**UNITED        STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM** **10-Q**

 

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

 

**For        the quarterly period ended June 29, 2007**

 

OR

 

| 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 Number 0-23832

 

**PSS        WORLD MEDICAL, INC.**

*(Exact        name of Registrant as specified in its charter)*

 

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

 

xYes oNo

 

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

 

| Large accelerated filerx | Accelerated filer o | Non-accelerated filer                        o |
|--------------------------|---------------------|------------------------------------------------|

 

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        August 6, 2007 was 67,340,323 shares.

**PSS        WORLD MEDICAL, INC. AND SUBSIDIARIES**

 

**JUNE        29, 2007**

 

**TABLE        OF CONTENTS**

|     |                                                                                                                                        |     |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **Item** |                                                                                                                                        | **Page** |
|     |                                                                                                                                        |     |
|     | Information Regarding Forward-Looking Statements                                                                                            | 3        |
|     |                                                                                                                                        |     |
|     | **Part** **I—Financial Information**                                                                                             |     |
|     |                                                                                                                                        |     |
| 1.       | Financial Statements:                                                                                                                       |     |
|     |                                                                                                                                        |     |
|     | Unaudited Condensed Consolidated Balance Sheets— June                        29, 2007 and March 30, 2007                              | 4        |
|     |                                                                                                                                        |     |
|     | Unaudited Condensed Consolidated Statements of Operations                        for the Three Months Ended June 29, 2007 and June 30, 2006 | 5        |
|     |                                                                                                                                        |     |
|     | Unaudited Condensed Consolidated Statements of Cash Flows                        for the Three Months Ended June 29, 2007 and June 30, 2006 | 6        |
|     |                                                                                                                                        |     |
|     | Unaudited Notes to Condensed Consolidated Financial                        Statements                                                       | 7        |
|     |                                                                                                                                        |     |
| 2.       | Management’s Discussion and Analysis of Financial                        Condition and Results of Operations                          | 15       |
|     |                                                                                                                                        |     |
| 3.       | Quantitative and Qualitative Disclosures About Market                        Risk                                                           | 22       |
|     |                                                                                                                                        |     |
| 4.       | Controls and Procedures                                                                                                                     | 22       |
|     |                                                                                                                                        |     |
|     | **Part** **II--Other Information**                                                                                                     |     |
|     |
| 6.       | Exhibits                                                                                                                                    | 23       |
|     |                                                                                                                                        |     |
|     | **Signature**                                                                                                                               | 24       |
|     |                                                                                                                                        |     |

 

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 30,        2007, 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 cash flows from                        operations will fund future working capital needs, capital expenditures,                        and, in conjunction with borrowings under the revolving line of credit,                        capital markets, and/or other financing arrangements, the overall growth in                        the business; |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Management’s expectation that the Company may seek to                        retire its outstanding equity through share repurchases and may also issue                        or retire debt or equity to meet its future liquidity                        requirements; |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Management’s belief that the majority of the remaining                        net operating loss carryforwards will be utilized prior to their expiration                        date to reduce state tax liability; |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Management’s expectation that changes in the                        Company’s current uncertain tax positions will not have a material                        impact on the results of operations or the consolidated balance                        sheet; |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Management’s expectation that potential fines,                        penalties, and inventory exposure will be settled and resolved with the                        State of Florida Department of Health by the end of the Company’s                        second quarter of fiscal year 2008; and |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **•** | Management’s expectation that the integration of                        Activus Healthcare Solutions, Inc. will be complete by the end of the                        Company’s second quarter of fiscal year 2008. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

In        connection with the “safe harbor” provisions of the Private Securities        Litigation Reform Act of 1995, management is identifying important factors that could        affect the Company’s financial performance and could cause actual results for future        periods to differ materially from any opinions or statements expressed with respect to        future periods in any current statements about the Company’s goals or expectations.        The Company’s future results could be adversely affected by a variety of factors,        including those discussed in Item 1A-*Risk Factors*in the Company’s 2007 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 Factors*of the Company’s 2007 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.

 

3

**PART** **I--FINANCIAL INFORMATION**

**ITEM** **1.        FINANCIAL STATEMENTS**

 

**PSS        WORLD MEDICAL, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

**JUNE        29, 2007 AND MARCH 30, 2007**

**(Dollars in Thousands, Except Share and Per Share Data)**

**ASSETS**

|                                                                                                  |                                                                                                          |                                           |                 | **June 29,** | **March 30,** |
|-------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|------------------------------------------------|----------------------|--------------|---------------|
|                                                                                                  |                                                                                                          |                                           |                 | **2007**     | **2007**      |
| Current Assets:                                                                                       |                                                                                                          |                                           |
|                                                                                                  | Cash and cash equivalents                                                                                     | $  23,954                                 | $  46,658       |
|                                                                                                  | Accounts receivable, net of allowance for doubtful accounts                        of $9,084 and $8,686 as of |                                           |                 |
|                                                                                                  |                                                                                                          | June 29, 2007 and March 30, 2007, respectively | 222,699              | 222,776      |
|                                                                                                  | Inventories                                                                                                   | 187,499                                        | 174,130              |
|                                                                                                  | Deferred tax assets, net                                                                                      | 8,987                                          | 8,776                |
|                                                                                                  | Prepaid expenses and other                                                                                    | 34,257                                         | 34,434               |
|                                                                                                  |                                                                                                          |                                           | Total current assets | 477,396      | 486,774       |
|                                                                                                  |                                                                                                          |                                           |                 |         |               |
| Property and equipment, net of accumulated depreciation of                        $75,044 and $70,596 |                                                                                                          |                                           |
|                                                                                                  | as of June 29, 2007 and March 30, 2007,                        respectively                                   | 89,347                                         | 88,627               |
| Other Assets:                                                                                         |                                                                                                          |                                           |
|                                                                                                  | Goodwill                                                                                                      |                                                | 110,993              | 107,366      |
|                                                                                                  | Intangibles, net                                                                                              | 30,280                                         | 29,758               |
|                                                                                                  | Other                                                                                                         | 98,380                                         | 62,450               |
|                                                                                                  |                                                                                                          |                                           | Total assets         | $806,396     | $774,975      |
|                                                                                                  |                                                                                                          |                                           |                 |         |          |

 

**LIABILITIES AND SHAREHOLDERS’ EQUITY**

| Current Liabilities:                              |                                                                                                       |                                                                                                 |
|---------------------------------------------------|------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|
|                                              | Accounts payable                                                                                           | $144,572                                                                                             | $131,330 |
|                                              | Accrued expenses                                                                                           | 33,099                                                                                               | 37,224 |
|                                              | Revolving line of credit and current portion of long-term                        debt                      | 2,132                                                                                                | 2,238 |
|                                              | Other                                                                                                      | 15,267                                                                                               | 11,440 |
|                                              |                                                                                                       |                                                                                                 | Total current liabilities | 195,070 | 182,232 |
|                                              |                                                                                                       |                                                                                                 |   |   |   |
| Long-term debt, excluding current portion         | 150,527                                                                                                    | 150,675                                                                                              |
| Other noncurrent liabilities                      | 70,414                                                                                                     | 61,207                                                                                               |
|                                              |                                                                                                       |                                                                                                 | Total liabilities | 416,011 | 394,114 |
| Commitments and contingencies (Notes 2, 7, and 8) |                                                                                                       |                                                                                                 |
| Shareholders’ Equity:                       |                                                                                                       |                                                                                                 |
|                                              | Preferred stock, $0.01 par value; 1,000,000 shares                        authorized, no shares issued and |                                                                                                 |   |
|                                              |                                                                                                       | outstanding                                                                                          | - | - |
|                                              | Common stock, $0.01 par value; 150,000,000 shares                        authorized, 67,329,723 and        |                                                                                                 |   |
|                                              |                                                                                                       | 67,179,475 shares issued and outstanding at June 29, 2007                        and March 30, 2007, |   |
|                                              |                                                                                                       | respectively                                                                                         | 668 | 668 |
|                                              | Additional paid-in capital                                                                                 | 301,087                                                                                              | 300,014 |
|                                              | Retained earnings                                                                                          | 88,630                                                                                               | 80,179 |
|                                              |                                                                                                       |                                                                                                 | Total shareholders’ equity | 390,385 | 380,861 |
|                                              |                                                                                                       |                                                                                                 | Total liabilities and shareholders’ equity | $806,396 | $774,975 |
|                                              |                                                                                                       |                                                                                                 |   |   |   |

 

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

 

4

**PSS        WORLD MEDICAL, INC. AND SUBSIDIARIES**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR        THE THREE MONTHS ENDED JUNE 29, 2007 AND JUNE 30, 2006**

**(Dollars in Thousands, Except Share and Per Share Data)**

 

 

 

 

|                                                                       |                           |                   | **Three Months Ended** |
|----------------------------------------------------------------------------|--------------------------------|------------------------|------------------------|
|                                                                       |                           |                   | **June 29, 2007**      | **June 30, 2006** |
| Net sales                                                                  | $438,910                       | $413,135               |
| Cost of goods sold                                                         | 311,227                        | 293,233                |
|                                                                       |                           | Gross profit           | 127,683                | 119,902 |
|                                                                       |                           |                   |
| General and administrative expenses                                        | 83,600                         | 73,664                 |
| Selling expenses                                                           | 29,551                         | 27,498                 |
|                                                                       |                           | Income from operations | 14,532                 | 18,740 |
| Other (expense) income:                                                    |                           |                   |
|                                                                       | Interest expense               | (1,358)                | (1,406)                |
|                                                                       | Interest and investment income | 528                    | 101                    |
|                                                                       | Other income, net              | 544                    | 469                    |
|                                                                       |                           | Other (expense) income | (286)                  | (836) |
| Income before provision for income taxes                                   | 14,246                         | 17,904                 |
| Provision for income taxes                                                 | 5,559                          | 6,949                  |
| Net income                                                                 | $ 8,687                        | $ 10,955               |
|                                                                       |                           |                   |                   |   |
| Basic earnings per common share                                            | $ 0.13                         | $ 0.16                 |
| Diluted earnings per common share                                          | $ 0.13                         | $ 0.16                 |
|                                                                       |                           |                   |                   |   |
| Weighted average common shares outstanding, Basic                          | 66,793                         | 67,310                 |
| Weighted average common shares outstanding,                        Diluted | 68,765                         | 68,947                 |

 

 

 

 

 

 

 

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 CASH FLOWS**

**FOR        THE THREE MONTHS ENDED JUNE 29, 2007 AND JUNE 30, 2006**

**(Dollars in Thousands)**

|                                                                                                           | **Three Months Ended** |
|----------------------------------------------------------------------------------------------------------------|------------------------|
|                                                                                                           | **June 29, 2007**      | **June 30, 2006** |
| **Cash Flows From Operating Activities:**                                                                      |                   |   |
| Net income                                                                                                     | $  8,687          | $ 10,955 |
| Adjustments to reconcile net income to net cash provided by                        operating activities:       |                   |   |
| Provision for deferred income taxes                                                                            | 197                    | 4,353 |
| Depreciation                                                                                                   | 4,599                  | 4,094 |
| Amortization of intangible assets                                                                              | 1,458                  | 1,505 |
| Provision for doubtful accounts                                                                                | 950                    | 92 |
| Noncash compensation expense                                                                                   | 699                    | 300 |
| Amortization of debt issuance costs                                                                            | 358                    | 358 |
| Provision for deferred compensation                                                                            | 1,359                  | 445 |
| Loss on sales of property and equipment                                                                        | 14                     | 3 |
| Other                                                                                                          | --                     | (61) |
| Changes in operating assets and liabilities, net of effects                        from business combinations: |                   |   |
| Accounts receivable, net                                                                                       | 1,987                  | 2,627 |
| Inventories                                                                                                    | (11,319)               | 2,846 |
| Prepaid expenses and other current assets                                                                      | 769                    | (4,555) |
| Other assets                                                                                                   | (6,976)                | (169) |
| Accounts payable                                                                                               | 8,549                  | (16,778) |
| Accrued expenses and other liabilities                                                                         | 7,988                  | (2,026) |
| Net cash provided by operating activities                                                                      | 19,319                 | 3,989 |
|                                                                                                           |                   |   |
| **Cash Flows From Investing Activities:**                                                                      |                   |   |
| Payments for business combinations, net of cash acquired of                        $376 and $0, respectively   | (14,808)               | (100) |
| Payments for investment in preferred stock                                                                     | (22,500)               | -- |
| Capital expenditures                                                                                           | (4,937)                | (4,596) |
| Payments for nonsolicitation agreements                                                                        | --                     | (495) |
| Payments for signing bonuses                                                                                   | (53)                   | -- |
| Proceeds from sale of property and equipment                                                                   | 18                     | 8 |
| Net cash used in investing activities                                                                          | (42,280)               | (5,183) |
|                                                                                                           |                   |   |
| **Cash Flows From Financing Activities:**                                                                      |                   |   |
| Proceeds from exercise of stock options                                                                        | 353                    | 2,510 |
| Excess tax benefits from share-based compensation                        arrangements                          | 97                     | 1,223 |
| Payment under capital lease obligations                                                                        | (193)                  | (122) |
| Other                                                                                                          | --                     | 1,500 |
| Net cash provided by financing activities                                                                      | 257                    | 5,111 |
| Net (decrease) increase in cash and cash                        equivalents                                    | (22,704)               | 3,917 |
| Cash and cash equivalents, beginning of period                                                                 | 46,658                 | 23,867 |
| Cash and cash equivalents, end of period                                                                       | $23,954                | $27,784 |
|                                                                                                           |                   |   |

 

 

 

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

 

6

**PSS        WORLD MEDICAL, INC. AND SUBSIDIARIES**

**UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL        STATEMENTS**

**JUNE        29, 2007 AND JUNE 30, 2006**

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

| **1.** | **BACKGROUND AND 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 30, 2007 has been derived from the Company’s        audited consolidated financial statements for the fiscal year ended March 30, 2007. 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 30, 2007.

The        Company reports its year-end financial position, results of operations, and cash flows as        of the Friday closest to March 31. Fiscal years 2008 and 2007 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 months ended        June 29, 2007 and June 30, 2006 each consisted of 64 selling days.

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.

**Reclassification**

Certain        amounts reported in prior years have been reclassified to conform to the presentation at        June 29, 2007.

**Recent        Accounting Pronouncements**

In        July 2006, the FASB issued FASB Interpretation No. 48, *Accounting for        Uncertainty in Income Taxes, and Related Implementation        Issues*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty        in income taxes recognized in a company’s financial statements in accordance with        Statement of Financial Accounting Standards (“SFAS”) No. 109,*Accounting        for Income Taxes*. FIN 48 prescribes a recognition threshold and measurement        attributes for tax positions 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 was adopted by the Company during the three months ended June 29, 2007.        See the Footnote 8,*Income Taxes* for further discussion.

| **2.** | **PURCHASE BUSINESS COMBINATIONS** |
|--------|------------------------------------|

The        following acquisition was accounted for under the purchase method of accounting in        accordance with SFAS No. 141,*Business        Combinations*. Accordingly, the operations of the acquired company        have been included in the Company's results of operations subsequent to the date of        acquisition. The assets acquired and liabilities

 

7

assumed        were recorded at their estimated fair values at the date of acquisition as determined by        management based on information currently available. Supplemental unaudited pro forma        information, assuming this acquisition was made at the beginning of the immediate preceding        period, is not presented as the results would not differ materially from the amounts        reported in the accompanying Unaudited Condensed Consolidated Statements of        Operations.

**Physician Business (Fiscal Year 2008)**

On May 31,        2007, the Physician Business acquired 100% of the outstanding stock of Activus Healthcare        Solutions, Inc. (“Activus”). Activus is a California based distributor of        medical supplies and pharmaceuticals to office-based physicians and ambulatory surgery        centers. The maximum aggregate purchase price, subject to certain adjustments as set forth        in the purchase agreement, was approximately $13,282 (net of cash acquired of $376).        Payments totaling $13,282 were made during the first three months of fiscal year 2008, of        which $3,000 is held in escrow and will be released upon the satisfaction of certain sales        representative retention milestones, net of any amounts payable to the Company for        indemnity claims that arise under the purchase agreement. These funds are classified as        restricted cash within other current assets and accrued liabilities on the Unaudited        Condensed Consolidated Balance Sheet. The premium paid in excess of the fair value of the        net assets acquired was primarily for Activus’ tenured sales force.

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

|                      |                          |
|---------------------------|-------------------------------|
| Cash                      | $     376 |
| Accounts receivable, net  | 2,860                         |
| Inventory                 | 2,140                         |
| Other current assets      | 592                           |
| Property and equipment    | 385                           |
| Goodwill                  | 3,627                         |
| Intangibles               | 1,911                         |
| Deferred tax asset        | 6,582                         |
| Other noncurrent assets   | 29                            |
| Total assets acquired     | 18,502                        |
| Less: Current liabilities | 4,844                         |
| Net assets acquired       | **$13,658**                   |
|                      |                          |

Goodwill        of $3,627 was assigned to the Physician Business and is not deductible for tax purposes.        Based on the final purchase price allocation, acquired intangible assets totaled        approximately $1,911, and were assigned to customer relationships, with a useful life of        ten years for accounting purposes.

| **3.** | **EQUITY INVESTMENT** |
|--------|-----------------------|

On June        29, 2007, the Company made a $24,231 investment (including $1,731 of accrued legal and        other professional fees) in athenahealth, Inc. (“athena”), a privately held        company, representing an ownership interest of approximately 5%. Athena is a leading        provider of internet-based healthcare information technology and business services to        physician practices. The Company purchased shares of preferred stock from existing        shareholders. In accordance with APB Opinion No. 18,*The Equity        Method of Accounting for Investments in Common Stock*, which        governs the accounting for privately held investments, the investment in athena is recorded        at cost in “Other Assets” on the Unaudited Condensed Consolidated        Balance Sheets.

| **4.** | **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 potential impact of        convertible senior notes. Common equivalent shares are excluded from the computation in        periods in which they have an antidilutive effect.

 

8

The        following table sets forth computational data for the denominator in the basic and diluted        earnings per common share calculation for the three months ended June 29, 2007 and June 30,        2006:

|                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **For the Three Months Ended** |
|------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|
| *(in thousands)*                                                                         | **June 29, 2007**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                           | **June 30, 2006** |
| Denominator-Weighted average shares outstanding used in                        computing |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                           |
|                                                                                     | basic earnings per common share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 66,793                         |   | 67,310 |
| Assumed exercise of stock options (a)                                                    | 690                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                           | 1,028 |
| Assumed vesting of restricted stock                                                      | 142                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                           | 113 |
| Assumed conversion of 2.25% convertible senior                        notes              | 1,140                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                           | 496 |
| Denominator-Weighted average shares outstanding used in                        computing |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                           |   |
|                                                                                     | diluted earnings per common share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | **68,765**                     |   | **68,947** |
|                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                           |   |   |
| (a)                                                                                      | Options to purchase approximately 292 and 416 shares of                        common stock which were outstanding during the three months ended June 29,                        2007 and June 30, 2006, 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. |

 

| **5.** | **STOCK-BASED COMPENSATION** |
|--------|------------------------------|

Effective        April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting        Standards, 123(Revised 2004),*Share-Based        Payment*, (“SFAS 123(R)”). The Company elected to        adopt the modified prospective method provided by SFAS 123(R). 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).

The        Company’s unaudited condensed consolidated statements of income reflect pre-tax        share-based compensation expense of $586 and $189 for the three months ended June 29, 2007        and June 30, 2006, respectively. The amount of income tax benefits recognized in income        during the three months ended June 29, 2007 and June 30, 2006 were $222 and $72,        respectively.

The        Company’s unaudited condensed consolidated statements of cash flows present the        stock-based compensation expense as an adjustment to reconcile net income to net cash used        in operating activities for all periods presented. Benefits of $97 and $1,223 associated        with tax deductions in excess of recognized compensation expense are presented as a cash        inflow from financing activities for the three months ended June 29, 2007 and June 30,        2006, respectively.

 

Stock-based compensation represents the cost related to stock-based awards        granted to employees and non-employee directors. The Company measures stock-based        compensation at the grant date, based on the estimated fair value of the award, and        recognizes the cost as compensation expense on a straight-line basis (net of estimated        forfeitures) over the awards vesting period. The Company’s stock-based compensation        expense is reflected in general and administrative expenses in the Unaudited Condensed        Consolidated Statements of Operations.

As of June        29, 2007, the Company had one stock incentive plan for its employees and one stock        incentive plan for its Board of Directors from which it grants equity incentive awards. The        PSS World Medical, Inc. 2006 Incentive Plan (the “2006 Plan”), is a        stock incentive plan under which equity may be granted to the Company’s officers,        directors, and employees. The 2006 Plan replaced the 1999 Long-Term Incentive        Plan and the 1999 Broad-Based Employee Stock Plan (collectively, the “Prior        Plans”) during fiscal year 2007. 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 2.0 million as of June 29,        2007.

 

9

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        0.4 million as of June 29, 2007.

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.

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        following table summarizes outstanding stock-based awards granted under equity incentive        plans as of June 29, 2007 and March 30, 2007:

|                                 | **As of**         |
|--------------------------------------|-------------------|
| *(in thousands)*                     | **June 29, 2007** | **March 30, 2007** |
|                                 |              |   |
| Stock options(a)                     | 2,334             | 2,366 |
| Restricted stock(b)                  | 523               | 405 |
| Restricted stock units(a)            | 99                | -- |
| Deferred stock units(a)              | 9                 | 9 |
| Total outstanding stock-based awards | **2,965**         | **2,780** |
|                                 |              |   |

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

(b) Amounts as of June 29, 2007 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.

**Stock        Option Awards**

The        following table summarizes the stock option activity during the period from March 30,        2007 to June 29, 2007:

|                                                                                                                                                                                                                                                                                    | **Shares** | **Weighted**

**Average**

**Exercise**

**Price** | **Weighted**

**Average**

**Contractual**

**Term** | **Aggregate**

**Intrinsic Value** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------------------------------------------------|------------------------------------|
|                                                                                                                                                                                                                                                                                    |       |                                               |                                                 |                               |
| Balance, March 30, 2007(a)                                                                                                                                                                                                                                                              | 2,366      | $10.30                                             |                                                 |                               |
| Granted                                                                                                                                                                                                                                                                                 | --         | --                                                 |                                                 |                               |
| Exercised                                                                                                                                                                                                                                                                               | (30)       | 11.59                                              |                                                 |                               |
| Cancelled                                                                                                                                                                                                                                                                               | (2)        | 15.87                                              |                                                 |                               |
| Balance, June 29, 2007(a)                                                                                                                                                                                                                                                               | **2,334**  | **$10.28**                                         | **   2.6**                                 | **$19,569**                        |
|  

(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 $18.22 on the last        trading day of the Company’s quarter end and the exercise price, multiplied by the        number of outstanding stock options) that would have been received by the option holders        had all option holders exercised their options on June 29, 2007. This amount changes over        time based on changes in

 

10

the fair        market value of the Company’s stock. Under the stock option plans, the exercise price        of each option equals the market price of the Company’s common stock on the date of        grant.

The total        intrinsic value of stock options exercised during the three months ended June 29, 2007 and        June 30, 2006 was $255 and $3,273, respectively. Cash received from stock option exercises        during the three months ended June 29, 2007 and June 30, 2006 was approximately $353 and        $2,510, respectively. The excess tax benefit realized for the tax deductions from stock        option exercises totaled approximately $97 and $1,223 during the three months ended June        29, 2007 and June 30, 2006, respectively.

**Restricted Stock Awards**

The Company        issues i) restricted stock which vests based on the recipient’s continued service        over time (“Time-Based Awards”) or ii) restricted stock or restricted stock        units which vest based on the Company achieving specified performance measurements        (“Performance-Based Awards”).

 

*Time-Based Awards*

The Company measures the fair value of Time-Based Awards on the date of        grant based on the closing stock price. The related compensation expense is recognized on a        straight-line basis over the vesting period, net of estimated forfeitures.

         

*Performance-Based Awards*

On June 27, 2007 the Compensation Committee (the “Committee”) of        the Board of Directors of the Company, approved awards of performance-based restricted        stock units (“Performance Shares”) and performance-accelerated restricted stock        (“PARS”) under the Company’s 2006 Plan to the Company’s top six        officers.

         

The Performance Share awards, totaling 99,200 shares, will vest after three        years and convert to shares of common stock based on the Company’s achievement of        certain cumulative earnings per share growth targets. These awards, which are denominated        in terms of a target number of shares, will be forfeited if performance falls below a        designated threshold level and may vest for up to 250% of the target number of shares for        exceptional performance. The ultimate number of shares delivered to recipients and the        related compensation cost recognized as expense will be based on actual performance. The        Company recognizes compensation expense on a straight-line basis (net of estimated        forfeitures) over the awards three year vesting period based on the Company’s        estimate of what will ultimately vest. This estimate may be adjusted in future periods        based on actual experience and changes in management assumptions.

         

The PARS awards, totaling 99,200 shares, will vest on the five-year        anniversary of the grant date, subject to accelerated vesting after three years if the        Company achieves a cumulative earnings per share growth target. The Company measures        stock-based compensation at the grant date, based on the estimated fair value of the award,        and recognizes the cost as compensation expense on a straight-line basis (net of estimated        forfeitures) over the awards’ vesting period of five years based on the        Company’s estimate of its cumulative earnings per share growth rate. This estimate        may be adjusted in future periods based on actual experience and changes in management        assumptions.

 

The        following table summarizes the activity of restricted stock and restricted stock units        during the period from March 30, 2007 to June 29, 2007:

|                    | **Performance-Based Awards** |                                                      | **Time-Based Awards** |
|-------------------------|------------------------------|-----------------------------------------------------------|-----------------------|
|                    | **Performance Shares**       |                                                      | **PARS**              |   |   |   |
|                    | **Units**                    | **Weighted**

**Average**

**Grant Date**

**Fair Value** |                  | **Shares** | **Weighted**

**Average**

**Grant Date**

**Fair Value** |   | **Shares** | **Weighted**

**Average**

**Grant Date**

**Fair Value** |
|                    |                         |                                                      |                  |   |   |   |   |   |
| Balance, March 30, 2007 |    --              | --                                                        |                  |    -- | -- |   | 405 | $16.96 |
| Granted                 |    99         | $18.52                                                    |                  |    99 | $18.52 |   | 22 | -- |
| Vested                  |     --        | --                                                        |                  |    -- | -- |   | -- | -- |
| Forfeited               |  --                     | --                                                        |                  | -- | -- |  | (3) | -- |
| Balance, June 29, 2007  | **99**                       | **$18.52**                                                |                  | **99** | **$18.52** |   | 424 | **$17.13** |
|                    |                         |                                                      |                  |   |   |   |   |   |

 

 

 

 

11

 

| **6.** | **SEGMENT INFORMATION** |
|--------|-------------------------|

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

|                                          |                      |                                           | **For the Three Months Ended** |
|-----------------------------------------------|---------------------------|------------------------------------------------|--------------------------------|
|                                          |                      |                                           | **June 29,**                   |   | **June 30,** |   |
|                                          |                      |                                           | **2007**                       |   | **2006** |   |
| **Net Sales:**                                |                      |                                           |                           |   |
|                                          | Physician Business        | $306,245                                       |                           | $284,439 |   |
|                                          | Elder Care Business       | 132,665                                        |                           | 128,696 |   |
|                                          |                      | Total net sales                                | **$438,910**                   |   | **$413,135** |   |
|                                          |                      |                                           |                           |   |   |   |
| **Income from Operations:**                   |                      |                                           |                           |   |
|                                          | Physician Business        | $18,516                                        |                           | $18,608 |   |
|                                          | Elder Care Business       | 4,586                                          |                           | 4,883 |   |
|                                          | Corporate Shared Services | (8,570)                                        |                           | (4,751) |   |
|                                          |                      | Total income from operations                   | **$14,532**                    |   | **$18,740** |   |
|                                          |                      |                                           |                           |   |   |   |
| **Income Before Provision for Income Taxes:** |                      |                                           |                           |   |
|                                          | Physician Business        | $17,818                                        |                           | $17,926 |   |
|                                          | Elder Care Business       | 2,631                                          |                           | 2,929 |   |
|                                          | Corporate Shared Services | (6,203)                                        |                           |  (2,951) |   |
|                                          |                      | Total income before provision for income taxes | **$14,246**                    |   | **$17,904** |   |
|                                          |                      |                                           |                           |   |   |   |

         

|                      |         | **As of**         |
|---------------------------|--------------|-------------------|
|                      |         | **June 29, 2007** |   | **March 30, 2007** |
|                      |         |              |   |   |
| **Assets:**               |         |              |   |
| Physician Business        | $435,508     |              | $413,646 |
| Elder Care Business       | 274,585      |              | 266,472 |
| Corporate Shared Services | 96,303       |              | 94,857 |
|                      | Total assets | **$806,396**      |   | **$774,975** |
|                      |         |              |   |   |

| **7.** | **COMMITMENTS AND CONTINGENCIES** |
|--------|-----------------------------------|

**State of        Florida Pedigree Compliance**

During the        first quarter, the Company’s Florida distribution operations were subjected to        inspection and review by the Florida Department of Health for compliance with recently        enacted state drug pedigree legislation, which covers the receipt, storage, and        distribution of pharmaceutical products within the state of Florida. As a result of        these

 

12

inspections, the Company halted distribution of pharmaceutical products from        its Florida distribution centers. In addition, some pharmaceutical and medical device        products stocked in the Company’s St. Petersburg warehouse lacked adequate        documentation of temperature storage controls and have been quarantined. The Florida        Department of Health has also stated that it will not renew the Company’s        pharmaceutical distribution licenses, approve necessary changes to licenses, or release the        quarantined Florida inventory for sale until these issues are resolved.

During the quarter ending June 29, 2007, the Company incurred and recorded        approximately $0.7 million relating to legal costs and costs to modify and transition the        Company's compliance system and processes. The Company is in ongoing discussions with        representatives from the Florida Department of Health to resolve these concerns; however,        the outcome of these discussions could result in civil penalties and/or loss of inventory.        The Company has estimated the range of loss to be between $1.0 million and $3.0        million.

At June        29, 2007, the Company reserved $2.0 million within “Accrued Expenses” on the        Unaudited Condensed Consolidated Balance Sheet as an estimate of loss associated with        potential civil penalties and/or loss of inventory. The Company expects settlement and        resolution with the Florida Department of Health by the end of the second quarter of fiscal        year 2008.

**Other        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.

**Purchase Commitments**

During        February 2006, the Company entered into an agreement to purchase a minimum number of        latex and vinyl gloves through January 31, 2008. The pricing of the latex gloves may        be periodically adjusted and is based on the price of raw latex as traded on the Malaysian        Rubber Exchange. The pricing of the vinyl gloves may also be periodically adjusted and is        based on the weighted price of two raw materials, Poly vinyl chloride (PVC) and        Dioctylphthalate (DOP), as published on www.icis.com. These purchase commitments are valued        at approximately $7,180 at June 29, 2007 and are based on management’s estimate of        current pricing.

During        September 2006, the Company entered into an agreement to purchase a minimum number of        chemistry systems through December 31, 2007. This purchase commitment is valued at $1,250        at June 29, 2007, and is based on management’s best estimate of current        pricing.

Additionally, during October 2006, the Company entered into an exclusive        distributor agreement with another supplier to purchase a minimum number of chemistry        analyzers through September 29, 2009. To maintain its primary exclusive distributor        appointment, the Company must notify the supplier of product mix changes for the following        twelve-month period within 30 days of the agreement term. However, in no event shall such        amount be less than 35 analyzers per year. As of June 29, 2007, this purchase commitment        was valued at approximately $3,548.

**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

 

13

pay        severance to the executive officers in amounts ranging from three-fourths to three times        their base salary and target annual bonus. The Company may also be required to continue        welfare benefit plan coverage for the executive officers following a termination or        resignation for a period ranging from three months to three years.

If the        Physician Business or the Elder Care Business were to terminate a contract with a vendor of        its Select Medical ProductsTM brand (“SelectTM”) for any reason, the        Company may be required to purchase the remaining inventory of SelectTM 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 June 29,        2007, the Company has not terminated a contract with a SelectTM vendor which would        require the Company to purchase the vendor’s remaining inventory.

| **8.** | **INCOME TAXES** |
|--------|------------------|

The        Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income        Taxes – an interpretation of FAS No. 109” (“FIN 48”) during fiscal        year 2008. The adoption of FIN 48, effective April 1, 2007, resulted in a decrease to        stockholders equity of approximately $236. The total amount of unrecognized tax benefits as        of the date of adoption was approximately $2,091, all of which would affect the effective        tax rate if recognized. It is expected that the amount of unrecognized tax benefits will        change in the next twelve months; however, the change is not expected to have a material        impact on the consolidated financial statements.

The Company        classifies interest and penalties related to income tax matters as a component of income        tax expense. The total amount of accrued interest and penalties was approximately $49 as of        the date of adoption.

 

The tax        years subject to examination by major tax jurisdictions include the fiscal year ended April        2, 2004 and forward by the U.S. Internal Revenue Service, and the fiscal year ended March        28, 2003 and forward for certain states.

| **9.** | **SUPPLEMENTAL CASH FLOW INFORMATION** |
|--------|----------------------------------------|

The        Company’s supplemental disclosures for the three months ended June 29, 2007 and June        30, 2006 are as follows:

|              | **Three Months Ended**  |
|-------------------|-------------------------|
| Cash paid for:    | **June 29, 2007**       | **June 30, 2006** |
| Interest          | $    171 | $ 259 |
| Income taxes, net | $ 3,059                 | $   58 |
|              |                    |   |

During the        three months ended June 29, 2007, the Company had a $1,731 non-cash accrual relating to        additional expenses for the investment in preferred stock.

 

14

| **ITEM** **2.** | **MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                        CONDITION AND RESULTS OF OPERATIONS** |
|----------------------|------------------------------------------------------------------------------------------------------------------|

**THE COMPANY**

PSS World        Medical, Inc. (the “Company” or “PSSI”), a Florida corporation        which began operations in 1983, is a national distributor of medical products, equipment,        pharmaceutical related products, and healthcare information technology solutions to        alternate-site healthcare providers including physician offices, long-term care and        assisted living facilities, and home health care providers through 42 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.

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

**EXECUTIVE OVERVIEW**

In the        first quarter of fiscal year 2008, the Company continued to grow in the markets it serves.        Overall, comparative quarterly sales grew by 6.2% at the consolidated level. Sales of the        Company’s SelectTM brand product grew 21.7% and 25.6% in the Physician and Elder        Care businesses, respectively. Additionally, the Company continued the execution of its        business strategies by expanding its product offering in healthcare information technology        solutions within the Physician Business and continuing to diversify its customer base        through expansion into the home health care market within the Elder Care        business.

Income        from operations decreased approximately 22.5% when compared to the same quarter in the        prior year. This decrease was primarily a result of (i) a $2.7 million charge related to an        increase in operating costs and estimates for potential penalties related to the ongoing        inspection by the Florida Department of Health of the Company’s compliance with the        State of Florida Pedigree laws, (ii) operating losses of $0.7 million associated with the        May 31, 2007 acquisition of Activus Healthcare Solutions, Inc. and (iii) $1.3 million in        costs associated with the Physician Business’ launch of a national training program        to educate sales representatives on new SelectTM product lines and its        healthcare information technology programs related to the investment in athenahealth,        Inc.

Cash flow        from operations during the quarter ended June 29, 2007 was approximately        $19.3 million, and was primarily driven by operating performance. The Company’s        positive cash flow and available cash balances funded investments in health care        information technology and the Physician Business strategic acquisition during the        quarter.

The        following specific events impacted the Company’s results of operations during the        first quarter of fiscal year 2008:

**Acquisition of Activus Healthcare Solutions, Inc.**

On May 31,        2007, the Company acquired the stock of Activus Healthcare Solutions, Inc., a California        based distributor of medical supplies and pharmaceuticals to office-based physicians and        ambulatory surgery centers. The maximum aggregate purchase price, subject to certain        adjustments as set forth in the purchase agreement, was approximately $13.3 million, net of        cash acquired. During the three months ended June 29, 2007, the Company began integrating        Activus’ operations into the Company’s existing branches. The Company expects        the integration to be complete by the end of the Company’s second quarter of fiscal        year 2008. As of June 29, 2007, the Company has incurred operating losses totaling $0.7        million related to Activus.

 

15

**Investment in athenahealth, Inc.**

On June        29, 2007, the Company made a $22.5 million equity investment, representing        approximately 5% of current outstanding shares, in athenahealth, Inc.        (“athena”), a privately held company. Athena is a leading provider of        internet-based healthcare information technology and business services to physician        practices. The Company purchased shares of preferred stock from existing shareholders and        funded the transaction from cash on hand. The Company believes this investment will ensure        the two companies are aligned in bringing athena’s product to the physician market        and will enable Company shareholders to participate in this business        opportunity.

**Compliance with Florida Pedigree Laws**

The        Company’s Florida operations were subjected to review and inspection by state        regulatory agencies for compliance with guidelines for the receipt, storage, and        distribution of products covered by recently enacted drug pedigree legislation in the state        of Florida. Costs associated with this review were approximately $2.7 million during the        three months ended June 29, 2007, and include accruals and estimates for potential        inventory exposure, legal costs, fines and penalties, and costs incurred to modify and        transition the Company’s compliance systems and processes. The Company is in        continuing discussions with representatives from the Florida Department of Health to        address and resolve their concerns in an appropriate manner; however, the outcome of these        discussions could result in significant civil penalties and/or loss of inventory. The        Company expects settlement and resolution to the State’s findings by the end of the        Company’s second quarter of fiscal year 2008. See Footnote 7,*Commitments and Contingencies*for further        information.

**NET SALES**

The        following table summarizes net sales period over period.

|                           | **For the Three Months Ended** |
|--------------------------------|--------------------------------|
|                           | **June 29, 2007**              | **June 30, 2006** |   |
| *(dollars in* *millions)* | **Amount**                     | **Average**

**Daily Net**

**Sales** | **Amount** | **Average**

**Daily Net**

**Sales** | **Percent**

**Change** |
|                           |                           |   |   |   |   |
| Physician Business             | $306.2                         | $4.8 | $284.4 | $4.5 | 7.7% |
| Elder Care Business            | 132.7                          | 2.1 | 128.7 | 2.0 | 3.1% |
| Total Company                  | **$438.9**                     | **$6.9** | **$413.1** | **$6.5** | **6.2%** |
|                           |                           |   |   |   |   |

**Physician Business**

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

|                           | **For the Three Months Ended** |
|--------------------------------|--------------------------------|
| *(dollars in* *millions)* | **June 29, 2007**              | **June 30, 2006** | **Percent**

**Change** |
| Consumable products:           |                           |   |   |
| Branded                        | $108.2                         | $101.2 | 6.9% |
| SelectM                        | 33.0                           | 27.1 | 21.7% |
| Lab Diagnostics                | 55.1                           | 52.9 | 4.2% |
| Pharmaceuticals                | 67.4                           | 55.1 | 22.4% |
| Equipment                      | 33.7                           | 38.9 | (13.6)% |
| Immunoassay                    | 6.9                            | 7.8 | (11.7)% |
| Other                          | 1.9                            | 1.4 | 36.7% |
| Total                          | **$306.2**                     | **$284.4** | **7.7%** |
|                           |                           |   |   |

Net sales        growth during the three months ended June 29, 2007 was driven by continued momentum in the        consumable and pharmaceutical sales growth programs, offset by a decline in equipment        sales. Sales force productivity was impacted by additional sales training meetings launched        during the first quarter of fiscal year 2008. Management believes the timing of the        additional meetings were important to maximize the value of new product offerings within        the Select TM product line and marketing programs in health care information        technology.

 

16

Branded        product sales during the three months ended June 29, 2007 continued to be positively        impacted by the Company’s sales growth initiatives. SelectTM product sales        quarter over quarter increased due to the Company’s focus on promoting its globally        sourced, SelectTM products, which resulted in new customer sales as well as customer        conversions from branded to SelectTM products. In addition, pharmaceutical product        sales continued to be positively impacted by the*Rx        Extreme*revenue growth program.

**Elder        Care Business**

Management        evaluates the Elder Care business by customer segment. The following table summarizes the        change in net sales by customer segment period over period.

|                                        | **For the Three Months Ended** |
|---------------------------------------------|--------------------------------|
|                                        | **June 29, 2007**              | **June 30, 2006** | **Percent**

**Change** |
| Nursing home and assisted living facilities | $82.3                          | $  82.3 | 0.0% |
| Hospice and home health care agencies       | 35.2                           | 32.3 | 8.9% |
| Billing services                            | 3.1                            | 3.0 | 2.9% |
| Other                                       | 12.1                           | 11.1 | 9.1% |
| Total                                       | **$132.7**                     | **$128.7** | **3.1%** |
|                                        |                           |   |   |

Net sales        during the three months ended June 29, 2007 compared to the same period in the prior year        increased approximately $4.0 million. During fiscal year 2007, the Elder Care Business        implemented strategies to diversify its customer base through expansion in the home health        care market and other non-facilities based care and equipment providers. The        Company’s growth in the hospice and home health care lines of business during the        three months ended June 29, 2007, reflects the successful execution of these business        growth strategies. Net sales were also impacted by the continued utilization of the        following innovative Elder Care customer-specific solution programs:*ANSWERSTM HK, ANSWERS PlusTM, P.I.E, F.A.S.T, and        AccuSCAN.*

**GROSS        PROFIT**

Gross        profit dollars and margins remained relatively consistent period over period for the        Physician and Elder Care Businesses.

**GENERAL        AND ADMINISTRATIVE EXPENSES**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **For the Three Months Ended** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **June 29, 2007**              | **June 30, 2006** |   |
| *(dollars in* *millions)*                                                                                                                                                                                                                                                                                                                                                                                                                       | **Amount**                     | **% of Net**

**Sales** | **Amount** | **% of Net**

**Sales** | **Increase** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                           |   |   |   |   |
| Physician Business(a)                                                                                                                                                                                                                                                                                                                                                                                                                                | $48.1                          | 15.7% | $43.1 | 15.1% | $ 5.0 |
| Elder Care Business(a)                                                                                                                                                                                                                                                                                                                                                                                                                               | 26.9                           | 20.3% | 25.8 | 20.1% | 1.1 |
| Corporate Shared Services(b)                                                                                                                                                                                                                                                                                                                                                                                                                         | 8.6                            | 2.0% | 4.8 | 1.1% | 3.8 |
| Total Company(b)                                                                                                                                                                                                                                                                                                                                                                                                                                     | **$83.6**                      | **19.0%** | **$73.7** | **17.8%** | **$ 9.9** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (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 increased during the three months        ended June 29, 2007, when compared to the same period in the prior year. This increase was        primarily attributable to (i) additional costs of $1.3 million related to the        Company’s national launch of its new SelectTM and healthcare information        technology marketing programs, (ii) additional operating costs of $0.7 million related to        the acquisition of Activus, (iii) $0.7 million increase in payroll costs, (iv) $0.5 million        increase in bad debt expense, (v) $0.7 million increase in

 

17

marketing        expenses and (vi) approximately $0.1 million related to the Company’s ongoing        inspection by the Florida Department of Health for compliance with State Pedigree        laws.

**Elder        Care Business**

General and        administrative expenses as a percentage of net sales increased 21 basis points during the        three months ended June 29, 2007, when compared to the same period in the prior year. This        increase was primarily attributable to a net increase in bad debt and legal expenses of        approximately $0.3 million and an increase in sales and marketing expenses of $0.7        million.

**Corporate Shared Services**

General        and administrative expenses increased $3.8 million when compared to the same quarter        in the prior year. This increase is primarily attributable to (i) an increase of        approximately $2.6 million related to the Company’s ongoing inspection by the        Florida Department of Health for compliance with the State Pedigree laws, (ii) an increase        in payroll related expenses of $1.1 million related to salary increases and an increase in        full time employees, and (iii) an increase in deferred compensation expenses of        approximately $1.2 million. These increases were partially offset by decreases in the        Company’s health insurance expense.

**SELLING        EXPENSES**

The        following table summarizes selling expenses as a percentage of net sales period over        period.

|                           | **For the Three Months Ended** |
|--------------------------------|--------------------------------|
|                           | **June 29, 2007**              | **June 30, 2006** |   |
| *(dollars in* *millions)* | **Amount**                     | **% of Net**

**Sales** | **Amount** | **% of Net**

**Sales** | **Increase** |
|                           |                           |   |   |   |   |
| Physician Business             | $24.7                          | 8.1% | $22.9 | 8.0% | $1.8 |
| Elder Care Business            | 4.8                            | 3.6% | 4.6 | 3.6% | 0.2 |
| Total Company                  | **$29.5**                      | **6.7%** | **$27.5** | **6.7%** | **$2.0** |
|                           |                           |   |   |   |   |

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.

**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 interest components of the Company’s debt        structure:

|                                                                                                        | **For the Three Months Ended** |
|-------------------------------------------------------------------------------------------------------------|--------------------------------|
| *(dollars in* *millions)*                                                                              | **June 29, 2007**              | **June 30, 2006** | **(Decrease)** |
|                                                                                                        |                           |   |   |
| Total interest expense                                                                                      | $1.4                           | $1.4 | $   -- |
| Components of interest expense:                                                                             |                           |   |   |
| Interest on borrowings                                                                                      | 1.0                            | 1.1 | (0.1) |
| Debt issuance costs                                                                                         | 0.4                            | 0.4 | -- |
| Less: Capitalized interest                                                                                  | --                             | 0.1 | (0.1) |
|                                                                                                        |                           |   |   |
| Average daily borrowings under the LOC                                                                      | $ --                           | $4.7 | $(4.7) |
| Weighted average interest rate-LOC(a)                                                                       | N/A                            | 7.6% |   |
| (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 June 29,        2007.

 

18

**PROVISION FOR INCOME TAXES**

The        following table summarizes the provision for income taxes period over period.

|                    | **For the Three Months Ended** |
|-------------------------|--------------------------------|
|                    | **June 29, 2007**              | **June 30, 2006** |   |
| *(dollars in millions)* | **Amount**                     | **Effective**

**Rate** | **Amount** | **Effective**

**Rate** | **Decrease** |
|                    |                           |   |   |   |   |
| Total Company           | **$5.6**                       | **39.02%** | **$6.9** | **38.8%** | **$(1.3)** |
|                    |                           |   |   |   |   |

The        increase in the effective rate period over period is primarily attributable to an        unfavorable adjustment related to nondeductible accruals offset by a favorable adjustment        due 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 changes in        non-deductible accruals and the market return on the company-owned life insurance        policies.

**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 of**         |
|----------------------------------|-------------------|
|                             | **June 29, 2007** | **June 30, 2006** |
| **Days Sales Outstanding:(a)**   |              |   |
| Physician Business               | 41.8              | 40.2 |
| Elder Care Business              | 51.7              | 57.5 |
|                             |              |   |
| **Days On Hand:(b)**             |              |   |
| Physician Business               | 48.4              | 48.1 |
| Elder Care Business              | 56.9              | 47.0 |
|                             |              |   |
| **Days in Accounts Payable:(c)** |              |   |
| Physician Business               | 43.8              | 42.7 |
| Elder Care Business              | 27.8              | 28.4 |
|                             |              |   |
| **Cash Conversion Days:(d)**     |              |   |
| Physician Business               | 46.4              | 45.6 |
| Elder Care Business              | 80.8              | 76.1 |
|                             |              |   |
| **Inventory Turnover:(e)**       |              |   |
| Physician Business               | 7.4x              | 7.5x |
| Elder Care Business              | 6.3x              | 7.7x |

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

19

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

| *(dollars in thousands)*         | **As of**           |
|----------------------------------|---------------------|
|                             | **June 29, 2007**   | **March 30, 2007** |
| **Capital Structure:**           |                |   |
| Bank Debt                        | $   1,410 | $   1,500 |
| Other Debt                       | 1,248               | 1,413 |
| Convertible senior notes         | 150,000             | 150,000 |
| Less: Cash and cash equivalents  | (23,954)            | (46,658) |
| Net debt                         | 128,704             | 106,255 |
| Shareholders’ equity       | 390,385             | 380,861 |
| Total capital                    | **$519,089**        | **$487,116** |
|                             |                |   |
| **Operational Working Capital:** |                |   |
| Accounts receivable, net         | $222,699            | $222,776 |
| Inventories                      | 187,499             | 174,130 |
| Accounts payable                 | (144,572)           | (131,330) |
|                             | **$265,626**        | **$265,576** |
|                             |                |   |

**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 three months ended June 29,        2007 was primarily the result of overall operating profits partially offset by investments        in operational working capital of approximately $0.8 million.

Cash flows        from operating activities during three months ended June 29, 2007 and June 30, 2006 include        the Company’s utilization of $0.4 and $4.2 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 June 29,        2007, the Company has $3.3 million (tax-effected) of state NOL carryforwards and        expects to utilize a portion of these state NOL carryforwards during fiscal year 2008. 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 $42.3 million and $5.2 million during the three        months ended June 29, 2007 and June 30, 2006, respectively, and was primarily impacted by        the following factors:

|   | **•** | Payments for business combinations, net of cash acquired,                        were $14.8 million and $0.1 million during the three months ended                        June 29, 2007 and June 30, 2006, respectively. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

On May 31, 2007, the Company acquired the stock of Activus Healthcare        Solutions, Inc. (“Activus”), a California based distributor of medical supplies        and pharmaceuticals to office-based physicians and surgery centers. The maximum aggregate        purchase price, subject to certain adjustments as set forth in the purchase agreement, was        approximately $13.3 million (net of cash acquired of $0.4 million). Payments totaling $13.3        million were made during the first three months of fiscal year 2008 from cash on        hand.

The Physician Business acquired Southern Anesthesia & Surgical, Inc.        (“SAS”) on September 30, 2005. During the three months ended June 29,        2007, the Company made a final payment of $1.5 million, as outlined in the purchase        agreement.

|   | **•** | On June 29, 2007, the Company acquired approximately a 5%                        equity ownership in athenahealth, Inc. for $22.5 million, which was                        paid during the first quarter of fiscal year 2008. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

20

|   | **•** | Capital expenditures totaled $4.9 million and                        $4.6 million during the three months ended June 29, 2007 and June 30,                        2006, respectively, of which approximately $2.0 million and                        $3.1 million, respectively, related to development and enhancement of                        the Company’s ERP system, electronic commerce platforms, and supply                        chain integration. Capital expenditures related to the distribution center                        expansions were approximately $1.7 million and $0.5 million during the                        quarter ended June 29, 2007 and June 30, 2006, respectively. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Cash        Flows From Financing Activities**

Net cash        provided by financing activities was $0.3 million during the three months ended June        29, 2007 compared to $5.1 million during the three months ended June 30, 2006. Net        cash provided by financing activities during the three months ended June 29, 2007 and June        30, 2006 were primarily impacted by the following factors:

|   | **•** | The Company received proceeds from the exercise of stock                        options of approximately $0.4 million and $2.5 million during the                        three months ended June 29, 2007 and June 30, 2006,                        respectively. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | The Company recognized excess tax benefits from share-based                        compensation of $0.1 million and $1.2 million during the three months                        ended June 29, 2007 and June 30, 2006, respectively. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | During the three months ended June 30, 2006, the Company                        received a $1.5 million refund for a security deposit paid in previous                        years in support of financing for an operating lease. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**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”). The ability of note holders to convert is assessed on a        quarterly basis. As of June 29, 2007, the fair value of the convertible senior notes was        approximately $159.9 million and the value of the shares, if converted, was        approximately $172.8 million.

At June        29, 2007, there were no outstanding borrowings under the revolving line of credit. After        reducing the availability of borrowings for letter of credit commitments, the Company had        sufficient assets based on eligible accounts receivable and inventories to borrow up to        $200.0 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. During the        three months ended June 29, 2007, the Company has not entered into any material        working capital commitments that require funding.

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.

 

21

**APPLICATION OF CRITICAL ACCOUNTING POLICIES**

Critical        Accounting Policies are disclosed in the Annual Report on Form 10-K for the fiscal        year ended March 30, 2007 filed on May 25, 2007 under the heading*“Management’s Discussion and Analysis of Financial Condition        and Results of Operations.”*There have been no material        changes in the Company’s Critical Accounting Policies, as disclosed in the Annual        Report.

**RECENT ACCOUNTING PRONOUNCEMENTS**

In        July 2006, the FASB issued FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, and Related Implementation        Issues*(“FIN 48”). FIN 48 clarifies the        accounting for uncertainty in income taxes recognized in a company’s financial        statements in accordance with Statement of Financial Accounting Standards        (“SFAS”) No. 109,*Accounting for Income        Taxes*. FIN 48 prescribes a recognition threshold and        measurement attribute for a tax position taken or expected to be taken in a tax return.        FIN 48 is effective as of the beginning of fiscal years commencing after        December 15, 2006. As such, FIN 48 was effective during the three months ended        June 29, 2007. See the Footnote 8,*Income Taxes*for further discussion.

**ITEM** **3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The        Company believes there has been no material change in its exposure to market risk from that        discussed in Item 7A in the Annual Report on Form 10-K for the fiscal year ended        March 30, 2007 filed on May 25, 2007.

**ITEM** **4. CONTROLS        AND PROCEDURES**

**Evaluation of disclosure controls and procedures**

The        Company‘s management, with the participation of the Company’s Principal        Executive Officer and Principal Financial Officer, 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 June 29, 2007 that have materially affected, or are        reasonably likely to materially affect, the Company’s internal control over financial        reporting.

22

**PART** **II--OTHER        INFORMATION**

 

**ITEM** **6.        EXHIBITS**

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

| **Exhibit**

**Number** |  

**Description**                                                                  |
|-------------------------|------------------------------------------------------------------------------------------|
|                    |                                                                                     |
| 10.1                    | athenahealth, Inc. Stock Purchase Agreement.                                             |
| 10.2                    | Form of Performance-Based Restricted Stock Unit                        Agreement.        |
| 10.3                    | Form of Performance-Accelerated Restricted Stock Award                        Agreement. |
| 10.4                    | PSS World Medical, Inc. 2006 Incentive Plan (1).                                         |
| 31.1                    | Rule 13a-14(a) Certification of the Chief Executive                        Officer.      |
| 31.2                    | Rule 13a-14(a) Certification of the Chief Financial                        Officer.      |
| 32.1                    | Section 1350 Certification of the Chief Executive                        Officer.        |
| 32.2                    | Section 1350 Certification of the Chief Financial                        Officer.        |
|                    |                                                                                     |

|   |  

**Footnote References**                                                                                      |
|--------|----------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                 |
| (1)    | Incorporated by Reference to the Company's Current Report on                        Form 8-K, filed August 29, 2006. |

 

 

23

**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 August 8, 2007.

         

|   |   |   | PSS WORLD MEDICAL, INC.                                                                                                                                                                        |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   | By:    |  

/s/ David M. Bronson                                                                                                                                                                   |
|   |   |   |                                                                                                                                                                                                |
|   |   |   | David M. Bronson

Executive Vice President and Chief Financial                        Officer

(Duly Authorized Officer and Principal Financial and                        Accounting Officer) |

         

 

24