10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 29, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________

Commission File Number 0-23832

PSS WORLD MEDICAL, INC.

(Exact name of Registrant as specified in its charter)

Florida	59-2280364
(State or other jurisdiction	(IRS Employer
of incorporation or organization)	Identification Number)
4345 Southpoint Blvd.
Jacksonville, Florida	32216
(Address of principal executive offices)	(Zip code)
Registrant’s telephone number, including area code (904) 332-3000

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

x Yes o No

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

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

The number of shares of common stock, par value $0.01 per share, of the registrant outstanding as of August 6, 2007 was 67,340,323 shares.

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

JUNE 29, 2007

TABLE OF CONTENTS

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

2

CAUTIONARY STATEMENTS

Forward-Looking Statements

Management may from time-to-time make written or oral statements with respect to the Company’s annual or long-term goals, including statements contained in this Quarterly Report on Form 10-Q, the Annual Report on Form 10-K for the fiscal year ended March 30, 2007, Reports on Form 8-K, and reports to shareholders that are “forward-looking statements” within the meaning, and subject to the protections of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical earnings and those currently anticipated or projected. Management cautions readers not to place undue reliance on any of the Company’s forward-looking statements, which speak only as of the date made.

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

• Management’s belief that the ultimate outcome of the various legal and administrative proceedings and claims that have arisen in the normal course of business will not have a material adverse effect on the Company’s business, financial condition or results of operations;

• Management’s belief that the effective tax rate may fluctuate due to changes in the market return on underlying investments of company-owned life insurance policies;

• Management’s expectation that cash flows from operations will fund future working capital needs, capital expenditures, and, in conjunction with borrowings under the revolving line of credit, capital markets, and/or other financing arrangements, the overall growth in the business;

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

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

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

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

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

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, management is identifying important factors that could affect the Company’s financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements about the Company’s goals or expectations. The Company’s future results could be adversely affected by a variety of factors, including those discussed in Item 1A-Risk Factors in the Company’s 2007 Form 10-K. In addition, all forward-looking statements that are made by or attributable to the Company are qualified in their entirety by and should be read in conjunction with this cautionary notice and the risks described or referred to in Item 1A-Risk Factors of the Company’s 2007 Form 10-K. The Company has no obligation to and does not undertake to update, revise, or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements are made.

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PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 29, 2007 AND MARCH 30, 2007

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

ASSETS

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

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

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

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PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

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

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

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

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PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

(Dollars in Thousands)

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

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

6

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 29, 2007 AND JUNE 30, 2006

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

1. BACKGROUND AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been omitted pursuant to the SEC rules and regulations. The condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position and results of operations for the periods indicated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP and include the consolidated accounts of PSS World Medical, Inc. and its wholly owned subsidiaries as well as a variable interest entity for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated balance sheet as of March 30, 2007 has been derived from the Company’s audited consolidated financial statements for the fiscal year ended March 30, 2007. The financial statements and related notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended March 30, 2007.

The Company reports its year-end financial position, results of operations, and cash flows as of the Friday closest to March 31. Fiscal years 2008 and 2007 consist of 52 weeks or 253 selling days. The Company reports its quarter-end financial position, results of operations, and cash flows as of the Friday closest to month-end. The three months ended June 29, 2007 and June 30, 2006 each consisted of 64 selling days.

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

Reclassification

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

Recent Accounting Pronouncements

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

2. PURCHASE BUSINESS COMBINATIONS

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

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

Physician Business (Fiscal Year 2008)

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

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

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

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

3. EQUITY INVESTMENT

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

4. EARNINGS PER SHARE

Basic and diluted earnings per share are presented in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period adjusted for the potential dilutive effect of stock options and restricted stock using the treasury stock method and the potential impact of convertible senior notes. Common equivalent shares are excluded from the computation in periods in which they have an antidilutive effect.

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

		For the Three Months Ended
(in thousands)		June 29, 2007	June 30, 2006
Denominator-Weighted average shares outstanding used in computing
	basic earnings per common share	66,793	67,310
Assumed exercise of stock options (a)		690	1,028
Assumed vesting of restricted stock		142	113
Assumed conversion of 2.25% convertible senior notes		1,140	496
Denominator-Weighted average shares outstanding used in computing
	diluted earnings per common share	68,765	68,947
(a)	Options to purchase approximately 292 and 416 shares of common stock which were outstanding during the three months ended June 29, 2007 and June 30, 2006, respectively, were not included in the computation of diluted earnings per share for each of the respective periods because the options’ exercise prices exceeded the average fair market value of the Company’s common stock.

5. STOCK-BASED COMPENSATION

Effective April 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards, 123(Revised 2004), Share-Based Payment, (“SFAS 123(R)”). The Company elected to adopt the modified prospective method provided by SFAS 123(R). There was no impact to the Company’s statements of operations for outstanding stock options on April 1, 2006 as a result of adopting SFAS 123(R) because on June 7, 2004, the Compensation Committee of the Board of Directors approved an amendment to all outstanding stock options granted to employees. This amendment accelerated the vesting of all unvested stock options outstanding as of April 1, 2005, which was prior to the effective date of SFAS 123(R). The Company took this action to reduce compensation expense in future periods in light of SFAS 123(R).

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

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

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

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

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In addition to the 2006 Plan, the Company maintains the 2004 Non-Employee Directors Compensation Plan (the “2004 Directors Plan”), which permits the grant of restricted stock to the Company’s non-employee directors. Subject to adjustment as provided in the plan, the aggregate number of shares of common stock reserved and available for issuance pursuant to awards granted under the 2004 Directors Plan is approximately 0.4 million as of June 29, 2007.

The Company also has the following stock incentive plans under which new awards are no longer granted: 1999 Long-Term Incentive Plan, 1994 Long-Term Stock Plan, Amended and Restated Directors’ Stock Plan, 1997 Gulf South Medical Supply Plan, Amended and Restated 1994 Long-Term Incentive Plan, 1992 Gulf South Medical Supply Plan, and 1999 Broad-Based Employee Stock Plan. Awards outstanding under these plans may still vest and be exercised in accordance with their terms.

It is the Company’s policy to issue shares of common stock upon exercise of stock options or granting of restricted stock from those shares reserved for issuance under the stock incentive plans.

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

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

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

^(b) Amounts as of June 29, 2007 are included in shares of common stock issued and outstanding on the face of the balance sheet, but are not considered outstanding for accounting purposes under SFAS 123(R) until restrictions lapse.

Stock Option Awards

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

	Shares	Weighted Average Exercise Price	Weighted Average Contractual Term	Aggregate Intrinsic Value
Balance, March 30, 2007(a)	2,366	$10.30
Granted	--	--
Exercised	(30)	11.59
Cancelled	(2)	15.87
Balance, June 29, 2007(a)	2,334	$10.28	2.6	$19,569
(a) This balance represents stock options that are both outstanding and exercisable since the vesting of unvested stock options outstanding as of April 1, 2005 was accelerated on June 7, 2004.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price of $18.22 on the last trading day of the Company’s quarter end and the exercise price, multiplied by the number of outstanding stock options) that would have been received by the option holders had all option holders exercised their options on June 29, 2007. This amount changes over time based on changes in

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

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

Restricted Stock Awards

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

Time-Based Awards

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

Performance-Based Awards

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

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

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

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

	Performance-Based Awards				Time-Based Awards
	Performance Shares		PARS
	Units	Weighted Average Grant Date Fair Value	Shares	Weighted Average Grant Date Fair Value	Shares	Weighted Average Grant Date Fair Value
Balance, March 30, 2007	--	--	--	--	405	$16.96
Granted	99	$18.52	99	$18.52	22	--
Vested	--	--	--	--	--	--
Forfeited	--	--	--	--	(3)	--
Balance, June 29, 2007	99	$18.52	99	$18.52	424	$17.13

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6. SEGMENT INFORMATION

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

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

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

7. COMMITMENTS AND CONTINGENCIES

State of Florida Pedigree Compliance

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

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

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

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

Other Litigation

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

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

Purchase Commitments

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

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

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

Commitments and Other Contingencies

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

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

If the Physician Business or the Elder Care Business were to terminate a contract with a vendor of its Select Medical Products™ brand (“Select™”) for any reason, the Company may be required to purchase the remaining inventory of Select™ products from the vendor, provided that, in no event would the Company be required to purchase quantities of such products which exceed the aggregate amount of such products ordered by the Company in a negotiated time period immediately preceding the date of termination. As of June 29, 2007, the Company has not terminated a contract with a Select™ vendor which would require the Company to purchase the vendor’s remaining inventory.

8. INCOME TAXES

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

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

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

9. SUPPLEMENTAL CASH FLOW INFORMATION

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

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

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

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

THE COMPANY

PSS World Medical, Inc. (the “Company” or “PSSI”), a Florida corporation which began operations in 1983, is a national distributor of medical products, equipment, pharmaceutical related products, and healthcare information technology solutions to alternate-site healthcare providers including physician offices, long-term care and assisted living facilities, and home health care providers through 42 full-service distribution centers, which serve all 50 states throughout the United States. The Company currently conducts business through two operating segments, the Physician Business and the Elder Care Business. These strategic segments serve a diverse customer base.

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

EXECUTIVE OVERVIEW

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

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

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

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

Acquisition of Activus Healthcare Solutions, Inc.

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

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Investment in athenahealth, Inc.

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

Compliance with Florida Pedigree Laws

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

NET SALES

The following table summarizes net sales period over period.

	For the Three Months Ended
	June 29, 2007		June 30, 2006
(dollars in millions)	Amount	Average Daily Net Sales	Amount	Average Daily Net Sales	Percent Change
Physician Business	$306.2	$4.8	$284.4	$4.5	7.7%
Elder Care Business	132.7	2.1	128.7	2.0	3.1%
Total Company	$438.9	$6.9	$413.1	$6.5	6.2%

Physician Business

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

	For the Three Months Ended
(dollars in millions)	June 29, 2007	June 30, 2006	Percent Change
Consumable products:
Branded	$108.2	$101.2	6.9%
SelectM	33.0	27.1	21.7%
Lab Diagnostics	55.1	52.9	4.2%
Pharmaceuticals	67.4	55.1	22.4%
Equipment	33.7	38.9	(13.6)%
Immunoassay	6.9	7.8	(11.7)%
Other	1.9	1.4	36.7%
Total	$306.2	$284.4	7.7%

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

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Branded product sales during the three months ended June 29, 2007 continued to be positively impacted by the Company’s sales growth initiatives. Select™ product sales quarter over quarter 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 branded to Select™ products. In addition, pharmaceutical product sales continued to be positively impacted by the Rx Extreme revenue growth program.

Elder Care Business

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

	For the Three Months Ended
	June 29, 2007	June 30, 2006	Percent Change
Nursing home and assisted living facilities	$82.3	$  82.3	0.0%
Hospice and home health care agencies	35.2	32.3	8.9%
Billing services	3.1	3.0	2.9%
Other	12.1	11.1	9.1%
Total	$132.7	$128.7	3.1%

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

GROSS PROFIT

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

GENERAL AND ADMINISTRATIVE EXPENSES

	For the Three Months Ended
	June 29, 2007		June 30, 2006
(dollars in millions)	Amount	% of Net Sales	Amount	% of Net Sales	Increase
Physician Business(a)	$48.1	15.7%	$43.1	15.1%	$ 5.0
Elder Care Business(a)	26.9	20.3%	25.8	20.1%	1.1
Corporate Shared Services(b)	8.6	2.0%	4.8	1.1%	3.8
Total Company(b)	$83.6	19.0%	$73.7	17.8%	$ 9.9
(a)       General and administrative expenses as a percentage of net sales are calculated based on reportable segment net sales. (b)       General and administrative expenses as a percentage of net sales are calculated based on consolidated net sales.

Physician Business

General and administrative expenses as a percentage of net sales increased during the three months ended June 29, 2007, when compared to the same period in the prior year. This increase was primarily attributable to (i) additional costs of $1.3 million related to the Company’s national launch of its new Select^TM and healthcare information technology marketing programs, (ii) additional operating costs of $0.7 million related to the acquisition of Activus, (iii) $0.7 million increase in payroll costs, (iv) $0.5 million increase in bad debt expense, (v) $0.7 million increase in

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

Elder Care Business

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

Corporate Shared Services

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

SELLING EXPENSES

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

	For the Three Months Ended
	June 29, 2007		June 30, 2006
(dollars in millions)	Amount	% of Net Sales	Amount	% of Net Sales	Increase
Physician Business	$24.7	8.1%	$22.9	8.0%	$1.8
Elder Care Business	4.8	3.6%	4.6	3.6%	0.2
Total Company	$29.5	6.7%	$27.5	6.7%	$2.0

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

INTEREST EXPENSE

The Company’s debt structure consists of $150 million of 2.25% senior convertible notes, variable rate borrowings under its revolving line of credit (“LOC”) agreement, and a short-term note payable. The following table summarizes the various interest components of the Company’s debt structure:

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

There were no borrowings under the Company’s LOC during the three months ended June 29, 2007.

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PROVISION FOR INCOME TAXES

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

	For the Three Months Ended
	June 29, 2007		June 30, 2006
(dollars in millions)	Amount	Effective Rate	Amount	Effective Rate	Decrease
Total Company	$5.6	39.02%	$6.9	38.8%	$(1.3)

The increase in the effective rate period over period is primarily attributable to an unfavorable adjustment related to nondeductible accruals offset by a favorable adjustment due to the change in fair market value of the Company’s investments in company-owned life insurance policies used to fund certain deferred compensation plan liabilities. Gains and losses on the underlying investments within these policies are excluded from taxable income and treated as permanent adjustments in accordance with SFAS No. 109, Accounting for Income Taxes. The Company’s effective tax rate may continue to fluctuate due to changes in non-deductible accruals and the market return on the company-owned life insurance policies.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources Highlights

Cash flows from operations are primarily impacted by segment profitability and operational working capital. Management measures operational working capital cash flows by monitoring the following metrics:

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

 

^(a) Days sales outstanding (“DSO”) is average accounts receivable divided by average daily net sales. Average accounts receivable is the sum of accounts receivable, net of the allowance for doubtful accounts, at the beginning and end of the most recent four quarters divided by five. Average daily net sales are net sales for the most recent four quarters divided by 360.

^(b) Days on hand (“DOH”) is average inventory divided by average daily cost of goods sold (“COGS”). Average inventory is the sum of inventory at the beginning and end of the most recent four quarters divided by five. Average daily COGS is COGS for the most recent four quarters divided by 360.

^(c) Days in accounts payable (“DIP”) is average accounts payable divided by average daily COGS. Average accounts payable is the sum of accounts payable at the beginning and end of the most recent four quarters divided by five.

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

^(e) Inventory turnover is 360 divided by DOH.

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

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

Cash Flows From Operating Activities

The primary components of net cash provided by operating activities consist of net income, adjusted to reflect the effect of non-cash expenses, and changes in operational working capital. Net cash provided by operating activities during the three months ended June 29, 2007 was primarily the result of overall operating profits partially offset by investments in operational working capital of approximately $0.8 million.

Cash flows from operating activities during three months ended June 29, 2007 and June 30, 2006 include the Company’s utilization of $0.4 and $4.2 million (tax-effected), respectively, of net operating loss (“NOL”) carryforwards (primarily generated during fiscal year 2003 as a result of the disposition of the Imaging Business) to offset cash payments due for Federal and state tax liabilities based on estimated taxable income. As of June 29, 2007, the Company has $3.3 million (tax-effected) of state NOL carryforwards and expects to utilize a portion of these state NOL carryforwards during fiscal year 2008. Cash flows from operating activities were also impacted by cash payments made or refunds received for Federal and state taxes.

Cash Flows From Investing Activities

Net cash used in investing activities was $42.3 million and $5.2 million during the three months ended June 29, 2007 and June 30, 2006, respectively, and was primarily impacted by the following factors:

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

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

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

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

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

Cash Flows From Financing Activities

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

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

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

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

Capital Resources

The Company’s two primary sources of capital are the proceeds from the 2.25% convertible senior notes offering and the $200.0 million revolving line of credit, which may be increased to $250.0 million at the Company’s discretion. These instruments provide the financial resources to support the business strategies of customer service and revenue growth. The revolving line of credit, which is an asset-based agreement, is primarily collateralized by the Company’s accounts receivable and inventory. The Company’s long-term priorities for use of capital are internal growth, acquisitions, and repurchase of the Company’s common stock.

The 2.25% convertible senior notes may be converted into shares of the Company’s common stock prior to March 15, 2019, during any calendar quarter that the closing sale price of the Company’s common stock for at least 20 of the 30 consecutive trading days ending the day prior to such quarter is greater than 120% of the applicable conversion price of $17.10 per share (or $20.51 per share) (“Contingent Conversion Trigger”). The ability of note holders to convert is assessed on a quarterly basis. As of June 29, 2007, the fair value of the convertible senior notes was approximately $159.9 million and the value of the shares, if converted, was approximately $172.8 million.

At June 29, 2007, there were no outstanding borrowings under the revolving line of credit. After reducing the availability of borrowings for letter of credit commitments, the Company had sufficient assets based on eligible accounts receivable and inventories to borrow up to $200.0 million (excluding the additional increase of $50.0 million) under the revolving line of credit.

As the Company’s business grows, its cash and working capital requirements are expected to increase. The Company normally meets its operating requirements by maintaining appropriate levels of liquidity under its revolving line of credit and using cash flows from operating activities. The Company expects that the overall growth in the business will be funded through a combination of cash flows from operating activities, borrowings under the revolving line of credit, capital markets, and/or other financing arrangements. During the three months ended June 29, 2007, the Company has not entered into any material working capital commitments that require funding.

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

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APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

The Company‘s management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company‘s disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e) and 240.15d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based on the evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that, as of the evaluation date, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (“the Exchange Act”) and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is accumulated and communicated to the Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the three months ended June 29, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II--OTHER INFORMATION

ITEM 6. EXHIBITS

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

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

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

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jacksonville, State of Florida, on August 8, 2007.

	PSS WORLD MEDICAL, INC.
By:	/s/ David M. Bronson
	David M. Bronson Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

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EX-10

Execution Copy

STOCK PURCHASE AGREEMENT

STOCK PURCHASE AGREEMENT (this “Agreement”) dated as of June 29, 2007 (the “Closing Date”), by and among the selling stockholders identified in Schedule I hereto (the “Selling Stockholders”), PSS WORLD MEDICAL, INC. (“PSS”), a Florida corporation (the “Buyer”) and athenahealth, Inc. a Delaware corporation (the “Company”).

W I T N E S S E T H:

WHEREAS, the Selling Stockholders desire to sell to the Buyer and the Buyer desires to purchase from the Selling Stockholders, in the aggregate, 493,157 shares (the “Series C Shares”) of the Series C Convertible Preferred Stock, par value $0.01 per share of the Company (the “Series C Preferred Stock”);

WHEREAS, the Selling Stockholders desire to sell to the Buyer and the Buyer desires to purchase from the Selling Stockholders, in the aggregate, 862,164 shares (the “Series D Shares”) of the Series D Convertible Preferred Stock, par value $0.01 per share of the Company (the “Series D Preferred Stock”); and

WHEREAS, the Selling Stockholders desire to sell to the Buyer and the Buyer desires to purchase from the Selling Stockholders, in the aggregate, 115,268 shares (the “Series E Shares” and collectively with the Series C Shares and Series D Shares the “Preferred Shares”) of the Series E Convertible Preferred Stock, par value $0.01 per share of the Company (the “Series E Preferred Stock” and collectively with the Series C Preferred Stock and Series D Preferred Stock the “Preferred Stock”).

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

ARTICLE I - PURCHASE AND SALE

1.01               Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, on the Closing Date, the Selling Stockholders severally and not jointly shall sell to the Buyer, and the Buyer shall purchase from each Selling Stockholder that number of Series C Shares, Series D Shares and Series E Shares set forth opposite its name on Schedule I attached hereto for the purchase price set forth opposite its name on such schedule under the column heading “Aggregate Purchase Price to Selling Stockholder.” The price per share for each Preferred Share is $ 15.30 (the “Per Share Purchase Price”).

1.02               Closing. On the Closing Date and at the closing of the transactions contemplated hereby (the “Closing”) the following actions shall take place:

(a)               Each Selling Stockholder shall deliver or cause to be delivered to Buyer and the Company, as applicable (i) a certificate or certificates for the Preferred Shares duly endorsed or accompanied by irrevocable stock transfer powers substantially in the form attached

hereto as Exhibit A and (ii) such other instruments of transfer and documents as Buyer or the Company may reasonably request.

(b)              The Buyer shall deliver or cause to be delivered to the Selling Stockholders or the Company, as applicable (i) the amount set forth opposite such Selling Stockholder’s name under the heading “Aggregate Purchase Price to Selling Stockholder” as set forth on Schedule I attached hereto, by wire transfer of immediately available funds in accordance with the wire instructions set forth on Schedule I, (ii) an instrument of accession to that certain Second Amended and Restated Voting Agreement dated as of April 16, 2004 by and between the Company and the parties thereto, as amended, (the “Voting Agreement”) and that certain Second Amended and Restated Investor Rights Agreement dated as of April 16, 2004 by and between the Company and the parties thereto, as amended, (the “Investor Rights Agreement”) in substantially the form attached hereto as Exhibit B and (iii) such other documents as the Company or Selling Stockholders may reasonably request. Each Selling Stockholder will provide their wire transfer instructions in writing to the Buyer at least 24 hours before the Closing.

(c)              The Company, upon delivery by the Buyer to the Company of the items referenced in (b), shall promptly, and without further requirements on the Buyers, the Selling Stockholders or otherwise, issue to the Buyers certificates representing the Preferred Shares in the name of Buyer and in the amounts set forth opposite its name on Schedule II attached hereto.

(d)              The Company and the Buyer shall enter into a Board Observer Rights Agreement in the form attached hereto as Exhibit C.

(e)              The Buyer shall enter into a Lock-Up Agreement in the form attached hereto as Exhibit D with the managing underwriters of the Company’s proposed initial public offering (the “Underwriters”).

(f)              The Underwriters shall release the Selling Shareholders from lock-up agreements previously executed by them, to the extent required for the sale of the Preferred Shares hereunder.

(g)              The Buyer shall pay the expenses set forth in Section 5.10 hereof.

1.03               Closing Time. Theinitial purchase and sale of the Preferred Shares shall take place remotely via the exchange of documents and signatures, at 10:00 a.m., on June 29, 2007, or at such other time and place as the Company, the Selling Stockholders and Buyer mutually agree upon, orally or in writing. In the event there is more than one closing, the term “Closing” shall apply to each such closing unless otherwise specified.

ARTICLE II - REPRESENTATIONS AND WARRANTIES

OF THE SELLING STOCKHOLDERS

Each Selling Stockholder, severally and not jointly, represents and warrants to the Buyer and the Company that the statements contained in this Article II as to itself are correct and complete as of the date of this Agreement.

2.01              Title to and Validity of Shares. The Selling Stockholder has good and valid title to and has the power to sell the Preferred Shares, free and clear of any lien, pledge, security interest, options, charges, encumbrances or other claim or defect of title whatsoever (collectively, “Liens”) and, upon purchase and payment therefor and delivery to the Buyer thereof in accordance with the terms of this Agreement, the Buyer will obtain good and valid title to such Preferred Shares free and clear of any Lien or adverse claim other than any Liens contained in agreements between the Company and the Selling Shareholders entered into in connection with the purchase of the Preferred Shares .

2.02               Organization; Authority; Binding Agreement. The Selling Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. The Selling Stockholder has the legal power, right and authority to enter into and perform this Agreement, and to perform its obligations hereunder. The Selling Stockholder has received all authorizations and approvals required by law and under its charter and by-laws or other organizational documents to enter into this Agreement and to sell, transfer and deliver all of the Preferred Shares being sold by such Selling Stockholder hereunder and to comply with its other obligations hereunder. This Agreement has been duly executed and delivered and constitutes a valid, legal binding and enforceable agreement of such Selling Stockholder.

2.03               No Conflicts; No Further Consents, etc. Neither the execution, delivery and performance by the Selling Stockholder of this Agreement nor the consummation by such Selling Stockholder of the transactions contemplated hereby conflicts with such Selling Stockholder’s organizational documents, or any instrument, agreement, governmental authorization, or order to which the Preferred Shares are subject or by which such Selling Stockholder is a party or is bound [lockup waiver]. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the consummation by the Selling Stockholders of the transactions contemplated by this Agreement. No consent, approval or waiver is required under any instrument or agreement to which the Preferred Shares are subject or by which such Selling Stockholder is a party or is bound in connection with the consummation by the Selling Stockholder of the transactions contemplated by this Agreement. The Selling Stockholder has complied with, or conformed to, in all respects, the provisions of each instrument or agreement to which the Preferred Shares are subject or by which such Selling Stockholder is a party or is bound, in connection with the consummation of the transactions contemplated by this Agreement.[lockup waiver]

2.04               Release. There are no representations, warranties, agreements or undertakings of the Buyer with respect to the transactions contemplated by this Agreement other than those set forth in this Agreement. The Selling Stockholder acknowledges that it has performed its own analysis of the price at which it would agree to sell the Preferred Shares being sold by such Selling Stockholder and that the Company could effect at any time an initial public offering or sale which generates liquidity for its stockholders at valuations on a per share basis far in excess of the Original Per Share Purchase Price. Such Selling Stockholder hereby and forever fully releases and discharges the Buyer, the Company and its respective directors, officers, trustees, shareholders, employees, beneficiaries, attorneys, agents, representatives, partners, limited partners, investors, affiliates, successors and assigns (collectively, the “Buyer Released Parties” and the “Company Released Parties,” respectively) of and from any and all suits, demands, obligations, liabilities, claims and causes of action, contingent or otherwise, of every kind and

nature, at law and in equity, whether asserted, unasserted, absolute, contingent, known or unknown, which such Selling Stockholder or its directors, officers, trustees, shareholders, employees, beneficiaries, attorneys, agents, representatives, partners, limited partners, investors, affiliates, successors and/or assigns may have against the Buyer Released Parties or the Company Released Parties, or any of them, to the extent arising from the transactions contemplated by this Agreement, except for claims arising under, and subject to the limitations contained in, the express terms of this Agreement, including any inaccuracies in the representations and warranties of the Buyer set forth in this Agreement.

ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE BUYER

The Buyer represents and warrants to the Selling Stockholders and the Company that the statements contained in this Article III are true and complete as of the date of this Agreement.

3.01               Organization; Authority; Binding Agreement. Buyer is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Buyer has the legal power, right and authority to eater into and perform this Agreement, and to perform its obligations hereunder. Buyer has received all authorizations and approvals required by law and under its charter and by-laws or other organizational documents to enter into this Agreement and to purchase all of the Preferred Shares being acquired by Buyer hereunder and to comply with its other obligations hereunder. This Agreement has been duly executed and delivered and constitutes a valid, legal binding and enforceable agreement of Buyer.

3.02               No Conflicts; No Further Consent, etc. Neither the execution, delivery and performance by Buyer of this Agreement nor the consummation by Buyer of the transactions contemplated hereby conflicts with Buyer’s organizational documents, or any governmental authorization or order by which Buyer is a party or is bound. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the consummation by Buyer of the transactions contemplated by this Agreement.

3.03               Purchasing for Own Account. Buyer is acquiring the Preferred Shares being purchased by Buyer for investment purposes only and is not acquiring the Preferred Shares being purchased by Buyer with a view to, or for sale in connection with, the distribution of the Preferred Shares being purchased by Buyer within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).

3.04               Accredited Investor. Buyer is an accredited investor as such term is defined in Rule 501(a) of Regulation D under the Securities Act, and has reasonable access to, and has had sufficient opportunity to carefully review and analyze, all material information about the Company’s business, financial condition, operations and value that Buyer believes to be relevant to its purchase of the Preferred Shares. Buyer is sophisticated and experienced in evaluating the merits and risks involving an investment in the Company’s securities and the particulars of the purchase of the Preferred Shares. Buyer has the ability to bear the economic risks of its purchase of the Preferred Shares and has been able to obtain all information required in making an informed decision regarding its investment.

3.05               Release. There are no representations, warranties, agreements or undertakings of the Selling Stockholders with respect to the transactions contemplated by this Agreement other than those set forth in this Agreement. Buyer further represents and warrants that, in executing and delivering this Agreement, it has not relied on any statement or representation made by any legal counsel or investment advisor to or other agent of any Selling Stockholder. Buyer hereby and forever fully releases and discharges the Company Released Parties and the Selling Stockholders and their respective directors, officers, trustees, shareholders, employees, beneficiaries, attorneys, agents, representatives, partners, limited partners, investors, affiliates, successors and assigns (collectively, the “Seller Released Parties”) of and from any and all suits, demands, obligations, liabilities, claims and causes of action, contingent or otherwise, of every kind and nature, at law and in equity, whether asserted, unasserted, absolute, contingent, known or unknown, which Buyer or its directors, officers, trustees, shareholders, employees, beneficiaries, attorneys, agents, representatives, partners, limited partners, investors, affiliates, successors and/or assigns may have against the Seller Released Parties or the Company Released Parties, or any of them, to the extent arising from the transactions contemplated by this Agreement, except for claims arising under, and subject to the limitations contained in, the express terms of this Agreement, including any inaccuracies in the representations and warranties of the Selling Stockholders set forth in this Agreement.

3.06               Company Participation. Buyer acknowledges that (i) the offer and sale of the Preferred Shares have been made solely by the Selling Stockholders, and (ii) the Company is not participating in or recommending the sale and has made no representation or warranty (and has not authorized the Sellers to do so on behalf of the Company) regarding the Preferred Shares, or the business operations or future prospects of the Company.

ARTICLE IV - AGREEMENTS OF THE COMPANY,

SELLING STOCKHOLDERS AND THE BUYERS

4.01               Consent to Transaction; Transfer of Shares. The Company hereby irrevocably consents to the sale of the Preferred Shares as contemplated by this Agreement. The Company and each Selling Stockholder hereby irrevocably consents to the sale of the Preferred Shares as contemplated in this Agreement and, solely with respect to the sale of the Preferred Shares to Buyer, hereby waives any consents, notices or notice periods, rights of first offer, rights of first refusal and any other limitations upon the transfer of the Preferred Stock to Buyer contained in any agreement between the Company and any Selling Stockholder (other than this Agreement). Upon delivery to the Company of stock certificates representing the Preferred Shares duly enclosed or accompanied, by irrevocable stock transfer powers substantially in the form attached hereto as Exhibit A, the Company shall promptly, and without further requirements on the Buyer, the Selling Stockholders or otherwise, issue to the Buyer certificates representing the Preferred Shares in the name of Buyer and in the amounts set forth opposite its name on Schedule II attached hereto.

4.02 Change of Control Repurchase Right.

(a)               Grant. Buyer hereby unconditionally and irrevocably grants to the each Selling Stockholder the right to repurchase from Buyer all or a portion of the Seller Shares sold by such Selling Stockholder to Buyer pursuant to this Agreement, upon a Change of Control of

Buyer (as defined below) occurring at any time prior to the earlier of (i) December 31, 2010 or (ii) the consummation of the Company’s first underwritten public offering of its common stock (hereinafter, “Common Stock”) under the Securities Act (“IPO”) pursuant to provisions of this Section 4.02 (the “Change of Control Repurchase Right”).

(b)               Notice. The Buyer shall give notice of a Change of Control by mail, postage prepaid, to the Company and each Selling Stockholder as soon as is practicable prior to the closing of such Change of Control, but in any event no later than sixty (60) days prior to the closing date of the Change of Control (the “Change of Control Notice”). To exercise its Change of Control Repurchase Right under this Section 4.02, a Selling Stockholder must deliver to the Buyer and the Company written notice of its intention to exercise such repurchase right within thirty (30) days of receipt of the Change of Control Notice (the “Selling Stockholder Change of Control Repurchase Notice”).

(c)               Undersubscription. If options to repurchase the Seller Shares have been exercised by the Selling Stockholders with respect to some but not all of the Seller Shares by the end of the 30-day period specified in the last sentence of Section 4.02(b)) (the “Selling Stockholder Change of Control Notice Period”), then the Buyer shall, immediately after the expiration of the Selling Stockholder Change of Control Notice Period, send written notice (the “Change of Control Undersubscription Notice”) to the Company and those Selling Stockholders who fully exercised their Change of Control Repurchase Right within the Selling Stockholder Change of Control Notice Period (collectively, the “Change of Control Exercising Selling Stockholders”). Each Change of Control Exercising Selling Stockholder shall, subject to the provisions of this Section 4.02(c), have an additional option to purchase all or any part of the balance of any such remaining unsubscribed Seller Shares. To exercise such option, a Change of Control Exercising Selling Stockholder must deliver to the Buyer and the Company written notice of its intention to exercise its option to purchase all or any portion of the Seller Shares not purchased pursuant to Section 4.02(b) within ten (10) days after the expiration of the Selling Stockholder Change of Control Notice Period (the “Change of Control Undersubscription Selling Stockholder Notice Period”) . In the event there are two or more such Change of Control Exercising Selling Stockholders that choose to exercise the last-mentioned option for a total number of remaining shares in excess of the number available, the remaining shares available for purchase under this Section 4.02(a) shall be allocated to such Change of Control Exercising Selling Stockholders in manner mutually agreeable to such Change of Control Exercising Selling Stockholders. If the options to purchase the remaining shares are exercised in full by the Change of Control Exercising Selling Stockholders, the Buyer shall immediately notify all of the Change of Control Exercising Selling Stockholders and the Company of that fact.

(d)               Grant of Secondary Change of Control Repurchase Right to the Company. Buyer hereby unconditionally and irrevocably grants to the Company a secondary Change of Control Repurchase Right to purchase all or any portion of the Seller Shares not purchased by the Selling Stockholders pursuant their Change of Control Repurchase Right, as provided in Section 4.02(b) and Section 4.02(c) above. To exercise its Change of Control Repurchase Right under this Section 4.02, the Company must deliver written notice of its intention to exercise such repurchase right within ten (10) days of the expiration of the Change of Control Undersubscription Selling Stockholder Notice Period. If the option to purchase the remaining

shares are exercised in full by the Company, the Company shall immediately notify all Buyer and the Change of Control Exercising Selling Stockholders of that fact.

(e)               Consideration; Closing. The closing of the repurchase and/or purchase of the Seller Shares by the Selling Stockholders and the Company, respectively, as the case may be, shall take place, and all payments from the Selling Stockholders and the Company, as applicable, shall have been delivered to the Buyer, immediately prior to, and contingent upon, the consummation of the Change of Control. The consideration to be paid for the Seller Shares shall be the Fair Market Value (as defined below) of the Seller Shares at the time of the Change of Control. Immediately prior to, and contingent upon, the consummation of such Change of Control, the Buyer shall promptly surrender to the Selling Stockholders and the Company, as applicable, free and clear of any liens or encumbrances, any certificates representing the Seller Shares being repurchased or purchased, together with a duly executed stock power for the transfer of such Seller Shares to the Selling Stockholders or the Company.

(f) Definitions.

(i)               “Capital Stock” means (a) shares of Common Stock and Preferred Stock (whether now outstanding or hereafter issued in any context), (b) shares of Common Stock issued or issuable upon conversion of Preferred Stock and (c) shares of Common Stock issued or issuable upon exercise or conversion, as applicable, of stock options, warrants or other convertible securities of the Company.

(ii)               “Change of Control” means the consummation of (1) the dissolution or liquidation of the Buyer, (2) the sale of all or substantially all of the assets of the Buyer on a consolidated basis to an unrelated person or entity, (3) a merger, reorganization or consolidation in which the outstanding shares of Stock are converted into or exchanged for securities of the successor entity and the holders of the Buyer’s outstanding voting power immediately prior to such transaction do not own at least a majority of the outstanding voting power of the successor entity immediately upon completion of such transaction, (4) the sale of all or a majority of the Stock of the Buyer to an unrelated person or entity in a single transaction or a series of related transactions, or (5) any other transaction or series of related transactions in which the holders of the Buyer’s outstanding voting power immediately prior to such transaction do not own at least a majority of the outstanding voting power of the Buyer or a successor entity immediately upon completion of the transaction. Notwithstanding the foregoing, a transaction described in this paragraph shall constitute a Change of Control if, and only if the entity acquiring control of the Buyer as a result of the transaction is a Company Competitor (as defined below).

(iii)               “Company Competitor” means a business, firm or entity that (i) is, at the time of the Change of Control, listed in the KLAS Enterprises LLC vendor directory, found at http://www.healthcomputing.com/vendordirectory/ , (or any successor directory) as a vendor of software or services to the healthcare industry within one or more the following market segments: ambulatory billing and scheduling, ambulatory EMR, ambulatory specialty, claims management, outsourced billing and revenue cycle transformation; and (ii) had sales of such software or services in excess of $300,000,000

for the fiscal year ending immediately prior to the determination of whether such entity is a Company Competitor.

(iv)                Fair Market Value” shall be the fair market value thereof, as collectively determined in good faith by the Buyer, the Change of Control Exercising Selling Stockholders and/or the Company, as applicable. If such parties are unable to agree on the value of the Seller Shares, they shall collectively and unanimously select an independent nationally recognized investment banking firm (the “Appraiser”) to determine the Fair Market Value of the Seller Shares and the determination of such investment banking firm shall be binding upon the parties. In the event the parties are unable collectively and unanimously select an investment banking firm, each party shall each select its own nationally-recognized investment banking firm and such firms shall select a nationally-recognized investment banking firm to determine the value of the Seller Shares and the determination of this investment banking firm (the “Alternate Appraiser”) shall be binding upon the parties hereto. The Buyer, the Change of Control Exercising Selling Stockholders and/or the Company, as applicable, shall each bear their own costs and expenses with respect to the investment banking appraisal process described above; provided that, all fees incurred in connection with use of the Appraiser or the Alternate Appraiser in accordance with the foregoing, shall be evenly split among the Buyer, the Change of Control Exercising Selling Stockholders and/or the Company, as applicable. Notwithstanding anything to the contrary contained herein, the method of valuation of securities subject to investment letters or other similar restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate) shall take into account an appropriate discount from the market value as determined pursuant to clause (1) above so as to reflect the approximate fair market value thereof.

4.03. Company’s Right of First Refusal.

(a)               Grant. Buyer hereby unconditionally and irrevocably grants to the Company a Right of First Refusal to purchase all or any portion of Seller Shares that Buyer may propose to Transfer after December 31, 2010, at the same price and on the same terms and conditions as those offered to any person to whom Buyer proposes Transfer Seller Shares (the “Prospective Transferee”). Notwithstanding the foregoing, the Company’s Right of First Refusal in this Section 4.03 shall not apply to transfers made by Buyer pursuant to the repurchase rights set forth in Section 4.02 and shall terminate upon the consummation of the IPO.

(b)               Notice. Buyer must deliver a written notice to the Company not later than forty-five (45) days prior to the consummation of such proposed Transfer (the “Proposed Transfer Notice”). Such Proposed Transfer Notice shall contain the material terms and conditions (including price and form of consideration) of the proposed Transfer and the identity of the Prospective Transferee. To exercise its Right of First Refusal under this Section 4.03, the Company must deliver written notice to Buyer of the Company’s intention to exercise its Rights of First Refusal with respect to some or all of the Seller Shares (the “Company Right of First Refusal Notice”) within fifteen (15) days after delivery of the Proposed Transfer Notice. In the event of a conflict between this Agreement and any other agreement that may have been entered into by Buyer with the Company that contains a preexisting right of first refusal, the Company

and Buyer acknowledge and agree that the terms of this Agreement shall control and the preexisting right of first refusal shall be deemed satisfied by compliance with Section 4.03(a) and this Section 4.03 (b).

(c)               Consideration; Closing. If the consideration proposed to be paid for the Seller Shares is in property, services or other non-cash consideration, the fair market value of the consideration shall be as determined in accordance with the provisions of Section 4.02(f)(iii). If the Company cannot for any reason pay for the Seller Shares in the same form of non-cash consideration, the Company may pay the cash value equivalent thereof, as determined in good faith by the Board of Directors and as set forth in the Company Right of Refusal Notice. The closing of the purchase of Seller Shares by the Company shall take place, and all payments from the Company shall have been delivered to Buyer, by the later of (i) the date specified in the Proposed Transfer Notice as the intended date of the proposed Transfer and (ii) forty-five (45) days after delivery of the Proposed Transfer Notice. If any proposed sale or transfer by the Buyer (or its Affiliate) is not consummated within 45 days after receipt by the Company of the initial notice thereof, the Buyer (or its Affiliate) may not sell or transfer any Seller Shares unless it complies in full with each provision of this Section 4.03. Any Seller Shares purchased by such proposed transferee shall be deemed held by an Affiliate of the Buyer and accordingly shall remain subject to the terms of this Agreement. Any Seller Shares not sold to the proposed transferee shall remain subject to this Agreement.

(d)              Termination. The covenants set forth in Section 4.03 shall terminate and be of no further force or effect immediately before the consummation of the IPO.

4.04.               Standstill. Buyer shall not purchase any securities of the Company prior to December 31, 2010, to the extent that after giving effect to such purchase, Buyer (together with such Buyer’s Affiliates, and any other person or entity acting as a group together with Buyer or any of such Buyer’s Affiliates), would beneficially own in excess of 14.99% of the number of shares of the Common Stock on an as-converted basis outstanding immediately after giving effect to such purchase. For purposes of this Section 4.04, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. For purposes of this Section 4.04, in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of Buyer, the Company shall within three trading days confirm orally and in writing to Buyer the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, by Buyer or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. This Section 4.04 shall terminate and be of no further force and effect immediately upon the earlier of (i) January 1, 2011, (ii) the first public announcement by an unaffiliated third party of the Buyer (or group of such parties constituting a “group” for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934) of its intention to purchase a majority of the Capital Stock of the Company, or (iii) an unaffiliated third party of the Buyer (or group of such parties constituting a “group” for purposes of Section 13(d)(3) of the Securities

Exchange Act of 1934) acquiring more than 14.99% of the outstanding Capital Stock of the Company.

4.05.               Prohibited Stock Purchase Offer. Prior to the IPO, Buyer shall not offer to purchase shares of the company’s Capital Stock from any stockholder without the prior written consent of the Company’s Board of Directors.

4.06.               Lock Up. Buyer hereby agrees that upon the request of the Company in connection with a proposed initial public offering of the Company’s stock, it will execute and deliver to the managing underwriters of such initial public offering a lock-up agreement substantially in the form of Exhibit D attached hereto.

4.07.               Stop Transfer Instructions. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the shares of Capital Stock of Buyer (and transferees and assignees thereof) until the end of such restricted period.

4.08               Conversion of Preferred Stock. In the event of the Company’s IPO (as defined above), the Buyer shall voluntarily convert (or if requested by the Company consent to having such shares automatically convert) into shares of the Company’s Common Stock, in any such case, effective as of the closing of the IPO and as further provided in the Company’s certificate of incorporation, provided that any such conversion or vote may be contingent upon the conversion of all other shares of the Company’s Preferred Stock into shares of Common Stock.

ARTICLE V - MISCELLANEOUS

5.01.               Notices. All notices and other communications to any party hereunder shall be in writing and shall be given at the address listed below such party’s name on the signature page hereto.

5.02.               No Waivers. No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

5.03.               Governing Law; Venue. This Agreement shall be construed in accordance with the General Corporation Law of the State of Delaware as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts, without regard to its principles of conflicts of law provisions.

5.04.               Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other parties hereto.

5.05.               Entire Agreement. This Agreement constitutes the entire agreement between the Seller and the Buyer with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between any of such parties with respect to the subject matter hereof. And other agreements delivered pursuant.

5.06.               Successors and Assigns; Third Parties. No party to this Agreement shall convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the express written consent of the other parties hereto. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and there respective successors and permitted assigns. Subject to the immediately preceding sentence and except as provided in Section 4.07, this Agreement is not intended to benefit, and shall not run to the benefit of or be enforceable by, any other person or entity other than the parties hereto and their permitted successors and assigns.

5.07.               Legend. Each certificate representing shares of Transfer Stock held by Buyer or issued to any permitted transferee in connection with a transfer permitted by Section 4.03 hereof shall be endorsed with the following legend:

THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO, AND IN CERTAIN CASES PROHIBITED BY, THE TERMS AND CONDITIONS OF A CERTAIN STOCK PURCHASE AGREEMENT BY AND AMONG THE STOCKHOLDER, THE COMPANY AND CERTAIN OTHER HOLDERS OF STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.

Buyer agrees that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in this Section 5.07 above to enforce the provisions of this Agreement, and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement at the request of the holder.

5.08.               Amendments; Waivers. This Agreement may be modified or amended only by a written agreement signed by all parties. Provisions hereof may be waived by a party hereto only by an instrument signed by such party. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of such party of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder.

5.09.               Survival of Representations and Warranties. All representations and warranties shall survive the Closing and remain in full force and effect indefinitely.

5.10.               Expenses. The Buyer agrees to pay on demand (i) amounts owed to Goldman, Sachs & Co. as advisor to the Company in connection with this transaction, up to a maximum of $562,000 and (ii) a maximum of $30,000 of the other reasonable costs and expenses of the

Company and the Selling Stockholders, including reasonable legal fees and expenses, in connection with the preparation, execution and delivery of this Agreement, and other instruments and documents to be delivered hereunder, and in connection with the consummation of the transactions contemplated hereby and thereby. In connection with such payment, the Company shall provide to the Buyer, on request, detailed invoices setting forth the fees and expenses so incurred. For the avoidance of doubt, such fees and expenses shall not include any fees or expenses incurred by the Company in connection with the preparation or negotiation of the Marketing and Sales Agreement between the Buyer and the Company.

5.11.               Further Assurances. From and after the date of this Agreement, upon the request of any Buyer or the Company, the Company, the Seller, and the Buyers shall execute and deliver such instruments, documents and other writings as may be reasonably necessary or desirable to confirm, carry out and to effectuate fully the intent and purposes of this Agreement, the transactions contemplated in this Agreement and the sale and purchase of the Shares.

[Signature pages to follow]

IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement as of the date first written above.

COMPANY

ATHENAHEALTH, INC.

By:_______________________

Name:

Title:

BUYER

PSS WORLD MEDICAL, INC.

By:_______________________

Name:

Title:

[Signature Page to Stock Purchase Agreement]

SELLING STOCKHOLDERS

Cardinal Health Partners, L.P.

By: Cardinal Health Partners Management, LLC, its sole General Partner

By: ____________________

Name: Brandon H. Hull

Title: Managing Member

CHP II, L.P.

By: CHP II Management, LLC, its sole General Partner

By:_____________________

Name: Brandon H. Hull

Title: Managing Member

[Signature Page to Stock Purchase Agreement]

OAK INVESTMENT PARTNERS IX, L.P.

By: Oak Associates IX, L.L.C.

Its: General Partner

____________________________________

By:

Its:

OAK IX AFFILIATES FUND, L.P.

By: Oak IX Affiliates, L.L.C.

Its: General Partner

____________________________________

By:

Its:

OAK IX AFFILIATES FUND – A, L.P.

By: Oak IX Affiliates, L.L.C.

Its: General Partner

____________________________________

By:

Its:

[Signature Page to Stock Purchase Agreement]

Granite Global Ventures (Q.P.) L.P.

By Granite Global Ventures L.L.C., its General Partner

By: ____________________________

Name:

Managing Director

Granite Global Ventures L.P.

By Granite Global Ventures L.L.C., its General Partner

By: ____________________________

Name:

Managing Director

[Signature Page to Stock Purchase Agreement]

VENROCK ASSOCIATES

By:  its General Partner

VENROCK ASSOCIATES II, L.P.

By:  its General Partner

VENROCK ENTREPRENEURS FUND, L.P.

By:  its General Partner, Venrock Management, LLC

By: _________________________________

Bryan E. Roberts

General Partner or Member

[Signature Page to Stock Purchase Agreement]

EX-10

P E R F O R M AN C E – B A S E D

R E S T R I C T E D  S T O C K  U N I T  A G R E E M E N T

Non-transferable

GRANT TO

_________________

(“Grantee”)

by PSS World Medical, Inc. (the “Company”) of

[_______________]

Restricted Stock Units (the “Units”)

representing the right to earn, on a one-for-one basis, shares of the Company’s common stock, par value $0.01 per share (“Shares”), pursuant to and subject to the provisions of the PSS World Medical, Inc. 2006 Incentive Plan (the “Plan”) and to the terms and conditions set forth on the following page (the “Terms and Conditions”). By accepting the Units, Grantee shall be deemed to have agreed to the terms and conditions set forth in this Agreement and the Plan.

The target number of Shares subject to this award is ____________ (the “Target Award”). Depending on the Company’s level of attainment of specified targets for earnings per share for the fiscal year period ending ________, 201_, Grantee may earn up to 250% of the Target Award, in accordance with the matrices attached hereto as Exhibit A.

IN WITNESS WHEREOF, PSS World Medical, Inc., acting by and through its duly authorized officers, has caused this Agreement to be executed as of the Grant Date.

PSS WORLD MEDICAL, INC.

By:  ______________________

Its: Authorized Officer

Grant Date:  ______________

TERMS AND CONDITIONS

1.  Defined Terms. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan. In addition, for purposes of this Certificate, “Earnings Per Share” means earnings per diluted shares as determined by the Company in accordance with generally accepted accounting principles and reported on the year-end financial statements of the Company.

2.  Vesting of Units. The Units have been credited to a bookkeeping account on behalf of Grantee. The Units will be earned, vest and become non-forfeitable in whole, in part, or not at all, as provided on Exhibit A attached hereto, on the earliest to occur of the following (in any such case, the “Vesting Date”):

(a) ________, 201_, or

(b) the termination of Grantee’s employment from the Company or any Affiliate due to death or Disability, or

(c) the occurrence of a Change in Control , or

(d) any earlier date as may be set forth in an employment agreement, change in control agreement or similar agreement in effect from time to time between the Company or an Affiliate and Grantee (a “Grantee Employment Agreement”).

If Grantee’s employment terminates prior to the Vesting Date for any reason other than Grantee’s death or Disability or unless otherwise specified in Grantee’s Employment Agreement, if any, Grantee shall forfeit all right, title and interest in and to the Units as of the date of such termination and the Units will be reconveyed to the Company without further consideration or any act or action by Grantee. In addition, any Units that fail to vest in accordance with the terms of this Certificate will be forfeited and reconveyed to the Company without further consideration or any act or action by Grantee.

3.  Conversion to Shares. The Units that vest will be converted to actual Shares (one Share per vested Unit) as soon as practicable after _______, 201_, following the Committee’s certification of the Company’s achievement of the earnings per share goals for the fiscal year ending _______, 201_, as set forth on Exhibit A (the “Conversion Date”). Notwithstanding the foregoing, upon the occurrence of a Change in Control that meets the definition of a “change in control event” under 409A of the Code and applicable regulations thereunder, the conversion of the Units to Shares will occur as of the effective date of such Change in Control Shares will be registered on the books of the Company in Grantee’s name as of the Conversion Date and delivered to Grantee as soon as practical thereafter, in certificated or uncertificated form.

4.  Dividend Equivalents. No dividend equivalent rights shall attach to the SARs granted hereby.

5.  Restrictions on Transfer and Pledge. No right or interest of Grantee in the Units or in any Dividend Equivalents may be pledged, encumbered, or hypothecated or be made subject to any lien, obligation, or liability of Grantee to any other party other than the Company or an Affiliate. Neither the Units nor any accumulated Dividend Equivalents may be sold, assigned, transferred or otherwise disposed of by Grantee other than by will or the laws of descent and distribution.

6.  Limitation of Rights. The Units do not confer to Grantee or Grantee’s Beneficiary, executors or administrators any rights of a stockholder of the Company unless and until Shares are in fact issued to such person in connection with the Units. Nothing in this Certificate shall interfere with or limit in any way the right of the Company or any Affiliate to terminate Grantee’s employment at any time, nor confer upon Grantee any right to continue in employment of the Company or any Affiliate.

7.  Payment of Taxes. The Company or any Affiliate employing Grantee has the authority and the right to deduct or withhold, or require Grantee to remit to the employer, an amount sufficient to satisfy federal, state, and local taxes (including Grantee’s FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of the vesting or settlement of the Units or Dividend Equivalents. The withholding requirement may be satisfied, in whole or in part, at the election of the Company’s corporate secretary (the “Secretary”), by withholding from the settlement of the Units Shares having a fair market value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Secretary establishes. The obligations of the Company under this Certificate will be conditional on such payment or arrangements, and the Company, and, where applicable, its Affiliates will, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to Grantee.

8.  Restrictions on Issuance of Shares. If at any time the Committee shall determine in its discretion, that registration, listing or qualification of the Shares underlying the Units upon any securities exchange or similar self-regulatory organization or under any foreign, federal, or local law or practice, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the settlement of the Units, the Units will not be converted to Shares in whole or in part unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.

9.  Plan Controls. The terms contained in the Plan shall be and are hereby incorporated into and made a part of this Certificate and this Certificate shall be governed by and construed in accordance with the Plan. Without limiting the foregoing, the terms and conditions of the Units, including the number of shares and the class or series of capital stock which may be delivered upon settlement of the Units, are subject to adjustment as provided in Article 10 of the Plan. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Certificate, the provisions of the Plan shall be controlling and determinative. Any conflict between this Certificate and the terms of a written employment agreement with Grantee that has been approved, ratified or confirmed by the Board of Directors of the Company or the Committee shall be decided in favor of the provisions of such employment agreement.

10. Notice. Notices and communications hereunder must be in writing and either personally delivered or sent by registered or certified United States mail, return receipt requested, postage prepaid. Notices to the Company must be addressed to PSS World Medical, Inc., 4345 Southpoint Blvd, Suite 250, Jacksonville, FL 32216, Attn: Secretary, or any other address designated by the Company in a written notice to Grantee. Notices to Grantee will be directed to the address of Grantee then currently on file with the Company, or at any other address given by Grantee in a written notice to the Company.

EXHIBIT A

Except as set forth below in the case of an early vesting event, the Units will be earned and will become fully vested, in whole or in part, on _______, 201_, based on the Company’s attainment of earnings per share targets for the fiscal year ending ______, 201_, as follows:

Fiscal Year 201_ Earnings Per Share ($)	Percent of Target Award Earned and Vested*
	0%
	50%
	75%
	100%
	150%
	200%
	250%

* Payouts between performance levels will be determined based on straight line interpolation.

Early Vesting Events

Notwithstanding the foregoing, if prior to _____, 201_, Grantee’s employment is terminated by reason of his or her death or Disability, or if there occurs an earlier vesting event as specified in Grantee’s Employment Agreement, if any, then the Units will become fully vested and nonforfeitable as of the date of such event, but conversion of the Units to Shares will not occur until the normal Conversion Date, and will be based on actual performance through the Performance Period.

In addition, if prior to _____, 201_, a Change in Control of the Company occurs, then the Units will become fully vested and nonforfeitable, and the conversion of the Units to Shares will occur as of the effective date of such event, based on an assumed attainment of the earnings per share goal at “target” level.

EX-10

P E R F O R M AN C E – A C C E L E R A T E D

R E S T R I C T E D  S T O C K  A W A R D  A G R E E M E N T

Non-transferable

GRANT TO

_________________

(“Grantee”)

by PSS World Medical, Inc. (the “Company”) of

[_______________]

shares of its common stock, $0.01 par value (the “Shares”)

pursuant to and subject to the provisions of the PSS World Medical, Inc. 2006 Incentive Plan (the “Plan”) and to the terms and conditions set forth on the following page (the “Terms and Conditions”). By accepting the Shares, Grantee shall be deemed to have agreed to the terms and conditions set forth in this Agreement and the Plan.

The restrictions imposed under Section 2 of the Terms and Conditions will expire on the fifth anniversary of the Grant Date, provided, however, that such restrictions may lapse earlier based on the Company’s achievement of an earnings per share target for the fiscal year ending ______, 201_, or upon certain other events as set forth in Section 3 of the Terms and Conditions.

IN WITNESS WHEREOF, PSS World Medical, Inc., acting by and through its duly authorized officers, has caused this Agreement to be executed as of the Grant Date.

PSS WORLD MEDICAL, INC.

By:  _____________________________

Its: Authorized Officer

Grant Date:  _______________

TERMS AND CONDITIONS

1.  Grant of Shares. The Company hereby grants to the Grantee named on page 1 hereof (“Grantee”), subject to the restrictions and the other terms and conditions set forth in the Plan and in this award agreement (this “Agreement”), the number of shares indicated on page 1 hereof of the Company’s $0.01 par value common stock (the “Shares”). Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.

2.  Restrictions. The Shares are subject to each of the following restrictions. “Restricted Shares” mean those Shares that are subject to the restrictions imposed hereunder which restrictions have not then expired or terminated. Restricted Shares may not be sold, transferred, exchanged, assigned, pledged, hypothecated or otherwise encumbered. If Grantee’s employment with the Company or any subsidiary terminates for any reason other than as set forth in paragraph (b) of Section 3 hereof, then Grantee shall forfeit all of Grantee’s right, title and interest in and to the Restricted Shares as of the date of employment termination and such Restricted Shares shall revert to the Company immediately following the event of forfeiture. The restrictions imposed under this Section shall apply to all shares of the Company’s common stock or other securities issued with respect to Restricted Shares hereunder in connection with any merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure affecting the common stock of the Company.

3.  Expiration and Termination of Restrictions. The restrictions imposed under Section 2 will expire on the earliest to occur of the following (the period prior to such expiration being referred to herein as the “Restricted Period”):

(a) the fifth anniversary of the Grant Date; provided Grantee is then still employed by the Company or any subsidiary; or

(b) the third anniversary of the Grant Date; provided that the Company has achieved an earnings per diluted share target of $[______] for the fiscal year ending ______, 201_;

  (c) the termination of Grantee’s employment by reason of death or Disability;

 (d) the occurrence of a Change in Control; or

(e) any earlier date as may be set forth in an employment agreement, change in control agreement or similar agreement in effect from time to time between the Company or an Affiliate and Grantee.

4.  Delivery of Shares. The Shares will be registered in the name of Grantee as of the Grant Date and may be held by the Company during the Restricted Period in certificated or uncertificated form. If a certificate for Restricted Shares is issued during the Restricted Period with respect to such Shares, such certificate shall be registered in the name of Grantee and shall bear a legend in substantially the following form (in addition to any legend required under applicable state securities laws): “This certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture and restrictions against transfer) contained in a Restricted Stock Agreement between the registered owner of the shares represented hereby and PSS World Medical, Inc. Release from such terms and conditions shall be made only in accordance with the provisions of such Agreement, copies of which are on file in the offices of PSS World Medical, Inc.” Stock certificates for the Shares, without the first above legend, shall be delivered to Grantee or Grantee’s designee upon request of Grantee after the expiration of the Restricted Period, but delivery may be postponed for such period as may be required for the Company with reasonable diligence to comply if deemed advisable by the Company, with registration requirements under the 1933 Act, listing requirements under the rules of any stock exchange, and requirements under any other law or regulation applicable to the issuance or transfer of the Shares.

5.  Voting and Dividend Rights. Grantee, as beneficial owner of the Shares, shall have full voting and dividend rights with respect to the Shares during and after the Restricted Period. If Grantee forfeits any rights he may have under this Agreement, Grantee shall no longer have any rights as a stockholder with respect to the Restricted Shares or any interest therein and Grantee shall no longer be entitled to receive dividends on such stock. In the event that for any reason Grantee shall have received dividends upon such stock after such forfeiture, Grantee shall repay to the Company any amount equal to such dividends.

6.  Changes in Capital Structure. The provisions of the Plan shall apply in the case of a change in the capital structure of the Company.

7.  No Right of Continued Employment. Nothing in this Agreement shall interfere with or limit in any way the right of the Company or any subsidiary to terminate Grantee’s employment at any time, nor confer upon Grantee any right to continue employment.

8.  Payment of Taxes. Upon issuance of the Shares hereunder, Grantee may make an election under Section 83(b) of the Code to be taxed as of the Grant Date. Grantee will, no later than the date as of which any amount related to the Shares first becomes includable in Grantee’s gross income for federal income tax purposes, pay to the Company any federal, state and local taxes of any kind required by law to be withheld with respect to such amount. The obligations of the Company under this Agreement will be conditional on such payment or arrangements, and the Company, and, where applicable, its subsidiary will, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind (including Shares hereunder) otherwise due to Grantee..

9.  Amendment. The Committee may amend, modify or terminate this Agreement without approval of Grantee; provided, however, that such amendment, modification or termination shall not, without Grantee’s consent, reduce or diminish the value of this award determined as if it had been fully vested on the date of such amendment or termination.

10.  Plan Controls. The terms contained in the Plan are incorporated into and made a part of this Agreement and this Agreement shall be governed by and construed in accordance with the Plan. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall be controlling and determinative.

11.  Severability. If any one or more of the provisions contained in this Agreement is deemed to be invalid, illegal or unenforceable, the other provisions of this Agreement will be construed and enforced as if the invalid, illegal or unenforceable provision had never been included.

12.  Notice. Notices and communications under this Agreement must be in writing and either personally delivered or sent by registered or certified United States mail, return receipt requested, postage prepaid. Notices to the Company must be addressed to PSS World Medical, Inc., 4345 Southpoint Blvd, Suite 250, Jacksonville, FL 32216, Attn: Secretary, or any other address designated by the Company in a written notice to Grantee. Notices to Grantee will be directed to the address of Grantee then currently on file with the Company, or at any other address given by Grantee in a written notice to the Company.

EX-31

EXHIBIT31.1

CERTIFICATION

I, David A. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PSS World Medical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 8, 2007

David A. Smith

Chairman and Chief Executive Officer

EX-31

EXHIBIT31.2

CERTIFICATION

I, David M. Bronson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PSS World Medical, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 8, 2007

/s/ David M. Bronson

David M. Bronson

Executive Vice President and Chief Financial Officer

EX-32

Exhibit32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, David A. Smith, Chairman of the Board of Directors and Chief Executive Officer of PSS World Medical, Inc. (the “Company”), hereby certify that the Company’s Quarterly Report on Form 10-Q for the three months ended June 29, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David A. Smith

David A. Smith

Chairman and Chief Executive Officer

August 8, 2007

EX-32

Exhibit32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, David M. Bronson, Executive Vice President and Chief Financial Officer of PSS World Medical, Inc. (the “Company”), hereby certify that the Company’s Quarterly Report on Form 10-Q for the three months ended June 29, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David M. Bronson

David M. Bronson

Executive Vice President and Chief Financial Officer

August 8, 2007