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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended April 1, 2005

Commission File Number 0-23832

PSS WORLD MEDICAL, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code (904) 332-3000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share

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 such 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.

Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

Yes  þ    No  ¨

The aggregate market value of common stock held by nonaffiliates, computed by reference to the closing price as reported on the NASDAQ, as of October 1, 2004 was approximately $612,267,000.

The number of shares of Common Stock, $0.01 par value, of the Registrant outstanding at June 10, 2005, was 65,210,191.

Document Incorporated by Reference

Portions of the Registrant’s Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after April 1, 2005, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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CAUTIONARY STATEMENTS

Forward-Looking Statements

Management may from time-to-time make written or oral forward-looking statements with respect to the Company’s annual or long-term goals, including statements contained in this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Reports on Form 8-K, reports to shareholders, press releases, and other communications. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical earnings and those currently anticipated or projected. Management cautions readers not to place undue reliance on any of the Company’s forward-looking statements, which speak only as of the date made.

Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” and similar expressions identify forward-looking statements. Forward-looking statements contained in this Annual Report on Form 10-K that involve risks and uncertainties include, without limitation:

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In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, management is identifying important factors that could affect the Company’s financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements about the Company’s goals or expectations. The Company’s future results could be adversely affected by a variety of factors, including those discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Risk Factors”. In addition, all forward-looking statements are qualified by and should be read in conjunction with the risks described or referred to in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Risk Factors”.

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PART I

THE COMPANY

PSS World Medical, Inc. (the “Company” or “PSSI”), a Florida corporation which began operations in 1983, is a specialty marketer and distributor of medical products, equipment, and pharmaceutical related products to alternate-site healthcare providers including physician offices, long-term care facilities, and home care providers through 43 full-service distribution centers, which serve all 50 states throughout the United States. PSSI is a leader in the two market segments it serves as a result of value-added, solution-based marketing programs; a customer differentiated distribution and service model; a consultative sales force with extensive product, disease state, reimbursement, and supply chain knowledge; unique arrangements with product manufacturers; innovative information systems and marketing programs; and a culture of performance. The Company is focused on improving business operations and management processes, maximizing its core distribution capability and efficiency, and developing and implementing innovative marketing strategies. In addition, the Company has recently made several acquisitions to broaden its reach and leverage its infrastructure and may continue to make acquisitions in the future.

The Company currently conducts business through two operating segments, the Physician Business and the Elder Care Business. These strategic segments serve a diverse customer base. Historically, the Company conducted business under a third operating segment, the Imaging Business 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. On November 18, 2002, the Company completed the sale of the Imaging Business. As a result, DI’s results of operations for fiscal year 2003 have been classified as discontinued operations. Refer to Note 17, Discontinued Operations, in the accompanying financial statements for a further discussion.

THE INDUSTRY

According to industry estimates, the market size of the medical supply and equipment, home care and office-administered pharmaceutical segments of the United States (“U.S.”) healthcare industry is approximately $45 billion. These market segments consist of medical products, medical equipment, and pharmaceutical products administered in an out-patient setting, which are distributed to alternate-site healthcare providers, including physician offices, long-term care and assisted living facilities, home healthcare providers and agencies, dental offices, and other alternate-site providers, such as outpatient surgery centers, podiatrists, and veterinarians. The Company’s primary focus is a sub-segment of this larger market, which is a $26.5 billion market, including the distribution of medical products, medical equipment, and office-administered pharmaceutical products to physician offices, long-term care and assisted living facilities, and home healthcare providers and equipment dealers.

The medical products distribution industry continues to experience growth due to the aging population, increased healthcare awareness, the proliferation of medical technology and testing, new pharmacology treatments, and expanded third-party insurance coverage. The elder care market is expected to continue benefiting from the increasing growth rate of the elderly U.S. population and the expansion of provider care into the patient’s home. For example, the January 2000 U.S. Bureau of the Census estimated that the elderly population in the U.S. will more than double by the year 2040. In 2000, four million Americans age 85 years and older represented the segment of the population that is in the greatest need of long-term and elder care services and this segment is projected to more than triple to over 14 million by the year 2040. The segment of the population who is age 65 to 84 years is projected to more than double in the same time period. The physician market is expected to continue benefiting from the shift of procedures and diagnostic testing in hospitals to alternate sites, particularly physician offices. Furthermore, as the cosmetic surgery and elective procedure markets continue to grow, physicians are increasingly performing these procedures in their offices. Currently, estimated growth rates for the physician and elder care markets is approximately 4.0% and 1.5%, respectively. The nursing home and homecare segments of the elder care market are growing at rates ranging from 1% to 2% and 5% to 7%, respectively. As a result of these market dynamics, annual expenditures for healthcare services continue to increase in the United States. As cited in The Centers for Medicaid and Medicare Services (“CMS”), Office of the Actuary, National Health Statistics Group 2002 study, Trends and Indicators in the Changing Health Care Marketplace, total national health care spending reached $1.3 trillion in

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2000, or 13.2% of the nation’s gross domestic product, and it is expected to have reached $1.8 trillion in 2004. Health care spending is projected to reach $3.4 trillion in 2013, or 18.4% of the estimated gross domestic product. These statistics are generally released approximately 18 months subsequent to the measurement period in reports issued by CMS and the Office of the Actuary.

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 significant portion of medical care costs in the United States. In recent years, Federal and state-imposed limits on reimbursement to hospitals, long-term care and assisted living facilities, home healthcare and other healthcare providers have affected spending budgets in certain markets within the medical products industry. The nursing home and home healthcare industries have been impacted by these changes, and shifts in operations and business strategies, facility divestitures of elder care providers as well as overall general economic conditions over the last few years.

However, management believes that the additional funding under the Medicare and Medicaid programs during 2000 through 2004, or “add-on” reimbursement payments for providers of skilled nursing and long-term care services, have positively impacted the financial strength of companies providing these services. The “add-on” reimbursement payments were scheduled to expire in September 2005, concurrently with the expected refinement of the Resource Utilization Groups (“RUGs”) during October 2005. The RUGs, which commenced as part of the Balanced Budget Act of 1997 and were further refined under the Balanced Budget Refinement Act of 1999, are used by CMS to classify skilled nursing facility residents into Medicare payment groups. In May 2005, the U.S. House of Representatives and Senate voted to delay the October 2005 expiration of the RUGs and “add on” reimbursement payments in phases beginning in January 2006 and extending through October 2006. In May 2005, CMS also issued its recommendation to refine the RUGs and expand the number of RUGs from 44 to 53, which included a overall reduction in reimbursements for elder care providers beginning in October 2005. Additionally, CMS recommended a 3% market basket increase (inflationary-related increase that is recommended by CMS and modified, approved or not approved by Congress annually) for all services administered by skilled nursing and other elder care service providers. The net effect of these changes in reimbursement as recommended by CMS, and if approved by Congress, is estimated to be essentially neutral or possibly no change in the effective reimbursement rates for fiscal year 2006 (beginning October 1, 2005). The final acceptance of CMS’ recommendations is due in August 2005. Management cannot yet determine the effects, if any, these changes may have on the financial strength of its customers and/or the elder care services industry. However, management believes the recent changes to the Medicare and Medicaid reimbursement rates along with the introduction of the Medicare/Medicaid prescription drug program that became effective October 2003 has positively impacted, and will continue to positively impact, the financial condition of elder care providers and the financial strength of the elder care industry.

The 2006 Federal budget presented for approval to Congress includes a cut in funding for Medicaid by $10 billion over five years, commencing in 2007. Congress also established a Medicaid commission to recommend changes to modernize the Medicaid program to ensure the cut in funding will be achieved over fiscal years 2007 through 2011. President Bush stated in his State of the Union address, which has subsequently been supported in speeches by members of Congress, that the majority of the $10 billion in savings is expected to come from prescription drug pricing, with indications that the primary source would be realized under the Medicare/Medicaid prescription drug program.

THE PHYSICIAN BUSINESS

The Physician Business, or the Physician Sales & Service division, is the leading distributor of medical supplies, diagnostic equipment, and pharmaceutical related products to primary care office-based physicians in the United States based on revenues, number of physician-office customers, number and quality of sales representatives, diagnostic equipment and reagent revenues, and number of products distributed under exclusive or unique arrangements. The Physician Business has approximately 700 sales professionals.

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Distribution Infrastructure

The Physician Business services customers throughout the United States through a distribution network consisting of 29 full-service distribution centers, 23 break-freight locations, 2 redistribution facilities, and 435 delivery vehicles at April 1, 2005. The operations of a full-service distribution center include sales support and certain administrative functions, such as customer billing, collections, cash application, and customer service, as well as general warehousing functions, such as inventory management, warehouse management, and product delivery directly to customers on a daily basis. The procurement of inventory is centralized in Jacksonville, Florida. Full-service distribution centers receive inventory directly from manufacturers and distribute product to customers and break-freight locations. The operations of the break-freight locations include local sales support and product delivery. Break-freight locations receive inventory from full-service distribution centers and distribute product directly to customers on a daily basis. In order to meet the rapid delivery requirements of customers, most products are delivered using the Company’s fleet of leased delivery vehicles. The distribution network is complemented by myPSS.com, a customer Internet ordering portal, and Instant Customer Order Network (“ICON”), a laptop-based sales force automation tool which has enabled the Physician Business to extend customer-specific services with local market product and pricing flexibility.

During fiscal year 2003, the conversion to the JD Edwards XE^® operating system and centralization of the purchasing function to the corporate office located in Jacksonville, Florida were completed. As a result, during fiscal years 2004 and 2005, the Physician Business focused on operational efficiencies and improvements to customer service.

Products

The Physician Business distributes over 75,000 products consisting of medical-surgical disposable supplies, pharmaceuticals, diagnostic equipment, and non-diagnostic equipment.

Medical-Surgical Disposable Supplies. This product category includes a broad range of medical supplies, including various types and sizes of paper goods, needles and syringes, gauze and wound dressings, surgical instruments, sutures, latex gloves, orthopedic soft goods and casting products, tongue blades and applicators, sterilization and intravenous solutions, specimen containers, diagnostic equipment reagents, and diagnostic rapid test kits for pregnancy, strep, mononucleosis, HIV, Chlamydia, and H-pylori. The Physician Business offers a broad array of branded products from numerous medical product manufacturers as well as its own private-label product line. The Physician Business is currently in the process of re-branding its private label product line from PSS Select to Select Medical Products in connection with the Company’s focus on leveraging its global sourcing channels to drive enhanced profitability and implementing a private-label branding strategy across its business segments.

Pharmaceuticals. This product category includes various vaccines, injectables, inhalants, topicals, opthalmic ointments and solutions, otic solutions and oral analgesics, antacids and antibiotics, which are administered in the physician’s office.

Diagnostic Equipment. This product category includes various equipment lines such as blood chemistry analyzers, automated cell and differential counters, immunoassay analyzers, bone densitometers, electrocardiograph monitors and defibrillators, cardiac stress systems, cardiac and OB/GYN ultrasound, holter monitors, flexible sigmoidoscopy scopes, hyfrecators, spirometers, pulse oximeters, tympanometers, and microscopes. Sales of certain diagnostic equipment entail the ongoing reordering of disposable diagnostic reagents. Demand for diagnostic equipment has increased due to technological advances that enable increasingly sophisticated diagnostic tests to be performed in the physician’s office.

Non-Diagnostic Equipment. This product category includes all other equipment used in a medical practice such as aesthetic lasers, autoclaves, examination tables, medical scales, and furniture.

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Customers

The Physician Business primarily distributes products to office-based physicians who specialize in internal medicine, family practice, primary care, pediatrics, OB/GYN, and general practice. The Physician Business’ target market consists of approximately 520,000 physicians practicing at over 230,000 sites.

Customer pricing for each product is either negotiated directly with the physician or contracted through group purchasing organizations (“GPOs”). GPOs negotiate directly with medical product manufacturers and distributors on behalf of their members, establishing exclusive or multi-supplier relationships. Approximately 63%, 55%, and 52% of the Physician Business’ net sales during fiscal years 2005, 2004, and 2003, respectively, were sales to members of GPOs.

Competition

The Physician Business operates in a highly competitive industry where products sold and certain services rendered are readily available to customers from a number of different manufacturers, distributors, and suppliers. Competitors of the Physician Business are large, multinational, full-line distributors as well as many smaller regional and local distributors. The Physician Business’ principal competitors are national distributors including the General Medical operating division of McKesson Corporation, the Caligor operating division of Henry Schein, Inc., and the Allegiance operating division of Cardinal Health, Inc.

THE ELDER CARE BUSINESS

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 based on revenues, number of nursing home and national chain customers, number of sales representatives, and number of customer service agents. The Elder Care Business also provides Medicare Part B reimbursable products and billing services, either on a fee-for-service or a full assignment basis. The Elder Care Business primarily serves the nursing home and homecare industries with limited penetration into the assisted living market segment. The nursing home industry refers to customers that operate skilled nursing facilities in the United States and can be divided into three segments: national chains, regional groups, and independent operators. The homecare industry refers to providers (companies, agencies, and care givers) of medical services, medical supplies, and equipment to patients in a home or residence setting.

Distribution Infrastructure

The Elder Care Business services customers throughout the United States through a distribution network consisting of 14 full-service distribution centers, 5 break-freight locations, 2 ancillary billing service centers, and 100 delivery vehicles at April 1, 2005. The operations of a full-service distribution center include sales support and general warehousing functions such as inventory management, warehouse management, and product delivery directly to customers on a daily basis. Accounts receivable collections, cash application, and procurement of inventory are centralized in Jacksonville, Florida and customer order processing, customer billing, and customer service is centralized in Ridgeland, Mississippi. Full-service distribution centers receive inventory directly from manufacturers and distribute product to customers and break-freight locations. The operations of the break-freight locations include sales support and product delivery. Break-freight locations receive inventory from full-service distribution centers and distribute product directly to customers on a daily basis. In order to meet the rapid delivery requirements of our customers, product is delivered using either the Company’s fleet of leased delivery vehicles or third party common carriers. Coupled with a team of approximately 140 sales professionals and GSOnline, an automated customer Internet platform, the Elder Care Business provides consistent and reliable service to customers ranging from independent nursing homes to large national chains, as well as providers of home healthcare, sub-acute, rehabilitation, and transitional care.

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Products

The Elder Care Business distributes over 22,000 medical and related products consisting of medical supplies, incontinent supplies and personal care items, enteral feeding supplies, home medical equipment, and other supplies required by the long-term care patient.

Medical Supplies. This product category includes wound care supplies, needles and syringes, gauze, sutures, various types of examination gloves, urological supplies, and blood and urine testing supplies and test kits. The Elder Care Business offers a broad array of branded products from numerous manufacturers as well as its own private-label product line. The Elder Care Business is also currently in the process of re-branding its private label product line from GS Select to Select Medical Products.

Incontinent Supplies and Personal Care Items. This product category includes adult diapers and underpads, as well as soaps and shampoos, personal hygiene items, various other paper products, and bedside utensils.

Enteral Feeding Supplies. This product category includes nutritional supplements, pump sets, and intravenous tubing and solutions.

Home Medical Equipment. This product category includes hospital beds, patient-lifts, wheel chairs, oxygen-concentrators, walkers, patient aids, and bath safety products.

Other. This product category includes medical instruments, oxygen supplies, tracheotomy, housekeeping supplies, medical instruments, respiratory and ostomy supplies, and over-the-counter pharmaceuticals.

Services

The Elder Care Business provides Medicare Part B billing services, either on a fee for service or a full assignment basis.

Customers

The Elder Care Business distributes to independent, regional, and national nursing home facilities, home health agencies, assisted living centers, hospices, and home medical equipment dealers. The Elder Care Business has a number of large, national chain customers, which have experienced significant financial pressure since the advent of the Prospective Payment System in 1998. Approximately 21%, 24%, and 30% of the Elder Care Business’ net sales for fiscal years 2005, 2004, and 2003, respectively, represent sales to its largest five customers.

Competition

The Elder Care Business operates in a highly competitive industry where products sold and certain services rendered are readily available to customers from a number of different manufacturers, distributors, and suppliers. Competitors of the Elder Care Business are large, national, or multinational distributors as well as many smaller national, regional, and local distributors. The Elder Care Business’ principal competitors are national distributors including the Redline operating division of McKesson Corporation; Medline, a national independent distributor; the Allegiance operating division of Cardinal Health, Inc.; and many independent, local, and regional distributors.

CORPORATE SHARED SERVICES

The Company continues to expand and enhance the use of a shared services model to drive productivity gains and cost savings. Corporate Shared Services is a concentration of Company resources performing functions across the organization with a common goal of providing lower operating costs and higher service levels. Corporate Shared Services includes: accounting and finance; information technology development, infrastructure, and support; operations management; global sourcing; regulatory compliance; human resources and payroll administration; Center for Career Development; and procurement of inventory and non-inventory products and services. Corporate Shared Services developed a comprehensive three-year strategic plan focused on maximizing the effectiveness and

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efficiency of the functional processes supporting the two operating segments. Costs incurred by Corporate Shared Services are allocated to the two operating segments.

VENDOR RELATIONSHIPS

The Company pursues the opportunity to market and sell medical equipment and supplies through unique and exclusive marketing arrangements. Manufacturers of medical diagnostic equipment and supplies typically offer distribution rights only to a select group of distributors and seek to optimize the number of distributors selling their products to end users in an effort to reduce the cost associated with marketing and field sales support. The Company has been successful in obtaining unique or exclusive arrangements to sell certain products.

Vendor relationships are an integral part of the Company’s businesses. Marketing sales support, performance incentives, product literature, samples, demonstration units, training, marketing intelligence, distributor discounts and rebates, and new products are important strategies in developing and enhancing vendor relationships.

The Company improves profitability by purchasing certain medical supplies, pharmaceutical products, and equipment at the lowest available price through volume discounts, rebates, and product line consolidation. Vendor contracted pricing and terms are negotiated by the Company’s vendor relations group.

The Company pursues opportunities to improve margins through increasing sales of private label products, leveraging the buying power of products common to the Physician Business and Elder Care Business, and implementing process improvements with vendor partners. The Company continues to seek enhancements for its sourcing and vendor relationships to improve its market position.

GLOBAL SOURCING

During fiscal year 2005, the Company began implementing its global sourcing strategy, which will provide the necessary resources for managing the global product sourcing process, quality assurance and controls, and product availability in alignment with the operating segments and customer standards. During fiscal year 2005, a multi-disciplined Global Sourcing team was created, consisting of several functional experts in areas such as global sourcing, logistics, supply chain design and management, vendor relations, product management, and business analysis. In addition, relationships with manufacturers in China were established, regulatory and quality assurance processes were established, and the United States distribution infrastructure and logistics processes were built. During the fourth quarter of fiscal year 2005, the Company entered into a sourcing services agreement in which the Company has agreed to purchase certain medical and other products from Chinese suppliers and manufacturers. Management believes that its Global Sourcing team is developing adequate controls, procedures, and infrastructure to import products without supply interruptions, legal infringement issues, governmental compliance issues, and product quality deficiencies.

INFORMATION SYSTEMS

Core Enterprise Resource Planning Applications – JD Edwards XE®

The Company has invested in the development of state-of-the-art distribution platforms to improve its distribution capability, opportunities, and efficiencies. The Company is currently leveraging these platforms to capture additional benefits and return on its investment. The Physician and Elder Care Businesses operate the JD Edwards XE® platform (“JDE XE”) at all distribution centers. During fiscal year 2005, the Elder Care Business successfully implemented the advanced warehouse distribution module of JDE XE at 9 of its 14 distribution centers. During the first quarter of fiscal year 2006, the Elder Care Business successfully completed this implementation at the remaining distribution centers. The Elder Care Business will begin implementing the customer service module of JDE XE during fiscal year 2006. Management anticipates that the implementation of this module will be successfully completed during the fiscal year 2006.

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Supply Chain Management – i2 Demand Planner, Replenishment Planner, Demand Fulfillment

I2 Supply Chain Management (“SCM”) enables PSSI to strategize, plan, and execute the Company’s buy, move, store, fulfill, and service business processes across multiple locations to increase profitability. Specifically, i2 SCM assists the Company to (i) understand, predict, and manage customer demand collaboratively with channels and customers, (ii) profitably optimize supply to meet demand across multiple locations, (iii) communicate order delivery timing accurately to customers, and (iv) deliver customer orders at the lowest cost of fulfillment. Since the implementation of several i2 SCM products, the Company has been able to reduce inventory stocking levels, improve fill rates, increase inventory turnover, and increase cash provided by operating activities in distribution centers that were not involved in implementing the advanced warehouse module of JDE XE.

Customer/Sales Force Automation Systems

The Company’s Customer Relationship Management (“CRM”) systems create a seamless connection between customers, company distribution services, and vendor resources. Each of the operating segments of PSSI is developing and providing sales representatives and customers with the latest technology in CRM solutions.

The Physician Business’ laptop-based sales-force automation application, known as ICON, carries one year of customer buying history and accounts receivable detail, prices against complex GPO contracts, and transmits orders over a wireless network. The Physician Business’ internet portal, myPSS.com, launched during fiscal year 2001, provides its customers with a year of sales history, provides accounts receivable detail, and supports a number of purchasing methods. Approximately 82% of all orders in the Physician Business are electronic orders.

The Elder Care Business’ CRM systems include RepNet, GSOnline, AccuSCAN, FAST, and Budget Manager. These systems have significantly improved the availability of supply chain information analysis, speed, and consistency of service, allowing the Company to grow at more than two times the market growth rate. The Elder Care Business has been highly successful with these tools both with its sales force and its customer base. The Elder Care Business is the industry leader in eCommerce transactions with GSOnline and its business partnership with Direct Supply Systems, Inc. (“DSSI”). The DSSI network is the largest eBusiness network in the long-term care and assisted living industry. Approximately 69% of all orders in the Elder Care Business are electronic orders.

The Company is currently in the process of enhancing myPSS.com and GSOnline to a standardized, shared platform that will improve functionality and security without disruption to business operations. Management anticipates the implementation of this additional functionality will be completed during fiscal year 2006.

REGULATORY MATTERS

General

Federal, state, and local government agencies extensively regulate the distribution of medical devices and supplies and over-the-counter pharmaceutical products, as well as the distribution of prescription pharmaceutical products. Applicable Federal and state statutes and regulations require the Company to meet various standards relating to, among other things, licensure, personnel, maintenance of proper records, privacy of health information, maintenance and repair of equipment, and quality assurance programs.

The costs to the Company associated with complying with the various applicable Federal and state statutes and regulations, as they now exist and as they may be modified, could be material. Many Federal and state laws applicable to the Company are broadly worded and have not been interpreted by courts. They may be interpreted or applied by governmental authorities in a manner that differs from the Company’s interpretation and that could require the Company to make changes in its operating procedures. Allegations by a state or the Federal government that the Company has not complied with these laws could have a material adverse impact on the Company. If it is determined that the Company has not complied with these laws, or if the Company enters into settlement agreements to resolve allegations of non-compliance, the Company could be required to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses or its ability to participate in Medicare, Medicaid and other Federal and state healthcare programs. Any of the foregoing could have a material negative impact on the Company. The Company believes that the healthcare services industry will continue to be subject to

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extensive regulation at the Federal, state, and local levels and the Company has adequate compliance programs and controls to ensure compliance with the laws and regulations.

The Food, Drug and Cosmetic Act, Prescription Drug Marketing Act of 1987, Safe Medical Devices Act of 1990, Controlled Substances Act and Various State Regulations

The Company’s business is subject to regulation under the Federal Food, Drug and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the Safe Medical Devices Act of 1990, and state laws applicable to the manufacture, importation and distribution of medical devices and over-the-counter pharmaceutical products, as well as the distribution of prescription pharmaceutical products. In addition, the Company is subject to regulations issued by the Food and Drug Administration, the Drug Enforcement Administration, and comparable state agencies.

The Federal Food, Drug, and Cosmetic Act generally regulates the manufacture and importation of drugs and medical devices shipped via interstate commerce, including such matters as labeling, packaging, storage, and handling of such products. The Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug and Cosmetic Act, establishes certain requirements applicable to the wholesale distribution of prescription drugs, including the requirement that wholesale drug distributors be registered with the Secretary of Health and Human Services or be licensed in each state in which business is conducted in accordance with federally established guidelines on storage, handling, and records maintenance. The Safe Medical Devices Act of 1990 imposes certain reporting requirements on distributors in the event of an incident involving serious illness, injury, or death caused by a medical device. The Company is also required to maintain licenses and permits for the distribution of pharmaceutical products and medical devices under the laws of the states in which it operates.

The Anti-Kickback Statute

Under Medicare, Medicaid, and other government-funded healthcare programs, Federal and state governments enforce a Federal law called the Anti-Kickback Statute. The Anti-Kickback Statute prohibits any person from offering, paying, soliciting or receiving anything of value to or from another person to induce the referral of business, including the sale or purchase of items or services covered by Medicare, Medicaid, or other federally subsidized programs. Many states also have similar anti-kickback statutes.

The Health Insurance Portability and Accountability Act of 1996

The Health Insurance Portability and Accountability Act of 1996 and its implementing regulations (collectively, “HIPAA”) establishes (1) national standards for some types of electronic health information transactions and the data elements used in those transactions, (2) standards to protect the privacy of individually identifiable health information, and (3) security standards to ensure the integrity and confidentiality of health information. Health plans, health care clearinghouses and most health care providers, including the Company, are Covered Entities subject to HIPAA.

Other Laws

The Company is subject to various additional Federal, state and local laws, regulations, and recommendations in the United States, relating to the safe working conditions and the sales, use and disposal of hazardous or potentially hazardous substances. In addition, U.S. and international import and export laws and regulations require that the Company abide by certain standards relating to the importation and exportation of finished goods, raw materials, and supplies. Furthermore, the Department of Transportation regulates the conveyance of regulated materials, both in Company-leased delivery vehicles and via common carrier.

Impact of Changes in Healthcare Legislation

Federal, state and foreign laws and regulations regarding the sale and distribution of medical devices and supplies, over-the-counter and prescription pharmaceutical products by the Company are subject to change. The Company cannot predict what impact, if any, such changes might have on its business. Any new legislation or regulations, or new interpretations of existing statutes and regulations, governing the manner in which the Company conducts its business could have a material adverse impact on the Company and could adversely affect its profitability.

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The extensive Federal and state laws and regulations described above apply not only to the Company, but also to the manufacturers which supply the products distributed by the Company and the Company’s physician and other healthcare customers. For instance, medical product and device manufacturers are subject to design, manufacturing, labeling, promotion and advertising standards imposed on, as well as registration and reporting requirements regarding, their facilities and products. Likewise, pharmaceutical manufacturers are subject to development, manufacturing and distribution regulation by the Food and Drug Administration, the Drug Enforcement Administration and other Federal, state and local authorities. Failure of a manufacturer to comply with these requirements, or changes in such requirements, could result in recalls, seizures, manufacturing suspensions or other interruptions in the production, supply, and sale of its products. Such interruptions may result in a material adverse impact on the Company’s business. Similarly, changes in the extensive regulations, or in their interpretation or enforcement, applicable to the Company’s customers could adversely impact the Company’s business in ways which are difficult for the Company to predict.

PROPRIETARY RIGHTS

The Company has registered with the United States Patent and Trademark Office the marks PSS WORLD MEDICAL (and Design), PSS, ANSWERS, and NIGHTINGALE, among others, and has applied to register the mark SELECT MEDICAL PRODUCTS (and Design). The Company believes that the PSS World Medical, Physician Sales & Service, and Gulf South Medical Supply names are well recognized in the medical supply industry and by healthcare providers and, therefore, are valuable assets of the Company.

EMPLOYEES

As of April 1, 2005, the Company employed 3,116 full-time and 53 part-time employees. The Company believes that ongoing employee training is critical to its success and, accordingly, invests significant resources in recruiting, training, and continuing professional development. The Company’s Online Source for Career Advancement and Retention (“OSCAR”) is an innovative, Internet-based, enterprise-wide learning management system that is designed to provide a comprehensive learning environment and in-depth training for every employee. OSCAR enables employees to gain product, regulatory, career advancement, industry, and distribution-process knowledge and training within a consistent and reliable educational forum. At April 1, 2005, there were over 100 online classes available to employees and since inception, employees have completed over 53,000 classes online. Management believes that relations with employees are good and the Company’s long-term success depends on good relations with its employees, including its sales professionals.

AVAILABLE INFORMATION

The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Any documents that have been filed with the SEC may be read and copied, at prescribed rates, at its Public Reference Room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These documents are also filed with the SEC electronically and are accessible on the SEC’s Internet website found at www.sec.gov. Copies of materials we file with the SEC may also be obtained from our Internet website found at www.pssworldmedical.com.

The Company also provides public access to its Code of Ethics, the Audit Committee charter, and the Corporate Governance Committee charter. The Code of Ethics and Corporate Governance Committee charter may be viewed free of charge on the Company’s web site www.pssworldmedical.com. The Audit Committee charter is an exhibit to the Company’s definitive proxy Statement and may be obtained by writing to: PSS World Medical, Inc., Investor Relations, 4345 Southpoint Blvd., Jacksonville, Florida 32216.

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Physician Business

At April 1, 2005, the Physician Business maintained 29 full-service distribution centers, 23 break-freight locations, and 2 redistribution facilities providing service to all 50 states. The Company leases all locations. The following tables identify the full-service distribution center and break-freight locations.

Elder Care Business

At April 1, 2005, the Elder Care Business maintained 14 full-service distribution centers, 5 break-freight locations, and 2 ancillary billing service centers providing service to all 50 states. The Company leases all locations. The following tables identify the full-service distribution center and break freight locations.

In the aggregate, the Company’s service center locations consist of approximately 2.3 million square feet of leased space. The lease agreements have expiration dates ranging from April 2005 to August 2011 and facilities ranging in size from approximately 1,000 square feet to 113,200 square feet.

The Company’s corporate office consists of approximately 103,000 square feet of leased office space located at 4345 Southpoint Boulevard, Jacksonville, Florida 32216. This lease expires in March 2014.

As of April 1, 2005, the Company’s facilities provided adequate space for the Company’s operations. Throughout the Company’s history of growth, the Company has been able to secure adequate facilities to meet its operating requirements.

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The Company and certain of its current and former officers and directors are named as defendants in a securities class action lawsuit entitled Jack Hirsch v. PSS World Medical, Inc., et al., Civil Action No. 3:98-CV 502-J-32TEM. The action, which was filed in May 1998, is pending in the United States District Court for the Middle District of Florida, Jacksonville Division. The plaintiff initially alleged, for himself and for a purported class of similarly situated stockholders who purchased the Company’s stock between December 23, 1997 and May 8, 1998 that the defendants engaged in violations of certain provisions of the Securities Exchange Act, and Rule 10b-5 promulgated thereunder. The allegations reference a decline in the Company’s stock price following an announcement by the Company in May 1998 regarding the Gulf South Medical Supply, Inc. merger, which resulted in earnings below analysts’ expectations. In December 2002, the Court granted the Company’s motion to dismiss the plaintiff’s second amended complaint with prejudice with respect to the Section 10(b) claims. The plaintiffs filed their third amended complaint in January 2003 alleging claims under Sections 14(a) and 20(a) of the Exchange Act on behalf of a putative class of all persons who were shareholders of the Company as of March 26, 1998. In May 2003, the Court denied the defendants’ motion to dismiss. By order dated February 18, 2004, the Court granted plaintiffs’ motion for class certification. Court ordered mediation occurred on June 10, 2004 and April 6, 2005, during which the parties were not able to resolve their dispute. The parties all served motions for summary judgment and motions in limine to strike the opposing experts on May 11, 2005. These motions are currently pending. The case is set for trial in November 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. An estimate of the potential range of loss is $1.0 million to $3.5 million.

On February 8, 2005, the Company settled a lawsuit pursuant to which the opposing parties agreed to pay the Company $2.6 million to resolve all claims and counterclaims. The settlement agreement received court approval. Accordingly, during fiscal year 2005, the Company recorded a $2.6 million gain, which was offset by approximately $1.9 million of legal and professional fees and expenses incurred during this same period. The Company previously recorded approximately $0.4 million in legal and professional fees and expenses from the inception of the case in July 2003 through April 2, 2004.

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.

No matters were submitted to a vote of shareholders during the quarter ended April 1, 2005.

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PART II

Market Information

Shares of the Company’s common stock are quoted on Nasdaq Stock Market, Inc.’s National Market (“NASDAQ”) under the ticker symbol “PSSI.” The following table presents, for the periods indicated, the range of high and low sale prices per share of the Company’s common stock as reported on NASDAQ.

Holders of Common Stock

As of June 13, 2005, there were approximately 1,601 holders of record of the Company’s common stock.

Cash Dividends

Since inception, the Company has neither declared nor paid cash dividends and intends to continue to retain earnings for the growth and development of the Company’s business. Accordingly, the Company does not anticipate that any cash dividends will be declared in the foreseeable future. The Company’s revolving line of credit agreement contains certain covenants that limit the amount of cash dividends that can be declared by the Company.

Rights Agreement

Pursuant to a Rights Agreement adopted in 1998, each outstanding share of the Company’s common stock carries with it a right to purchase one additional share at a price of $115 (subject to anti-dilution adjustments). The rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 15% or more of the common stock by a person or group (an “Acquiring Person”) or the commencement of a tender or exchange offer for 15% or more of the common stock.

In the event that an Acquiring Person acquires 15% or more of the common stock or commences a tender or exchange offer for 15% or more of the common stock, each right entitles the holder to purchase for the then current exercise price that number of shares of common stock having a market value of two times the exercise price, subject to certain exceptions. Similarly, if the Company is acquired in a merger or other business combination or 50% of more of the Company’s assets or earning power is sold, each right entitles the holder to purchase at the then current exercise price that number of shares of common stock of the surviving corporation having a market value of two times the exercise price. The rights, which do not entitle the holder thereof to vote or to receive dividends, expire on April 20, 2008 and may be terminated by the Company under certain circumstances.

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Equity Compensation Plan Information

The Company maintains several stock incentive plans (the “Plans”) for the benefit of employees, officers, and directors. The following table summarizes the potential dilution that could occur from past and future equity grants for all Plans.

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The selected financial data for fiscal years 2001 through 2005 have been derived from the Company’s consolidated financial statements, which give retroactive effect to the restatement of the Imaging Business as discontinued operations. The selected financial data below should be read in conjunction with the Company’s financial statements and the notes thereto and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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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 at twice the market growth rate in new and existing markets. The key components of the Company’s strategy include:

Develop and implement innovative customer solutions. The Company develops programs that focus on identified needs of its customers, including increasing practice cash flows, providing cost containment or reduction opportunities, and improving patient care.

The Physician Business utilizes the following programs to accomplish these objectives.

The Elder Care Business utilizes the following programs to accomplish these objectives.

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Leverage sales and marketing through relationships, products, and services. The Company believes that its sales professionals, which consists of approximately 840 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 seeks to establish unique distribution and marketing arrangements for selected products from leading medical product and technology manufacturers.

Be a center of operations excellence. The Company has made a significant investment in its distribution infrastructure, information systems, process reengineering, and training during the last three fiscal years. In order to maximize profitability and build a competitive edge in the market place, the Company will continue to focus on improving operations and distribution processes. During fiscal year 2003, the Physician Business initiated a rationalization program that redesigned its distribution network, reduced the number of full-service distribution centers, and centralized the inventory procurement process. As a result of the program, operating costs and working capital investments have been reduced while improving customer service levels, customer satisfaction, and operating margins. During fiscal year 2005, the Physician Business continued to leverage the infrastructure built during fiscal year 2003 and implemented various process improvements that have resulted in operating efficiencies and improved customer service levels.

During fiscal year 2002, the Elder Care Business completed the rationalization of its distribution infrastructure by reducing the number of full-service distribution centers from 26 to 13. During fiscal year 2003, the Elder Care Business focused on increasing operating efficiency to support current sales growth. During fiscal year 2004, the Elder Care Business began converting its Enterprise Resource Planning (“ERP”) system to JD Edwards XE^® platform (“JDE XE”), the same technology platform as the Physician Business. During the conversion, the advanced warehouse distribution module was implemented, which facilitated the management and tracking of customer orders and inventory. As of April 1, 2005, the Elder Care Business successfully implemented the advanced warehouse distribution module of JDE XE at 9 of its 14 distribution centers.

Be the employer of choice within the industry. The Company believes its sales force, management, and associates are its most valuable assets. Accordingly, the Company invests significant resources in recruiting, training, and continuing professional development. The Company has significantly improved benefits offered to employees, human resource competency, communications regarding the Company’s strategy, and training programs. As a result, employee knowledge and understanding of their benefits has increased as well as understanding of the Company’s mission and business strategies. As a result, the Company’s turnover of employees continues to decrease with an additional decrease of over 13% in calendar year 2004 compared to calendar year 2003 due to this emphasis on employee development and training.

Conduct business in a legal and ethical manner. The Company believes that every employee is responsible for both the integrity and consequences of their actions and is expected to follow the highest standards of honesty, fairness and obedience to the law. No employee is to undertake any business activity that is, or gives the appearance of being, improper, illegal or immoral. Over the last several years, the Company has improved its compliance programs by strengthening and broadenings providing health, safety, and regulatory education training programs for its employees.

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OPERATING HIGHLIGHTS AND TRENDS

The following tables set forth certain financial information by business segment for the past three fiscal years. Such financial information gives retroactive effect to the restatement of the Imaging Business (or “DI”) as discontinued operations. All dollar amounts presented below are in thousands unless otherwise indicated.

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RESULTS OF OPERATIONS

FISCAL YEAR ENDED APRIL 1, 2005 VERSUS FISCAL YEAR ENDED APRIL 2, 2004

NET SALES

The comparability of net sales year over year was impacted by the number of selling days in each fiscal year. Fiscal years 2005 and 2004 consisted of 253 and 258 selling days, respectively. Accordingly, although net sales increased 9.2% during fiscal year 2005, average daily net sales increased 11.3% during fiscal year 2005, as shown in the following table.

Physician Business

The increase in net sales is primarily attributable to (i) an increase in branded consumable product sales of approximately $41.4 million, (ii) an increase in pharmaceutical sales (excluding influenza vaccine sales) of approximately $37.0 million, (iii) an increase in equipment sales of approximately $13.3 million, and (iv) an increase in private label consumable product sales of approximately $8.7 million, offset by (i) a decrease in influenza vaccine sales of approximately $20.3 million and (ii) a decrease in immunoassay sales of approximately $2.8 million. Net sales continued to be positively impacted by utilizing the Advantage Club, Rx Extreme, and Can-Do revenue growth programs to increase sales of consumable products, pharmaceutical products, and equipment, respectively.

Net sales during the fiscal year ended April 1, 2005 were negatively impacted by Chiron Corporation’s (“Chiron”) inability to supply the Fluvirin® influenza vaccine to the U.S. market. Chiron was the Company’s primary supplier of the influenza vaccine and the Company anticipated approximately $44.0 million of influenza vaccine sales during fiscal year 2005. Actual influenza vaccine sales for the fiscal year ended April 1, 2005 were approximately $2.9 million compared to $23.2 million for the fiscal year ended April 2, 2004. Management has estimated that diluted earnings per share for the fiscal year ended April 1, 2005 was negatively impacted by approximately $0.04 due to the supply interruption of the Fluvirin® influenza vaccine.

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

Elder Care Business

The increase in net sales is primarily attributable to (i) an increase in sales to skilled nursing home facilities of approximately $27.4 million, (ii) an increase in sales to home care facilities of $11.3 million, and (iii) an increase in ancillary billing service fees of $6.1 million. The growth in net sales to skilled nursing home facilities primarily resulted from acquisitions, new customers, increased penetration in existing customer facilities, the introduction of new product lines as well as the continued implementation of the ANSWERS, ANSWERS Housekeeping, ANSWERS Home Medical Equipment, Partners in Efficiency, Fast Accurate Supply Technology, and AccuSCAN customer solution programs. This increase was offset by a decrease in net sales to national accounts and is primarily attributable to the loss of a national chain customer and other national chain customers divesting nursing home facilities. Nursing home divestitures may continue to impact net sales during fiscal year 2006 as large, national chain customers may continue to divest facilities located in states with high malpractice claims, high insurance costs, and litigation exposure. Furthermore, voluntary or involuntary changes in control of national chain customers may impact net sales in future periods where the acquirer of an existing customer may not have a previous relationship with the Company. Net sales during the fiscal year ended April 1, 2005 decreased approximately $9.2 million as a result of the loss of a national chain customer during fiscal year 2004.

Subsequent to year end, a national chain customer discontinued its medical supply contractual relationship, effective July 1, 2005. The trailing twelve months of net sales to this customer was approximately $27.0 million.

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

The customer segment sales mix has been impacted by management’s increased focus during fiscal years 2004 and 2005 on growing sales to independent and regional accounts and increasing the penetration into the home care market, a strategy to mitigate the impact of large, national chain customer divestitures.

Net sales year over year were also positively impacted by business combinations consummated during fiscal years 2004 and 2005. As a result of these business combinations, approximately $37.5 million of additional net sales were recognized during fiscal year 2005 compared to fiscal year 2004.

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GROSS PROFIT

Gross profit for the fiscal year ended April 1, 2005 totaled $423.4 million, an increase of $38.0 million, or 9.9%, from gross profit of $385.4 million for the fiscal year ended April 2, 2004. Gross profit as a percentage of net sales increased 20 basis points to 28.7% during the fiscal year ended April 1, 2005 from 28.5% during the fiscal year ended April 2, 2004.

Physician Business

Gross profit dollars increased primarily due to the growth in net sales discussed above as well as increased profitability generated by inventory procurement-to-pay process improvements. The Company believes its strategy of centralizing the procurement and disbursements functions has resulted, and will continue to result, in efficiencies and savings that will partially offset pricing declines. Gross profit as a percentage of net sales decreased approximately 30 basis points year over year as a result of change in sales mix (excluding influenza vaccine sales) offset by an increase in vendor incentives earned. Gross margin on pharmaceutical product sales is typically lower than the gross margin on consumable products. Gross profit as a percentage of net sales may decrease in future periods due to an expected increased sales volume of pharmaceutical products and diagnostic equipment. However, the Company’s global sourcing strategy is expected to improve its cost competitiveness and significantly increase its gross margins on certain products.

Elder Care Business

Gross profit dollars increased primarily due to the growth in net sales discussed above. Gross profit as a percentage of net sales increased approximately 110 basis points primarily due to replacing lower margin sales to larger accounts with higher margin sales to smaller accounts. In addition, ancillary billing service revenues have increased which typically generate higher gross profit margins. Furthermore, vendor incentives increased approximately $1.4 million year over year as a result of the revenue growth and changes in contract terms with vendors. Gross profit as a percentage of net sales may continue to increase in future periods as a result of net sales growth in ancillary billing services. In addition, the Company’s global sourcing strategy is expected to improve its cost competitiveness and significantly increase its gross margins on certain products.

GENERAL AND ADMINISTRATIVE EXPENSES

Physician Business

General and administrative expenses as a percentage of net sales decreased 120 basis points year over year. This percentage decrease is attributable to leveraging the net sales growth across various fixed costs and the Company’s focus on reducing its cost to deliver. Cost to deliver represents all costs associated with the transportation and delivery of products to customers. Cost to deliver as a percentage of net sales was 2.9% and 3.1% during the fiscal years 2005 and 2004, respectively. This percentage decrease is a result of a decrease in freight costs due to negotiated lower freight rates, route optimization of the Company’s fleet, and optimization of shipments between branches, offset by a significant increase in fuel costs. Management anticipates that rising fuel costs may continue to negatively impact the cost to deliver or expected improvements in cost to deliver during fiscal year 2006.

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Elder Care Business

General and administrative expenses as a percentage of net sales increased 120 basis points year over year. Cost to deliver as a percentage of net sales was 4.3% and 4.1% during the fiscal years 2005 and 2004, respectively. During fiscal year 2004, management focused on reducing the cost to deliver which resulted in a decrease in freight costs due to negotiated lower freight rates, but this decrease was exceeded by a significant increase in fuel costs. Management anticipates that rising fuel costs may continue to negatively impact the cost to deliver or expected improvements in cost to deliver during fiscal year 2006.

Changes in the other components of general and administrative expenses year over year are primarily related to the acquisition of an ancillary billing company during fiscal year 2004 and the acquisition of a long-term medical supply distributor during the three months ended December 31, 2004, including (i) increased salary expense of approximately $3.8 million due to additional employees as a result of these business combinations completed and (ii) increased amortization of intangible assets of approximately $1.3 million as a result of these business combinations. In addition, costs related to the implementation of the JDE XE were approximately $1.1 million during fiscal year 2005. These increases were offset by a decrease in bad debt expense of approximately $0.8 million, which was primarily a result of a decrease in specific allowances recorded for customers entering into bankruptcy during fiscal year 2005 compared to fiscal year 2004.

Corporate Shared Services

The increase in general and administrative expenses is primarily attributable to (i) an increase in accrued incentive compensation of approximately $4.7 million primarily related to the achievement of targets under the Shareholder Value Plan and short term incentive plans, (ii) the reversal of an operating tax charge reserve of approximately $1.4 million during the second quarter of fiscal year 2004, (iii) an increase in depreciation of approximately $1.7 million, (iv) an increase in salary expense of approximately $2.5 million due to the addition of executive level management as well as general wage increases, and (v) an increase in professional fees of approximately $2.3 million primarily related to costs incurred to comply with Section 404 of the Sarbanes-Oxley Act, offset by (i) a settlement for a lawsuit pursuant to which the opposing parties agreed to pay the Company $2.6 million to resolve all claims and counterclaims, (ii) a decrease in business insurance expense of approximately $1.5 million due to general rate decreases, and (iii) a decrease in the cost of the private data network of approximately $0.9 million as a result of reducing the number of service center locations and the conversion to a virtual private network for data transmission.

SELLING EXPENSES

Overall, the change in selling expenses is primarily attributable to an increase in commission expense due to the growth in net sales discussed above. Commissions are generally paid to sales representatives based on gross profit dollars and gross profit as a percentage of net sales.

Physician Business

Selling expenses as a percentage of net sales decreased approximately 30 basis points, which is primarily attributable to leveraging the net sales growth across certain fixed selling expenses. A portion of the decrease is also attributable to the change in the sales mix. Pharmaceutical product sales and equipment sales as a percentage of total sales increased year over year. Commission rates on pharmaceutical product and equipment sales are generally lower as these sales generate lower gross profit margins.

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Elder Care Business

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

INCOME FROM OPERATIONS

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

INTEREST EXPENSE

Interest expense for the fiscal year ended April 1, 2005 totaled $6.9 million, an increase of $1.3 million, or 23.3%, from interest expense of $5.6 million for the fiscal year ended April 2, 2004. Capitalized interest was approximately $0.4 million during fiscal year 2005 and was immaterial during fiscal year 2004. During fiscal year 2005, the Company’s debt structure consisted of the $150 million of 2.25% senior convertible notes and variable rate borrowings under its revolving line of credit agreement. During fiscal year 2004, the Company’s debt structure primarily consisted of the variable rate borrowings under its revolving line of credit agreement, as the Company issued the $150 million senior convertible notes on March 8, 2004, near the end of fiscal year 2004.

Interest expense and amortization of debt issuance costs related to the Company’s 2.25% convertible senior notes totaled approximately $4.4 million during fiscal year 2005 compared to $0.3 million during fiscal year 2004. Interest expense, debt issuance costs, and unused line fees related to the revolving line of credit totaled approximately $2.9 million during fiscal year 2005 compared to $5.3 million during fiscal year 2004.

The daily average outstanding borrowings under the revolving line of credit during fiscal years 2005 and 2004 were approximately $34.3 million and $101.2 million, respectively. The interest rate swap arrangement established an interest rate at 4.195% (consisting of a fixed interest rate of 2.195% and a credit spread of 2.00%) for a notional amount of $35 million for four months during fiscal year 2005 and twelve months during fiscal year 2004. In July 2004, the Company terminated $10 million in notional amount of the interest rate swap. The amended interest rate swap arrangement established an interest rate at 3.945% (consisting of a fixed interest rate of 2.195% and a credit spread of 1.75%) for a notional amount of $25 million for eight months of fiscal year 2005. Interest expense related to the interest rate swap was approximately $1.1 million and $1.5 million during fiscal years 2005 and 2004, respectively. Variable interest expense related to the daily average outstanding borrowings of $6.1 million (weighted average interest rate of 4.8%) during fiscal year 2005 was approximately $0.3 million. Variable interest expense related to the daily average outstanding borrowings of $66.2 million (weighted average interest rate of 3.9%) during fiscal year 2004 was approximately $2.6 million. Amortization of the debt issuance costs and fees on the unused portion of the line of credit were approximately $1.5 million and $1.2 million during fiscal years 2005 and 2004, respectively.

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OTHER INCOME

Other income for the fiscal year ended April 1, 2005 totaled $1.2 million, a decrease of $2.7 million from other income of $3.9 million for the fiscal year ended April 2, 2004. The decrease is primarily related to the $3.0 million of other income that was recorded as a result of the transition services agreement (“TSA”) associated with the sale of the Imaging Business. This agreement was terminated during fiscal year 2004.

PROVISION FOR INCOME TAXES

Provision for income taxes was $16.8 million for the fiscal year ended April 1, 2005, a decrease of $0.8 million from the provision for income taxes of $17.6 million for the fiscal year ended April 2, 2004. The effective income tax rate was approximately 29.9% and 38.0% for fiscal year 2005 and 2004, respectively. The decrease in the effective rate is primarily attributable to an Internal Revenue Service (“IRS”) Appeals settlement, described below, which resulted in a reduction in the provision for income taxes for fiscal year 2005 of approximately $5.6 million. The decrease in the effective rate was partially offset by an increase in permanent adjustments and an increase in annual income from continuing operations before provision for income taxes. The increase in permanent adjustments primarily relates to a decrease in the value of cash surrender value of company-owned life insurance policies.

During fiscal year 2002, the Company sold its International Business, which generated a capital loss carryforward. At the time of sale, management believed it was more likely than not that the Company would be unable to use the capital loss before its expiration in fiscal year 2007 and, accordingly, a valuation allowance was recorded. Also during fiscal year 2002, the IRS notified the Company that the Federal income tax returns for the fiscal years ended March 31, 2000 and March 30, 2001 would be examined. During the three months ended December 31, 2003, fieldwork was completed and the Company received the IRS’s report. The Company appealed certain audit findings, which primarily related to timing of tax deductions, with the Appeals Office of the IRS. Based on recent Tax Court rulings, the Company filed a refund claim with the IRS during the three months ended December 31, 2003, to report an ordinary worthless stock deduction on the sale of the International Business. The refund claim reflected a reclassification of the nondeductible capital loss to a tax-deductible ordinary loss.

During the three months ended December 31, 2004, the Company reached a settlement with the Appeals Office of the IRS regarding its audit findings for the fiscal years ended March 31, 2000 and March 30, 2001 and the refund claim. This settlement, which is subject to final review and approval by the Congressional Joint Committee on Taxation (“Joint Committee”), resulted in a reduction to the provision for income taxes of approximately $5.6 million. Management believes that the Joint Committee will approve the agreed-upon settlement with the Appeals Office of the IRS.

During the three months ended December 31, 2004, the IRS completed fieldwork on the audit of the Federal income tax returns for the fiscal years ended March 29, 2002 and March 28, 2003. The Company has appealed certain findings, which primarily related to timing of tax deductions, with the Appeals Office of the IRS. Management does not anticipate the results of the audit to have a material impact on the financial condition or consolidated results of operations of the Company.

TOTAL LOSS FROM DISCONTINUED OPERATIONS

The loss on disposal of discontinued operations of approximately $0.4 million recorded during the fiscal year ended April 1, 2005 represented (i) a true-up of management’s estimated net asset adjustment to the actual net asset adjustment as indicated in the arbitrator’s final ruling of $1.8 million and (ii) interest of $0.4 million, offset by (iii) a reversal of a tax reserve of approximately $1.0 million and (iv) a benefit for income taxes of $0.8 million.

The loss on disposal of discontinued operations of approximately $1.2 million, net of a benefit for income taxes of $0.7 million, recorded during the fiscal year ended April 2, 2004 represented legal and professional fees incurred related to the arbitration proceedings for the claimed purchase price adjustment that was settled during fiscal year 2005.

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The deferred tax asset that was recorded for the tax effect of the actual loss generated as a result of the sale of the Imaging Business was approximately $58.0 million at April 1, 2005. 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.

NET INCOME

Net income for the fiscal year ended April 1, 2005 totaled $39.0 million compared to net income of $27.5 million for the fiscal year ended April 2, 2004. Variances are due to the factors discussed above.

FISCAL YEAR ENDED APRIL 2, 2004 VERSUS FISCAL YEAR ENDED MARCH 28, 2003

NET SALES

The comparability of net sales year over year was impacted by the number of selling days in each fiscal year. Fiscal years ended April 2, 2004 and March 28, 2003 consisted of 258 and 253 selling days, respectively. Accordingly, although net sales increased 14.6% during fiscal year 2004, average daily net sales increased 12.4% during fiscal year 2004, as show in the following table.

Physician Business

The increase in net sales is primarily attributable to (i) an increase in branded consumable product sales of approximately $54.9 million, (ii) an increase in pharmaceutical product sales of approximately $46.7 million, of which approximately $13.2 million was attributable to increased seasonal flu vaccine sales, (iii) an increase in equipment sales of approximately $19.5 million, (iv) an increase in private label consumable product sales of approximately $9.5 million, offset by (v) a decrease in immunoassay sales of approximately $4.0 million. Net sales continued to be positively impacted by the Advantage Club, Rx Extreme and Can-Do revenue growth programs that were launched in June 2003 and focused on consumable products, pharmaceutical products, and equipment, respectively.

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

Elder Care Business

The increase in net sales is primarily attributable to (i) an increase in sales to home care facilities of $23.9 million, (ii) an increase in sales to nursing home facilities of approximately $17.5 million, (iii) an increase in ancillary billing service fees of $2.6 million, and (iv) an increase in sales to assisted living facilities of approximately $1.1 million. The growth in net sales to independent nursing home facilities primarily resulted from new customers, acquisitions, increased penetration in existing customer facilities, and the introduction of new product lines. The decrease in net sales to corporate accounts (national and regional nursing home facilities) is primarily attributable to national chain customers divesting nursing home facilities and the loss of a national chain customer. The overall net sales growth was achieved through the continued implementation of the innovative Elder Care customer specific solution programs such as ANSWERS, ANSWERS HK, ANSWERS HME, P.I.E., and F.A.S.T.

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

During fiscal year 2004, management’s focus was on growing independent and regional accounts to offset the impact of large, national chain customer divestitures. In addition, during fiscal year 2004, the Elder Care Business increased focus on the home care market by establishing a dedicated sales force to service home care customers and introducing a new home care marketing program.

Net sales year over year were also positively impacted by business combinations consummated during fiscal years 2004 and 2003. As a result of these business combinations, approximately $18.4 million of additional net sales were recognized during the fiscal year ended April 2, 2004 compared to the fiscal year ended March 28, 2003.

GROSS PROFIT

Gross profit for the fiscal year ended April 2, 2004 totaled $385.4 million, an increase of $49.4 million, or 14.7%, from gross profit of $336.0 million for the fiscal year ended March 28, 2003. Gross profit as a percentage of net sales remained relatively constant at 28.5% during fiscal years ended April 2, 2004 and March 28, 2003.

Physician Business