The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of PSS World Medical, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company reports its year-end financial position, results of operations, and cash flows on the Friday closest to March 31. Fiscal years 2012 and 2011 each consisted of 52 weeks and 253 selling days and fiscal year 2010 consisted of 53 weeks or 258 selling days.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions 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. Significant items subject to such estimates and assumptions include the carrying amount of inventories, property and equipment, goodwill, and intangibles; allowances for doubtful accounts receivables, contractual billing adjustments and vendor rebate receivables; valuation allowances for deferred income taxes; liabilities for loss contingencies; incentive and stock-based compensation expense; and valuations associated with business combinations. Actual results could differ from the estimates and assumptions used in preparing the consolidated financial statements.

The carrying amounts of the Company's current financial instruments, including cash and cash equivalents, short-term trade receivables, and accounts payable, approximate their fair values due to the short-term nature of these assets and liabilities. The gross carrying value of the Company's 6.375% unsecured senior notes issued in 2012 as of March 30, 2012 was $250,000 and the fair value, estimated using a third party valuation model, was approximately $257,500. The gross carrying value of the Company's 3.125% senior convertible notes issued in 2008 as of March 30, 2012 and April 1, 2011 was $230,000 and the fair value, estimated using a third party valuation model, was approximately $302,174 and $323,800, respectively.

Cash and cash equivalents generally consist of demand deposits with financial institutions and highly liquid investment grade instruments having maturities of three months or less at the date of purchase. Cash and cash equivalents are stated at cost, which approximates market value.

Outstanding checks in excess of cash balances available for a legal right of offset are reclassified to Accounts payable on the Consolidated Balance Sheets. Amounts reclassified to accounts payable were $10,069 and $13,425 as of March 30, 2012 and April 1, 2011, respectively.

Trade accounts receivable consists of amounts owed to the Company and is stated net of allowances, which approximates fair value due to the short-term nature of the asset. The Company's outstanding accounts receivable balances are exposed to credit risk and valuation allowances are established for estimated losses resulting from non-collection of outstanding amounts due from customers. The valuation allowances include specific amounts for those accounts that are deemed likely to be uncollectible, such as disputed amounts and customers in bankruptcy, and general allowances for accounts that management currently believes to be collectible but that may later become uncollectible. Estimates are used to determine the valuation allowances and are generally based on historical collection results, current economic trends, credit-worthiness of customers, and changes in customer payment terms. Cash flows related to changes in accounts receivable balances are classified as operating activities within the Consolidated Statements of Cash Flows.

The Physician Business' trade accounts receivable consists of many individual accounts, none of which is individually significant to the Company. The Physician Business had allowances for doubtful accounts of approximately $3,167 and $2,934 as of March 30, 2012 and April 1, 2011, respectively. During fiscal years 2012, 2011, and 2010, bad debt expense was less than 1% of net sales.

The Extended Care Business' trade accounts receivable has a number of large customer accounts that are significant to its business. Approximately 16%, 16%, and 15%, of the Extended Care Business' net sales for the fiscal years ended March 30, 2012, April 1, 2011, and April 2, 2010, respectively, represent net sales to its largest five customers. As of March 30, 2012 and April 1, 2011, the outstanding accounts receivable balances of these customers represented approximately 10% of accounts receivable, net of allowance for doubtful accounts, respectively. The Extended Care Business had allowances for doubtful accounts of approximately $3,047 and $2,875 as of March 30, 2012 and April 1, 2011, respectively. During fiscal years 2012, 2011, and 2010, bad debt expense was less than 1% of net sales.

Over the past three years, the Company's average allowance for doubtful accounts has represented 2% of the Physician Business' gross accounts receivable balance, and 4% of the Extended Care business' gross accounts receivable balance.

The Company provides medical claim billing services on a fee-for-service or a full-assignment basis and records claims receivable due from insurance carriers. A claim may become uncollectible in full due to denial, or partially uncollectable due to discounts taken. Management estimates contractual billing adjustments based on historical collection experience, and also considers voided claims and claims written off. Contractual billing adjustments are recorded as a reduction to Net sales on the Consolidated Statements of Operations.

Inventories consist of medical products, medical equipment, and other related products and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. Market is defined as net realizable value. The net realizable value of excess and slow moving inventory is determined using judgment as to when inventory will be sold and the quantities and prices at which inventory will be sold in the normal course of business. Obsolete or damaged inventory is disposed of or written down to net realizable value on a quarterly basis. Additional adjustments, if necessary, are made based on management's specific review of inventory on-hand. Cash flows related to changes in inventory are classified as operating activities within the Consolidated Statements of Cash Flows.

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives of the respective classes of assets:

		Useful Life
Equipment		2 to 10 years
Computer hardware and software		3 to 15 years
Capitalized internal-use software costs		5 to 15 years

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Management is required to use judgment in determining the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Company's business model, changes in the Company's business strategy, or changes in the planned use of property and equipment could result in the actual useful lives differing from the Company's current estimates. In those cases where the Company determines the useful life of property and equipment should be shortened or extended, the Company depreciates the net book value in excess of the estimated salvage value over its revised remaining useful life.

The Company capitalizes the following costs associated with developing internal-use computer software: (i) external direct costs of materials and services consumed in developing or obtaining internal-use computer software; (ii) certain payroll and payroll-related costs for Company employees who are directly associated with the development of internal-use software, to the extent of time spent directly on the project; and (iii) interest costs incurred while developing internal-use computer software. According to ASC 835-20, Interest-Capitalization of Interest, interest cost may be capitalized as a part of the historical cost of acquiring certain assets, such as assets that are constructed or produced for a company's own use. The amount of capitalized interest during fiscal years 2012, 2011, and 2010 was $897, $511, and $1,182, respectively.

Gains or losses upon retirement or disposal of property and equipment are recorded in Other income, net in the accompanying Consolidated Statements of Operations. Normal repair and maintenance costs that do not substantially extend the life of property and equipment are expensed as incurred.

Goodwill represents the future economic benefits and synergies arising from other assets acquired in a business combination that are not individually identified and separately recognized. In accordance with the provisions of ASC 350-20, Intangibles – Goodwill and Other – Goodwill, goodwill is reviewed for impairment annually as of the last day of the fiscal year. An interim review is performed between annual tests whenever events or changes in circumstances indicate the carrying amount of the goodwill may be impaired. Because the estimated fair value of the reporting units exceeded the carrying amount of the goodwill, there was no impairment as of March 30, 2012 and April 1, 2011.

ASC 350-30, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill, requires intangible assets with finite useful lives be amortized over their respective estimated useful lives. Amortization is computed using the straight-line method.

Certain sales representatives employed by the Physician and Extended Care Businesses have executed employment agreements in exchange for a cash payment (“Nonsolicitation Agreements”). These employment agreements include nonsolicitation covenants, which state that the sales representative can neither solicit nor accept business from certain of the Company's customers for a stated period of time subsequent to the date the sales representative ceases employment with the Company. The costs associated with these Nonsolicitation Agreements are capitalized and amortized on a straight-line basis over their estimated useful lives, plus the stated nonsolicitation period. If a sales representative terminates employment prior to the end of the estimated useful life of the agreement, the remaining net book value of the asset is amortized over the stated nonsolicitation period.

During the period the sales representatives remain employed with the Company, the nonsolicitation intangible asset is evaluated for impairment in accordance with the provisions of ASC 360-10, Property, Plant, and Equipment – Overall. This standard requires the Company to test for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Certain factors which may indicate an impairment exists include, but are not limited to: (i) a change in a state's legal system that would impact any legal opinion relied upon when assessing enforceability of the nonsolicitation covenants, (ii) a decline in gross profit or sales volume, (iii) death, or (iv) full retirement by the sales representative. In the event the carrying value of the assets were to be determined unrecoverable, the Company would estimate the fair value of the assets and record an impairment charge for the excess of the carrying value over the fair value. There were no impairments as of March 30, 2012 or April 1, 2011.

Long-lived assets, other than goodwill and indefinite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable in accordance with ASC 360-10, Property, Plant, and Equipment – Overall. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. The impairment loss is measured as the amount by which the carrying amount of the long-lived asset exceeds fair value.

The Company evaluates the recoverability of indefinite-lived intangible assets annually in accordance with ASC 350-30, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill. An interim review may be performed more frequently, if events or changes in circumstances, such as a decline in sales, earnings, or cash flows, or material adverse changes in the business climate, indicate that the carrying value of an asset might be impaired. There were no impairments as of March 30, 2012 or April 1, 2011.

A business is classified as a discontinued operation when the operations and cash flows of the business can be clearly distinguished and have been or will be eliminated from the Company's ongoing operations, the business has either been disposed of or is classified as held for sale, and the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations (as well as the gain or loss on the disposal) are aggregated and separately presented in the Company's Consolidated Statements of Operations, net of income taxes, and in the Consolidated Statements of Cash Flows.

During the first quarter of fiscal year 2013 the Company's Board of Directors approved a strategic restructuring plan designed to transform the Company. The restructuring plan will include the sale of two business units serving skilled nursing facilities and specialty dental practices, the integration of all warehouse operations into one common distribution infrastructure, as well as a redesign of the shared services function. The Company determined that certain held for sale criteria had not been met as of March 30, 2012 and therefore reports the assets, liabilities, and the related results of operations as continuing operations. See Footnote 23, Subsequent Events, for additional information.

The Company has a self-funded program for employee and dependent health insurance. This program includes an administrator, a large provider network, and stop loss reinsurance to cover individual claims in excess of $250 per person, with an additional aggregate specific deductible of $190 annually, and up to $2,000 catastrophic loss maximum per lifetime benefit per person. Claims incurred but not reported are recorded based on estimates of claims provided by the third party administrator and are included in Accrued expenses in the accompanying Consolidated Balance Sheets. The Company recognized $16,853, $13,153, and $13,452 in medical expenses, net of employee contributions, during the fiscal years ended March 30, 2012, April 1, 2011, and April 2, 2010, respectively.

The Company maintains a primary casualty insurance program for its automobile liability, employer's liability, and general liability risks, which in general provides limits of up to $2,000, $1,000, and $2,000, respectively. The primary program contains a deductible of $350 for automobile liability, $500 for employer's liability, and $100 for general liability, subject to a primary aggregate stop loss of approximately $8,000 for the current plan year. The Company also maintains workers compensation policies which have statutory limits that are based on state regulations and have a deductible of $500 per occurrence. In addition, the Company maintains an umbrella/excess liability program to cover occurrences in excess of the underlying primary limits.

In determining the accrual necessary for probable loss contingencies as defined by ASC 450-20, Contingencies – Loss Contingencies, the Company includes estimates for professional fees, such as legal, accounting, and consulting, and other related costs to be incurred, unless such fees and related costs are not probable of being incurred or are not reasonably estimable.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the tax consequences attributable to temporary differences between the financial statement carrying amounts and the respective tax basis in existing assets and liabilities. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Operations in the period that includes the enactment date. The Company has not provided for U.S. income taxes on accumulated and undistributed earnings attributable to foreign operations as the Company intends to permanently reinvest these undistributed earnings.

Revenue is recognized when persuasive evidence of an arrangement exists, evidence of delivery of products or services is obtained, the selling price is fixed or determinable, and collectability of the resulting accounts receivable is reasonably assured. The Company assesses collectability based upon a thorough evaluation of current and prospective customers' credit history and ability to pay. The Company establishes and adjusts credit terms and limits to reflect customer credit worthiness based upon this evaluation. Customer credit evaluations are updated periodically and for specific events or circumstances such as deterioration in the aging of account balances, bankruptcy filings, or notice or knowledge of financial difficulties.

Consolidated sales allowances are immaterial and generally represent less than 1% of gross sales.

Physician Business. The Physician Business has three primary sources of revenue: (i) the sale of consumable products; (ii) the sale of equipment; and (iii) claims processing services provided to physician dispensing customers.

Revenue from the sale of consumable products is recognized when products are shipped or delivered since at that time there is persuasive evidence that an arrangement exists, the price is fixed and determinable, and the collection of the resulting accounts receivable is reasonably assured. Revenue from the sale of single deliverable equipment is generally recognized when the equipment is shipped, unless there are multiple deliverables, in which case revenue is recognized when all obligations to the customer are fulfilled. Obligations to the customer are typically satisfied when installation and training are complete. Customers have the right to return consumable products and equipment. Sales allowances are recorded as a reduction of revenue for potential product returns and estimated billing errors. Management analyzes sales allowances quarterly using historical data adjusted for significant changes in volume and business conditions, as well as specific identification of significant returns or billing errors.

Revenue from claims processing services provided to physician dispensing customers is recognized when claims are processed. As the Company acts an agent in the arrangement, revenue is recorded on a net basis.

Extended Care Business. The Extended Care Business has three primary sources of revenue: (i) the sale of consumable products and services to skilled nursing home and assisted living facilities, hospice and home health care providers; (ii) service fees earned for providing Medicare Part B and Medicaid products and services; and (iii) consulting services to skilled nursing home and assisted living facilities, hospice and home health care providers.

Revenue from the sale of consumable products to skilled nursing home facilities, assisted living facilities, and home health care providers is recognized when products are shipped or delivered. Revenue for these products is recorded upon shipment since at that time there is persuasive evidence that an arrangement exists, the price is fixed and determinable, and the collection of the resulting accounts receivable is reasonably assured.

Revenue from providing ancillary medical supplies for Medicare Part B eligible patients and Medicaid eligible patients on a full assignment basis is recognized during the period the supplies are shipped to the eligible patients. The product is shipped to the facility patient specific and becomes the property of that specific patient. Revenue is recorded at the amounts expected to be collected from Medicare, Medicaid, other third-party payers, and directly from customers. Reimbursement from Medicare is subject to review by appropriate government regulators. Revenue from providing Medicare Part B and Medicaid billing services on a fee for service basis is recognized when billing services are rendered to the customer.

Revenue from the sale of consulting services to skilled nursing home and assisted living facilities, hospice and home health care providers is recognized when services are rendered to the customer.

Customers have the right to return consumable products and equipment. Sales allowances are recorded as a reduction of revenue for (i) potential product and equipment returns, (ii) patients that turn out to be ineligible to be billed to Medicare or other payor, and (iii) Medicare Part B and Medicaid reimbursement denials, capped rental of enteral pumps, and billing errors. Management analyzes actual revenue adjustments and Medicare Part B reimbursement denials using historical actual cash collection and actual adjustments to gross revenue. The historical percentage is used to estimate the future cash collections and required accounts receivable reserve. Additional allowances are recorded for any significant specific adjustments known to management.

The Company receives transaction-based and performance-based rebates from third party suppliers. Transaction-based rebates are generally associated with a specific customer contract and are recognized as a reduction to cost of goods sold at the time the transaction occurs. Management establishes a reserve for uncollectible transaction-based vendor rebates based on management's judgment after considering the status of current outstanding rebate claims, historical denial experience with suppliers, and any other pertinent available information.

In accordance with ASC 605-50, Revenue Recognition – Customer Payments and Incentives, performance-based rebates are recognized based on a systematic estimation of the consideration to be received relative to the transaction that marks the progress of the Company toward earning vendor rebates, provided the collection of the amounts is, in the judgment of management, reasonably assured. The factors the Company considers in estimating performance-based rebates include actual inventory purchases or sales volumes, in conjunction with vendor rebate contract terms, which generally provide for increasing rebates based on either increased purchases or sales volume. Performance-based rebates are recognized in income only if the related inventory has been sold.

In accordance with ASC 605-50, Revenue Recognition – Customer Payments and Incentives, sales incentive arrangements that meet certain criteria are not recorded as a reduction of cost of sales. Accordingly, reimbursements from manufacturers under these arrangements are recognized by the Company as revenue rather than a reduction of cost of sales.

Transaction-based and performance-based rebate contracts are negotiated periodically with vendors.

The following table summarizes the financial statement impact of transaction-based and performance-based vendor rebates recognized by the Company and each of its segments during fiscal years 2012, 2011, and 2010. Such rebates are classified as either (i) a reduction to cost of goods sold or (ii) an increase to net sales in the accompanying Consolidated Statements of Operations.

(in thousands)	Physician Business
Rebates included within:	2012		2011		2010
Net sales	$	759	$	1,237	$	2,433
Cost of goods sold		124,792		107,924		108,143
Total	$	125,551	$	109,161	$	110,576

	Extended Care Business
Rebates included within:	2012		2011		2010
Cost of goods sold	$	106,251	$	108,718	$	106,141

	Total Company
Rebates included within:	2012		2011		2010
Net sales	$	759	$	1,237	$	2,433
Cost of goods sold		231,043		216,642		214,284
Total	$	231,802	$	217,879	$	216,717

Shipping and handling costs billed to customers are included in Net sales and totaled approximately $15,832, $13,521, and $11,383, for fiscal years 2012, 2011, and 2010, respectively. Shipping and handling costs incurred by the Company, which are included in General and administrative expenses, totaled approximately $110,142, $105,334, and $104,134, for fiscal years 2012, 2011, and 2010, respectively.

In accordance with ASC 470-20, Debt – Debt with Conversion and Other Options, issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlements) should separately account for the liability and equity components in a manner that reflects an estimate of the entity's nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. The equity components of the Company's senior convertible notes are included in Additional paid in capital in the Consolidated Balance Sheets, with a corresponding reduction in the carrying values of these convertible notes as of the date of issuance or modification, as applicable. The reduced carrying values of the convertible notes are accreted to principal amounts through the recognition of non-cash interest expense. This accretion results in recognizing interest expense on these borrowings at effective rates approximating what would have been incurred had the Company issued nonconvertible debt with otherwise similar terms. See Footnote 12, Debt, for additional information.

Derivative financial instruments are accounted for under ASC 815, Derivatives and Hedging. Accordingly, all derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated other comprehensive income and subsequently recognized in earnings when the hedged items impact earnings, typically upon settlement. Changes in the fair value of derivatives not designated as hedges and the ineffective portion of cash flow hedges are recorded in current earnings.

Guidance within ASC 815, Derivatives and Hedging, requires enhanced disclosures about an entity's derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows.

Derivative financial instruments are used principally in the management of the Company's interest rate exposure. During the fiscal year ended March 28, 2008, the Company entered into an interest rate swap agreement to hedge the variable interest rate of its revolving line of credit. The interest rate swap was designated as a cash flow hedge. During fiscal year ended April 2, 2010, the interest rate swap matured. Amounts paid upon maturity of the interest rate swap agreement were recorded as additions to interest expense. Refer to Footnote 12, Debt, for additional information regarding the Company's interest rate swap agreement.

Basic and diluted earnings per share are presented in accordance with ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per 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 unvested restricted stock and stock options using the treasury stock method and the conversion of the senior convertible notes. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.

The following table sets forth computational data for the denominator in the basic and diluted earnings per share calculation for fiscal years ended March 30, 2012, April 1, 2011, and April 2, 2010:

(in thousands)		2012	2011	2010
Denominator-weighted average shares outstanding used
	in computing basic earnings per share	51,998	54,996	58,029
Assumed exercise of stock options^(a)		63	198	324
Assumed vesting of restricted stock		453	650	514
Assumed conversion of 2008 Notes		1,475	702	76
Denominator-weighted average shares outstanding used
	in computing diluted earnings per share	53,989	56,546	58,943

(a) There were no antidilutive options outstanding as of March 30, 2012, April 1, 2011, and April 2, 2010.

In accordance with ASC 260, Earnings Per Share, and the Company's stated policy of settling the principal amount in cash, the Company is required to include shares underlying the 2008 Notes in its diluted weighted average shares outstanding due to the average stock price per share for the period exceeding $21.22 (the conversion price for the senior convertible notes) during fiscal year ended March 30, 2012. Only the number of shares that would be issuable (under the treasury stock method of accounting for share dilution) was included, which was based upon the amount by which the average stock price exceeded the conversion price. If the price of the Company's common stock exceeds $28.29 per share, it will also include the effect of the additional potential shares that may be issued related to the warrants transactions associated with the 2008 Notes, using the treasury stock method. Prior to conversion, the purchased options associated with the 2008 Notes are not considered for purposes of the dilutive earnings per share calculation as their effect is considered to be anti-dilutive. Refer to Footnote 12, Debt, for additional information regarding the 2008 Notes.

Effective April 1, 2006, the Company adopted the provisions of ASC 718, Compensation – Stock Compensation, (“ASC 718”) using the modified prospective transition method, and therefore, has not restated results for prior periods. The Company applies the fair value recognition provisions of the guidance as it relates to the Company's stock-based compensation, which requires the Company to recognize expense for the fair value of stock-based compensation awards. Refer to Footnote 15, Incentive and Stock-Based Compensation, for additional information.

Comprehensive income represents all changes in equity of an enterprise that result from recognized transactions and other economic events during the period. Other comprehensive income refers to revenues, expenses, gains, and losses that under GAAP are included in comprehensive income but excluded from net income, such as the unrealized gain or loss on the interest rate swap and unrealized holding gain or loss on available-for-sale investments.

As of March 30, 2012, the Company held no investment in available for sale securities. Equity securities previously held by the Company were considered to be available for sale and carried at fair value as of the balance sheet dates. Fair values were based on quoted market prices.

Realized gains and losses on the sale of investments were determined on the basis of the cost of the specific investments sold and were credited or charged to income on a trade date basis. Unrealized gains or losses on equity securities which were classified as available for sale, net of applicable deferred income taxes (benefits), were excluded from earnings and credited or charged directly to a separate component of stockholders' equity.

The Company repurchases its common stock under stock repurchase programs authorized by the Company's Board of Directors. The Company retires shares upon repurchase. Payments to repurchase shares are recorded to Common stock on the Consolidated Balance Sheets, with the amount in excess of par value recorded to Additional paid-in capital on the Consolidated Balance Sheets.

During fiscal year 2012, the Company's additional paid-in capital balance was reduced to zero as a result of share repurchases. In accordance with ASC 505, Equity, retirements of the Company's shares may be recorded as a reduction of additional paid-in capital to the extent that previous net gains from sales or retirements of the same class of stock remain, and otherwise should be recorded to retained earnings. As a result, retained earnings was reduced by $7,154 during fiscal year 2012, which represented share repurchases occurring after the additional paid-in capital balance had been reduced to zero.