THE COMPANY

PSS World Medical, Inc. (the "Company" or "PSSI"), a Florida corporation, began operations in 1983. The Company is a national distributor of medical products and equipment, pharmaceutical products, healthcare information technology and billing services to alternate-site healthcare providers including physician offices, long-term care and assisted living facilities, home health care and hospice providers through 39 full-service distribution centers, which serve all 50 states throughout the United States ("U.S."). The Company currently conducts business through two operating segments, the Physician Business and the Elder Care Business, which serve a diverse customer base. For information on comparative segment revenue, segment profit and related financial information, refer to Footnote 16, Segment Information, of the consolidated financial statements.

PSSI is a market leader in the alternate-site customer segments it serves as a result of value-added, solutions-based marketing programs; a differentiated customer distribution and service model; a consultative sales force with extensive product, disease state, reimbursement, and supply chain knowledge; unique arrangements with manufacturers; a full line of the Company's own brand, Select; innovative information systems and technologies that serve its core markets; and a culture of performance.

THE COMPANY'S STRATEGY

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

Grow sales through innovative, differentiated marketing programs, customer interface improvements, relationships, products, and services. The Company believes its sales professionals, which consists of approximately 830 employees, and their customer relationships and knowledge are strategic competitive advantages. The Company trains its sales professionals to build unique relationships with customers and provide solutions though innovative marketing programs, exclusive products, and new product or technology offerings. The Company develops and provides unique customer-based solutions and marketing programs. The Company utilizes improved customer interface processes that focus on increasing sales representative bandwidth and improving the customer experience.

Optimize the Company's product offering. The Company continues to develop its sourcing capabilities, including developing global product sourcing capabilities to optimize its product offering by integrating sourcing and branding initiatives with customer, product and Company strategies to increase profitability. The Company intends to broaden its reach and breadth of products by expanding its Select and specialty brand product offerings, increase product quality and category management and effectively leverage its sourcing capabilities, both foreign and domestic.

Make investments to simplify business activities and leverage existing distribution and shared service capabilities to reduce operating expenses as a ratio to net sales. The Company is making significant investments in its distribution infrastructure, information systems, process reengineering, and training in order to simplify its distribution and administrative infrastructure, develop easy to use scalable processes and systems that enable growth, reduce costs to serve, and achieve the Company's commitments to superior customer service. Simplification initiatives focus on process redesign, investments in automation and organizational commitments to customer service. During fiscal year 2009, the Company continued to leverage its existing infrastructure investments and process improvements resulting in operating efficiencies, improved customer service levels and operating margins.

Aggressively identify, develop and retain leaders capable of managing a growing corporation. The Company is committed to the effective recruitment, hiring and promotion of employees with outstanding performance, culture and leadership abilities. The Company provides leadership development strategies, individual leadership assessment and development plans, education and coaching programs to its employees. The Company's goal is to develop a diverse group of individuals capable of leading a fast growing corporation.

Conduct business in a legal and ethical manner. The Company believes each employee is responsible for personal integrity and the consequences of actions, and is expected to follow the highest standards of ethics, honesty, fairness and compliance with the law. The Company provides health, safety, and regulatory education training programs and a safe and positive work environment for its employees.

Be the employer of choice within the industry. The Company believes its management, sales force and employees are its most valuable assets. The Company seeks to foster a culture of performance and execution by designing employee incentive programs aligned with the Company's business strategies and objectives. The Company strives to be the employer of choice in the markets it serves, in terms of benefits offered to employees, availability of health and wellness programs, professional competency and personal development training.

Make strategic acquisitions. The Company expects to continue to make strategic acquisitions to complement its core business strategies and seek target acquisitions which leverage infrastructure and distribution capabilities, expand its product sourcing and product development expertise, and increase market share and profitability.

EXECUTIVE OVERVIEW

During the fiscal year 2009, the Company continued profitable growth despite the volatile economic environment. Consolidated sales grew by 5.2% during the fiscal year, compared to 6.6% during the prior fiscal year. This slower sales growth was due to general economic conditions and resulting downturn in the overall economy. The Company expects near term sales growth rates to be lower than recent historic sales growth, particularly in the Physician Business, due to general economic conditions.

The Company recognized sales growth throughout most product lines within the Physician Business and across each customer segment within the Elder Care Business during fiscal year 2009 when compared to fiscal year 2008. Net sales for the Physician Business increased by 3.7%, while net sales for the Elder Care Business increased by 8.7%. The Physician and Elder Care Businesses continued sales promotions to increase sales of its Select product line, which positively impacted the Company's growth and margins. During fiscal year 2009, Select brand product sales grew 14.9% and 28.1% over prior year in the Physician and Elder Care businesses, respectively.

Consolidated income from operations increased approximately $8.7 million, or 9.5% during the fiscal year ended March 27, 2009, while operating margins increased 20 basis points. During fiscal year 2008, operating margins were negatively impacted by costs associated with the Florida Department of Health's review discussed under the caption "Compliance with Florida Pedigree Laws" below. The remaining fiscal year 2009 increase was primarily a result of the net sales growth leverage discussed above as well as management's focus on reducing operating costs as a percentage of net sales through its business simplification strategies.

Cash flow from operations during fiscal year 2009 grew to $89.7 million, primarily attributable to growth in profitability and improved collections.

With tightening of business and consumer credit markets, the Company remains focused on credit management and collection of its receivable balances, with additional investments in credit and collections training and continued focus on aged balances. During fiscal year 2009, days sales outstanding decreased from 42.0 days to 40.3 days in the Physician Business and from 49.6 days to 49.3 days in the Elder Care business, when compared to prior year. The Company's increased operating cash flow and available cash balances funded a portion of the Company's stock repurchase program and investments in capital projects during the year.

The following significantly impacted the Company's financial and operating results during fiscal years 2009, 2008, and 2007:

Convertible Debt Transactions

During the second quarter of fiscal year 2009, the Company issued $230.0 million principal amount of 3.125% senior convertible notes. The Company also entered into convertible note hedge transactions with the initial purchaser and/or its affiliates and, separately, sold warrants to the initial purchaser and/or its affiliates. The Company used a portion of the net proceeds to (i) repurchase approximately $35.0 million of its common stock; (ii) pay the costs of its hedge transactions; and (iii) redeem $150.0 million of the Company's 2.25% senior convertible. Remaining proceeds were used for general corporate purposes. Refer to Footnote 11, Debt, for additional information.

Global Sourcing Initiative

The Company's global sourcing strategy involves purchasing products directly from contracted manufacturers and is a key initiative for the Company. Milestones reached during fiscal year 2009 and 2008 included (i) expanding the Company's global sourcing resources in Asia and Europe, (ii) increasing the capacity of the redistribution infrastructure in the United States;
(iii) expanding the Select product offering, and (iv) designing and implementing a security assessment program for global manufacturers in compliance with the U.S. Customs Trade Partners Against Terrorism Act. At March 27, 2009 and March 28, 2008, the Company had approximately $39.1 million and $29.5 million of globally-sourced product inventory, respectively, representing an increase of 152 product SKUs and 84 product categories. Management believes this initiative will continue to positively impact the Company's results of operations in future years.

Investment in athenahealth, Inc.

On June 29, 2007, the Company made a $24.1 million equity investment, including transaction costs, in athenahealth, Inc. ("athena"), a privately held leading provider of internet-based healthcare information technology and business services to physician practices. This equity investment represented approximately 5% of athena's outstanding shares. On September 20, 2007, an initial public offering of shares of athena's common stock was made available for sale on the NASDAQ Global Market under the symbol "ATHN," which impacted the valuation of shares under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. During fiscal year 2009 and 2008, the Company sold a portion of its investment in athena, resulting in a gain of approximately $0.4 million ($0.3 million, net of tax) and $4.6 million ($2.9 million, net of tax), respectively.

As of March 27, 2009, the aggregate fair value of the Company's remaining investment was $10.6 million, recorded on the Consolidated Balance sheets as Investment in available for sale securities. During the fiscal year ended March 27, 2009, the Company recorded unrealized holding losses of $0.1 million. In April of 2009, the Company sold its remaining holdings in athena. Refer to Footnote 6, Equity Investment, for additional information.

Compliance with Florida Pedigree Laws

During the fiscal year ended March 28, 2008, the Company's Florida operations were the subject of an inspection by the Florida Department of Health for compliance with guidelines for the receipt, storage, and distribution of products covered by recently enacted drug pedigree legislation in the state of Florida. Products covered by this legislation included prescription pharmaceutical products used by physicians in their practices, such as vaccines, ointments and creams, anesthetics, and topicals used in office procedures. On January 23, 2008, the Company signed an agreement with the State of Florida resolving issues regarding the interpretation of procedures for documenting the ordering, receipt, storage, and shipping of certain products covered by Florida drug pedigree legislation. Pursuant to the terms of the agreement, the Company reimbursed the State $1.0 million in costs and fees, and donated pharmaceutical inventory valued at $0.5 million. In turn, the State agreed to issue and/or renew permits to the Company's Florida facilities and release the Company's quarantined inventory subject to third party validation of pedigree compliance.

Costs associated with the review and inspection were approximately $6.3 million and include costs and fees, inventory exposure, additional operating and legal costs, as well as costs incurred to modify the Company's compliance systems and processes. These costs were recorded within Corporate Shared Services and the Physician Business.

Influenza Vaccine Product Sales

Influenza vaccine product sales were approximately $48.6 million during the fiscal year ended March 30, 2007 but fell short of expectations due to an oversupply in the market and the cancellation of customer orders due to a mild influenza season. In connection with these environmental issues and as part of the Company's periodic review of the carrying amount of inventory during fiscal year 2007, management determined that a write-down of $7.0 million, net of recoveries, was required. The Company did not participate in the influenza vaccine market during its fiscal year 2008. The Company reentered the influenza vaccine market on an agency basis during fiscal year 2009. As such, the Company is relieved from inventory and accounts receivable risk and recognizes fees received from its supplier on a net revenue recognition basis.

Acquisition of Activus Healthcare Solutions, Inc.

On May 31, 2007, the Company acquired the stock of Activus Healthcare Solutions, Inc. ("Activus"), a California based distributor of medical supplies and pharmaceuticals to office-based physicians and ambulatory surgery centers. The aggregate purchase price, subject to certain adjustments as set forth in the purchase agreement, was $13.2 million, net of cash acquired. As of March 28, 2008, Activus' operations have been integrated into the Company's existing operations. The Company incurred operating losses totaling $2.0 million related to the integration and transition of Activus operations during fiscal year 2008.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED MARCH 27, 2009 VERSUS FISCAL YEAR ENDED MARCH 28, 2008

NET SALES



                                           For the Fiscal Year Ended
                                   March 27, 2009             March 28, 2008
                                             Average                    Average
                                            Daily Net                  Daily Net    Percent
  (dollars in millions)         Amount        Sales        Amount        Sales      Change
  Physician Business          $  1,357.4   $       5.4   $  1,308.7   $       5.2       3.7 %
  Elder Care Business              594.5           2.3        547.1           2.2       8.7 %
  Corporate Shared Services          0.8             -            -             -       N/A

  Total Company               $  1,952.7   $       7.7   $  1,855.8   $       7.4       5.2 %

Physician Business

Management evaluates the Physician Business by product category. The following
table summarizes the growth rate by product category period over period.



                                    For the Fiscal Year Ended
   (dollars in millions)        March 27, 2009     March 28, 2008    Percent Change
   Branded(a)                   $         709.3    $         691.3              2.6 %
   Select(b)                              168.3              146.4             14.9 %
   Pharmaceutical products                305.2              289.2              5.5 %
   Influenza vaccine products               2.4                  -              N/A
   Equipment                              137.4              146.0             (5.9 )%
   Immunoassay product sales               27.3               26.8              1.7 %
   Other                                    7.5                9.0            (17.5 )%

   Total                        $       1,357.4    $       1,308.7              3.7 %

(a) Branded products are comprised of disposables and lab diagnostics from branded manufacturers.

(b) Select products are comprised of the Company's brand of disposables and lab diagnostics.

Net sales growth during the year ended March 27, 2009 was driven by continued momentum in the consumable and pharmaceutical growth programs. Select product sales increased due to the Company's focus on promoting its globally sourced, Select products, which resulted in new customer sales as well as customer conversions from other manufacturer branded products to Select brand products. Equipment sales decreased due to the current economic conditions and tightening credit policies which negatively impacted customers' ability to obtain equipment financing.

Pharmaceutical sales increased primarily as a result of growth in the Company's non-controlled drugs product line and, in part, to the introduction of additional products, including additional generic products, to the Company's offering. The Company reentered the influenza vaccine market on an agency basis during fiscal year 2009. Under the agreement, the Company is relieved from inventory and accounts receivable risk and recognizes fees received from its supplier on a net revenue recognition basis. The agreement requires the sale of minimum amount of influenza vaccine doses annually, the failure of which could result in the termination of the agreement.

Other revenue was impacted by a decrease in leasing incentives due to lower equipment sales, partially offset by an increase in customer freight and handling charges.

The Company expects fuel surcharges to customers to decline in future periods due to lower fuel costs.

Elder Care Business

Management evaluates the Elder Care business by customer category. Net sales were impacted by the utilization of innovative Elder Care customer-specific solution programs, including Momentum Rewards, a customer incentive programs introduced during fiscal year 2009.

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

                                             For the Fiscal Year Ended
(dollars in millions)                  March 27, 2009          March 28, 2008         Percent Change
Nursing home and assisted
living facilities                     $          363.7        $          339.7                   7.1 %
Hospice and home health care
agencies                                         166.1                   151.6                   9.5 %
Billing services                                  13.7                    13.0                   5.0 %
Other                                             51.0                    42.8                  19.3 %

Total                                 $          594.5        $          547.1                   8.7 %

Net sales during the year ended March 27, 2009 compared to the prior year increased approximately $47.4 million, as sales grew in each customer segment. The Company's growth in the hospice and home health care customer segments during fiscal year 2009 reflects the successful execution of strategies to diversify its customer base through expansion in the home health care market and other non-facility based care. Net sales were also impacted by the continued utilization of innovative customer-specific solution programs and a focus on independent customer segments within the nursing homes market.

Across its Elder Care customer segments, Select product sales increased 28.1% during fiscal year 2009, when compared to fiscal year 2008, due to the Company's focus on promoting its globally sourced products which resulted in additional sales to new and existing customers.

GROSS PROFIT

Physician Business

Gross profit dollars for the Physician Business increased $23.0 million and gross margins increased 62 basis points during fiscal year 2009. The increase in gross profit was primarily due to the growth in net sales discussed above, in conjunction with the Company's continued focus on its sourcing strategies and addition of influenza vaccine sales. The Company reentered the influenza vaccine market on an agency basis during fiscal year 2009. As such, the Company is relieved from inventory and accounts receivable risk and recognizes fees received from its supplier on a net revenue recognition basis. The Company's sourcing strategies are designed to improve the cost competitiveness and increase gross margins on certain products. The increase in gross profit was also attributed to a decrease in vendor rebates denied and inventory sourcing efficiencies.

Elder Care Business

Gross profit dollars in the Elder Care Business increased $17.1 million year over year and were impacted by the increase in sales across the Business' customer segments. Gross margin percentages increased 60 basis points due to effective inventory cost initiatives, an increase in patient-specific delivery, and increased gross profit from the Company's Medicare Part B and Medicaid billing service provider, ProClaim, which generates higher gross margin percentages.

GENERAL AND ADMINISTRATIVE EXPENSES



                                                For the Fiscal Year Ended
                                          March 27, 2009         March 28, 2008
                                                  % of Net               % of Net
         (dollars in millions)          Amount     Sales       Amount     Sales
         Physician Business(a)          $ 195.3       14.4 %   $ 191.3       14.6 %
         Elder Care Business(a)           118.1       19.9 %     106.9       19.5 %
         Corporate Shared Services(b)      38.9        2.0 %      25.8        1.4 %

         Total Company(b)               $ 352.3       18.0 %   $ 324.0       17.5 %

(a) General and administrative expenses as a percentage of net sales are calculated based on reportable segment net sales.

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

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

Physician Business

General and administrative expenses increased $4.0 million and decreased 20 basis points as a percentage of net sales over the prior year. This increase in expenses were primarily attributable to (i) increased compensation expense of $4.7 million due to additional employees and general wage increases; (ii) an increase of $1.7 million related to incentive compensation expense for the year related to a combination of new incentive compensation plans introduced during fiscal year 2009 and stronger operating performance; (iii) an increase of $1.4 million in the corporate overhead allocation from Corporate Shared Services which is primarily related to increased payroll and medical related costs; and
(iv) increased cost to deliver of approximately $1.6 million related to increased volume. Partially offsetting these increases are costs incurred in fiscal year 2008 and not repeated in fiscal year 2009; (i) $2.9 million in integration costs for Activus; and (ii) approximately $2.2 million related to additional operating expenses from the Company's inspection by the Florida Department of Health for compliance with State Pedigree laws.

Elder Care Business

General and administrative expenses increased $11.2 million and 40 basis points as a percentage of net sales over the prior year. This increase was primarily attributable to (i) increased cost to deliver of approximately $3.2 million related to volume; (ii) increased compensation expense of $3.2 million due to additional employees and general wage increases; (iii) an increase of $0.7 million in incentive compensation expense for the year related to a combination of new incentive compensation plans introduced during fiscal year 2009 and stronger operating performance; and (iv) an increase in bad debt expense of $0.6 million due to the recoveries that occurred in fiscal year 2008 that did not occur in fiscal year 2009.

Corporate Shared Services

General and administrative expenses increased $13.1 million during the fiscal year ended 2009 due primarily to (i) an increase of $5.7 million in incentive compensation expense related to a combination of new incentive compensation plans introduced during fiscal year 2009 and an increase in payout estimates based on performance; (ii) a $2.4 million increase in payroll related costs due to an increase in full-time employees and merit increases; (iii) $2.5 million related to an increase in medical insurance costs; (iv) a $2.4 million increase in stock compensation expense related to new long-term incentive plans introduced during fiscal years 2009 and 2008; (v) and an increase in depreciation expense of $1.3 million due to increased investments in IT infrastructure during the fiscal year. Partially offsetting these increases is a $4.1 million decrease in settlement and legal costs related to the Florida Department of Health's inspection of the Company's operation for compliance with State Pedigree laws in fiscal year 2008.

SELLING EXPENSES



                                             For the Fiscal Year Ended
                                       March 27, 2009         March 28, 2008
                                               % of Net               % of Net
            (dollars in millions)    Amount     Sales       Amount     Sales
            Physician Business(a)    $ 107.7        7.9 %   $ 105.6        8.1 %
            Elder Care Business(a)      20.8        3.5 %      19.7        3.6 %

            Total Company(b)         $ 128.5        6.6 %   $ 125.3        6.8 %

(a) Selling expenses as a percentage of net sales are calculated based on divisional net sales.

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

Selling expenses are principally driven by commission expenses, which are generally paid to sales representatives based on gross profit dollars and gross profit as a percentage of net sales. The increase in selling expenses for the Physician Business and Elder Care Business was consistent with the increase in net sales year over year. Selling expense as a percentage of net sales decreased . . .