# 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       December 31, 2003
| | ------------------------------------------------------

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period
that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

[X] Yes [ ] No

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

[X] Yes [ ] No

The number of shares of common stock,
par value $.01 per share, of the registrant outstanding as of February 10, 2004 was
67,411,811 shares.

---

# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES

# DECEMBER 31, 2003

# TABLE OF CONTENTS

|Item |                                                                                       | Page
|---- | ------------------------------------------------------------------------------------- | ----
|     | Information Regarding Forward-Looking Statements                                      | 3   
|    
|     | Part I--Financial Information                                                        
|    
|1.   | Financial Statements:                                                                
|    
|     | Consolidated Balance Sheets--December 31, 2003 and March 28, 2003                     | 5   
|    
|     | Consolidated Statements of Operations for the Three and Nine Months Ended            
|     | December 31, 2003 and December 27, 2002                                               | 6   
|    
|     | Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2003    
|     | and December 27, 2002                                                                 | 7   
|    
|     | Notes to Consolidated Financial Statements                                            | 8   
|    
|     | Independent Accountants' Review Report                                                | 21  
|    
|2.   | Management's Discussion and Analysis of Financial Condition and Results of Operations | 22  
|    
|3.   | Quantitative and Qualitative Disclosures About Market Risk                            | 42  
|    
|4.   | Controls and Procedures                                                               | 42  
|    
|     | Part II--Other Information                                                           
|    
|1.   | Legal Proceedings                                                                     | 42  
|    
|2.   | Changes in Securities and Use of Proceeds                                             | 43  
|    
|3.   | Defaults Upon Senior Securities                                                       | 43  
|    
|4.   | Submission of Matters to a Vote of Security Holders                                   | 43  
|    
|5.   | Other Information                                                                     | 43  
|    
|6.   | Exhibits and Reports on Form 8-K                                                      | 43  
|    
|     | Signature                                                                             | 44  

Page 2

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# CAUTIONARY STATEMENTS

# Forward-Looking
Statements

This Quarterly Report on
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). All statements regarding the Company, and its subsidiaries (including
subsidiaries that are limited liability companies and limited partnerships), included in
this Quarterly Report, other than statements that are purely historical, are
forward-looking statements. Words such as anticipates, expects,
intends, plans, believes, seeks,
estimates, intends, may, could, and
similar expressions also identify forward-looking statements. Forward-looking statements
in this Quarterly Report that involve risks and uncertainties include, without limitation:

- The results of operations for the interim periods covered by this Quarterly Report may not be indicative
of operating results for the full fiscal year;
- Management's expectations regarding the effect of adopting Financial Accounting Standards Board
Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities, Statement of Financial
Accounting Standards ("SFAS") No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, and SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, on the Company's financial condition or results of operations;
- Management's belief that the ultimate outcome of the various litigation matters described in Note 11,
Commitments and Contingencies, and various other litigation that have arisen in the normal course of
business will not have a material adverse effect on the Company's business, financial condition or
results of operations;
- The Company's intent to vigorously defend against the claims from the buyer of the Imaging Business;
- The Company's intent to appeal certain findings, which primarily relate to timing of tax deductions,
with the Appeals Office of the Internal Revenue Service ("IRS");
- Management's expectation that the results of the IRS audit of the income tax returns for fiscal years
2000, 2001, 2002, and 2003 will not have a material impact on the financial condition or consolidated
results of operations of the Company;
- Management's expectation that the income tax net operating loss generated from the sale of the Imaging
Business will be carried forward and applied against regular taxable income in future years;
- Management's expectation that gross profit as a percentage of net sales may decrease in future periods
due to an expected increased sales volume of pharmaceutical products and equipment in the Physician
Business, which generate lower gross profit margins;
- Management's expectation that the Company will not incur material charges related to the restructuring
plans previously adopted by the Physician Business;
- 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;
- The Company's debt ratings will continue for any given period of time;
- Management's belief that the Company may, from time-to-time, seek to retire its outstanding debt or
equity through cash purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise and such amounts involved may be material;
- Management's belief that the recent changes to Medicare and Medicaid reimbursement rates that became
effective during the nine months ended December 31, 2003 will positively impact the financial condition
of elder care providers and financial strength of the elder care industry; and
- The Company may seek to issue additional debt or equity to meet its future liquidity requirements.

Page 3

---

The Companys expectations,
beliefs, objectives, anticipations, intentions and strategies regarding the future,
including, without limitation, those concerning expected operating results, revenues and
earnings, and current and potential litigation are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results to differ
materially from results contemplated by the forward-looking statements. The Company also
wishes to caution readers that it undertakes no duty or is under no obligation to update
or revise any forward-looking statements.

Page 4

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# PART I FINANCIAL
INFORMATION

# ITEM 1.              FINANCIAL
STATEMENTS

# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND MARCH 28,
2003 (Dollars in Thousands, Except Share Data)

# ASSETS

|                            | December 31,
2003 | March 28,
2003
|--------------------------- | ----------------- | --------------
|
|Current Assets:             |                   |               
|Cash and cash equivalents   |                   |               
|Accounts receivable, net    |                   |               
|Inventories                 |                   |               
|Employee advances           |                   |               
|Deferred tax assets         |                   |               
|Prepaid expenses and other  |                   |               
|                            |                   |               
|Total current assets        |                   |               
|                            |                   |               
|Property and equipment, net |                   |               
|Other Assets:               |                   |               
|Goodwill                    |                   |               
|Intangibles, net            |                   |               
|Employee advances           |                   |               
|Deferred tax assets         |                   |               
|Other                       |                   |               
|                            |                   |               
|Total assets                |                   |               
|                            |                   |               

# LIABILITIES AND
SHAREHOLDERS' EQUITY

|                                                                                                     |  | 
|---------------------------------------------------------------------------------------------------- |  | 
|
|Current Liabilities:                                                                                 |  | 
|Accounts payable                                                                                     |  | 
|Revolving line of credit                                                                             |  | 
|Accrued expenses                                                                                     |  | 
|Other                                                                                                |  | 
|                                                                                                     |  | 
|Total current liabilities                                                                            |  | 
|Other noncurrent liabilities                                                                         |  | 
|                                                                                                     |  | 
|Total liabilities                                                                                    |  | 
|                                                                                                     |  | 
|Shareholders' Equity:                                                                                |  | 
|Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued and outstanding       |  | 
|Common stock, $.01 par value; 150,000,000 shares authorized, 67,268,905 and 67,870,561 shares issued |  | 
|and outstanding at December 31, 2003 and March 28, 2003, respectively                                |  | 
|Additional paid-in capital                                                                           |  | 
|Accumulated deficit                                                                                  |  | 
|Accumulated other comprehensive income                                                               |  | 
|Unearned compensation                                                                                |  | 
|                                                                                                     |  | 
|Total shareholders' equity                                                                           |  | 
|                                                                                                     |  | 
|Total liabilities and shareholders' equity                                                           |  | 
|                                                                                                     |  | 

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

Page 5

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# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF OPERATIONS   FOR
THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND DECEMBER 27, 2002 (Unaudited)
(Dollars in Thousands, Except Per Share Data)

|                                                   | Three Months Ended | Nine Months Ended
|-------------------------------------------------- | ------------------ | -----------------
|
|Net sales                                          |                    |                  
|Cost of goods sold                                 |                    |                  
|                                                   |                    |                  
|Gross profit                                       |                    |                  
|General and administrative expenses                |                    |                  
|Selling expenses                                   |                    |                  
|                                                   |                    |                  
|Income from operations                             |                    |                  
|                                                   |                    |                  
|Other (expense) income:                            |                    |                  
|Interest expense                                   |                    |                  
|Interest and investment income                     |                    |                  
|Other income                                       |                    |                  
|                                                   |                    |                  
|                                                   |                    |                  
|                                                   |                    |                  
|Income from continuing operations before provision |                    |                  
|for income taxes                                   |                    |                  
|Provision for income taxes                         |                    |                  
|                                                   |                    |                  
|Income from continuing operations                  |                    |                  
|                                                   |                    |                  
|Discontinued operations:                           |                    |                  
|Loss from discontinued operations (net of          |                    |                  
|benefit for income taxes of $1,366, and            |                    |                  
|$2,575, respectively)                              |                    |                  
|Loss on disposal of discontinued operations        |                    |                  
|(net of benefit for income taxes of                |                    |                  
|$1,021, $206, and $35,675, respectively) .         |                    |                  
|                                                   |                    |                  
|Total loss from discontinued operations            |                    |                  
|                                                   |                    |                  
|Net income (loss)                                  |                    |                  
|                                                   |                    |                  
|Earnings (loss) per share - Basic:                 |                    |                  
|Income from continuing operations                  |                    |                  
|Total loss from discontinued operations            |                    |                  
|                                                   |                    |                  
|Net income (loss)                                  |                    |                  
|                                                   |                    |                  
|Earnings (loss) per share - Diluted:               |                    |                  
|Income from continuing operations                  |                    |                  
|Total loss from discontinued operations            |                    |                  
|                                                   |                    |                  
|Net income (loss)                                  |                    |                  
|                                                   |                    |                  

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

Page 6

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# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED
DECEMBER 31, 2003 AND DECEMBER 27, 2002 (Unaudited) (Dollars in Thousands)

|                                                                           | Nine Months Ended
|-------------------------------------------------------------------------- | -----------------
|
|Operating Activities:                                                      |                  
|Net income (loss)                                                          |                  
|Adjustments to reconcile net income to net cash provided by operating      |                  
|activities:                                                                |                  
|Total loss from discontinued operations                                    |                  
|Depreciation                                                               |                  
|Amortization of intangible assets                                          |                  
|Amortization of debt issuance costs                                        |                  
|Provision for doubtful accounts                                            |                  
|Provision for notes receivable                                             |                  
|Provision for deferred income taxes                                        |                  
|Provision for deferred compensation                                        |                  
|Noncash compensation expense                                               |                  
|Loss on sales of property and equipment                                    |                  
|Changes in operating assets and liabilities:                               |                  
|Accounts receivable                                                        |                  
|Inventories                                                                |                  
|Prepaid expenses and other current assets                                  |                  
|Other assets                                                               |                  
|Accounts payable                                                           |                  
|Accrued expenses and other liabilities                                     |                  
|Net cash used in discontinued operations                                   |                  
|                                                                           |                  
|Net cash provided by operating activities                                  |                  
|                                                                           |                  
|Investing Activities:                                                      |                  
|Payment for business combinations, net of cash acquired of $135 and $0,    |                  
|respectively                                                               |                  
|Capital expenditures                                                       |                  
|Proceeds from sale of Imaging Business, net of transaction costs of $1,596 |                  
|and $1,309, respectively                                                   |                  
|Payments on noncompete agreements                                          |                  
|Proceeds from sales of property and equipment                              |                  
|Net cash used in discontinued operations                                   |                  
|                                                                           |                  
|Net cash used in investing activities                                      |                  
|                                                                           |                  
|Financing Activities:                                                      |                  
|Net proceeds from the revolving line of credit                             |                  
|Proceeds from issuance of common stock                                     |                  
|Proceeds from note receivable                                              |                  
|Purchase of treasury stock                                                 |                  
|Repayment of Senior Subordinated Notes                                     |                  
|Payment of premiums for retirement of Senior Subordinated Notes            |                  
|                                                                           |                  
|Net cash provided by (used in) financing activities                        |                  
|                                                                           |                  
|Net decrease in cash and cash equivalents                                  |                  
|Cash and cash equivalents, beginning of period                             |                  
|                                                                           |                  
|Cash and cash equivalents, end of period                                   |                  
|                                                                           |                  

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

Page 7

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# PSS WORLD MEDICAL,
INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
                  (Dollars in Thousands, Except Share and Per Share Data, Unless
Otherwise Noted)

|1. | BACKGROUND
AND BASIS OF PRESENTATION
|-- | ------------------------------------

| | Nature
of Operations
| | --------------------

| | PSS
World Medical, Inc. (the Company or PSSI), a Florida corporation,
is a specialty marketer and distributor of medical products to alternate-site healthcare
providers including physician offices, long-term care facilities, and home care providers
through 44 full-service distribution centers, which serve all 50 states throughout the
United States of America. The Company currently conducts business through two operating
segments, the Physician Business and the Elder Care Business. These strategic segments
serve a diverse customer base. A third reporting segment, titled Corporate Shared
Services, includes allocated and unallocated costs of corporate departments that provide
services to the operating segments and overhead associated with the Imaging Business,
which was sold on November 18, 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Physician Business, or the Physician Sales & Service division, is the leading
distributor of medical supplies, equipment, and pharmaceuticals to primary care
office-based physicians in the United States of America. The Physician Business currently
operates 32 full-service distribution centers, 20 break-freight locations, and 4 other
strategic facilities serving physician offices in all 50 states.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Elder Care Business, or the Gulf South Medical Supply, Inc. subsidiary, is a leading
national distributor of medical supplies and related products to the long-term and elder
care industry in the United States of America. The Elder Care Business currently operates
12 full-service distribution centers, 1 break-freight location, and 1 ancillary billing
service center serving independent, regional, and national skilled nursing facilities,
assisted living centers, and home care providers in all 50 states.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Historically,
the Company conducted business under a third operating segment, the Imaging Business. On
November 18, 2002, the Company completed the sale of the Imaging Business, or the
Diagnostic Imaging, Inc. subsidiary (DI), a distributor of medical diagnostic
imaging supplies, chemicals, equipment, and services to the acute and alternate-care
markets in the United States of America. As a result, DIs results of operations for
the three and nine months ended December 27, 2002 have been classified as
discontinued operations. Refer to Note 12, Discontinued Operations, for a further
discussion.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Basis
of Presentation
| | ---------------------

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

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

| | The
consolidated balance sheet as of March 28, 2003 included herein has been derived
from the Companys audited consolidated financial statements for the fiscal year
ended March 28, 2003. 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 28, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 8

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| | The
Company reports its year-end financial position, results of operations, and cash flows on
the Friday closest to March 31. Fiscal year 2004 consists of 53 weeks or 258 selling
days whereas fiscal year 2003 consisted of 52 weeks or 253 selling days. As a
result of the increase in selling days during fiscal year 2004, the Company changed the
reporting of its quarter-end financial results to distribute the 5 additional
selling days among all four quarters. During fiscal year 2004, the Company will report
its quarter-end financial position, results of operations, and cash flows on the calendar
month-end for those quarters in which physical inventories are not taken and on the
Friday closest to month-end for those quarters in which physical inventories are taken.
During fiscal year 2003, the Company reported its quarter-end financial position, results
of operations, and cash flows on the Friday closest to June 30, September 30,
and December 31. The following table summarizes the number of selling days in each
period presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       | Three Months Ended | Nine Months Ended
|---------------------- | ------------------ | -----------------
|
|Number of selling days | 60                 | 62               

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

| | Reclassification
| | ----------------

| | Certain
amounts reported in prior years have been reclassified to conform to the fiscal year 2004
presentation. The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, on March 29,
2003, the first day of fiscal year 2004. As a result, the loss from the early
extinguishment of the 8 1⁄2% Senior Subordinated Notes (the Notes),
which was reported as an extraordinary loss during fiscal year 2003, was reclassified to
income from continuing operations. The premiums paid to retire the Notes early, the
accelerated amortization of debt issuance costs, and the related income tax benefit were
reclassified to other income, interest expense, and provision for income taxes,
respectively, in the consolidated statements of operations. The following table
summarizes the impact of this reclassification.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | Nine Months Ended December 27, 2002
|-------------------------- | -----------------------------------
|
|Interest expense           |                                    
|Other income               |                                    
|Provision for income taxes |                                    

| | Revenue
Recognition
| | -------------------

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

| | There
are two primary sources of revenue: the sale of consumable products and equipment.
Revenue from the sale of consumable products is recognized when products are shipped or
delivered. Revenue from the sale of single deliverable equipment is generally recognized
when the equipment is shipped, unless there are multiple deliverables, in which case
revenue is recognized when all obligations to the customer are fulfilled and when
installation and training are complete.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 9

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| | The
Companys customers have the right to return consumable products and equipment.
Sales are reported net of returns. The Company maintains an allowance for potential
product returns and records a provision for estimated product returns, which is based on
historical experience as well as specific identification of significant returns, as a
reduction to net sales.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Supplemental
Disclosures for Statements of Cash Flows
| | -----------------------------------------------------

|                           | Nine Months Ended
|-------------------------- | -----------------
|
|Cash (paid) received  for: |                  
|Interest                   | (3,411)          
|Income taxes, net          | (278)            

| | Recent
Accounting Pronouncements
| | --------------------------------

| | Financial
Accounting Standards Board Interpretation (FIN) No. 46, Consolidation of
Variable Interest Entities (FIN 46), clarified the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties. FIN 46
is applicable immediately for variable interest entities created after January 31,
2003. The revised FIN 46 is applicable to all entities subject to this
Interpretation no later than the end of the first reporting period that ends after March 15,
2004. However, prior to the required application of this Interpretation, the revised FIN 46
shall be applied to those entities that are considered to be special-purpose-entities no
later than as of the end of the first reporting period that ends after December 15,
2003. This Interpretation will not have an effect on the Companys consolidated
financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
(SFAS 149). SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). In particular, this Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative and when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. This Statement is generally
effective for contracts entered into or modified after June 30, 2003 and is not
expected to have a material impact on the Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FASB recently issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity (SFAS 150). This
Statement requires issuers to classify as liabilities (or assets in some circumstances)
three classes of freestanding financial instruments that embody obligations for the
issuer. Previously, many such instruments had been classified as equity. A freestanding
financial instrument is an instrument that is entered into separately and apart from any
of the entitys other financial instruments or equity transactions, or that is
entered into in conjunction with some other transaction and is legally detachable and
separately exercisable, such as certain put and call options. These provisions are
effective for financial instruments entered into or modified after May 31, 2003, and
otherwise were effective at the beginning of the second quarter. The Company does not
currently have any financial instruments that are affected by this Statement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2003, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 03-10, Application of Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers(EITF 03-10). This consensus
addresses the application of EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor (EITF 02-16).
EITF 02-16 addresses accounting issues pertaining to cash consideration received by
a reseller from a vendor entered into after December 31, 2002. EITF 03-10
addresses the accounting and disclosure treatment for consideration received by a
reseller from a vendor that is a reimbursement by the vendor for honoring the vendors
sales incentives offered directly to consumers. In general, EITF 03-10 requires
certain sales incentives reimbursed by manufacturers to resellers be classified as revenue versus a reduction of
cost of goods sold. The provisions of EITF 03-10 would be applied to the accounting
for sales incentives tendered by consumers in fiscal periods beginning after November 25,
2003. Early adoption is not permitted. The Company is in the process of analyzing the
impact of the adoption of this consensus on its consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 10

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|2. | EARNINGS
PER SHARE
|-- | ------------------

| | In
accordance with SFAS No. 128, Earnings Per Share, the calculation of basic earnings
per common share and diluted earnings per common share is presented below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | Three Months Ended | Nine Months Ended
|--------------------------------------- | ------------------ | -----------------
|
|Income from continuing operations       |                    |                  
|Total loss from discontinued operations |                    |                  
|(net of benefit for income taxes of     |                    |                  
|$0, $2,387, $206, and $38,250)          |                    |                  
|                                        |                    |                  
|Net income (loss)                       |                    |                  
|                                        |                    |                  
|Earnings (loss) per share - Basic:      |                    |                  
|Income from continuing operations       |                    |                  
|Total loss from discontinued operations |                    |                  
|                                        |                    |                  
|Net income (loss)                       |                    |                  
|                                        |                    |                  
|Earnings (loss) per share - Diluted:    |                    |                  
|Income from continuing operations       |                    |                  
|Total loss from discontinued operations |                    |                  
|                                        |                    |                  
|Net income (loss)                       |                    |                  
|                                        |                    |                  
|Weighted average shares outstanding:    |                    |                  
|Common shares                           |                    |                  
|Assumed exercise of stock options       |                    |                  
|Assumed vesting of restricted stock .   |                    |                  
|                                        |                    |                  
|Diluted shares outstanding              |                    |                  
|                                        |                    |                  

| | Diluted earnings per share assume options to purchase shares of common stock have been exercised
using the treasury stock method. The following table summarizes the options to purchase
common stock that were outstanding and not included in the computation of diluted
earnings per share for each of the periods presented because the options exercise
prices exceeded the fair market value of the Companys common stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Three Months Ended | Nine Months Ended
|------------------------------------ | ------------------ | -----------------
|
|                                    
|Out-of-the-money options outstanding | 1.8                | 5.2              

| | On
December 17, 2002, the Companys Board of Directors approved a stock repurchase
program authorizing the Company, depending upon market conditions and other factors, to
repurchase up to a maximum of 5% of its common stock, or approximately 3.4 million
common shares, in the open market, in privately negotiated transactions, or otherwise.
During the nine months ended December 31, 2003, the Company repurchased
approximately 1.0 million shares of common stock under this program at an average
price of $5.92 per common share. During the nine months ended December 27, 2002, the
Company repurchased approximately 3.6 million shares of common stock at an average
price of $7.13 per common share under a separate share repurchase program approved by the
Board of Directors that authorized the Company to repurchase up to a maximum of 5% of its
common stock, or approximately 3.6 million common shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 11

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|3. | COMPREHENSIVE
INCOME (LOSS)
|-- | ---------------------------

| | Comprehensive
income (loss) is defined as net income (loss) plus direct adjustments to shareholders equity.
The following details the components of comprehensive income (loss) for the periods
presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|4. | STOCK-BASED
COMPENSATION
|-- | ------------------------

| | The Company applies the intrinsic-value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations including FIN No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,
to account for its fixed-plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the underlying stock
exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123),
established accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS 123, the
Company has elected to continue to apply the intrinsic-value-based method of accounting
described above, and has only adopted the disclosure requirements of SFAS 123. The
following table illustrates the effect on net income and earnings per share if the
fair-value-based method had been applied to all outstanding and unvested awards in each
period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Three Months Ended | Nine Months Ended
|------------------------------------ | ------------------ | -----------------
|
|Net income (loss), as reported       |                    |                  
|Total stock-based employee           |                    |                  
|compensation expense determined      |                    |                  
|under fair value based method        |                    |                  
|for all awards, net of related       |                    |                  
|tax effects                          |                    |                  
|                                     |                    |                  
|Pro forma net income (loss)          |                    |                  
|                                     |                    |                  
|Earnings (loss) per share - Basic:   |                    |                  
|As reported                          |                    |                  
|Pro forma                            |                    |                  
|Earnings (loss) per share - Diluted: |                    |                  
|As reported                          |                    |                  
|Pro forma                            |                    |                  

|5. | INTANGIBLES
|-- | -----------

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

Page 12

---

|                           | As of December 31, 2003 | As of March 28, 2003
|-------------------------- | ----------------------- | --------------------
|
|Noncompetition Agreements: |                         |                     
|Physician Business         |                         |                     
|Elder Care Business        |                         |                     
|Corporate Shared Services  |                         |                     
|                           |                         |                     
|                           |                         |                     
|                           |                         |                     
|Signing Bonuses:           |                         |                     
|Physician Business         |                         |                     
|Elder Care Business        |                         |                     
|                           |                         |                     
|                           |                         |                     
|                           |                         |                     
|Other Intangibles:         |                         |                     
|Physician Business         |                         |                     
|Elder Care Business        |                         |                     
|                           |                         |                     
|                           |                         |                     
|                           |                         |                     
|Total                      |                         |                     
|                           |                         |                     

| | Total amortization expense for intangible assets for the three months ended December 31,
2003 and December 27, 2002 was $782 and $570, respectively. Total amortization
expense for intangible assets for the nine months ended December 31, 2003 and
December 27, 2002 was $1,882 and $1,758, respectively. The estimated amortization
expense for the next five fiscal years is as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 
|------------------------- | 
|Fiscal Year:              | 
|2004 (remaining 3 months) | 
|2005                      | 
|2006                      | 
|2007                      | 
|2008                      | 
|Thereafter                | 
|                          | 
|Total                     | 
|                          | 

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

|(in years)                    | December 31,
2003 | March 28,
2003
|----------------------------- | ----------------- | --------------
|                              |                   |               
|Noncompetition Agreements     |                   | 6.0           
|Signing Bonuses               |                   | 4.3           
|Other Intangibles             |                   | 8.6           
|                              |                   |               
|Total weighted-average period |                   | 7.1           
|                              |                   |               
|                              |                   |               

Page 13

---

| | Future minimum payments required under noncompetition agreements at December 31, 2003 are
as follows:
| | -----------------------------------------------------------------------------------------------------

|                          | 
|------------------------- | 
|Fiscal Year:              | 
|2004 (remaining 3 months) | 
|2005                      | 
|2006                      | 
|2007                      | 
|2008                      | 
|Thereafter                | 
|                          | 
|Total                     | 
|                          | 

|6. | REVOLVING LINE OF CREDIT
|-- | ------------------------

| | On May 20, 2003, the Company entered into an amended and restated Credit Agreement (the
Credit Agreement), by and among the Company, as borrower thereunder (the
Borrower), the subsidiaries of the Borrower party thereto, the lenders from
time to time party thereto (the Lenders), and Bank of America, N.A., as Agent
for the Lenders. The Credit Agreement provides for a three-year credit facility
consisting of an aggregate $150 million revolving line of credit and letters of
credit (the Credit Facility). On December 16, 2003, the Company entered
into a second amended and restated Credit Agreement (the Amended Credit Agreement),
which matures on March 28, 2006. The Amended Credit Agreement primarily increased
the maximum availability of borrowings under the Credit Facility from $150 million
to $200 million (Amended Credit Facility). Availability of borrowings
under the Amended Credit Facility depends upon the amount of a borrowing base consisting
of accounts receivable and, upon satisfaction of certain requirements, inventory. The
Amended Credit Facility bears interest at the Banks prime rate plus a margin of
between -0.25% and 1.00% based on the Companys ratio of funded debt to earnings
before interest, taxes, depreciation, and amortization (Leverage Ratio), as
defined in the Amended Credit Agreement, or at LIBOR plus a margin of between 1.75% and
3.00% based on the Companys Leverage Ratio. Under the Amended Credit Agreement, the
Company and its subsidiaries are subject to certain covenants, including but not limited
to, limitations on (i) paying dividends and repurchasing stock, (ii) selling or
transferring assets, (iii) making certain investments (including acquisitions), (iv) incurring
additional indebtedness and liens, and (v) annual capital expenditures. Proceeds
from the Amended Credit Facility will be used to fund the Companys anticipated
future requirements for working capital, capital expenditures, acquisitions, and issue
letters of credit. At December 31, 2003, the Company had sufficient assets based on
eligible inventories and accounts receivables to borrow up to approximately $165,800 of
the $200 million revolving line of credit. At December 31, 2003 and March 28,
2003, there was $114,253 and $83,000, respectively, outstanding under the revolving line
of credit.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During the three months ended June 28, 2003, the Company entered into an interest rate swap
agreement to hedge the variable interest rate debt of its revolving line of credit. Under
the terms of the interest rate swap agreement, the Company makes payments based on the
fixed rate and will receive interest payments based on the 1-month LIBOR. The changes in
market value of this financial instrument are highly correlated with changes in market
values of the hedged item both at inception and over the life of the agreement. Amounts
received or paid under the interest rate swap agreement are recorded as reductions or
additions to interest expense. In accordance with SFAS 133 and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
amendment of FASB Statement No. 133, the Companys interest rate swap agreement
has been designated as a cash flow hedge with changes in fair value recognized in
accumulated other comprehensive income in the accompanying consolidated balance sheets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The swap carries a notional principal amount of $35.0 million and effectively fixes the
interest rate on a portion of the revolving line of credit to 2.195%, prior to applying
the Leverage Ratio margin discussed above. The swap agreement expires on March 28,
2006 and settles monthly until expiration. At December 31, 2003, the Company
recorded an unrealized gain, net of taxes, of $25 for the estimated fair value of the
swap agreement in accumulated other comprehensive income in the accompanying balance
sheet.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | PURCHASE
BUSINESS COMBINATIONS
|-- | ------------------------------

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

Page 14

---

| | Fiscal Year 2004
| | ----------------

| | During
the nine months ended December 31, 2003, the Company acquired the stock of a service
company that provides ancillary billing services to the long-term care industry and a
long-term care medical supply distributor. The Company also acquired certain assets and
assumed certain liabilities of a billing service company. The aggregate purchase price,
net of cash acquired, for these acquired companies was $19,328. The Company obtained
independent valuations of certain intangible assets; however, the allocation of the
purchase price is subject to revision. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the dates of acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The $9,656 of goodwill was assigned to the Elder Care Business and is expected to be
primarily nondeductible for tax purposes. Of the $6,700 of identifiable intangibles,
$1,200 and $5,500 was assigned to noncompete agreements and customer relationships,
respectively, and is primarily nondeductible for tax purposes as well. The acquired
intangible assets have a weighted-average useful life of approximately 6.1 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
terms of one purchase agreement provided for additional consideration to be paid
(earn-out payment) if the acquired entitys earnings before interest expense,
provision for income taxes, depreciation and amortization, as defined, (EBITDA)
exceeds a targeted level. The targeted level was generally set above the historical
experience of the acquired entity at the time of acquisition. The maximum amount of
contingent consideration that would become due on October 31, 2004 if the targeted
EBITDA is achieved is approximately $1,700.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal Year 2003
| | ----------------

| | On
September 16, 2002, the Company acquired certain assets and assumed certain
liabilities of a long-term care medical supply distributor. The aggregate purchase price
was $4,464. The Company obtained independent valuations of certain intangible assets and
finalized the allocation of the purchase price during the three months ended December 27,
2002. The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The $1,893 of goodwill was assigned to the Elder Care Business and is expected to be
deductible for tax purposes. Of the $1,694 of identifiable intangible assets, $265, $538,
and $891 was assigned to noncompete agreements, customer contracts, and customer
relationships, respectively, and is primarily deductible for tax purposes. The acquired
intangible assets have a weighted-average useful life of approximately 5.6 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 15

---

|8. | GOODWILL
|-- | --------

| | In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the changes in
the carrying value of goodwill during the nine months ended December 31, 2003 are as
follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Physician
Business | Elder Care
Business | Total
|------------------------------- | ------------------ | ------------------- | -----
|Balance as of March 28, 2003    |                    | $9,788              |      
|Purchase business combinations  |                    | --                  |      
|                                |                    |                     |      
|Balance as of December 31, 2003 |                    | $9,788              |      
|                                |                    |                     |      

| | The Company performs its annual impairment test for each reporting unit on the last day of
each fiscal year.
| | ------------------------------------------------------------------------------------------------------------

|9. | NOTE
RECEIVABLES
|-- | ----------------

| | At
March 28, 2003, the Company had three note receivables (the Loans)
outstanding from its former Chairman and Chief Executive Officer. The Loans, which bear
interest at the applicable Federal rate for long-term obligations, were issued to the
former Chairman and Chief Executive Officer in order to consolidate debt incurred in
relation to certain real estate activities, as well as to provide the cash needed to
pay-off personal debt. One Loan is unsecured, one Loan is secured by common stock of the
Company, and the other Loan is secured by a split-dollar life insurance policy. As part
of the Companys ongoing review of the realization of the Loans during fiscal year
2003, during the three months ended December 27, 2002, the Company recorded an
allowance for doubtful accounts of $2,939 against the unsecured Loan. This allowance did
not represent a forgiveness of debt.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 2, 2003 the Loan secured by common stock matured and the Company received a
cash payment of $1,190, which consisted of principal and interest payments of $997 and
$193, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | SEGMENT
INFORMATION
|--- | -------------------

| | The
Companys reportable segments are strategic businesses that offer different products
and services to different segments of the healthcare industry, and are the basis for
which management regularly evaluates the Company. These segments are managed separately
because of different customers and products. The Company primarily evaluates the
operating performance of its segments based on net sales and income from operations.
Corporate Shared Services includes allocated and unallocated costs of corporate
departments that provide services to the operating segments and overhead associated with
the Imaging Business, which was sold on November 18, 2002. The table below presents
financial information about the Companys business segments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 16

---

|                                      | Three Months Ended | Nine Months Ended
|------------------------------------- | ------------------ | -----------------
|
|NET SALES:                            |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|                                      |                    |                  
|Total net sales                       |                    |                  
|                                      |                    |                  
|INCOME FROM OPERATIONS:               |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|Corporate Shared Services             |                    |                  
|                                      |                    |                  
|Total income from operations          |                    |                  
|                                      |                    |                  
|                                      |                    |                  
|DEPRECIATION:                         |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|Corporate Shared Services             |                    |                  
|                                      |                    |                  
|Total depreciation                    |                    |                  
|                                      |                    |                  
|AMORTIZATION OF INTANGIBLE ASSETS:    |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|Corporate Shared Services             |                    |                  
|                                      |                    |                  
|Total amortization of intangible      |                    |                  
|assets                                |                    |                  
|                                      |                    |                  
|PROVISION FOR DOUBTFUL ACCOUNTS:      |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|                                      |                    |                  
|Total provision for doubtful          |                    |                  
|accounts                              |                    |                  
|                                      |                    |                  
|INTEREST EXPENSE:                     |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|Corporate Shared Services             |                    |                  
|                                      |                    |                  
|Total interest expense                |                    |                  
|                                      |                    |                  
|PROVISION (BENEFIT) FOR INCOME TAXES: |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|Corporate Shared Services             |                    |                  
|                                      |                    |                  
|Total provision for income taxes      |                    |                  
|                                      |                    |                  
|CAPITAL EXPENDITURES:                 |                    |                  
|Physician Business                    |                    |                  
|Elder Care Business                   |                    |                  
|Corporate Shared Services             |                    |                  
|                                      |                    |                  
|Total capital expenditures            |                    |                  
|                                      |                    |                  

Page 17

---

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

11.    
          COMMITMENTS AND CONTINGENCIES

| | Litigation
| | ----------

| | The
Company, through its Elder Care Business, its Physician Supply Business, and/or
predecessor companies, has been named as one of many defendants in latex glove product
liability claims in various Federal and state courts. The defendants are primarily
distributors of certain brands of latex gloves. Currently, state litigation exists in New
Hampshire and California, while Federal litigation is present in Washington, New
Hampshire, and Ohio. Defense costs are currently allocated by agreement between a
consortium of insurers on a pro rata basis for each case depending upon policy years and
alleged years of exposure. All of the insurance carriers are defending subject to a
reservation of rights. The Company intends to vigorously defend the proceedings; however,
there can be no assurance that this litigation will be ultimately resolved on terms that
are favorable to the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and certain of its current and former officers and directors are named as
defendants in a purported securities class action lawsuit entitled Jack Hirsch v.
PSS World Medical, Inc., et al., Civil Action No. 3:98-CV 502-J-32TEM. The action,
which was filed in May 1998, is pending in the United States District Court for the
Middle District of Florida, Jacksonville Division. The plaintiff seeks indeterminate
damages, including costs and expenses. The plaintiff initially alleged, for himself and
for a purported class of similarly situated stockholders who purchased the Companys
stock between December 23, 1997 and May 8, 1998 that the defendants engaged in
violations of certain provisions of the Securities Exchange Act, and Rule 10b-5
promulgated there under. The allegations were based upon a decline in the Companys
stock price following an announcement by the Company in May 1998 regarding the Gulf South
Medical Supply, Inc. merger, which resulted in earnings below analysts expectations.
In December 2002, the Court granted the Companys motion to dismiss the plaintiffs
second amended complaint with prejudice with respect to the Section 10(b) claims. The
plaintiffs filed their third amended complaint in January 2003 alleging claims under
Sections 14(a) and 20(a) of the Exchange Act on behalf of a putative class of all persons
who were shareholders of the Company as of March 26, 1998. In May 2003, the Court
denied the defendants motion to dismiss. The Court held a hearing on the plaintiffs
motion for class certification on January 27, 2004, which is presently pending.
Mediation is scheduled to occur during the week of June 15, 2004. The case is set
for trial in April 2005. The Company intends to vigorously defend the proceedings;
however, there can be no assurance that this litigation will be ultimately resolved on
terms that are favorable to the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company has been named as a defendant in a suit brought by three former and present
employees of the Company, entitled Angione, et al. v. PSS World Medical, Inc., which
was filed on or about June 4, 2002 in the U.S. District Court for the Central
District of California, Santa Ana Division. The court approved the transfer of venue, and
the case is now pending in the United States Court for the Middle District of Florida,
Jacksonville Division. The plaintiffs allege that the Company wrongfully classified its
purchasers, operations leader trainees, and accounts receivable representatives as exempt
from the overtime
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 18

---

| | requirements imposed by the Fair Labor Standards Act and the California
Wage Orders, and they seek to recover back pay, interest, costs of suit, declaratory and
injunctive relief, and applicable statutory penalties. On February 21, 2003, the
court conditionally allowed the case to proceed as a collective action under the Fair Labor Standards Act.
Two of the three original named plaintiffs also brought, but subsequently have settled,
individual claims for gender discrimination and retaliation under Title VII of the
Civil Rights Act of 1964 and the Equal Pay Act of 1963. The parties have engaged in
extensive discovery on these claims. The parties will likely mediate the case. If the
claims are not settled, the claims will proceed through discovery and ultimately proceed
to trial. The Company is vigorously defending against the claims; however, there can be
no assurance that this litigation will be ultimately resolved on terms that are favorable
to the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Commitments and Other Contingencies
| | -----------------------------------

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

| | During
July 2003, the Physician Business entered into an agreement with a supplier to
purchase a minimum of $39,500 of flu vaccines during the second and third quarters of
fiscal year 2005. Currently, the Company has obtained non-binding, customer orders for
approximately 83% of the committed flu vaccine purchases.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
September 2, 2003, the Elder Care Business entered into an exclusive distribution
agreement with a strategic vendor. Under the agreement, the Elder Care Business is
required to purchase a minimum of $7,000 of product by September 30, 2004. For each
one-year period thereafter through September 2008, the purchases shall not be less
than the sum of $7,000 plus 7.0% compounded annually.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | DISCONTINUED
OPERATIONS
|--- | -----------------------

| | On
September 26, 2002, the Companys Board of Directors adopted a plan to dispose
of the Imaging Business, reflecting a strategic decision by management to focus the
Companys efforts on its Physician and Elder Care Businesses, which offer attractive
opportunities for growth and profitability.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
November 18, 2002, the Company completed the sale of DI to Imaging Acquisition
Corporation (the Buyer), a wholly owned subsidiary of Platinum Equity, LLC, a
private equity firm (Platinum). The sale was completed pursuant to a Stock
Purchase Agreement, dated as of October 28, 2002, among the Company, the Buyer, and
Platinum, as amended on November 18, 2002 (the Stock Purchase Agreement).
Under the Stock Purchase Agreement, the purchase price was $45,000 less (i) an
adjustment for any change in net asset value from the initial net asset value target date
and (ii) an adjustment for any change in the net cash from the initial net cash
target date (the Purchase Price). The cash proceeds received during fiscal
year 2003 were reduced by approximately $4,894 for transaction costs. In connection with
the closing of the transaction, the Company and the Buyer entered into a transitional
services agreement, pursuant to which the Company provided certain reimbursable services
to the Buyer for a period of one year. This agreement terminated during the three months
ended December 31, 2003. The costs incurred related to providing services under the
transition services agreement were included in general and administrative expenses and
the reimbursement for these expenses were included in other income in the accompanying
statements of operations. During the three and nine months ended December 31, 2003,
the Company recognized approximately $200 and $2,950, respectively, of other income
related to the transition services agreement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 19

---

| | The
results of operations of the Imaging Business and the estimated loss on disposal have
been classified as discontinued operations in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The estimated loss on
disposal is subject to change based on the final Purchase Price adjustments that will be
recorded in the period in which they become known. The accompanying financial statements
have been restated to conform to discontinued operations treatment for all historical
periods presented.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net sales and total loss from discontinued operations of the Imaging Business are as follows:
| | ---------------------------------------------------------------------------------------------

|                             | Three Months Ended
December 27, 2002 | Nine Months Ended
December 27, 2002
|---------------------------- | ------------------------------------ | -----------------------------------
|Net sales                    |                                      |                                    
|Pretax loss from operations  |                                      |                                    
|Pretax loss on disposal of   |                                      |                                    
|discontinued operations      |                                      |                                    
|Benefit for income taxes     |                                      |                                    
|                             |                                      |                                    
|Total loss from discontinued |                                      |                                    
|operations                   |                                      |                                    
|                             |                                      |                                    
|                             |                                      |                                    

| | Net sales for the three and nine months ended December 27, 2002 included 35 days
and 162 days of sales, respectively.
| | ---------------------------------------------------------------------------------------------------------------------

| | In
accordance with EITF Issue No. 87-24, Allocation of Interest to Discontinued
Operations (EITF 87-24), a portion of the Companys interest
expense that is not directly attributable to or related to other operations of the
Company has been allocated to discontinued operations based upon the ratio of net assets
to be sold to the sum of consolidated net assets plus consolidated debt. In addition, in
accordance with EITF 87-24, general corporate overhead was not allocated to
discontinued operations. Interest expense allocated to discontinued operations was $454
and $2,157 during the three and nine months ended December 27, 2002, respectively.
The provision for income taxes related to continuing operations has been calculated for
the periods presented. The difference between this amount and the total provision for
income taxes, as previously reported, has been allocated to discontinued operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 14, 2003, the Company received a letter from the Buyer claiming a purchase
price adjustment of $32,257. The claimed purchase price adjustment is based on an
accounting of the net asset statement as of the closing date, which was delivered to the
Buyer in January 2003. Pursuant to the terms of the Stock Purchase Agreement, the
matter has been referred to an independent accounting firm of national reputation for
arbitration. During the three months ended December 31, 2003, the Buyer provided an
adjusted claim to the arbitrator claiming a purchase price adjustment of $30,540. The
Company is currently in the process of preparing its response to the Buyers claim.
The Company intends to defend vigorously against these claims; however, there can be no
assurance that this claim will be ultimately resolved on terms that are favorable to the
Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 20

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# INDEPENDENT ACCOUNTANTS REVIEW
REPORT

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

We have reviewed the consolidated
balance sheet of PSS World Medical, Inc. and subsidiaries as of December 31, 2003 and
the related consolidated statements of operations for the three- month and nine- month
periods ended December 31, 2003 and December 27, 2002 and the related
consolidated statements of cash flows for the nine-month periods ended December 31,
2003 and December 27, 2002. These consolidated financial statements are the
responsibility of the Companys management.

We conducted our review in accordance
with standards established by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of applying analytical
procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.

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

We have previously audited, in
accordance with auditing standards generally accepted in the United States of America, the
consolidated balance sheet of PSS World Medical, Inc. and subsidiaries as of
March 28, 2003, and the related consolidated statements of operations,
shareholders equity, and cash flows for the year then ended (not presented herein);
and in our report dated May 22, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of March 28, 2003, is fairly stated, in
all material respects, in relation to the consolidated balance sheet from which it has
been derived.

KPMG LLP

Jacksonville, Florida February 10, 2004

Page 21

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# ITEM 2.      MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONTITION AND RESULTS OF OPERATIONS

# THE COMPANY

PSS World Medical, Inc. (the
Company or PSSI), a Florida corporation, is a specialty marketer
and distributor of medical products to alternate-site healthcare providers including
physician offices, long-term care facilities, and home care providers through 44
full-service distribution centers, which serve all 50 states throughout the United States
of America. Since its inception in 1983, PSSI has become a leader in the two market
segments it serves as a result of value-added, solution-based marketing programs, a
customer differentiated distribution and service model, a consultative sales force with
extensive product knowledge, unique arrangements with product manufacturers, innovative
information systems, acquisitions, and a culture of performance. During fiscal years 2000
through 2004, the Company has focused on business operations, growing through innovative
solution-based marketing programs, maximizing its core distribution capability and
efficiency, and improving management business processes.

The Company currently conducts
business through two operating segments, the Physician Business and the Elder Care
Business. These strategic segments serve a diverse customer base. A third reporting
segment, titled Corporate Shared Services, includes allocated and unallocated costs of
corporate departments that provide services to the operating segments and overhead
associated with the Imaging Business, which was sold on November 18, 2002.

Historically, the Company conducted
business under a third operating segment, the Imaging Business. On November 18, 2002,
the Company completed the sale of the Imaging Business, or the Diagnostic Imaging, Inc.
subsidiary (DI), a distributor of medical diagnostic imaging supplies,
chemicals, equipment, and services to the acute and alternate-care markets in the United
States of America. As a result, DIs results of operations have been classified as
discontinued operations for all periods presented. Refer to Note 12, Discontinued
Operations, in the accompanying financial statements for a further discussion.

# THE INDUSTRY

According to industry estimates, the
medical supply and equipment segment of the healthcare industry in the United States of
America represents an approximate $34 billion market. This market is comprised of medical
products and equipment that are distributed to alternate-site healthcare providers,
including physician offices, long-term care and assisted living facilities, home
healthcare agencies, dental offices, and other alternate-site providers, such as
outpatient surgery centers, podiatrists, and veterinarians. The Companys primary
focus is the distribution of medical products and equipment to physician offices,
long-term care and assisted living facilities, and home healthcare providers, which
represents an approximate $10 billion market.

The medical products distribution
industry continues to experience growth due to the aging population, increased healthcare
awareness, the proliferation of medical technology and testing, new pharmacology
treatments, and expanded third-party insurance coverage. In addition, the physician market
continues to benefit from the shift of procedures and diagnostic testing in hospitals to
the alternate site, particularly physician offices, despite significantly lower pricing of
hospital medical products. As the cosmetic surgery and elective procedure markets continue
to grow, physicians are increasingly performing more of these procedures in their offices.
The elder care market continues to benefit from the increasing growth rate of the
population of elderly Americans. The January 2000 U.S. Bureau of the Census estimates that
the elderly population in America will more than double by the year 2040. In 2000, four
million Americans were age 85 years and older, the part of the population most in need of
long-term care and elder care services. By the year 2040, that number is projected to more
than triple to over 14 million. The population age 65 to 84 years is projected to more
than double in the same time period. As of December 31, 2002, the estimated growth rate
for the physician and elder care markets was approximately 3.8% and 2.3%, respectively.

As a result of these market dynamics,
the annual expenditures for healthcare services continue to increase in the United States
of America. The Centers for Medicaid and Medicare Services (CMS), Office of the Actuary,
National Health Statistics Group, cited in its 2002 study, Trends and Indicators in the Changing Health Care Marketplace, that total
national health care spending reached $1.3

Page 22

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trillion in 2000, or 13.2% of the nations
gross domestic product. Health care spending is projected to reach $2.6 trillion in 2010,
an estimated 16.8% of the gross domestic product, the benchmark measure for annual
production of goods and services in the United States of America.

The healthcare industry is subject to
extensive government regulation, licensure, and operating compliance procedures. National
healthcare reform has been the subject of a number of legislative initiatives by Congress.
Additionally, government and private insurance programs fund a large portion of the total
cost of medical care. During 1997, the Balanced Budget Act passed by Congress
significantly reduced reimbursement rates for nursing homes and home healthcare providers,
affecting spending levels and overall financial viability of these institutions. The
Company responded by tightening its credit policies and increasing its allowance for
doubtful accounts. During the three months ended December 31, 2003, changes to
Medicare and Medicaid reimbursement rates became effective and are expected to positively
impact the financial condition of elder care providers and the financial strength of the
elder care industry. The Company responded to these recent changes by decreasing its
allowance for doubtful accounts.

# OPERATING HIGHLIGHTS AND
TRENDS

The following tables set forth
certain financial information by business segment and give retroactive effect to the
restatement of the Imaging Business as discontinued operations. All dollar amounts
presented below are in thousands unless otherwise indicated.

|                             | Three Months Ended | Nine Months Ended
|---------------------------- | ------------------ | -----------------
|
|Net Sales:                   |                    |                  
|Physician Business           |                    |                  
|Elder Care Business          |                    |                  
|                             |                    |                  
|Total Company                |                    |                  
|                             |                    |                  
|Income from Operations:      |                    |                  
|Physician Business           |                    |                  
|Elder Care Business          |                    |                  
|Corporate Shared Services    |                    |                  
|                             |                    |                  
|Total Company                |                    |                  
|                             |                    |                  
|Days Sales Outstanding:(a)   |                    |                  
|Physician Business           |                    |                  
|Elder Care Business          |                    |                  
|                            
|Days On Hand:(b)             |                    |                  
|Physician Business           |                    |                  
|Elder Care Business          |                    |                  
|                            
|Days in Accounts Payable:(c) |                    |                  
|Physician Business           |                    |                  
|Elder Care Business          |                    |                  
|                            
|Cash Conversion Days:(d)     |                    |                  
|Physician Business           |                    |                  
|Elder Care Business          |                    |                  
|                            
|Inventory Turnover:(e)       |                    |                  
|Physician Business           |                    |                  
|Elder Care Business          |                    |                  

Page 23

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| | (a) | Days
sales outstanding (DSO) is average accounts receivable divided
by average net sales. Average accounts receivable is the sum of accounts
receivable, net of allowance for doubtful accounts, at the beginning and
ending of the third quarter divided by two. Average net sales is the sum
of net sales for each of the three months in the third quarter divided by
ninety.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Days
on hand (DOH) is average inventory divided by average cost of
               goods sold (COGS). Average inventory is the sum of inventory
at the                beginning and ending of the third quarter divided by two. Average
COGS is COGS                for each of the three months in the third quarter divided by
ninety.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Days
in accounts payable (DIP) is average accounts payable divided
               by average COGS. Average accounts payable is the sum of accounts payable
at the                beginning and ending of the third quarter divided by two.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# THREE MONTHS ENDED
DECMEBER 31, 2003 VERSUS THREE MONTHS ENDED DECEMBER 27, 2002

# NET SALES

|                    | For the Three Months Ended |           | 
|------------------- | -------------------------- | --------- | 
|
|                    |                            |           | 
|Physician Business  |                            | $   231.4 | 
|Elder Care Business |                            | 112.9     | 
|                    |                            |           | 
|Total Company       |                            | $344.3    | 
|                    |                            |           | 

The comparability of net sales
quarter over quarter was impacted by the number of selling days in each quarter. The three
months ended December 31, 2003 and December 27, 2002 consisted of 60 and 62
selling days, respectively. The following table summarizes the impact of the number of
selling days on net sales quarter over quarter.

|                    | Average Daily Net Sales |      | 
|------------------- | ----------------------- | ---- | 
|
|                    |                         |      | 
|Physician Business  |                         | $3.9 | 
|Elder Care Business |                         | 1.9  | 
|                    |                         |      | 
|Total Company       |                         | $5.8 | 
|                    |                         |      | 

Physician Business

The change in net sales is primarily
attributable to (i) an increase in branded consumable product sales of approximately
$12.2 million, (ii) an increase in private label consumable product sales of
approximately $1.3 million, (iii) an increase in pharmaceutical product sales of
approximately $20.1 million, of which approximately $9.8 million was
attributable to seasonal flu vaccine sales, (iv) an increase in equipment sales of
approximately $3.4 million, offset by (v) a decrease in immunoassay sales of
approximately $1.2 million. Net sales continued to be positively impacted by the
following revenue growth programs that were launched in June 2003 and focused on
consumable products, pharmaceuticals, and equipment.

Page 24

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- Advantage Clubis the Physician Business' customer membership club that enables customers to participate
in exclusive promotions for a broad selection of commonly used products.
- Rx Extremeis the Physician Business' comprehensive program offering pharmaceutical, vaccine and general
injectibles products to office-based physicians in all 50 states. The term "Extreme" symbolizes the
Physician Business' significant commitment to its customers to become the leading provider of these
products and related services to the U.S. physician market.
- Can-Dois the Physician Business' equipment marketing program that enables customers to access a broad
portfolio of industry-leading laboratory and diagnostic equipment, as well as certain exclusive products
available only through the Physician Business.

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

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

Elder Care Business

During the three months ended
December 31, 2003, net sales to regional and independent nursing home facilities
increased approximately $2.3 million, which was offset by a decrease in net sales to
national nursing home facilities of approximately $4.9 million. In addition, net
sales to homecare providers and assisted living facilities increased $5.8 million.
The growth in net sales to regional and independent nursing home facilities resulted from
new customers, increased penetration in existing customer facilities, and the introduction
of new product lines. The decrease in net sales to national nursing home facilities is
attributable to national chain customers divesting nursing home facilities and the loss of
national chain customers. The overall net sales growth was achieved through the continued
implementation of the following innovative customer solutions:

- ANSWERS and ANSWERS Housekeeping (ANSWERS HK)are marketing programs that align improved business
processes typically in the ordering process of nursing home operations and purchasing, with efficient
distribution activities of the Elder Care Business. The goals of the programs are to produce savings
for the customer, vendor, and distributor. In addition to reducing distribution costs by encouraging
more efficient buying patterns, ANSWERS and ANSWERS HK provide opportunities for manufacturing partners
to increase sales volume of category-leading, name-brand products while providing customers the
opportunity to purchase higher quality products at reduced prices.
- Partners in Efficiency (P.I.E.)is a product program designed to reduce customers' product procurement
costs and drive operating efficiencies in their businesses by committing to certain purchasing levels
and standardized ordering procedures.
- Fast Accurate Supply Technology (F.A.S.T)is an ordering, bar-code scanning, inventory management
system that utilizes a Palm Pilot-based operating platform.

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

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

Net sales period over period were
also positively impacted by the three business combinations consummated during fiscal year
2004. These business combinations provided additional net sales of approximately $5.3 million
during the three months ended December 31, 2003 compared to the three
months ended December 27, 2002.

GROSS PROFIT

Gross profit for the three months
ended December 31, 2003 totaled $97.0 million, an increase of
$11.5 million, or 13.5%, from gross profit of $85.5 million for the three months
ended December 27, 2002. Gross profit as a percentage of net sales increased
10 basis points to 28.2% during the three months ended December 31, 2003 from
28.1% during the three months ended December 27, 2002. Gross profit dollars increased
primarily due to the growth in net sales discussed above as well as an increase in vendor
incentives earned of approximately $2.0 million. The growth in net sales combined
with increased volume purchasing allowed the Company to achieve higher vendor incentive
targets compared to the prior period. Gross profit as a percentage of net sales in the
Physician Business decreased slightly as a result of the increase in sales of
pharmaceutical products that generate lower gross margins compared to consumable products.
Gross profit as a percentage of net sales in the Elder Care Business increased primarily
as a result of the replacement of low margin national accounts with higher margin regional
and independent accounts and increased vendor incentives period over period.

# GENERAL AND
ADMINISTRATIVE EXPENSES

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

Physician Business

General and administrative expenses
as a percentage of net sales decreased 3.1% quarter over quarter. This decrease in
percentage is attributable to leveraging the net sales growth across various fixed costs,
the benefit of cost reductions as a result of completing the Rationalization Programs, and
the Companys focus on reducing the cost to deliver. Warehouse expense, which is
included in general and administrative expenses, was impacted the most by these
initiatives. Although warehouse expenses increased $0.4 million period over period,
warehouse expense as a percent of net sales decreased from 4.8% during the three months
ended December 27, 2002 to

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4.3% during the three months ended December 31, 2003.
This percentage decrease is a result of a reduction in the Companys delivery fleet,
optimization of shipments between branches, and lower negotiated freight rates. However,
this decrease was slightly offset by an increase in freight costs due to the
net sales growth, an increase in salary expenses, and an increase in fuel costs. The
following details other significant dollar increases or decreases in various components
of general and administrative expenses: (i) other general and administrative
expenses decreased approximately $1.1 million which is discussed below under the
caption Other General and Administrative Expenses, (ii) salary expenses decreased
approximately $0.4 million related to lower head count as a result of the
Rationalization Programs and the centralization of the accounts payable function to
corporate headquarters in Jacksonville, Florida, offset by general wage increases, (iii) depreciation
expense increased approximately $0.8 million for completed phases of the ERP system,
myPSS.com electronic commerce platform, and supply chain initiatives, and (iv) incentive
compensation increased approximately $0.3 million as a result of improved branch
profitability.

Elder Care Business

General and administrative expenses
as a percentage of net sales remained relatively constant quarter over quarter. Warehouse
expense, which is included in general and administrative expenses, was impacted by the
Companys focus on reducing the cost to deliver. Warehouse expenses slightly
decreased period over period while warehouse expense as a percent of net sales decreased
from 7.1% during the three months ended December 27, 2002 to 6.7% during the three
months ended December 31, 2003. This percentage decrease is a result of leveraging
the net sales growth across the relative fixed payroll costs for warehouse personnel and
delivery costs. In addition, this decrease is attributable to an overall reduction in
freight costs due to lower negotiated freight rates, offset by an increase in freight
costs due to the net sales growth and an increase in fuel costs. The following details
other significant dollar increases or decreases in various components of general and
administrative expenses: (i) the provision for bad debt expense decreased
approximately $0.6 million primarily due to the change in accounting estimate (refer
to discussion below in Application of Critical Accounting Policies-Estimating Allowances
for Doubtful Accounts), (ii) salary expense increased approximately $0.6 million
for general wage increases and additional employees as a result of the business
combinations, (iii) amortization of intangible assets increased approximately
$0.3 million as a result of the recent business combinations, and (iv) employee
benefits and insurance decreased approximately $0.2 million as a result of fewer
medical claims quarter over quarter.

Corporate Shared Services

The increase in general and
administrative expenses is primarily attributable to (i) an increase in legal and
professional fees of approximately $0.8 million due to the settlement of the class
action lawsuit and compliance with Section 404 of the Sarbanes-Oxley Act, (ii) an
increase in incentive compensation of approximately $0.6 million which is primarily
related to the adoption of the Shareholder Value Plan during fiscal year 2003,
(iii) an increase in business insurance expense of approximately $0.5 million
primarily due to rate increases on the corporate umbrella and director and officer
policies and loss experience, offset by (v) a decrease in other general and
administrative expenses of approximately $0.9 million which is discussed below under
the caption Other General and Administrative Expenses.

The comparability of general and
administrative expenses period over period is impacted by (i) the accounting for the
disposition of the Imaging Business and (ii) the costs incurred in connection with
providing certain services to the buyer under the transition services agreement. In
accordance with Emerging Issues Task Force (EITF) Issue No. 87-24,
Allocation of Interest to Discontinued Operations (EITF 87-24), the
Company allocated corporate overhead expenses to discontinued operations that are directly
attributable to the operations of the Imaging Business. EITF 87-24 states that
indirect expenses are not allocable to discontinued operations. During the three months
ended December 27, 2002, the Company incurred approximately $2.8 million of
general and administrative expenses, which included both direct and indirect overhead
expenses that were attributable to the Imaging Business. The Company allocated
approximately $1.2 million of these expenses to discontinued operations, which
represented direct overhead expenses for the period from September 28, 2002 to
December 27, 2002.

Other General and
Administrative Expenses

General and administrative expenses
include charges related to restructuring activity, merger activity, and other items. These
charges decreased approximately $2.0 million during the three months ended
December 31, 2003 compared to the same period in the prior fiscal year. The following
tables summarize other general and administrative expenses (in millions) by business
segment:

Page 27

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|                                   | Three Months Ended December 31, 2003
|---------------------------------- | ------------------------------------
|
|Restructuring costs and expenses   |                                     
|Accelerated depreciation           |                                     
|Merger costs and expenses          |                                     
|Reversal of operational tax charge |                                     
|Rationalization expenses           |                                     
|                                   |                                     
|Total                              |                                     
|                                   |                                     

|                                   | Three Months Ended December 27, 2002
|---------------------------------- | ------------------------------------
|
|Restructuring costs and expenses   |                                     
|Accelerated depreciation           |                                     
|Merger costs and expenses          |                                     
|Reversal of operational tax charge |                                     
|Rationalization expenses           |                                     
|                                   |                                     
|Total                              |                                     
|                                   |                                     

Restructuring costs and expenses for
the three months ended December 27, 2002 primarily relate to charges recorded for the
plan adopted by the Physician Business during the fourth quarter of fiscal year 2002 and
the plan adopted by Corporate Shared Services during the three months ended
December 27, 2002. During the three months ended December 27, 2002, the
Physician Business recorded charges of $0.4 million, which primarily relate to branch
shutdown costs. During the three months ended December 27, 2002, Corporate Shared
Services recorded charges of $0.4 million, which primarily relate to involuntary
employee termination costs.

Merger costs and expenses for the
three months ended December 27, 2002 include costs related to employee retention
bonuses to retain certain officers and key employees that were fully paid during fiscal
year 2003.

Rationalization expenses are costs
incurred as a result of the conversion to the new ERP system, the centralization of the
purchasing function, and a restructuring plan that was adopted during the fourth quarter
of fiscal year 2002.

# SELLING EXPENSES

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

Page 28

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# Physician Business
and Elder Care Business

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. The Physician
Business selling expenses as a percentage of net sales decreased 60 basis points due
to a decrease in gross profit as a percentage of net sales resulting from an increased
sales volume of pharmaceutical products, which generate lower gross profit margins. The
Elder Care Business selling expenses as a percentage of net sales increased 80 basis
points due to an increase in gross profit as a percentage of net sales resulting from the
addition of higher margin business, the addition of sales representatives and regional
account executives, and the launch of commission promotion programs to support the sales
initiatives discussed above.

# INCOME FROM OPERATIONS

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

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

# INTEREST EXPENSE

Interest expense for the three months
ended December 31, 2003 totaled $1.4 million, a decrease of $0.9 million,
or 36.7%, from interest expense of $2.3 million for the three months ended
December 27, 2002. Interest expense allocated to discontinued operations was
$0.5 million during the three months ended December 27, 2002. In accordance with
EITF 87-24, a portion of the Companys interest expense that is not directly
attributable to or related to other operations of the Company can be allocated to
discontinued operations based upon the ratio of net assets to be sold to the sum of
consolidated net assets plus consolidated debt. Excluding the effects of the allocation of
interest expense to discontinued operations, interest expense decreased approximately
$1.4 million due to a lower average total debt outstanding and a general reduction in
interest rates as a result of refinancing the Notes. The average interest rate for the
three months ended December 31, 2003 was approximately 5.1% compared to 7.9% for the
three months ended December 27, 2002.

# OTHER INCOME

Other income for the three months
ended December 31, 2003 totaled $0.4 million, a decrease of $1.5 million
from other income of $1.9 million for the three months ended December 27, 2002.
During the three months ended December 31, 2003 and December 27, 2002,
approximately $0.2 million and $1.6 million, respectively, of other income was
recorded as a result of the transition services agreement associated with the sale of the
Imaging Business. The transitional services agreement terminated during the third quarter
of fiscal year 2004.

# PROVISION FOR INCOME
TAXES

Provision for income taxes was
$4.7 million for the three months ended December 31, 2003, an increase of
$2.3 million from the provision for income taxes of $2.4 million for the three
months ended December 27, 2002. The effective income tax rate was approximately 36.2%
and 37.5% for the three months ended December 31, 2003 and December 27, 2002,
respectively. The provision for income taxes increased approximately $2.6 million as
a result of an increase in income from continuing operations before provision for income
taxes. The decrease in the effective rate is primarily attributable to a decrease in
unfavorable permanent adjustments and an increase in expected annual income from
continuing operations before provision for income taxes. The change in the permanent
adjustments primarily relates to an increase in the value of cash surrender value life
insurance policies which was slightly offset by an increase in nondeductible amortization
of intangibles.

---

During fiscal year 2002, the Internal
Revenue Service (IRS) notified the Company that the income tax returns for the
fiscal years ended March 31, 2000 and March 30, 2001 would be examined. During the three
months ended December 31, 2003, fieldwork was completed and the Company received the
IRSs report related to the fiscal years ended March 31, 2000 and March 30,
2001. The Company intends to appeal certain findings, which primarily relate to timing of
tax deductions, with the Appeals Office of the IRS. Management does not anticipate the
results of the audit to have a material impact on the financial condition or consolidated
results of operations of the Company.

During fiscal year 2002, the Company
sold its European Operations. As a result of this sale, the Company recorded a capital
loss carryforward and a valuation allowance was established as management believed it was
more likely than not that the Company would be unable to use this loss before its
expiration in fiscal year 2007. Based on recent Tax Court rulings, the Company filed a
refund claim during the three months ended December 31, 2003 with the IRS to report a
ordinary worthless stock deduction on the sale of its European Operations. This claim has
been formally denied by the IRS as part of the audit of fiscal years ended March 31,
2000 and March 30, 2001. The claim has been combined with the formal protest to the
results of the audit and the Company is awaiting notification of receipt from the Appeals
Office of the IRS. If the Company is successful in defending its claim filed with the IRS
in Appeals, the valuation allowance would be reversed against the provision for income
taxes, which represents approximately $5.2 million or $0.08 earnings per diluted
share.

During the three months ended
December 31, 2003, the IRS began fieldwork on the audit of fiscal years ending
March 29, 2002 and March 28, 2003. Management anticipates fieldwork for these
tax years to be completed during the first quarter of fiscal year 2005. Management does
not anticipate the results of the audit to have a material impact on the financial
condition or consolidated results of operations of the Company.

# TOTAL LOSS FROM
DISCONTINUED OPERATIONS

Net sales for the Imaging Business
were $93.2 million for the three months ended December 27, 2002. The pretax loss
from operations was $3.6 million for the three months ended December 27, 2002.
The Imaging Business was sold on November 18, 2002.

The Company recorded a
$2.4 million income tax benefit related to the operations and disposal of the Imaging
Business during the three months ended December 27, 2002. As a result of the sale of
the Imaging Business, the Company recorded a total deferred tax asset of approximately
$57.2 million, which represents the tax effect of the anticipated income tax net
operating loss (NOL) generated from the transaction. Under the terms of the
Stock Purchase Agreement, the Company made a joint election with the buyer to treat the
transaction as a sale of assets in accordance with §338(h)(10) of the Internal
Revenue Code. Management estimates that this NOL will be carried forward and applied
against regular taxable income in future years. In future periods, the provision for
income taxes will be recorded in the statements of operations at the appropriate effective
tax rate based on income generated by the Company.

# NET INCOME

Net income for the three months ended
December 31, 2003 totaled $8.3 million compared to net income of
$0.6 million for the three months ended December 27, 2002. Net income for the
three months ended December 27, 2002 included a charge of $3.4 million for the
loss from discontinued operations. Otherwise, variances are due to the factors discussed
above.

# NINE MONTHS ENDED
DECEMBER 31, 2003 VERSUS NINE MONTHS ENDED DECEMBER 27, 2002

# NET SALES

|                    | For the Nine Months Ended |           | 
|------------------- | ------------------------- | --------- | 
|
|                    |                           |           | 
|Physician Business  |                           | $   653.1 | 
|Elder Care Business |                           | 347.1     | 
|                    |                           |           | 
|Total Company       |                           | $1,000.2  | 
|                    |                           |           | 

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The comparability of net sales period
over period was impacted by the number of selling days in each period. The nine months
ended December 31, 2003 and December 27, 2002 consisted of 192 and 189 selling
days, respectively. The following table summarizes the impact of the number of selling
days on net sales period over period.

|                    | Average Daily Net Sales |      | 
|------------------- | ----------------------- | ---- | 
|
|                    |                         |      | 
|Physician Business  |                         | $3.4 | 
|Elder Care Business |                         | 1.8  | 
|                    |                         |      | 
|Total Company       |                         | $5.2 | 
|                    |                         |      | 

# Physician Business

The change in net sales is primarily
attributable to (i) an increase in branded consumable product sales of approximately
$39.9 million, (ii) an increase in private label consumable sales of
approximately $6.3 million, (ii) an increase in pharmaceutical product sales of
approximately $35.9 million, of which approximately $13.2 million was
attributable to seasonal flu vaccine sales, (iii) an increase in equipment sales of
approximately $11.5 million, offset by (iv) a decrease in immunoassay sales of
approximately $3.3 million, of which approximately $1.2 million was related to
the United States Food and Drug Administration recall of glycated hemoglobin in
July 2002. Net sales continued to be positively impacted by revenue growth programs
launched during June 2003, which were discussed in the three-month net sales
discussion above.

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

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

# Elder Care Business

During the nine months ended
December 31, 2003, net sales to regional and independent nursing home facilities
increased approximately $13.0 million, which was offset by a decrease in net sales to
national nursing home facilities of approximately $7.4 million. In addition, net
sales to homecare providers and assisted living facilities increased $23.2 million
and housekeeping product sales increased approximately $2.7 million. This growth in
net sales resulted from new customers, increased penetration in existing customer
facilities, and the introduction of new product lines. However, the growth was partially
offset by the loss of revenues attributable to national chain customers divesting nursing
home facilities and the loss of national chain customers. This sales growth was achieved
through the continued implementation of the innovative customer solutions discussed in the
three-month net sales discussion above.

In addition, during the nine months
ended December 31, 2003, the Company acquired certain assets and assumed certain
liabilities of two service companies that provide ancillary billing services to the
long-term care industry and one long-term care medical supply distributor. These business
combinations provided additional net sales of approximately $7.4 million. In
addition, the acquisition completed in September 2002 provided approximately
$4.5 million of additional net sales during the nine months ended December 31,
2003.

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During the three months ended
October 3, 2003, the Company signed an exclusive distribution agreement with Graham
Field Health Products, Inc. (Graham Field) to market durable medical equipment
(DME) to the long-term care, assisted living, and home care markets. The
Company began selling DME equipment under this agreement beginning in the third quarter of
fiscal year 2004.

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

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

# GROSS PROFIT

Gross profit for the nine months ended
December 31, 2003 totaled $283.0 million, an increase of $34.2 million, or
13.9%, from gross profit of $248.8 million for the nine months ended
December 27, 2002. Gross profit as a percentage of net sales remained constant at
28.3% period over period. Gross profit dollars increased primarily due to the growth in
net sales discussed above as well as an increase in vendor incentives earned of
approximately $3.8 million. The growth in net sales combined with increased volume
purchasing allowed the Company to achieve higher vendor incentive targets compared to the
prior period. Gross profit as a percentage of net sales in the Physician Business
decreased slightly as a result of the increase in sales of pharmaceutical products that
generate lower gross margins compared to consumable products. Gross profit as a percentage
of net sales in the Elder Care Business increased primarily as a result of the replacement
of low margin national accounts with higher margin regional and independent accounts and
increased vendor incentives period over period. Gross profit during the nine months ended
December 27, 2002 was negatively impacted by a charge of approximately
$2.0 million recorded by the Physician Business to terminate the Candela Corporation
distribution agreement. Gross profit as a percentage of net sales may decrease in future
periods due to an expected increased sales volume of pharmaceutical products and equipment
in the Physician Business, which generate lower gross profit margins.

# GENERAL AND
ADMINISTRATIVE EXPENSES

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

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# Physician Business

General and administrative expenses
decreased 1.1% as a percentage of net sales period over period. This decrease in
percentage is attributable to leveraging the net sales growth across various fixed costs,
the benefit of cost reductions as a result of completing the Rationalization Programs, and
the Companys focus on reducing the cost to deliver. Warehouse expense, which is
included in general and administrative expenses, was impacted the most by these two
initiatives. Although warehouse expenses increased $2.9 million period over period,
warehouse expense as a percent of net sales slightly decreased from 4.7% during the three
months ended December 27, 2002 to 4.5% during the three months ended
December 31, 2003. This percentage decrease is a result of a reduction in the
Companys delivery fleet, optimization of shipments between branches, and lower
negotiated freight rates. However, this decrease was slightly offset by an increase in
freight costs due to the net sales growth, an increase in salary expenses, and an increase
in fuel costs. The following details other significant dollar increases or decreases in
various components of general and administrative expenses: (i) meeting expenses
increased approximately $1.1 million primarily as a result of the two regional sales
meetings held in June 2003 to launch the new sales growth programs,
(ii) incentive compensation increased approximately $0.9 million as a result of
improved branch profitability, (iii) employee benefits and insurance increased
approximately $0.8 million as a result of increased medical claims quarter over
quarter, (iv) depreciation expense increased approximately $0.5 million for
completed phases of the ERP system, myPSS.com electronic commerce platform, and supply
chain initiatives, offset by (v) a decrease in other general and administrative
expenses of approximately $2.4 million which is discussed below under the caption
Other General and Administrative Expenses, and (vi) a decrease in salary expenses of
approximately $0.9 million related to lower head count as a result of the
Rationalization Programs and the centralization of the accounts payable function to
corporate headquarters in Jacksonville, Florida, offset by general wage increases.

# Elder Care Business

General and administrative expenses
as a percentage of net sales remained relatively constant period over period. Warehouse
expense, which is included in general and administrative expenses, was impacted by the
Companys focus on reducing the cost to deliver. Warehouse expenses increased
$1.6 million period over period while warehouse expense as a percent of net sales
slightly decreased from 6.9% during the three months ended December 27, 2002 to 6.8%
during the tree months ended December 31, 2003. The following details the significant
dollar increases in various components of general and administrative expenses:
(i) salary expense increased approximately $1.0 million due to general wage
increases and additional employees as a result of the business combinations, (ii) the
provision for bad debt expense increased approximately $0.8 million primarily due to
an overall increase in the accounts receivable base of approximately $12.5 million
resulting from the net sales growth discussed above, an increase in past due amounts, and
a customer filing for bankruptcy during the three months ended June 30, 2003, offset
by the effect of the change in accounting estimate (refer to discussion below in
Application of Critical Accounting Policies-Estimating Allowances for Doubtful Accounts),
(iii) amortization of intangible assets increased approximately $0.3 million as
a result of the recent business combinations, and (iv) meeting expenses increased
approximately $0.3 million primarily as a result of the additional sales meetings
held to launch the new DME sales initiative.

# Corporate Shared
Services

The increase in general and
administrative expenses is primarily attributable to (i) an increase in incentive
compensation of approximately $1.8 million which is primarily related to the adoption
of the Shareholder Value Plan during fiscal year 2003, (ii) an increase in business
insurance expense of approximately $1.2 million due to rate increases on the
corporate umbrella and director and officer policies and loss experience, (iii) an
increase in legal and professional fees of approximately $1.1 million due to the
settlement of the class action lawsuit and compliance with Section 404 of the
Sarbanes-Oxley Act, offset by (iii) a decrease in other general and administrative
expenses of approximately $5.8 million which is discussed below under the caption
Other General and Administrative Expenses, and (iv) a decrease in the cost of the
private data network of approximately $1.1 million as a result of reducing the number
of service center locations and the conversion to a virtual private network for data
transmission.

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As discussed above, the comparability
of general and administrative expenses period over period is impacted by (i) the
accounting for the disposition of the Imaging Business and (ii) the costs incurred in
connection with providing certain services to the buyer under the transition services
agreement. During the nine months ended December 27, 2002, the Company incurred
approximately $8.5 million of general and administrative expenses, which included
both direct and indirect overhead expenses that were attributable to the Imaging Business.
The Company allocated approximately $5.5 million of these expenses to discontinued
operations, which represented direct overhead expenses for the period from March 30,
2002 to December 27, 2002. The expenses associated with providing services under the
transition services agreement are recorded as a component of general and administrative
expenses and the reimbursement is recorded in other income in the accompanying statements
of operations.

# Other General and
Administrative Expenses

General and administrative expenses
include charges related to restructuring activity, merger activity, and other items. These
charges decreased approximately $8.2 million period over period. The following tables
summarize other general and administrative expenses (in millions) by business segment:

|                                   | Nine Months Ended December 31, 2003
|---------------------------------- | -----------------------------------
|
|Restructuring costs and expenses   |                                    
|Merger costs and expenses          |                                    
|Accelerated depreciation           |                                    
|Reversal of operational tax charge |                                    
|Rationalization expenses           |                                    
|Other                              |                                    
|                                   |                                    
|Total                              |                                    
|                                   |                                    

|                                   | Nine Months Ended December 27, 2002
|---------------------------------- | -----------------------------------
|
|Restructuring costs and expenses   |                                    
|Merger costs and expenses          |                                    
|Accelerated depreciation           |                                    
|Reversal of operational tax charge |                                    
|Rationalization expenses           |                                    
|Other                              |                                    
|                                   |                                    
|Total                              |                                    
|                                   |                                    

Restructuring costs and expenses for
the nine months ended December 31, 2003 and December 27, 2002 primarily relate
to charges recorded for the plans adopted by the Physician Business during the fourth
quarter of fiscal year 2003 and the fourth quarter of fiscal year 2002. Management does
not expect material charges related to these plans during the remainder of fiscal year
2004. During the nine months ended December 27, 2002, the Physician Business recorded
charges of $1.6 million, which primarily included branch shutdown costs and
involuntary employee termination costs. In addition, management re-evaluated its estimates
for previously adopted plans and reversed approximately $0.7 million.

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Merger costs and expenses for the
nine months ended December 27, 2002 include costs related to employee retention
bonuses to retain certain officers and key employees that were fully paid during fiscal
year 2003.

The Elder Care Business recorded
charges totaling $9.5 million during fiscal years 1998, 1997, and 1996 primarily
related to state and local, sales and use, unclaimed property, and property tax payments
that were not remitted on a timely basis to taxing authorities. These charges related to
periods prior to the acquisition of Gulf South Medical Supply, Inc. in March 1998.
The Company reviewed all available information, including tax exemption notices received,
and recorded charges to general and administrative expenses during the period in which the
tax noncompliance issues arose. On a quarterly basis, management performed an analysis of
the estimated remaining exposure and records adjustments to general and administrative
expenses based on the expiration of various states statutes of limitations, the resolution
of compliance audits, and current available information. During the nine months ended
December 31, 2003 and December 27, 2002, the Company reversed $1.4 million
and $0.2 million of the previously recorded operating tax charge reserve,
respectively. At December 31, 2003, there was no remaining balance in the reserve.

Rationalization expenses are costs
incurred as a result of the conversion to the new ERP system, the centralization of the
purchasing function, and a restructuring plan that was adopted during the fourth quarter
of fiscal year 2002.

During the nine months ended
December 27, 2002, the Company recorded an allowance for doubtful accounts of
$2.9 million against the unsecured note receivable from the Companys former
Chairman and Chief Executive Officer. This allowance did not represent a forgiveness of
debt.

# SELLING EXPENSES

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

# Physician Business
and Elder Care Business

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. The Physician
Business selling expenses as a percentage of net sales decreased 50 basis points due
to a decrease in gross profit as a percentage of net sales resulting from an increased
sales volume of pharmaceutical products and equipment, which generate lower gross profit
margins. The Elder Care Business selling expenses as a percentage of net sales
increased 40 basis points due to an increase in gross profit as a percentage of net sales
resulting from the addition of higher margin business, the addition of sales
representatives and regional account executives, and the launch of commission promotion
programs to support the sales initiatives discussed above.

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# INCOME FROM OPERATIONS

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

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

# INTEREST EXPENSE

Interest expense for the nine months
ended December 31, 2003 totaled $3.9 million, a decrease of $3.3 million,
or 45.6%, from interest expense of $7.2 million for the nine months ended
December 27, 2002. Interest expense allocated to discontinued operations was
$2.2 million during the nine months ended December 27, 2002. In addition,
interest expense for the nine months ended December 27, 2002 includes
$0.4 million of accelerated amortization of debt issuance costs related to retiring
$19.0 million of the 8 1⁄2% Senior Subordinated Notes (the Notes).
Excluding the effects of the allocation of interest expense to discontinued operations and
the accelerated amortization of debt issuance costs, interest expense decreased
approximately $5.5 million due to lower average total debt outstanding and a general
reduction of interest rates primarily due to refinancing the Notes. The average interest
rate for the nine months ended December 31, 2003 was approximately 5.3% compared to
8.3% for the nine months ended December 27, 2002.

# OTHER INCOME

Other income for the nine months
ended December 31, 2003 totaled $3.7 million, an increase of $3.1 million
from other income of $2.1 million for the nine months ended December 27, 2002.
During the nine months ended December 31, 2003 and December 27, 2002,
approximately $3.0 million and $1.6 million, respectively, of other income was
recorded as a result of the transition services agreement associated with the sale of the
Imaging Business. The transitional services agreement terminated during the third quarter
of fiscal year 2004. The increase in other income was offset by a decrease in the amount
of customer finance charge income of approximately $0.2 million on the Physician
Business customer accounts. Other income for the nine months ended December 27,
2002 includes $0.7 million of redemption premiums that were paid as a result of the
early extinguishment of the Notes.

# PROVISION FOR INCOME
TAXES

Provision for income taxes was
$13.2 million for the nine months ended December 31, 2003, an increase of
$7.9 million from the provision for income taxes of $5.3 million for the nine
months ended December 27, 2002. The effective income tax rate was approximately 38.3%
and 37.3% for the nine months ended December 31, 2003 and December 27, 2002,
respectively. The increase in the effective rate is primarily attributable to the expected
increase in annual income from continuing operations before provision for income taxes as
well as an increase in the permanent adjustment for nondeductible amortization of
intangible assets. The provision for income taxes increased approximately
$7.5 million as a result of an increase in income from continuing operations before
provision for income taxes. The provision for income taxes for the nine months ended
December 27, 2002 is net of a benefit of approximately $0.4 million related to
the loss on extinguishment of the Notes of $1.1 million.

# TOTAL LOSS FROM
DISCONTINUED OPERATIONS

Net sales for the Imaging Business
were $445.6 million for the nine months ended December 27, 2002. The pretax loss
from operations was $6.7 million for the nine months ended December 27, 2002.
The Imaging Business was sold on November 18, 2002. The Company recorded a
$38.3 million income tax benefit related to the operations and disposal of the
Imaging Business during the nine months ended December 27, 2002. As a result of the
sale of the Imaging Business, the Company has recorded a total deferred

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tax asset of
approximately $57.2 million, which represents the tax effect of the anticipated
income tax NOL to be generated from the transaction.

During the nine months ended
December 31, 2003, the Company recorded a charge of approximately $0.3 million,
net of a benefit of income taxes of $0.2 million, for additional legal and
professional fees associated with the arbitration proceedings. (Refer to Note 12,
Discontinued Operations.)

# NET INCOME

Net income for the nine months ended
December 31, 2003 totaled $20.9 million compared to a net loss of
$52.0 million for the nine months ended December 27, 2002. The net loss for the
nine months ended December 27, 2002 included a charge of $60.9 million for the
loss from discontinued operations. Otherwise, variances are due to the factors discussed
above.

# LIQUIDITY AND CAPITAL
RESOURCES

# Liquidity and Capital
Resources Highlights

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

|                                | As of
|------------------------------- | -----
|
|                                |      
|Capital Structure:              |      
|Bank debt                       |      
|Cash and cash equivalents       |      
|                                |      
|Net debt                        |      
|Shareholders' equity            |      
|                                |      
|Total Capital                   |      
|                                |      
|Operational Working Capital:(a) |      
|Accounts receivable             |      
|Inventory                       |      
|Accounts payable                |      
|                                |      
|                                |      
|                                |      

(a)    
          Operational working capital is the sum of accounts receivable and inventory,
          less accounts payable.

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

The primary components of net cash
provided by operating activities consist of net income adjusted to reflect the effect of
discontinued operations, non-cash expenses, loss on the sale of property and equipment,
and changes in operating assets and liabilities.

Growth initiatives implemented in
June 2003 by the Physician and Elder Care segments have resulted in an increase of
consolidated net sales during the nine months ended December 31, 2003, of 13.7%
(11.9% on a same day sales basis) compared to the same period prior year. As a result of
core business growth, operational working capital has increased approximately
$53.1 million over the last nine months. A portion of this increase is directly
attributable to normal accounts receivable and inventory growth to support business growth
initiatives. During the nine months ended December 31, 2003:

- Accounts receivable increased by approximately $32.4 million primarily due to the
revenue growth initiatives in the Physician and Elder Care Businesses discussed above.
- Inventory increased by approximately $33.6 million primarily to support
pharmaceutical sales growth in the Physician Business and expansion into the DME and
housekeeping markets by the Elder Care Business. As a result, the Physician and Elder Care
Businesses inventory turns decreased slightly quarter over quarter. In addition,
approximately $5.0 million of inventory was purchased at quarter-end to take
advantage of favorable product cost before vendor price increases became effective.
- The increase in accounts payable of approximately $14.4 million was less than the
increase in inventories as a result of accelerating payments to select vendors to take
advantage of more favorable discount terms.

Overall, net cash provided by
operating activities during the nine months ended December 31, 2003, was flat.
However, net cash provided by operating activities during the three months ended
December 31, 2003, increased by $13.0 million. This was primarily attributable
to the leveling of inventory growth compared to prior periods during this fiscal year.

Net cash used in investing activities
was higher during the nine months ended December 31, 2003 compared to the nine months
ended December 27, 2002 due to the payments for acquired companies, capital
expenditures, and the use of cash as a result of the sale of the Imaging Business. Capital
expenditures during the nine months ended December 31, 2003 and December 27,
2002 totaled $10.4 million and $8.5 million, respectively, of which
approximately $5.6 million and $2.9 million, respectively, related to
development and enhancement of the Companys ERP system, electronic commerce
platforms, and supply chain integration. Capital expenditures related to the distribution
center expansions as a result of the Rationalization Programs were approximately
$2.8 million and $4.0 million during the nine months ended December 31,
2003 and December 27, 2002, respectively.

Cash provided by financing activities
during the nine months ended December 31, 2003 was primarily a result of the Company
borrowing funds against its revolving line of credit. The net proceeds from the revolving
line of credit were approximately $31.3 million and were used to fund the
acquisitions in the Elder Care Business and support the additional working capital
requirements created by revenue growth in both the Physician and Elder Care Businesses. In
addition, on October 1, 2003 the Company received approximately $1.2 million
from the former Chairman and Chief Executive Officer for full payment of one of his
outstanding notes receivable. Cash provided by financing activities was also impacted by
the repurchase of $5.6 million and $25.2 million of the Companys common
stock under Board of Director approved share repurchase programs during the nine months
ended December 31, 2003 and December 27, 2002, respectively. For the nine months
ended December 31, 2003, the Company repurchased approximately 1.0 million
shares of common stock at an average price of $5.92 per common share. For the nine months
ended December 27, 2002, the Company repurchased approximately 3.6 million
shares of the Companys common stock at an average price of $7.13 per common share.
Additionally, $19.7 million was used to retire a portion of the Companys 8
1⁄2% Senior Subordinated Notes during the nine months ended December 27, 2002.

# Capital Resources

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

The revolving line of credit, which
is an asset-based agreement, is the Companys primary capital resource and furnishes
the financial strength to support the business and service levels in a time of rapid
revenue growth by using the strength of the Companys working assets as collateral to
support necessary liquidity. Over the long-term, the Companys priorities for use of
capital are internal growth, acquisitions, and repurchase of the Companys common
stock.

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At December 31, 2003, the
Companys maximum availability under the revolving line of credit was
$200 million. Availability of borrowings under the revolving line of credit depends
upon the amount of a borrowing base consisting of accounts receivable and, upon
satisfaction of certain requirements, inventory. At December 31, 2003, the Company
had sufficient assets based on eligible inventories and accounts receivables to borrow up
to $165.8 million of the $200 million revolving line of credit.

As the Companys business grows,
its cash and working capital requirements will also continue to increase. The Company
normally meets its operating requirements by (i) maintaining appropriate levels of
liquidity under its revolving line of credit and (ii) using cash flows from operating
activities. The Company expects that the overall growth in the business will be funded
through a combination of cash flows from operating activities, borrowings under the
revolving line of credit, capital markets, and/or other financing arrangements. As of
December 31, 2003, the Company has not entered into any material working capital
commitments, other than those that are disclosed in the future minimum obligation table
below, that require funding.

# Revolving Credit
Agreement

On May 20, 2003, the Company
entered into an amended and restated Credit Agreement (the Credit Agreement),
by and among the Company, as borrower thereunder (the Borrower), the
subsidiaries of the Borrower party thereto, the lenders from time to time party thereto
(the Lenders), and Bank of America, N.A., as Agent for the Lenders. The Credit
Agreement provides for a three-year credit facility consisting of an aggregate
$150 million revolving line of credit and letters of credit (the Credit
Facility). On December 16, 2003, the Company entered into a second amended and
restated Credit Agreement (the Amended Credit Agreement), which matures on
March 28, 2006. The Amended Credit Agreement primarily increased the availability of
borrowings under the Credit Facility from $150 million to $200 million
(Amended Credit Facility). Availability of borrowings under the Credit
Facility depends upon the amount of a borrowing base consisting of accounts receivable
and, upon satisfaction of certain requirements, inventory. The Amended Credit Facility
bears interest at the Banks prime rate plus a margin of between -0.25% and 1.00%
based on the Companys ratio of funded debt to earnings before interest, taxes,
depreciation, and amortization (Leverage Ratio), as defined in the Amended
Credit Agreement, or at LIBOR plus a margin of between 1.75% and 3.00% based on the
Companys Leverage Ratio. Under the Amended Credit Agreement, the Company and its
subsidiaries are subject to certain covenants, including but not limited to, limitations
on (i) paying dividends and repurchasing stock, (ii) selling or transferring
assets, (iii) making certain investments (including acquisitions),
(iv) incurring additional indebtedness and liens, and (v) annual capital
expenditures. Proceeds from the Amended Credit Facility will be used to fund the
Companys anticipated future requirements for working capital, capital expenditures,
acquisitions, and issue letters of credit. At December 31, 2003 and March 28,
2003, there was $114.3 million and $83.0 million, respectively, outstanding
under the revolving line of credit.

During the three months ended
June 28, 2003, the Company entered into an interest rate swap agreement to hedge the
variable interest rate debt of its revolving line of credit. Under the terms of the
interest rate swap agreement, the Company makes payments based on the fixed rate and will
receive interest payments based on the 1-month LIBOR. The changes in market value of this
financial instrument are highly correlated with changes in market values of the hedged
item both at inception and over the life of the agreement. Amounts received or paid under
the interest rate swap agreement are recorded as reductions or additions to interest
expense. In accordance with SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No. 133, the
Companys interest rate swap agreement has been designated as a cash flow hedge with
changes in fair value recognized in accumulated other comprehensive income in the
accompanying consolidated balance sheets.

The swap carries a notional principal
amount of $35.0 million and effectively fixes the interest rate on a portion of the
revolving line of credit to 2.195%, prior to applying the funded debt to EBITDA margin
discussed above. The swap agreement expires on March 28, 2006 and settles monthly
until expiration. The unrealized gain, net of taxes, which is included in accumulated
other comprehensive income in the accompanying balance sheet, for the estimated fair value
of the swap agreement is immaterial at December 31, 2003.

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# Debt Rating

The Companys debt is rated by
nationally recognized rating agencies. Companies that have assigned ratings at the top end
of the range have, in the opinion of the rating agency, the strongest capacity for
repayment of debt or payment of claims, while companies at the bottom end of the range
have the weakest capability. Ratings are always subject to change and there can be no
assurance that the Companys ratings will continue for any given period of time.

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

# Liquidity and Capital
Resource Outlook

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

# Future Minimum
Obligations

In the normal course of business, the
Company enters into obligations and commitments that require future contractual payments.
The commitments primarily result from repayment obligations for borrowings under the
revolving line of credit, as well as contractual lease payments for facility, vehicle, and
equipment leases, and contractual payments under noncompetition agreements and employment
agreements. The following table presents, in aggregate, scheduled payments under
contractual obligations for the Physician Business, the Elder Care Business, and Corporate
Shared Services (in thousands):

|                            | Fiscal Years |  |  
|--------------------------- | ------------ |  | -
|
|Revolving line of credit(a) |              |  | $
|Operating leases:           |              | 
|Operating                   |              |  |  
|Restructuring               |              |  |  
|Noncompetition agreements   |              |  |  
|Employment agreements       |              |  |  
|Purchase commitments(b),(c) |              |  |  
|                            |              |  |  
|Total                       |              |  | $
|                            |              |  |  

| | (a) | The
revolving line of credit is classified as a current liability in accordance
               with EITF No. 95-22, Balance Sheet Classification of Borrowings
Outstanding                under Revolving Credit Agreements That Include both a
Subjective Acceleration                Clause and a Lock-Box Arrangement; however, the
New Credit Facility does not                expire until March 26, 2006. The Company
is not obligated to repay the                amount outstanding under the revolving line
of credit during fiscal year 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | The
purchase commitments primarily relate to an exclusive distribution agreement
entered into by the Elder Care Business, whereby a minimum purchase of
$7.0 million of product by September 30, 2004 is required. For
each one year period thereafter through September 2008, the purchases
shall not be less than the sum of $7.0 million plus 7.0% compounded
annually.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | The
purchase commitments for fiscal year 2005 include an agreement entered into
               by the Physician Business, whereby a minimum purchase of approximately
               $39.5 million of flu vaccines is required.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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# APPLICATION OF CRITICAL
ACCOUNTING POLICIES

The consolidated financial statements
require the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosure of contingent assets and
liabilities. Management evaluates the estimates, judgments and the policies underlying
these estimates on a periodic basis as situations change, and regularly discusses
financial events, policies, and issues with members of its audit committee and independent
accountants. The significant accounting policies, which management and the audit committee
believe are the most critical to fully understand and evaluate the Companys
financial position and results of operations, include those detailed in the Companys
Annual Report on Form 10-K for the year ended March 28, 2003 under the heading
Managements Discussion and Analysis of Financial Condition and Results of
Operations. The following reflects material changes to such disclosures during the
nine months ended December 31, 2003.

# Estimating Allowances
for Doubtful Accounts

The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability to collect outstanding
amounts due from its customers. The allowances include specific amounts for those accounts
that are likely to be uncollectible, such as bankruptcies, and general allowances for
those accounts that management currently believes to be collectible but later become
uncollectible. Estimates are used to determine the allowances for bad debts and are based
on historical collection experience, current economic trends, credit-worthiness of
customers, changes in customer payment terms, and percentages applied to the accounts
receivable aging categories. The percentage of each aging category that is reserved is
determined by analyzing historical write-offs and current trends in the credit quality of
the customer base. Management performs ongoing credit evaluations by reviewing the
customers current financial information. A credit review is performed on new
customers in the Physician Business and an annual credit review is performed on all major
customers in the Elder Care Business. At a minimum, each Elder Care customer account is
reviewed annually. Adjustments to credit limits and allowances for bad debts are made
based upon payment history and the customers current credit worthiness. If the
financial condition of the Companys customers were to deteriorate or improve,
allowances may be adjusted which will impact general and administrative expenses and
accounts receivable.

The United States Federal Government
recently enacted changes to the Medicare Prospective Pay System (PPS) that
became effective October 1, 2003. PPS, originally enacted in July 1998, limited
government payments to long-term care providers to federally established cost levels. The
recent changes to Medicare resulted in an approximate $850 million addition to
reimbursement funding for providers of elder care services that are part of the federal
Medicare annual budget. In addition, the United States Federal Government also increased
state Medicaid funding by $10 billion for providers of elder care services. As a
result of the recent Medicare and Medicaid changes, providers of elder care services and
the elder care industry are anticipated to receive increased reimbursement from these
sources.

Two events took place during the three months ended December 31, 2003 which caused the
Elder Care Business to review its method for establishing allowance for doubtful accounts. First, changes to
Medicare and Medicaid reimbursement rates became effective. These changes are expected to positively impact the
financial condition of elder care providers and the financial strength of the elder care industry. Second,
management analyzed the past two years of accounts receivable collection and write-off history and the current
projected bad debt write-offs for its elder care customers. Based on the results of this analysis, combined with
the changes to the reimbursement rates, management concluded that the current methodology for establishing the
allowance for doubtful accounts resulted in, and would continue to result in, an overstatement of the reserve
requirement. In accordance with Accounting Principles Board Opinion No. 20, Accounting Changes, management
revised the estimates used to establish the allowance for doubtful accounts for the Elder Care Business. This
change in estimate reduced the reserve percentages applied to various aging classes of accounts receivable, to
more closely reflect actual collection and write-off history that the Company has experienced and expects to
experience in the future. The impact of reducing the reserve percentages was approximately $1.7 million, or
$0.015 basic and diluted earnings per share for the three and nine months ended December 31, 2003.

# RECENT ACCOUNTING
PRONOUNCEMENTS

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

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# FACTORS THAT MAY AFFECT
FUTURE RESULTS

Factors that may affect future
results include those detailed in the Companys Annual Report on Form 10-K for
the fiscal year ended March 28, 2003 under the heading Managements
Discussion and Analysis of Financial Condition and Results of Operations. The
following reflects material changes to such disclosures during the nine months ended
December 31, 2003.

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

Because government health care programs, including Medicare and Medicaid, often reimburse the cost of the
Companys products, the Company's business, marketing activities, and pricing are subject to review by federal
or state agencies, including the United States Department of Health and Human Services, the Department of
Justice, and the Food and Drug Administration. Although the Company attempts to comply with law and regulations
applicable to medical products and supplies, such standards are rapidly developing and often subject to multiple
interpretations. Failure to comply with such laws and regulations could have a material adverse affect on the
Company.

During the nine months ended December 31, 2003, the Company acquired two companies that
provide billing services to the long-term care industry. As a result, the Company is directly subject to Medicare
laws and regulations regarding billing, coding, claim submission, and coverage. Failure to comply with the
regulations governing Medicare reimbursement or financial reporting, or otherwise committing healthcare fraud or
securities law violations, could subject the Company to delays or loss of reimbursement, recoupment of amounts
previously paid, substantial fines or penalties, and other sanctions, including exclusion from participation in
any federal health care program. The government is actively involved in enforcement of allegations of health care
fraud. In addition, the federal False Claims Act creates a financial incentive for private individuals, called
whistleblowers, to bring suit on behalf of the government to recover funds paid pursuant to a false claim, which
may include failure to comply with technical requirements for claim submission, coding, and billing. An adverse
determination regarding the Company's compliance with Medicare's billing, coding, claim submission, and coverage
requirements, brought by either the government or a private individual, could have a material effect on the
Company's financial position and results of operations.

# 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 28, 2003.

# ITEM 4.    CONTROLS
AND PROCEDURES

Evaluation of disclosure controls and procedures.
The Companys Principal Executive Officer and Principal Financial Officer have
reviewed and evaluated the effectiveness of the Companys disclosure controls and
procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of the
end of the period covered by this report (the Evaluation Date). Based on that
evaluation, the Principal Executive Officer and the Principal Financial Officer have
concluded that the Companys current disclosure controls and procedures are
effective, providing them with material information relating to the Company, including its
consolidated subsidiaries, as required to be disclosed in the reports the Company files or
submits under the Exchange Act on a timely basis.

Changes in internal controls. There
has been no significant change in the Companys internal controls over financial
reporting identified in connection with the foregoing evaluation that occurred during the
last quarter and that has materially affected, or is reasonably likely to material affect,
the Companys internal controls over financial reporting.

# PART II OTHER
INFORMATION

# ITEM 1.    LEGAL
PROCEEDINGS

See Note 11, Commitments and
Contingencies, of this Form 10-Q and Item 3 of the Companys Annual Report
on Form 10-K for the year ended on March 28, 2003.

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# ITEM 2.      CHANGES IN
SECURITIES AND USE OF PROCEEDS

Not applicable.

# ITEM 3.      DEFAULTS UPON
SENIOR SECURITIES

Not applicable.

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

Not applicable.

# ITEM 5.    OTHER INFORMATION

Not applicable.

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

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

|Exhibit
Number | Description                                                                                                                                                                                                                                                                  
|-------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |                                                                                                                                                                                                                                                                              
|10.1           | Amendment No. 2 to Credit Agreement, dated as of December 16, 2003, by and among the Company, each of the Company's
subsidiaries therein named, the Lenders from time to time party thereto, Bank of America, N.A., as Agent, and Banc of America Securities LLC, as Arranger
|              
|10.2*          | Fifth Amendment to the Amended and Restated Savings Plan                                                                                                                                                                                                                     
|              
|10.3*          | Severance Agreement, dated as of October 20, 2003, by and between the Company and Tony Oglesby                                                                                                                                                                               
|              
|10.4*          | Employment Agreement, dated as of November 1, 2003, by and between the Company and Gary J. Nutter                                                                                                                                                                            
|              
|15             | Awareness Letter from KPMG LLP                                                                                                                                                                                                                                               
|              
|31.1           | Rule 13a-14(a) Certification of the Chief Executive Officer                                                                                                                                                                                                                  
|              
|31.2           | Rule 13a-14(a) Certification of the Chief Financial Officer                                                                                                                                                                                                                  
|              
|32.1           | Section 1350 Certification of the Chief Executive Officer                                                                                                                                                                                                                    
|              
|32.2           | Section 1350 Certification of the Chief Financial Officer                                                                                                                                                                                                                    
|              
|               | *  Represents a management contract or compensatory plan or arrangement                                                                                                                                                                                                      

(b)    
          Reports on Form 8-K:

The
following current reports on Form 8-K were furnished during the quarter ended
December 31, 2003:

|Date of Report   | Item Reported                                                                                 
|---------------- | ----------------------------------------------------------------------------------------------
|October 29, 2003 | Furnished to announce the Company's financial results for the    quarter ended October 3, 2003

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# SIGNATURE

Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Jacksonville,
State of Florida, on February 16, 2004.

| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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)

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