in the form of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted or deferred stock units, performance awards, dividend equivalents, performance-based cash awards, and other stock-based awards. Subject to adjustment as provided in the plan, the aggregate number of
shares of common stock reserved and available for issuance pursuant to awards granted under the 2006 Plan is approximately 2.2 million as of December 29, 2006. In addition to the 2006 Plan, the Company maintains the 2004 Non-Employee Directors Compensation Plan (the 2004 Directors Plan), which permits the grant of restricted stock to the Companys non-employee directors. Subject to adjustment as provided in the plan, the aggregate number of shares of common stock reserved and available for issuance pursuant to awards granted under the 2004 Directors Plan is approximately 350,000 as of December 29, 2006. It is the Companys policy to issue shares of common stock upon exercise of stock options or granting of restricted stock from those shares reserved for issuance under the stock incentive plans. The Company also has the following stock incentive plans under which new awards are no longer granted:  1999 Long-Term Incentive Plan, 1994 Long-Term Stock Plan, Amended and Restated Directors Stock Plan, 1997 Gulf South Medical Supply Plan, Amended and Restated 1994 Long-Term Incentive Plan, 1992 Gulf South Medical Supply Plan, and 1999 Broad-Based Employee Stock Plan. Awards outstanding under these plans may still vest and be exercised in accordance with their terms. The following table summarizes the number of common shares to be issued upon exercise of outstanding options and the number of common shares remaining available for future issuance under the existing stock incentive plans at December 29, 2006.  15   (in thousands)
        Number of
securities
to be issued upon exercise of outstanding options
        Number of
securities
remaining
available for
future issuanceEquity compensation plans approved by shareholders:1999 Long-Term Incentive Plan(a)
        1,505
        --1994 Long-Term Stock Plan(a)
        726
        --Amended and Restated Directors Stock Plan(a)
        328
        --1997 Gulf South Medical Supply Plan(a)
        173
        --Amended and Restated 1994 Long-Term Incentive Plan(a)
        43
        --PSS World Medical, Inc. 2006 Incentive Plan(b)
        --
        2,1682004 Non-Employee Directors Compensation Plan(c)
        --
        3502,775
        2,518Equity compensation plan not approved by shareholders:1999 Broad-Based Employee Stock Plan(a)
        378
        --Total
        3,153
        2,518(a)   These plans are terminated; however, options remain outstanding at December 29, 2006 which are exercisable.
(b)   This plan superceded the 1999 Long-Term Incentive Plan and the 1999 Broad-Based Employee Stock Plan and was approved by shareholders on August 24, 2006.
(c)   This plan superceded the Amended and Restated Directors Stock Plan and was approved by shareholders during fiscal year 2005.
 Stock options granted under the 1999 Long-Term Incentive Plan and the 1999 Broad-Based Employee Stock Plan were fully vested and exercisable three years from the date of grant. Stock options granted under the Amended and Restated Directors Stock Plan, the 1994 Long-Term Stock Plan, and the Amended and Restated 1994 Long-Term Incentive Plan were fully vested and exercisable at the date of grant. Outstanding stock options have a term of 5 years or 10 years. Restricted stock and deferred stock units granted under these stock incentive plans generally vest over periods ranging from one to five years and no sooner than one year from the date of grant. Equity Based Award Activity Outstanding stock-based awards were as follows: As of(in thousands)
        December29, 2006
        March31, 2006Stock options(a)
        3,153
        3,985Restricted stock(b)
        418
        286Deferred stock units(a)
        9
        6Total outstanding stock-based awards
        3,580
        4,277(a)   Amounts are excluded from shares of common stock issued and outstanding.(b)   Amounts as of December 29, 2006 are included in shares of common stock issued and outstanding on the face of the balance sheet, but are not considered outstanding for accounting purposes under SFAS 123(R) until restrictions lapse.
   16  The following table summarizes the stock option activity during the period from March 31, 2006 to December 29, 2006: (in thousands)
        Shares
        Weighted Average Exercise
Price
        Weighted Average Contractual Term
        Aggregate Intrinsic ValueBalance, March 31, 2006
        3,985
        $10.42
        3.1
        --Granted
        --
        --
        --
        --Exercised
        (813)
        $  9.06
        --
        --Forfeited
        (19)
        $  8.82
        --
        --Balance, December 29, 2006(a)
        3,153
        $10.78
        2.7
        $28,232(a)   This balance represents stock options that are both outstanding and exercisable since the vesting of unvested stock options outstanding as of April 1, 2005 was accelerated on June 7, 2004.
 The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Companys closing stock price of $19.53 on the last trading day of the third fiscal quarter and the exercise price, multiplied by the number of outstanding stock options) that would have been received by the option holders had all option holders exercised their options on December 29, 2006. This amount changes over time based on changes in the fair market value of the Companys stock. The total intrinsic value of stock options exercised during the nine months ended December 29, 2006 and December 30, 2005 was $8,195 and $7,917, respectively. Cash received from stock option exercises during the nine months ended December 29, 2006 and December 30, 2005 was approximately $7,365 and $8,931, respectively. The actual tax benefit realized for the tax deductions from stock option exercises totaled approximately $2,888 and $2,908 during the nine months ended December 29, 2006 and December 30, 2005, respectively. The following table summarizes the restricted stock activity during the period from March 31, 2006 to December 29, 2006: Shares
        Weighted
Average
Grant Date Fair ValueNonvested balance, March 31, 2006
        286
        $12.62Granted
        238
        $19.73Vested
        (99)
        $11.43Forfeited
        (7)
        $13.15Nonvested balance, December 29, 2006
        418
        $16.95
 Total compensation expense related to unvested restricted stock awards during the three months ended December 29, 2006 and December 30, 2005, was approximately $562 and $360, respectively, with related income tax benefits of $213 and $136 respectively. Total compensation expense related to unvested restricted stock awards during the nine months ended December 29, 2006 and December 30, 2005, was approximately $1,060, and $799, respectively, with related income tax benefits of $402 and $303, respectively. The total fair value of shares vested during the nine months ended December 29, 2006 was $1,944.  17  Scheduled vesting for outstanding restricted stock is as follows: (in thousands)
        Number of
SharesFiscal Year:2007 (remaining 3 months)
        12008
        1502009
        1452010
        642011
        58Total
        418
 The estimated compensation expense for the next five fiscal years for all outstanding restricted stock grants is expected to be recognized over a weighted average period of 3.1 years and is as follows: Fiscal Year:2007 (remaining 3 months)
        $    5622008
        1,8782009
        1,2962010
        9982011
        429Total
        $5,163
 5.
        DEBT
 Debt consists of the following: As ofDecember29, 2006
        March31, 20062.25% convertible senior notes
        $150,000
        $150,000Capital lease obligations
        1,114
        1,364Other bank debt
        1,500
        --Total debt
        152,614
        151,364Less: Current portion of long-term debt
        152,154
        509Long-term debt
        $       460
        $150,855
  2.25% Convertible Senior Notes During fiscal year 2004, the Company issued $150 million principal amount of 2.25% convertible senior notes, which mature on March 15, 2024. Interest on the notes is payable semi-annually 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 2.25% convertible senior notes may be converted into shares of the Companys common stock prior to March 15, 2019, during any calendar quarter that the closing sale price of the Companys common stock for at least 20 of the 30 consecutive trading days ending the day prior to such quarter is greater than 120% of the applicable conversion price of $17.10 per share (or $20.51 per share) (Contingent Conversion Trigger). During the three months ended December 29,2006, the Contingent Conversion Trigger was met and the notes are convertible during the period January 1, 2007 to March 30, 2007. Therefore, the notes were classified as Current Portion of Long-Term Debt as of December 29, 2006. The ability of note holders  18  to convert is assessed on a quarterly basis and the ability to convert subsequent to March 30, 2007 is dependent on the trading price of the Companys stock during the last 30 trading days of each quarter. As of December 29, 2006, the fair value of the convertible senior notes was approximately $184.8 million and the value of the shares, if converted, was approximately $171.4 million. 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 conversion of the notes first, in cash, in an amount equal to the principle 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. Revolving Line of Credit The Company maintains an asset-based revolving line of credit (the Credit Agreement), which matures on June 30, 2010 and permits borrowings of up to $200 million. The borrowings may be increased to $250 million at the Companys discretion. Availability of borrowings (Availability) depends upon a borrowing base calculation consisting of accounts receivable and inventory, subject to satisfaction of certain eligibility requirements less any outstanding letters of credit. Borrowings under the revolving line of credit bear interest at the banks prime rate plus an applicable margin based on Availability, or at LIBOR plus an applicable margin based on Availability. Additionally, the Credit Agreement bears interest at a fixed rate of 0.25% for any unused portion of the facility. There were no outstanding borrowings under the revolving line of credit at December 29, 2006 and March 31, 2006. After reducing availability for outstanding letter of credit commitments, the Company had sufficient assets based on eligible accounts receivable and inventory to borrow up to $199.7 million (excluding the additional increase of $50 million) under the revolving line of credit. The average daily interest rate, excluding debt issuance costs and unused line fees, for the three months ended December 30, 2005 was 4.24%. The average daily interest rate, excluding debt issuance costs and unused line fees, for the nine months ended December 29, 2006 and December 30, 2005 was 7.61% and 3.99%, respectively. Capital Lease Obligations The Company leases various equipment under fifteen and thirty-nine month leases with an aggregate annual rental of approximately $700. The equipment was capitalized at its fair market value of $1,836, which approximated the present value of the minimum lease payments. The following table represents the remaining future minimum lease payments under capital leases by year, together with the present value of the net minimum lease payments as of December 29, 2006. Fiscal Year:2007 (remaining 3 months)
        $   1852008
        6542009
        329Total minimum lease payments
        1,168Less:  amount representing interest
        54Present value of net minimum lease payments
        $1,114
 6.
        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 on which management regularly evaluates the Company. These segments are managed separately because of different customers and products. The Company primarily evaluates the operating performance of its segments based on net sales and income from operations. Corporate Shared Services is a concentration of Company resources performing functions across the organization with a common goal of providing standardized service levels at an efficient operating cost. Corporate Shared Services includes: accounting and finance; information technology development, infrastructure, and support; operations management; global sourcing of inventory products; regulatory compliance; human resources, training, and payroll administration; and procurement
of inventory and non-inventory products and services. Corporate Shared Services allocates  19  amounts to the two operating segments for shared operating costs and intercompany interest expense. These allocations are generally proportional to the revenues of each operating segment. Intercompany interest is allocated based on (i) an internally calculated carrying value of historical capital used to acquire or develop the operating segments operations and (ii) budgeted operating cash flow. The following tables present financial information about the Companys business segments:   For the Three Months Ended
     For the Nine Months EndedDecember 29,
2006
     December 30,
2005
     December 29,
2006
     December 30,
2005Net Sales:Physician Business
     $329,352
        
     $290,010
        
     $915,001
        
     $795,976Elder Care Business
     129,261
        
     133,771
        
     384,203
        
     400,753Total net sales
     $458,613
        
     $423,781
        
     $1,299,204
        
     $1,196,729Income from Operations:Physician Business
     $18,318
        
     $20,039
        
     $58,065
        
     $51,883Elder Care Business
     5,072
        
     4,579
        
     14,860
        
     12,467Corporate Shared Services
     (5,517
        )
     (4,066
        )
     (14,725
        )
     (12,624
        )Total income from operations
     $17,873
        
     $20,552
        
     $58,200
        
     $51,726Income Before Provision for Income Taxes:Physician Business
     $17,622
        
     $19,153
        
     $55,983
        
     $49,802Elder Care Business
     3,112
        
     2,716
        
     8,994
        
     6,931Corporate Shared Services
     (3,238
        )
     (2,368
        )
     (8,615
        )
     (6,508
        )Total income before provision for income taxes
     $17,496
        
     $19,501
        
     $56,362
        
     $50,225 As ofDecember 29, 2006
        
        March 31, 2006Assets:Physician Business
        $412,190
        
        $389,206Elder Care Business
        276,921
        
        266,006Corporate Shared Services
        98,621
        
        81,763Total assets
        $787,732
        
        $736,975
 7.
        COMMITMENTS AND CONTINGENCIES
 Litigation The Company is party to various legal and administrative proceedings and claims arising in the normal course of business. While any litigation contains an element of uncertainty, the Company, after consultation with outside legal counsel, believes that the outcome of such proceedings or claims which are pending or known to be threatened will not, individually or in the aggregate, have a material adverse effect on the Companys condensed consolidated financial position, liquidity, or results of operations. The Company has various insurance policies, including product liability insurance, covering risks in amounts deemed adequate. In most cases in which the Company has been sued in connection with products manufactured by others, the Company has been 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.  20  Purchase Commitments During July 2003, the Physician Business entered into a five-year agreement with a supplier to purchase a minimum number of doses of influenza vaccines during fiscal years 2004-2008. The pricing of the doses of the vaccine is established on December 1 of each year. The Company must notify the supplier, annually by December 15, of any reductions in the number of doses to be purchased. During fiscal year 2006, the Company notified Novartis Vaccines and Diagnostics (formerly Chiron Corporation), that it would purchase doses of influenza vaccines valued at approximately $46,078 during fiscal year 2007. This obligation was contingent on the suppliers ability to deliver the influenza vaccines by October 31, 2006. As of December 29, 2006, the Company has fulfilled its remaining purchase obligation under this commitment. Additionally, the Company
notified Novartis Vaccines and Diagnostics that it would not be renewing its purchase commitment for fiscal year 2008. Therefore, as of December 29, 2006, the Company has no outstanding purchase obligations relating to the influenza vaccine. During February 2006, the Company entered into agreements with different suppliers to purchase a minimum number of latex and vinyl gloves through January 31, 2008. The pricing of the latex gloves may be periodically adjusted and is based on the price of raw latex as traded on the Malaysian Rubber Exchange. The pricing of the vinyl gloves may also be periodically adjusted and is based on the weighted price of two raw materials, Poly vinyl chloride (PVC) and Dioctylphthalate (DOP), as published on www.icis.com. These purchase commitments are valued at approximately $12,797 at December 29, 2006 and are based on managements estimate of current pricing. At December 29, 2006, there were other outstanding purchase commitments totaling approximately $6,990, which are not considered material on an individual basis. Such purchase commitments, which have not been accrued in the accompanying balance sheets, contractually require the Company to purchase a stated value of inventory over a stated period of time. Commitments and Other Contingencies The Company has employment agreements with certain executive officers, which provide that in the event of their termination or resignation, under certain conditions, the Company may be required to pay severance to the executive officers in amounts ranging from one-fourth to two times their base salary and target annual bonus. In the event that a termination or resignation follows or is in connection with a change in control, the Company may be required to pay severance to the executive officers in amounts ranging from three-fourths to three times their base salary and target annual bonus. The Company may also be required to continue welfare benefit plan coverage for the executive officers following a termination or resignation for a period ranging from three months to three years. If the Physician Business or the Elder Care Business were to terminate a contract with a 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 a negotiated time period immediately preceding the date of termination. As of December 29, 2006, the Company has not terminated any contracts with a private label vendor that required the Company to purchase the vendors remaining private label inventory. During the nine months ended December 29, 2006, the Company settled a dispute in which the opposing party agreed to pay the Company $4,000 to resolve all claims and counterclaims that resulted from a class action lawsuit filed in May 1998. Accordingly, the Company recorded the $4,000 recovery as a reduction to general and administrative expenses offset by legal expenses and other costs of approximately $2,222 during the nine months ended December 29, 2006. Previously, the Company recorded a loss of approximately $3,800 to cover uninsured losses and professional fees related to the class action lawsuit settled in fiscal year 2006. In addition, the Companys insurance companies have issued $1,550 of surety bonds primarily to meet the security requirements for statutory licenses and permits.  21  Variable Interest Entity In January 2005, the Company entered into a Sourcing Services Agreement (the Sourcing Agreement) with Tiger Specialty Sourcing Limited, Tiger Shanghai Specialty Sourcing Co. Ltd., and its principals (collectively Tiger Medical). The exclusive Sourcing Agreement focuses on two primary objectives:  delivery of consistent, high-quality medical products and lowering the acquisition cost of those products. Subject to the terms and conditions of the Sourcing Agreement, the Company has agreed to purchase certain medical and other products from Chinese suppliers and manufacturers using the exclusive sourcing services of Tiger Medical. The Company acquired a minority interest in Tiger Medical in January 2005 for $1,000. The Company ultimately has the right to increase its ownership interest in Tiger Medical to 100% during fiscal years 2007 through 2009 if certain
performance targets are achieved. If at any time during the term of the Sourcing Agreement, the Company achieves the agreed-upon cost of goods savings target in any twelve-month period prior to achieving the agreed-upon sales target, then either party has the right to trigger an early buy-out of Tiger Medical by the Company. The total purchase price to be paid by the Company for 100% ownership of Tiger Medical ranges from $1,000 to $32,500 depending on the satisfaction of certain performance targets. Cash payments made by the Company during fiscal years 2007 through 2008, if any, for additional interests in Tiger Medical will be credited against the final purchase price to be paid by the Company. 8.
        NOTES RECEIVABLE
 The Company has two notes receivable (the Loans), which bear interest at the applicable Federal rate for long-term obligations, outstanding from its former chairman and chief executive officer. One Loan is unsecured and the other Loan is secured by a split-dollar life insurance policy. Management reviews the realization of the Loans on a quarterly basis based on current facts and circumstances known at the valuation date. As part of the Companys periodic review of the carrying amount of the Loans during the three months ended September 27, 2002, management and the Board of Directors determined that an allowance for doubtful accounts of $2,939 was required on the unsecured Loan after communication with the former chairman and chief executive officer regarding his financial condition and other due diligence procedures performed by management. Subsequently, during the three months ended July 1, 2005, new facts and circumstances were obtained by management and the Board of Directors that indicated the former chairman and chief executive officers financial condition had improved. In addition, the Company received a payment of approximately $279 during this period for past due interest. These factors as well as direct communication with the former chairman and chief executive officer during
this period led to a determination by management and the Board of Directors that the allowance for doubtful accounts was no longer required for the unsecured loan. Therefore, general and administrative expenses were reduced $2,939 during the three months ended July 1, 2005, which increased net income $1,825. The Company received a cash interest payment of $128 and $279 during the three months ended June 30, 2006 and July 1, 2005, respectively. Interest income, included in interest and investment income in the accompanying consolidated statements of operations, for the three months ended December 29, 2006 and December 30, 2005 was approximately $49 and $42, respectively. Interest income for the nine months ended December 29, 2006 and December 30, 2005 was approximately $136 and $135, respectively.  22  The following table indicates the balance sheet classification of the gross amount of the outstanding principal and accrued interest for the Loans at December 29, 2006 and March 31, 2006. Outstanding Principal
        AccruedInterestAs of December 29, 2006:Prepaid expenses and other
        $2,737
        $  89Other noncurrent assets
        997
        311Total
        $3,734
        $400As of March 31, 2006:Prepaid expenses and other
        $     --
        $118Other noncurrent assets
        3,734
        275Total
        $3,734
        $393
 Loan 1, with a principle balance of $2,737 at December 29, 2006 was issued in September 1997 and amended during fiscal year 2003, matures on September 16, 2007 (Maturity Date). Principal payments are not required under the agreement until the Maturity Date. Interest payments due prior to May 2003 are deferred until the Maturity Date and interest payments are required at least annually after May 2003. Loan 2, with a principle balance of $997 at December 29, 2006 was issued in January 2001 and matures on the earlier of (i) the death of the former chairman and chief executive officer or (ii) the termination of a split-dollar agreement. Payments of both principal and interest are due upon maturity. As of December 29, 2006, there were no past due principal or interest payments outstanding under the Loans.  23  ITEM2.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 THE COMPANY PSS World Medical, Inc. (the Company or PSSI), a Florida corporation which began operations in 1983, is a national distributor of medical products, equipment, and pharmaceutical related products to alternate-site healthcare providers, including physician offices, long-term care and assisted living facilities, and home care providers. The Company distributes products and equipment through 41 full-service distribution centers, which serve all 50 states throughout the United States. The Company currently conducts business through two operating segments, the Physician Business and the Elder Care Business. These strategic segments serve a diverse customer base. PSSI is a leader in the two market segments it serves as a result of value-added, innovative solution-based marketing programs; a customer differentiated distribution and service model; a consultative sales force with extensive product, disease state, reimbursement, and supply chain knowledge; unique arrangements with product manufacturers; innovative information systems and technology that serve its core markets; 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 acquired two companies during fiscal year 2006 to broaden its reach and leverage its infrastructure and may continue to make acquisitions in the future. EXECUTIVE OVERVIEW During the three and nine months ended December 29, 2006, the Company continued to grow in the markets it serves. Overall, consolidated comparative quarterly sales grew by 8.2%, and 8.6% on a year to date basis. The Physician and Elder Care Businesses launched sales promotions to increase sales of the globally sourced, private label products (Select Brand) in the first half of the year, which positively impacted the growth period over period. Select Brand product sales grew 22.5% and 21.5% during the three months ended December 29, 2006, in the Physician and Elder Care businesses, respectively. In addition, the acquisition of Southern Anesthesia and Surgical (SAS) by the Physician Business on September 30, 2005 provided an additional $17.9 million of incremental net sales during the nine months ended December 29, 2006. These increases were partially offset by
decreases in net sales of approximately $8.2 million and $28.5 million during the three and nine months ended December 29, 2006, respectively, compared to the same periods in the prior year, as a result of the Elder Care Business discontinuing business with certain national chain customers. Income from Operations increased approximately $6.5 million during the nine months ended December 29, 2006. This increase was primarily a result of the net sales growth discussed above as well as managements continued focus on reducing operating costs as a percentage of net sales. Some of the programs impacting operating costs include (i) delivery and professional training and incentive programs, (ii) best practices programs for distribution centers (Blue Ribbon), and (iii) continuing to leverage investments in warehouse management and order processing systems. In addition, the Companys global sourcing initiatives, other purchasing efficiencies, and continued leveraging of the distribution and corporate shared services infrastructure contributed to additional incremental profit margin improvement.  Income from Operations was negatively impacted by two transactions
during the quarter. First, a write-down for influenza vaccine inventory of $7.1 million during the quarter. This write-down was the result of a lower-of-cost-or-market valuation on the Physician Business remaining influenza vaccine inventory at quarter end resulting from the cancellation of customer orders during the quarter due to an oversupply of the product in the market, and, to date, a mild influenza season. Second, subsequent to the end of the third fiscal quarter, the Company was notified that a customer of the Elder Care Business had declared bankruptcy. As a result, the Company increased the allowance for doubtful accounts by $1.25 million.  Cash flow from operations during the nine months ended December 29, 2006 was approximately $60.9 million, an 18% increase over cash flow from operations during the same period in the prior year. Profitability growth was the primary driver of cash flow from operations during this period. Both the Physician and Elder Care Businesses made significant inventory investments to support the sales promotions for the globally sourced products. 24   NET SALES The following table summarizes net sales period over period. For the Three Months Ended
        For the Nine Months EndedDecember29, 2006
        December30, 2005
        
        December29, 2006
        December30, 2005(dollars inmillions)
        Amount
        Average Daily Net
Sales
        Amount
        Average Daily Net
Sales
        Percent Change
        Amount
        Average Daily Net
Sales
        Amount
        Average Daily Net
Sales
        Percent ChangePhysician Business
        $329.3
        $5.3
        $290.0
        $4.7
        13.6%
        $915.0
        $4.9
        $  796.0
        $4.2
        15.0%Elder Care Business
        129.3
        2.1
        133.8
        2.1
        (3.4%)
        384.2
        2.0
        400.7
        2.1
        (4.1%)Total Company
        $458.6
        $7.4
        $423.8
        $6.8
        8.2%
        $1,229.2
        $6.9
        $1,196.7
        $6.3
        8.6%
 Physician Business The net sales growth during the three months ended December 29, 2006 was driven by continued momentum in the consumable and pharmaceutical sales growth programs, offset by a decline in equipment sales due to a change in Medicare reimbursement guidelines on one of the Companys equipment lines. Net sales growth during the nine months ended December 29, 2006 was a result of continued growth in all three of the segments product lines as a result of successful sales growth programs initiated during the year and the acquisition of SAS on September 30, 2005. During the first quarter of fiscal year 2007, the Physician Business launched a sales promotion to increase sales of its globally-sourced, private label products (Select Brand). This promotion continued to positively impact Select Brand product sales during the third quarter of fiscal year 2007. The following table summarizes the growth rate in product sales period over period. For the Three Months Ended
        For the Nine Months Ended(dollars inmillions)
        December29, 2006
        December30, 2005
        Increase (Decrease)
        December29, 2006
        December30, 2005
        Increase (Decrease)Consumable products:Branded products
        $162.0
        $150.5
        7.6%
        $472.5
        $430.6
        9.5%Select Brand products
        28.8
        23.5
        22.5%
        83.8
        69.9
        19.9%Pharmaceutical products
        60.3
        54.1
        10.9%
        173.3
        146.6
        18.1%Influenza vaccine products
        33.3
        12.4
        169.5%
        48.7
        12.3
        294.3%Equipment
        35.1
        40.3
        (13.0)%
        110.2
        109.8
        0.4%Immunoassay product sales
        8.1
        7.6
        5.3%
        22.7
        23.3
        (2.2)%Other
        1.7
        1.6
        35.8%
        3.8
        3.5
        8.0%Total
        $329.3
        $290.0
        13.6%
        $915.0
        $796.0
        15.0%
 Branded product sales during the three and nine months ended December 29, 2006 continued to be positively impacted by the Companys sales growth initiatives.  Select Brand product sales period over period increased due to the Companys focus on promoting its globally sourced, Select Brand products, which resulted in new customer sales as well as customer conversions from branded to Select Brand product. Influenza vaccine sales, while up when compared to the prior year, were impacted by a limited supply of influenza vaccine in the industry during fiscal year 2006.  In addition, the acquisition of SAS positively impacted pharmaceutical product sales during the three and nine months ended December 29, 2006. Elder Care Business The decline in net sales is primarily a result of the discontinuation of service to certain national chain customers during fiscal year 2006, partially offset by (i) an increased penetration into regional and independently-owned nursing home chains and home care accounts and (ii) traction in Elder Care business billing service line of business. In addition, during the second and third quarters of fiscal year 2007, the Elder Care Business launched successful sales promotions to increase sales of its globally-sourced, Select Brand products and promote its billing services business.  25  Management views the Elder Care business by customer segment. The following table summarizes the rate of change in net sales by customer segment period over period. For the Three Months Ended
        For the Nine Months EndedDecember29, 2006
        December30, 2005
        (Decrease)Increase
        December29, 2006
        December30, 2005
        (Decrease)IncreaseNursing home and assisted living facilities
        $  80.9
        $  89.3
        (9.4%)
        $242.6
        $271.7
        (10.7%)Hospice and homecare agencies
        35.9
        33.0
        9.0%
        105.0
        90.4
        16.1%Billing services
        3.0
        2.5
        23.9%
        9.0
        7.6
        18.7%Other
        9.5
        9.0
        3.4%
        27.6
        31.0
        (11.1%)Total
        $129.3
        $133.8
        (3.4%)
        $384.2
        $400.7
        (4.1%)
 Net sales during the three and nine months ended December 29, 2006 compared to the same periods in the prior year decreased approximately $4.5 million and $16.5 million, respectively, as a result of the loss of the national chain customers. These customers represented approximately $8.2 million and $28.5 million of net sales during the three and nine months ending December 30, 2005. These decreases in net sales were partially offset by $2.9 million and $14.6 million sales growth in the Elder Care business hospice and homecare lines of business during the three and nine months ended December 29, 2006, respectively, which reflects the successful execution of the Companys business growth strategies. These strategies include diversifying the segments customer base through expansion into hospices and home care agencies.
The Elder Care business' other sales, which includes all other non-strategic customers, declined by $3.4 million during the nine months ended December 29, 2006 when compared to the same period in the previous year. GROSS PROFIT The following table summarizes gross profit period over period. For the Three Months Ended
        For the Nine Months EndedDecember29, 2006
        December30,2005
        
        December29, 2006
        December30, 2005(dollars inmillions)
        Amount
        % of Net
Sales
        Amount
        % of Net
Sales
        Increase
        Amount
        % of Net
Sales
        Amount
        % of Net
Sales
        IncreaseTotal Company
        $123.2
        26.9%
        $120.1
        28.3%
        $3.1
        $367.0
        28.2%
        $342.9
        28.7%
        $24.1
 Physician Business Gross profit dollars increased primarily due to the growth in net sales discussed above. Gross profit was negatively impacted by a write-down for excess influenza vaccine inventory of $7.1 million during the quarter. This charge was the result of a lower-of-cost-or-market valuation on the Physician Business remaining influenza inventory at quarter end resulting from the cancellation of customer orders during the three months ended December 29, 2006 due to an oversupply of the product in the market, and, to date, a mild influenza season.  In addition to these factors, management based its decision on the likelihood of locating alternate markets for the product and the viability of the product based on its limited life span.  As a result of the write-down, cost of goods sold was increased by $7.1 million during the three and nine months ended December 29, 2006, which decreased net
income $4.3 million.(Refer to Note 1 and Critical Accounting Policies). The slight decrease in gross margin on increasing net sales is primarily due to changes in the segments product mix period over period, where the Company experienced increased pharmaceutical product and influenza vaccine sales during the quarter, which have lower gross margins than consumable product sales. The impact of these lower margin sales were largely offset by purchasing efficiencies complemented by the implementation of the Companys global sourcing strategy, which is designed to improve cost competitiveness and increase gross margins on certain products. Elder Care Business While gross profit dollars remained relatively consistent period over period, gross margin percentage increased during the three and nine months ended December 29, 2006 compared to the same periods in the prior year. This increase was primarily due to purchasing  26  efficiencies complemented by the implementation of the Companys global sourcing strategy and a change in the segments sales mix from sales to larger accounts that generated lower gross margins to sales to smaller accounts that generate higher gross margins. GENERAL AND ADMINISTRATIVE EXPENSES The following table summarizes general and administrative expenses as a percentage of net sales period over period. For the Three Months Ended
        For the Nine Months EndedDecember29, 2006
        December30, 2005
        
        December29, 2006
        December30, 2005(dollars inmillions)
        Amount
        % of Net
Sales
        Amount
        % of Net
Sales
        Increase
        Amount
        % of Net
Sales
        Amount
        % of Net
Sales
        Increase (Decrease)Physician Business(a)
        $42.8
        13.0%
        $41.6
        14.3%
        $ 1.2
        $  129.7
        14.2%
        $  118.6
        14.9%
        $ 11.1Elder Care Business(a)
        27.0
        20.9%
        26.5
        19.8%
        0.5
        78.3
        20.4%
        80.4
        20.1%
        (2.1)Corporate Shared Services(b)
        5.4
        1.2%
        4.0
        1.0%
        1.4
        14.3
        1.1%
        12.7
        1.1%
        1.6Total Company(b)
        $75.2
        16.4%
        $72.1
        17.0%
        $ 3.1
        $ 222.3
        17.1%
        $211.7
        17.7%
        $  10.6(a)    General and administrative expenses as a percentage of net sales are calculated based on reportable segment net sales.
(b)    General and administrative expenses as a percentage of net sales are calculated based on consolidated net sales.
 Physician Business General and administrative expenses as a percentage of net sales decreased 134 basis points and 72 basis points during the three and nine months ended December 29, 2006, respectively, compared to the same period in the prior year. This improvement is attributable to (i) leveraging the net sales growth across various fixed costs and (ii) reducing the Companys cost to deliver product to customers. General and administrative expenses other than cost to deliver increased during the three and nine months ended December 29, 2006 primarily due to (i) increased salary, relocation, and payroll tax expenses of approximately $0.9 million and $2.5 million, respectively, from additional employees as a result of the acquisition of SAS and general wage increases, offset by decreased short-term incentive compensation expense of $1.7 million, and (ii) an increase in the corporate overhead allocation from Corporate Shared Services. Elder Care Business The change in general and administrative expenses other than cost to deliver increased approximately $1.2 million during the three months ended December 29, 2006 compared to the same period in the prior year. This increase was mainly attributable to a net increase in bad debt expense of approximately $1.25 million established during the third quarter of fiscal 2007, which related to a customer that filed for bankruptcy shortly after quarter end. General and administrative expenses other than cost to deliver increased $0.4 million during the nine months ended December 29, 2006 compared to the same period in the prior year. This increase is primarily attributable to an increase in depreciation expense of approximately $1.4 million which was largely offset by a net decrease in bad debt expense. Corporate Shared Services General and administrative expenses increased $1.4 million quarter over quarter. This increase is primarily attributable to (i) an increase of approximately $0.9 million in the Companys health insurance expense as claims outpaced employee contributions to the plan and (ii) an increase in the Companys deferred compensation expense of approximately $0.2 million. General and administrative expenses during the nine months ended December 29, 2006 remained relatively consistent period over period. However, there were several non routine transactions that impacted the comparability of the periods, including: (i) a favorable net settlement of $1.8 million during the nine months ended December 29, 2006, resulting from the class action lawsuit filed in May 1998 and (ii) the reversal of an allowance for doubtful accounts of approximately $3.2 million during the nine months ended December 30, 2005 (Refer to Note 8,Notes Receivable, for a further discussion as well asCritical Accounting Policies.)  27  SELLING EXPENSES The following table summarizes selling expenses as a percentage of net sales period over period. For the Three Months Ended
        For the Nine Months EndedDecember29, 2006
        December30, 2005
        
        December29, 2006
        December30, 2005(dollars inmillions)
        Amount
        % of Net
Sales
        Amount
        % of Net
Sales
        Increase
        Amount
        % of Net
Sales
        Amount
        % of Net
Sales
        IncreasePhysician Business
        $25.1
        7.6%
        $22.7
        7.8%
        $2.4
        $71.9
        7.9%
        $65.0
        8.2%
        $ 6.9Elder Care Business
        5.0
        3.9%
        4.8
        3.6%
        0.2
        14.6
        3.8%
        14.5
        3.6%
        0.1Total Company
        $30.1
        6.6%
        $27.5
        6.5%
        $2.6
        $86.5
        6.7%
        $79.5
        6.6%
        $ 7.0
 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. INCOME FROM OPERATIONS The following table summarizes income from operations as a percentage of net sales period over period. For the Three Months Ended
        For the Nine Months EndedDecember29, 2006
        December30, 2005
        
        December29, 2006
        December30, 2005(dollars inmillions)
        Amount
        % of Net Sales
        Amount
        % of Net Sales
        Increase (Decrease)
        Amount
        % of Net Sales
        Amount
        % of Net Sales
        Increase (Decrease)Physician Business
        $18.3
        5.6%
        $20.1
        6.9%
        $(1.8)
        $58.0
        6.4%
        $51.9
        6.5%
        $ 6.1Elder Care Business
        5.1
        3.9%
        4.6
        3.4%
        0.5
        14.9
        3.9%
        12.4
        3.1%
        2.5Corporate Shared Services
        (5.5)         --
        (4.1)
        --
        (1.4)
        (14.7)
        --
        (12.6)
        --
        (2.1)Total Company
        $17.9
        3.9%
        $20.6
        4.9%
        $(2.7)
        $58.2
        4.5%
        $51.7
        4.3%
        $ 6.5
 Income from operations for each business segment changed due to the factors discussed above under Net Sales, Gross Profit and General and Administrative Expenses. INTEREST EXPENSE The Companys debt structure consists of $150 million of 2.25% senior convertible notes, variable rate borrowings under its revolving line of credit (LOC) agreement, and a short-term note payable. The following table summarizes the various components of the Companys debt structure: For the Three Months Ended
        For the Nine Months Ended(dollars inmillions)
        December 29, 2006
        December30, 2005
        (Decrease)Increase
        December 29, 2006
        December30, 2005
        (Decrease)IncreaseTotal interest expense
        $1.3
        $1.6
        ($0.3)
        $4.1
        $4.4
        ($0.3)Components of interest expense:Interest on borrowings
        $1.0
        $1.3
        ($0.3)
        $3.1
        $3.8
        ($0.7)Debt issuance costs
        $0.3
        $0.4
        ($0.1)
        $1.1
        $1.1
        --Capitalized interest
        --
        ($0.1)
        ($0.1)
        ($0.1)
        ($0.5)
        ($0.4)Weighted average interest rate-LOC(a)
        N/A
        4.24%
        
        7.61%
        3.99%Average daily borrowings under the LOC
        $0.0
        $31.6
        ($31.6)
        $1.6
        $27.9
        ($26.3)(a)    Weighted average interest rate excludes debt issuance costs and unused line fees.
 There were no borrowings under the Companys LOC during the three months ended December 29, 2006. During the nine months ended December 29, 2006, the borrowings under the Companys LOC were affected by market interest rate increases. During the same period in the prior year, the Company mitigated the effect of these rate increases through a $25 million variable-to-fixed interest rate swap. The interest rate swap matured on March 28, 2006, effectively returning 100% of the borrowings under the LOC to a  28  variable rate. Upon maturity of the interest rate swap, the Company paid down the entire $25 million of borrowings covered by the notional amount of the interest rate swap. OTHER INCOME The following table summarizes other income period over period. For the Three Months Ended
        For the Nine Months Ended(dollars inmillions)
        December29, 2006
        December30, 2005
        Increase
        Percent Change
        December29, 2006
        December30, 2005
        (Decrease)
        Percent ChangeTotal Company
        $0.5
        $0.4
        $0.1
        18.9%
        $1.4
        $2.6
        ($1.2)
        (46.4%)
 Other income during the nine months ended December 30, 2005 included a one-time distribution of $1.4 million resulting from the Companys membership interest in a mutual holding company that was liquidated. Excluding the effect of this distribution, other income remained consistent period over period. PROVISION FOR INCOME TAXES The following table summarizes provision for income taxes period over period. For the Three Months Ended
        For the Nine Months EndedDecember29, 2006
        December30, 2005
        
        December29, 2006
        December30, 2005(dollars inmillions)
        Amount
        Effective Rate
        Amount
        Effective Rate
        Decrease
        Amount
        Effective Rate
        Amount
        Effective Rate
        IncreaseTotal Company
        $6.4
        36.4%
        $7.1
        36.3%
        ($0.7)
        $21.5
        38.2%
        $18.9
        37.6%
        $2.6
 The increase in the effective rate period over period is primarily attributable to the change in fair market value of the Companys investments in  company-owned life insurance policies used to fund certain deferred compensation plan liabilities. Gains and losses on the underlying investments within these policies are excluded from taxable income and treated as permanent adjustments in accordance with SFAS No. 109,Accounting for Income Taxes. The Companys effective tax rate may continue to fluctuate due to the market return on these investments. During the three months ended December 31, 2004, the IRS completed fieldwork on the audit of the Federal income tax returns for the fiscal years ended March 29, 2002 and March 28, 2003. The Company has appealed certain findings, which primarily related to timing of tax deductions, with the Appeals Office of the IRS. 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. NET INCOME The following table summarizes net income period over period. For the Three Months Ended
        For the Nine Months Ended(dollars inmillions)
        December29, 2006
        December30, 2005
        Decrease
        Percent Change
        December29, 2006
        December30, 2005
        Increase
        Percent ChangeTotal Company
        $11.1
        $12.4
        ($1.3)
        (10.5%)
        $34.8
        $31.3
        $3.5
        11.2%
 The change in net income is related to the factors discussed above.  29  LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources Highlights Cash flows from operations are primarily impacted by segment profitability and operational working capital. Management measures operational working capital cash flows by monitoring the following metrics: As ofDecember29, 2006
        December30, 2005Days Sales Outstanding:(a)Physician Business
        41.0
        41.1Elder Care Business
        53.2
        60.4Days On Hand:(b)Physician Business
        49.1
        46.9Elder Care Business
        55.2
        41.2Days in Accounts Payable:(c)Physician Business
        45.3
        43.2Elder Care Business
        29.8
        26.6Cash Conversion Days:(d)Physician Business
        44.8
        44.8Elder Care Business
        78.6
        75.0Inventory Turnover:(e)Physician Business
        7.3x
        7.7xElder Care Business
        6.5x
        8.7x
 (a)
        Days sales outstanding (DSO) is average accounts receivable divided by average daily net sales. Average accounts receivable is the sum of accounts receivable, net of the allowance for doubtful accounts, at the beginning and end of the most recent four quarters divided by five. Average daily net sales are net sales for the most recent four quarters divided by 360.
 (b)
        Days on hand (DOH) is average inventory divided by average daily cost of goods sold (COGS). Average inventory is the sum of inventory at the beginning and end of the most recent four quarters divided by five. Average daily COGS is COGS for the most recent four quarters divided by 360.
 (c)
        Days in accounts payable (DIP) is average accounts payable divided by average daily COGS. Average accounts payable is the sum of accounts payable at the beginning and end of the most recent four quarters divided by five.
 (d)
        Cash conversion days is the sum of DSO and DOH, less DIP.
 (e)
        Inventory turnover is 360 divided by DOH.
 In addition to cash flow, the Company carefully monitors other components of liquidity, including the following: (dollars in thousands)
        As ofDecember29, 2006
        March31, 2006Capital Structure:Bank Debt
        $    1,500
        $        --Other Debt
        1,114
        1,364Convertible senior notes
        150,000
        150,000Cash and cash equivalents
        (54,904)
        (23,867)Net debt
        97,710
        127,497Shareholders equity
        368,078
        348,813Total capital
        $465,788
        $476,310Operational Working Capital:Accounts receivable, net
        $219,822
        $208,964Inventories
        186,193
        173,458Accounts payable
        (162,338)
        (139,227)$243,677
        $243,195
   30  Cash Flows From Operating Activities The primary components of net cash provided by operating activities consist of net income adjusted to reflect the effect of non-cash expenses and changes in operational working capital. Net cash provided by operating activities during the nine months ended December 29, 2006 was primarily the result of overall operating profits partially offset by investments in operational working capital of approximately $10.7 million. Cash flows from operating activities during nine months ended December 29, 2006 and December 30, 2005 include the Companys utilization of $4.2 million (tax-effected) and $11.8 million (tax-effected), respectively, of net operating loss (NOL) carryforwards (primarily generated during fiscal year 2003 as a result of the disposition of the Imaging Business) to offset cash payments due for Federal and state tax liabilities based on estimated taxable income. As of December 29, 2006, the Company has $2.2 million (tax-effected) of state NOL carryforwards remaining and expects to utilize the majority of these state NOL carryforwards during fiscal year 2007. Cash flows from operating activities were also impacted by cash payments made or refunds received for Federal and state taxes. Cash Flows From Investing Activities Net cash used in investing activities was $14.1 million and $51.3 million during the nine months ended December 29, 2006 and December 30, 2005, respectively, and was primarily impacted by the following factors: Capital expenditures totaled $10.6 million and $12.4 million during the nine months ended December 29, 2006 and December 30, 2005, of which approximately $7.0 million and $9.0 million, respectively, related to development and enhancement of the Companys ERP system, electronic commerce platforms, and supply chain integration. Payments for business combinations, net of cash acquired, were $2.5 million and $38.1 million during the nine months ended December 29, 2006 and December 30, 2005, respectively. The Physician Business acquired SAS on September 30, 2005. The maximum aggregate purchase price, which was subject to certain adjustments as set forth in the purchase agreement, was approximately $32.2 million (net of cash acquired) of which approximately $30.8 million was paid during the nine months ended December 30, 2005. During the three months ended December 29, 2006, the Company paid $1.5 million related to the resolution of indemnity claims as outlined in the purchase agreement. On October 7, 2004, the Elder Care Business acquired certain assets and assumed certain liabilities of a long-term care medical supply distributor and ancillary billing service provider. The aggregate purchase price, which was subject to certain adjustments as set forth in the purchase agreement, was approximately $26.8 million (net of cash acquired). Pursuant to the terms of the purchase agreement, cash payments of approximately $4.1 million were made during the nine months ended December 30, 2005, which primarily related to meeting certain minimum revenue thresholds in periods subsequent to the date of acquisition. There were no payments made during the nine months ended December 29, 2006. On October 31, 2005, the Elder Care Business acquired certain assets and assumed certain liabilities of Clinical Support Services, Inc. (CSSI), a California-based medical billing and recovery services company offering services to facilities-based healthcare providers in California. CSSI was integrated into the existing Medicare Part B billing operations. The maximum aggregate purchase price, which was subject to certain adjustments as set forth in the purchase agreement, was approximately $4.5 million, of which approximately $3.2 million was paid during the nine months ended December 30, 2005. Payments of approximately $0.8 million were made during the nine months ended December 29, 2006, which primarily related to meeting certain minimum revenue thresholds in periods subsequent to the date of acquisition. Cash Flows From Financing Activities Net cash used in financing activities was $15.8 million during the nine months ended December 29, 2006 compared to net cash provided by financing activities of $8.6 million during the nine months ended December 30, 2005. Financing activities during the nine months ended December 29, 2006 and December 30, 2005 were primarily impacted by the following factors.  31  The Company received proceeds from the exercise of stock options of approximately $7.4 million and $8.9 million during the nine months ended December 29, 2006 and December 30, 2005, respectively. The Company recognized excess tax benefits from share-based compensation arrangements of $3.2 million during the nine months ended December 29, 2006. Prior to the adoption of SFAS No. 123(R),Earnings Per Share, an amendment of FASB Statement No.123(SFAS 123(R)), the Company presented the excess tax benefit of stock option exercises as operating cash flows. Upon adoption of SFAS 123(R) on April 1, 2006, excess tax benefits resulting from tax deductions in excess of compensation cost recognized for those options are classified as financing cash flows. The Company repurchased approximately 1.4 million shares of common stock at an average price of $19.92 per common share for approximately $27.4 million during the nine months ended December 29, 2006. Capital Resources The Companys two primary sources of capital are the proceeds from the 2.25% convertible senior notes offering and the $200.0 million revolving line of credit, which may be increased to $250.0 million at the Companys discretion. These instruments provide the financial resources to support the business strategies of customer service and revenue growth. The revolving line of credit, which is an asset-based agreement, is primarily collateralized by the Companys accounts receivable and inventory. The Companys long-term priorities for use of capital are internal growth, acquisitions, and repurchase of the Companys common stock. The 2.25% convertible senior notes may be converted into shares of the Companys common stock prior to March 15, 2019, during any calendar quarter that the closing sale price of the Companys common stock for at least 20 of the 30 consecutive trading days ending the day prior to such quarter is greater than 120% of the applicable conversion price of $17.10 per share (or $20.51 per share) (Contingent Conversion Trigger). During the three months ended December 29, 2006, the Contingent Conversion Trigger was met and the notes are convertible during the period January 1, 2007 to March 30, 2007. Therefore, the notes were classified as Current Portion of Long-Term Debt as of December 29, 2006. The ability of note holders to convert is assessed on a quarterly basis and the ability to convert subsequent to March 30, 2007 is dependent on the trading price
of the Companys stock during the last 30 trading days of each quarter. As of December 29, 2006, the fair value of the convertible senior notes was approximately $184.8 million and the value of the shares, if converted, was approximately $171.4 million. If presented, the Company believes it has adequate liquidity under the Credit Agreement to settle the principle balance of the notes. At December 29, 2006, there were no outstanding borrowings under the revolving line of credit. After reducing the availability of borrowings for letter of credit commitments, the Company had sufficient assets based on eligible accounts receivable and inventories to borrow up to $199.7 million (excluding the additional increase of $50.0 million) under the revolving line of credit. As the Companys business grows, its cash and working capital requirements are expected to increase. The Company normally meets its operating requirements by maintaining appropriate levels of liquidity under its revolving line of credit and using cash flows from operating activities. The Company expects 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 December 29, 2006, the Company has not entered into any material working capital commitments that require funding, other than the items discussed below and the obligations included in the future minimum obligation table below. Based on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors, the Company may seek to retire a portion of its outstanding equity through cash purchases and/or reduce its debt. The Company may also seek to issue additional debt or equity to meet its future liquidity requirements. Such transactions may occur in the open market, privately negotiated transactions, or otherwise, and the amounts involved may be material.  32  Debt Rating The Companys debt is rated by a nationally recognized rating agency, Standard and Poors Ratings Services (S&P). Companies that have assigned ratings at the top end of the range have, in the opinion of the rating agency, the strongest capacity for repayment of debt or payment of claims, while companies at the bottom end of the range have the weakest capability. On August 10, 2006, S&P upgraded the Companys credit rating from BB- to BB and revised the ratings outlook from positive to stable. Additionally, on August 11, 2006, S&P upgraded the Companys $150 million senior convertible notes rating from B to B+.  Agency ratings are always subject to change, and there can be no assurance that a ratings agency will continue to rate the Company or its debt, and/or maintain its current ratings. Management
cannot predict the effect that a negative change in debt ratings will have on the Companys liquidity. 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 noncompetition and nonsolicitation agreements. The following table presents, in aggregate, scheduled payments under contractual obligations. Fiscal Years(in thousands)
        2007 (remaining 3 months)
        2008
        2009
        2010
        2011
        Thereafter
        TotalRevolving line of credit(a)
        $    125
        $    500
        $    500
        $    500
        $   125
        $                --
        $      1,7502.25% convertible senior notes(b)(f)
        151,688
        3,375
        3,375
        3,375
        3,375
        43,875
        209,063Letters of credit outstanding(c)
        --
        342
        --
        --
        --
        --
        342Operating lease obligations(d)
        6,143
        22,187
        17,902
        13,603
        9,663
        15,183
        84,681Capital lease obligations(b)
        185
        654
        329
        --
        --
        --
        1,168Employment Agreements
        --
        99
        294
        --
        --
        --
        393Purchase commitments(e), (g)
        4,745
        12,784
        1,505
        753
        --
        --
        19,787Outstanding purchase price(h)
        1,790
        --
        --
        --
        --
        --
        1,790Total
        $164,676
        $39,941
        $23,905
        $18,231
        $13,163
        $59,058
        $318,974
 (a)
        The Company did not have any outstanding borrowings under the revolving line of credit at December 29, 2006. Management expects that cash flows from operations will fund future working capital needs, capital expenditures, and other investing and financing activities, excluding business combinations. Therefore, the amounts included in the table above represent unused line fees. Actual interest expense may differ due to changes in the level of borrowings.
 (b)
        Amounts include interest expense.
 (c)
        The Company typically issues letters of credit with expirations of less than one year.
 (d)
        Amounts represent contractual obligations for operating leases of the Company as of December 29, 2006. Currently, it is managements intent to either renegotiate existing leases or execute new leases upon the expiration date of such agreements.
 (e)
        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 a negotiated time period immediately preceding the date of termination. As of December 29, 2006, the Company has not terminated any contracts with a private label vendor that required the Company to purchase the vendors remaining private label inventory.
 (f)
        During the three months ended December 29,2006, the Contingent Conversion Trigger of the Companys
         2.25% convertible notes was met.  As a result, the notes are convertible during the period
         January 1, 2007 to March 30, 2007 and have been reclassified to Current Portion of Long-Term
         Debt at December 29, 2006.  The ability of note holders to convert is assessed on a quarterly
         basis and the ability to convert subsequent to March 30, 2007 is dependent on the trading price
         of the Companys stock during the last 30 trading days of each quarter. Due to this conversion
         feature, which may return the notes to their long-term status, the interest payments due in
         fiscal years 2008 and thereafter remain in the future minimum obligations table.
 (g)
        During February 2006, the Company entered into agreements with different suppliers to purchase a minimum number of latex and vinyl gloves through January 31, 2008. The pricing of the latex gloves may be periodically adjusted and is based on the price of raw latex as traded on the Malaysian Rubber Exchange. The pricing of the vinyl gloves may also be periodically adjusted and is based on the weighted price of two raw materials, Poly vinyl chloride (PVC) and Dioctylphthalate (DOP), as published on www.icis.com. These purchase commitments are valued at approximately $12.8 million at December 29, 2006 and are based on managements estimate of current pricing.
 (h)
        Amounts represent estimated additional consideration, including interest, to be paid to the sellers of previously acquired businesses, net of any amounts payable to the Company for indemnity claims that arise under the purchase agreement. Approximately $0.4 million of this additional consideration to be paid is not accrued in the accompanying balance sheet as of December 29, 2006 as amounts represent earn-out payments to be paid to the sellers of CSSI.
  33  APPLICATION OF CRITICAL ACCOUNTING POLICIES Critical Accounting Policies are disclosed in the Annual Report on Form 10-K for the fiscal year ended March 31, 2006 filed on May 26, 2006 under the headingManagements Discussion and Analysis of Financial Condition and Results of Operations. The following reflects material changes to such disclosures during the nine months ended December 29, 2006. Revenue Recognition Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility of the resulting accounts receivable is reasonably assured. The Company also applies the provisions of Emerging Issues Task Force (EITF) Issue No. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent(EITF 99-19) in determining whether it is appropriate to record either (i) the gross amount of product sales in revenue and related costs in cost of goods sold or (ii) the net amount earned as a commission in revenue. The Companys application of EITF 99-19 includes evaluation of the terms of each major vendor contract relative to a number of criteria that management considers in making its determination
with respect to gross vs. net reporting of revenue. Managements criteria for making these judgments place particular emphasis on determining the primary obligor in a transaction and which party bears general inventory risk, among other factors. Net sales, gross margins, and operating margins may be impacted in future periods to the extent the Companys revenues expand into areas that require net reporting of revenue in accordance with EITF 99-19. Physician Business.The Physician Business has two primary sources of revenue:  the sale of consumable products and the sale of equipment. Revenue from the sale of consumable products is recognized when products are shipped or delivered since at that time there is persuasive evidence that an arrangement exists, the price is fixed and determinable, and the collection of the resulting accounts receivable is reasonably assured. Revenue from the sale of single deliverable equipment is generally recognized when the equipment is shipped, unless there are multiple deliverables, in which case revenue is recognized when all obligations to the customer are fulfilled. Obligations to the customer are typically satisfied when installation and training are complete. Customers have the right to return consumable products and equipment. Sales allowances are recorded as a reduction of revenue for potential product returns and estimated billing errors. Management analyzes sales allowances quarterly using historical data adjusted for significant changes in volume and business conditions, as well as specific identification of significant returns or billing errors. Elder Care Business.The Elder Care Business has four primary sources of revenue:  the sale of consumable products to skilled nursing home facilities, assisted living facilities, and home care providers; the sale of consumable products to Medicare eligible customers; the sale of equipment; and service fees earned for providing Medicare Part B billing services. Revenue from the sale of consumable products to skilled nursing home facilities, assisted living facilities, and home care providers is recognized when products are shipped or delivered. Revenue for these products is recorded at
shipment since at that time there is persuasive evidence that an arrangement exists, the price is fixed and determinable, and the collection of the resulting accounts receivable is reasonably assured. Revenue from providing Medicare Part B billing services on a full-assignment basis is recognized during the period the supplies being provided to Medicare eligible patients are consumed and Medicare is billed. Revenue is recorded at the amounts expected to be collected from Medicare, other third-party payers, and directly from customers. Revenue for Medicare reimbursement is recorded based on government-determined reimbursement prices for Medicare-covered items. Medicare reimburses 80% of the government-determined reimbursement prices for reimbursable supplies and the remaining balance is billed to either third-party payers or directly to customers. Reimbursement from Medicare is subject to review by appropriate government regulators. Revenue from providing Medicare Part B billing services on a fee-for-service basis is recognized when billing services are rendered to the customer. Revenue from the sale of single deliverable equipment is generally recognized when the equipment is shipped, unless there are multiple deliverables, in which case revenue is recognized when all obligations to the customer are fulfilled.  34  Customers have the right to return consumable products and equipment. Sales allowances are recorded as a reduction of revenue for (i) potential product and equipment returns, (ii) revenue adjustments related to actual usage of products by eligible Medicare Part B patients, and (iii) Medicare Part B reimbursement denials, and billing errors. Management analyzes product returns quarterly using historical data adjusted for significant changes in volume and business conditions, as well as specific identification of significant returns. Management analyzes billing errors on at least a semi-annual basis using historical data or a sampling methodology as well as specific identification of significant billing errors. Management analyzes revenue adjustments related to estimated usage of products by eligible Medicare Part B patients and Medicare Part B reimbursement denials using
historical actual cash collection and actual adjustments to gross revenue for a certain period of time. Additional allowances are recorded for any significant specific adjustments known to management. Consolidated sales allowances are immaterial and generally represent less than 1.0% of gross sales.  Inventories Inventories consist of medical products, medical equipment, and other related products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as net realizable value. The net realizable value of excess and slow moving inventory is determined using judgment as to when the inventory will be sold and the quantities and prices at which the inventory will be sold in the normal course of business. Obsolete or damaged inventory is disposed of or written down to net realizable value on a quarterly basis. Additional adjustments, if necessary, are made based on managements specific review of each full-service distribution centers inventory on-hand. As part of the Companys periodic review of the carrying amount of inventory during the three months ended December 29, 2006, management determined that a write-down of $7,058 was required on excess influenza vaccine inventory resulting from the cancellation of customer orders in the third quarter due to an oversupply of the product in the market, and, to date, a mild influenza season.  In addition to these factors, management based its decision on the likelihood of locating alternate markets for the product and the viability of the product based on its limited life span.  As a result of the valuation allowance, cost of goods sold were increased by $7,058 during the three and nine months ended December 29, 2006, or $4,383 net of tax.  35   Estimating Useful Lives of Property and Equipment Property and equipment is recorded at cost and is depreciated on a straight-line basis over the following estimated useful lives. Useful LifeEquipment
        2 to 15 yearsCapitalized internal-use software costs
        5 to 15 yearsComputer hardware and software
        3 to 15 years
  Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives. Management is required to use judgment in determining the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Companys business model, changes in the Companys business strategy, or changes in the planned use of property and equipment could result in the actual useful lives differing from the Companys current estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened or extended, the Company would depreciate the net book value in excess of the estimated salvage value over its revised remaining useful life. During fiscal year 2005, management reviewed the estimated useful lives of certain computer hardware and software in connection with completing the implementation of the JD Edwards enterprise resource planning (ERP) system. Based on this review, management revised the estimated useful lives of certain assets after considering (i) the Companys historical use of its prior ERP systems, (ii) future plans for the JD Edwards ERP system, (iii) expected enhancements, and (iv) expected ongoing product support, enhancements, and maintenance commitments from the vendor. Management believed this change in estimate was appropriate given the Companys commitment to and invested capital in the customization and future use of the JD Edwards ERP platform. As a result, the remaining estimated useful lives of certain computer hardware and software with a carrying value of approximately
$27.4 million were extended on March 23, 2005 to coincide with the expected service life of the assets in accordance with Accounting Principles Board Opinion No. 20,Accounting Changes. The weighted average remaining useful life of the assets prior to the change in estimate was approximately 80 months and the change in estimate lengthened the estimated useful lives by approximately 40 months. This change in estimate decreased depreciation expense by $1.1 million, net of tax, or approximately $0.02 diluted earnings per share for the fiscal year ended March 31, 2006. Notes Receivable Notes receivable consist of amounts owed to the Company and are stated at cost, which approximates fair value. The Companys outstanding notes receivable are exposed to credit risk and valuation allowances are established for estimated losses resulting from non-collection of outstanding amounts. The valuation allowances include specific amounts for those notes considered uncollectible and general allowances for delinquent notes. Specific allowances are provided for unsecured notes deemed uncollectible based on facts and circumstances known to management, such as the financial condition of the note holder. Estimates are used to determine the general valuation allowances and are generally based on historical collection results, the current status of the notes, and the credit-worthiness of the note holders. Management reviews the adequacy of the valuation allowances for notes receivable on a periodic basis
and adjustments are made, if needed, based on current facts and circumstances known at the valuation date. The Company has two notes receivable (the Loans), which bear interest at the applicable Federal rate for long-term obligations, outstanding from its former chairman and chief executive officer. One Loan is unsecured and the other Loan is secured by a split-dollar life insurance policy. Management reviews the realization of the Loans on a quarterly basis based on current facts and circumstances known at the valuation date.  36  As part of the Companys periodic review of the carrying amount of the Loans during the three months ended September 27, 2002, management and the Board of Directors determined that an allowance for doubtful accounts of $2.9 million was required on the unsecured Loan after communication with the former chairman and chief executive officer regarding his financial condition and other due diligence procedures performed by management. Subsequently, during the three months ended July 1, 2005, new facts and circumstances were obtained by management and the Board of Directors that indicated the former chairman and chief executive officers financial condition had improved. In addition, the Company received a payment of approximately $0.3 million during this period for past due interest. These factors as well as direct communication with the former chairman and chief executive officer
during this period led to a determination by management and the Board of Directors that the allowance for doubtful accounts was no longer required for the unsecured loan. Therefore, general and administrative expenses were reduced $2.9 million during the three months ended July 1, 2005, which increased net income $1.8 million. RECENT ACCOUNTING PRONOUNCEMENTS Refer to Note 1,Basis of Presentation, in the Companys financial statements included in this report for a discussion of recent accounting pronouncements and their impact on the Companys financial condition and results of operations. ITEM3. 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 March 31, 2006 filed on May 26, 2006. ITEM4. 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, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e) and 240.15d-15(e)) as of the end of the period covered by this report (the Evaluation Date). Based on the evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the evaluation date, the Companys disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (the Exchange Act) and are effective in ensuring that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act, is accumulated and communicated to the Companys management, including the Companys Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There have been no changes in the Companys internal control over financial reporting that occurred during the three months ended December 29, 2006 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. PARTII--OTHER INFORMATION ITEM1. LEGAL PROCEEDINGS See Note 7,Commitments and Contingencies, in the financial statements included with 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 March 31, 2006 filed on May 26, 2006.  37  ITEM1A. RISK FACTORS In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A,Risk Factors, in the Companys Annual Report Form 10-K for the fiscal year ended March 31, 2006, filed on May 26, 2006. Such factors could materially affect our business, financial condition or future results. The risks described in the Companys Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deem to be immaterial also may materially adversely affect the Companys business, financial condition, or operating results. Increasing governmental efforts to regulate the pharmaceutical supply channel may increase the Physician Business operating costs and reduce profitability. In 1999, the Food and Drug Administration (FDA) promulgated rules designed to protect American consumers from counterfeit drugs, but delayed the effective date of enforcement. In June 2006, the FDA announced that they intended to enforce the 1999 legislation beginning December 1, 2006, with no further delays in the effective date. In recent years, some states have passed or have proposed similar laws and regulations that are intended to protect the integrity of the supply channel that affects the purchase, sale, and shipment of pharmaceutical products. For example, Florida and other states are implementing pedigree requirements that require wholesalers to provide healthcare providers access to paperwork tracing drugs back to the manufacturers. These and other requirements may increase the Companys cost of operations. As a result of political, economic and regulatory influences, the
healthcare delivery industry in the United States is under intense scrutiny and subject to fundamental changes. Management cannot predict which reform proposals will be adopted, when they may be adopted, or what impact they may have on the Company. Furthermore, the costs associated with complying with federal and state regulations could be significant and the failure to comply with any such legal requirements could have a significant impact on the Companys results of operations and financial condition. ITEM2. 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. During the nine months ended December 29, 2006, the Company repurchased approximately 1.4 million shares of common stock under this program at an average price of $19.92 per common share for approximately $27.4 million. On December 6, 2006, the Companys Board of Directors amended the stock repurchase plan by approving the repurchase of an additional 5%, or approximately 3.4 million common shares, in the open market, in privately negotiated transactions, or otherwise. At December 29, 2006, approximately 4.3 million shares were available to repurchase under this program.  38  The following table summarizes the Companys repurchase activity during the three months ended December 29, 2006. Period
        Total
Number of
Shares
Purchased
        Average
Price Paid
per Share
        Maximum Number  of Shares Purchased as Part of Publicly Announced Plans or Programs
        Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or ProgramsSeptember 30-October 29
        189,300
        $  19.40
        189,300
        1,415,862October 30-November 29
        255,135
        $  20.61
        255,135
        1,160,727November 30-December 29
        303,852
        $  20.59
        303,852
        4,249,901Total third quarter
        748,287
        $  20.30
        748,287
        4,249,901
 ITEM6. EXHIBITS (a)
        Exhibits required by Item 601 of Regulation S-K:
 Exhibit
Number
        Description31.1
        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.
  39  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 February 7, 2007.  PSS WORLD MEDICAL, INC.By:
        /s/ David M. BronsonDavid M. Bronson
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)
   40