UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended April 3, 1998 Commission File Number 0-23832

PSS WORLD MEDICAL, INC.
(Exact name of Registrant as specified in its charter)

FLORIDA 59-2280364
(State of incorporation) (I.R.S. Employer
Identification No.)

4345 Southpoint Boulevard
Jacksonville, Florida 32216
(Address of principal executive offices) (Zip Code)

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

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value Per Share

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

Yes [X] No [_]

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

The aggregate market value of common stock, par value $0.01 per share (the
"Common Stock") held by nonaffiliates, based upon the closing sales price, was
approximately $843,138,045 as of July 7, 1998. In the determination of this
amount, affiliates include all of the Company's officers, directors and persons
known to the Company to be beneficial owners of more than five percent of the
Company's Common Stock. This amount should not be deemed conclusive for any
other purpose. As of July 7, 1998, a total of 70,209,174 shares of the
Company's Common Stock were outstanding.

Document Incorporated by Reference

The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after April 3, 1998.

PART I

All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following:
the availability of sufficient capital to finance the Company's business plans
on terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.

Item 1. Business

GENERAL

PSS World Medical, Inc. (the "Company" or "PSS") is a specialty marketer and
distributor of medical products to physicians, alternate-site imaging centers,
long-term care providers, and hospitals through 101 service centers to customers
in all 50 states and 5 European countries. Since its inception in 1983, the
Company has become a leader in all three market segments it serves with a
focused, market specific approach to customer services, a consultative sales
force, strategic acquisitions, strong arrangements with product manufacturers,
and a unique culture of performance.

The Company, through its Physician Sales & Service division, is the leading
distributor of medical supplies, equipment and pharmaceuticals to office-based
physicians in the United States. Physician Sales & Service currently operates
58 medical supply distribution service centers ("Physician Supply Business")
serving over 100,000 physician offices (representing approximately 50% of all
physician offices) in all 50 states. The Physician Supply Business' primary
market is the approximately 400,000 physicians who practice medicine in
approximately 200,000 office sites throughout the United States.

The Company, through its wholly owned subsidiary Diagnostic Imaging, Inc.
("DI"), is the leading distributor of medical diagnostic imaging supplies,
chemicals, equipment, and service to the acute care and alternate-care markets
in the United States. DI currently operates 26 imaging distribution service
centers ("Imaging Business") serving over 13,000 customer sites in 32 states.
The Imaging Business' primary market is the approximately 5,000 hospitals and
other alternate-site imaging companies operating approximately 50,000 office
sites throughout the United States.

Through its wholly owned subsidiary Gulf South Medical Supply, Inc. ("GSMS"),
the Company has become a leading national distributor of medical supplies and
related products to the long-term care industry in the United States. GSMS
currently operates 14 distribution service centers ("Long-Term Care Business")
serving over 10,000 long-term care facilities in all 50 states. The Long-Term
Care Business' primary market is comprised of a large number of independent
operators, small to mid-sized local and regional chains, and several national
chains representing over 10,000 long-term care facilities.

In addition to its operations in the United States, the Company, through its
wholly owned subsidiary WorldMed International, Inc. ("WorldMed"), operates
three European service centers ("International Business") distributing medical
products to the physician office and hospital markets in Belgium, France,
Germany, Luxembourg, and the Netherlands.

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INDUSTRY

According to industry estimates, the United States medical supply and
equipment segment of the health care industry represents a $34 billion market
comprised of distribution of medical products to hospitals, home health care
agencies, imaging centers, physician offices, dental offices, and long-term care
facilities. The Company's primary focus includes distribution to the physician
office, providers of imaging services, and long-term care facilities which
comprise $14 billion or approximately 40% of the overall market. The Company
currently shares approximately 9% of this $14 billion alternate-site market.

A significant portion of the medical supply and equipment distribution market
to nonhospital sites includes locally owned and operated distributors. The
Company believes that in the United States there are approximately 200 locally
owned companies serving the nonimaging physician-supply market, approximately
300 locally owned companies serving the imaging-supply market, and approximately
100 locally owned companies serving the long-term care market. The physician-
supply market has experienced rapid consolidation in recent years. PSS believes
that the imaging-supply and long-term care markets are in the early stages of
consolidation. The Company believes that consolidation is occurring due to
local and regional distributors experiencing: (i) a lack of purchasing and
administrative economies of scale; (ii) reduced access to medical equipment
lines as manufacturers seek to reduce marketing costs by minimizing the number
of distributors they use; (iii) consolidation among providers, who are
increasingly seeking to reduce the number of suppliers from which they purchase
medical products; (iv) a lack of resources for continued development and
training of personnel for maintenance, expansion or replacement of existing
business; and (v) a lack of resources to develop new distribution system
technologies and services.

Revenues of the medical products distribution industry are estimated to be
growing as a result of a growing and aging population, increased health care
awareness, proliferation of medical technology and testing, and expanding third-
party insurance coverage. In addition, the physician market is benefiting from
the shift of procedures and diagnostic testing from hospitals to alternate
sites, particularly physician offices despite a migration of significantly lower
hospital medical product pricing into the physician office market.

The health care industry is subject to extensive government regulation,
licensure, and operating procedures. National health care reform has been the
subject of a number of legislative initiatives by Congress. Such reform
proposals if adopted could impact the medical products distribution industry.
Additionally, the cost of a significant portion of medical care in the United
States is funded by government and private insurance programs. In recent years,
government-imposed limits on reimbursement of hospitals, long-term care
facilities, and other health care providers have impacted spending budgets in
certain markets within the medical products industry. Recently, Congress has
passed radical changes to reimbursements for nursing homes and home care
providers. These changes also effect some distributors who directly bill the
government for these providers.

Over the past few years, the health care industry has undergone significant
consolidation. Physician provider groups, long-term care facilities, and other
alternate-site providers along with the hospitals continue to consolidate. This
consolidation sometimes shifts the medical products purchasing decision to
individuals with whom medical products distributors had no prior selling
relationship. Additionally, the consolidation creates larger customers.
Although the majority of the market serviced by the Company remains a large
number of small customers, the Long-Term Care Business depends on a limited
number of large customers for a significant portion of its net sales.
Specifically, approximately 37% of the Long-Term Care Business revenues for the
12 months ended December 31, 1997 represented sales to its top five customers.
Growth in the Long-Term Care Business as well as consolidation of the health
care industry may increase the Company's dependence on large customers.

COMPANY STRATEGY

The Company's objectives are to be the leading distributor and marketer of
medical products to office-based physicians, providers of imaging services, and
long-term care providers in the United States, and to enhance its

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operating performance. The key components of the Company's strategy to achieve
these objectives are to continue to:

Pursue Strategic Acquisitions. The Company has made 45, 16, and 4
acquisitions since fiscal year 1989 in its Physician Supply Business, Imaging
Business, and International Business, respectively. With the March 1998
acquisition of Gulf South Medical Supply, Inc., the Company became a leading
national long-term care distributor in the United States. After consummating a
merger or acquisition, the Company begins an intensive process of converting the
acquired company to its business model through information systems conversion,
personnel development and training, and service and product expansion. The
Company intends to continue to acquire local, regional, and other distributors
in new and existing markets where it can leverage its distribution
infrastructure, expand its geographic coverage and gain market share. Growth
through business acquisitions exposes the Company to risks and uncertainties as
well as affects liquidity of the Company. Acquisitions place significant
demands of the Company's management and other resources specifically as they
relate to integration of the acquired companies. Recent acquisitions by the
Company have resulted in expansion into new business activities of the Imaging
Business and the Long-Term Care Business which exposes the Company to new risks
inherent in the operation of these businesses.

Enhance Selling Capabilities. The Company believes its sales force and
managers are its most valuable corporate assets and focuses not only on the
recruitment of sales personnel with superior sales aptitude, but also on the
initial and continued development of its sales force through training at The
University, its in-house educational center. The Company believes investment in
personnel and training enable it to provide high-quality service to its
customers, offer sophisticated product lines, and attract manufacturers that
desire a means of rapidly bringing new products and technology to market.

Offer a Broad Product Line Emphasizing Exclusive Products. The Company seeks
to meet all of the medical products needs of office-based physicians, providers
of imaging services and providers of long-term care. The Company currently
stocks over 35,000 medical products in its Physician Supply Business, over 4,000
imaging products in its Imaging Business, and over 18,000 medical products in
its Long-Term Care Business. The Company also seeks to establish exclusive
distribution and marketing arrangements for selected products. In the United
States, PSS currently has exclusive or semiexclusive marketing arrangements for
certain products with Abbott, Siemens AG, Hologic, Inc., Sonosight, Hewlett
Packard, Leisegang, Critikon, and other leading manufacturers. The Company
believes that its sophisticated selling efforts, highly trained sales force, and
large customer base provide manufacturers with a unique sales channel through
which to distribute new and existing products that require consultative selling.

Provide Differentiated, High-Quality Service. The Company believes its
success to date has been based largely on its ability to provide superior
customer service, including same-day delivery and "no-hassle" returns. Unlike
its competitors, which generally ship products via common carrier, the Company
operates a fleet of over 1,000 delivery and service vehicles enabling it to
provide same-day or next day delivery and service to virtually all of its
customers. The Long-Term Care Business is in the process of converting from
common carrier delivery to self-delivery.

Historically, the Company has differentiated itself from the competition
servicing the office-based physician market by providing consistent, same-day
delivery on a national basis. The Company again is distinguishing itself from
the competition by providing a metropolitan two-hour and a four-hour rural
technical service specialist deployment guarantee through its Imaging Business.
The Company has plans to significantly increase self-delivery within its Long-
Term Care Business with the goal of providing at a minimum next-day delivery
service.

Utilize Sophisticated Information Systems. In 1994, the Company implemented
its Instant Customer Order Network ("ICON(SM)"), an ordering and customer data
system, with all its Physician Supply Business sales representatives. ICON(SM)
has increased time available to sales representatives for selling, decreased
operating expenses, and increased the Company's ability to provide same-day
delivery. During fiscal year 1997, the Physician Supply Business developed and
test marketed CustomerLink, an Internet-based system for inventory management
and purchasing. The Company is currently developing and implementing a separate
hardware and

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software system for the Imaging Business and Long-Term Care Business that will
incorporate CustomerLink and ICON(SM). The Company intends to continue to
develop sophisticated information technology, which it believes is essential to
its continued success in integrating acquired businesses and increasing sales
and profitability.

Expand Operating Margins. The Company is pursuing several initiatives to
enhance its operating margins. With respect to sales, the Company is focusing
its efforts on higher-margin accounts and on sales of diagnostic equipment,
often on an exclusive or semiexclusive basis, that involves ongoing sales of
high-margin reagents. With respect to its product line, the Company seeks to
generate high sales volumes of selected products and to obtain such products on
a discounted basis from manufacturers. Finally, with respect to its service
center expansion program, the Company intends in the future to emphasize
acquisitions over new-center development, avoiding the substantial start-up
losses associated with new-center development.

ACQUISITIONS

The Company's Physician Supply Business has grown from one service center
located in Jacksonville, Florida in 1983 to 58 service centers currently.
Historically, the Company's growth has been accomplished through both the start-
up of service centers and the acquisition of local and regional medical supply
and equipment distributors. Since fiscal year 1994 the Company's Physician
Supply Business has accelerated its acquisition of medical supply and equipment
distributors both in number and in materiality of the operations acquired.

With the November 1996 acquisition of a medical diagnostic imaging supply and
equipment distributor, the Company began the operations of its Imaging Business
through its wholly owned subsidiary Diagnostic Imaging, Inc. Subsequent
acquisitions have resulted in 26 Imaging Business service centers (after
consolidation of certain centers) currently operating throughout 32 states. The
Company's objectives for the Imaging Business during fiscal year 1999 are to:
(i) continue geographic expansion with acquisitions of local and regional
imaging distributors; (ii) complete implementation of a separate hardware and
software system for the business utilizing the Physician Supply Business'
ICON(SM) and CustomerLink systems; (iii) expand the products and services
currently provided; (iv) implement efficient next day delivery; and (v) further
develop through The University a training program specifically tailored for the
Imaging Business.

With the March 1998 acquisition of Gulf South Medical Supply, Inc., the
Company became the leading national long-term care distributor in the United
States. Gulf South is a leading national distributor of medical supplies and
related products to the long-term care industry. Gulf South provides products
and services to over 10,000 long-term care facilities in all 50 states. Prior
to the March 1998 acquisition of Gulf South by the Company, Gulf South was
publicly traded on NASDAQ with a symbol of GSMS with approximately 16.3 million
shares (preconversion to PSS) outstanding at December 31, 1997. Each
shareholder of record of Gulf South received the right to receive 1.75 shares of
the Company's stock upon consummation of the merger. Gulf South currently
operates as a wholly owned subsidiary of the Company pursuing the Long-Term Care
Business.

The Company's objectives for the Long-Term Care Business during fiscal year
1999 are to: (i) continue expansion into the long-term care market with the
acquisitions of local and regional long-term care distributors to leverage
existing infrastructure; (ii) develop and implement separate hardware and
software system for the business utilizing the Physician Supply Business'
ICON(SM) and CustomerLink systems; (iii) expand the products and services
currently provided; (iv) enhance the delivery system to include self-delivery;
and (v) develop through the Company's Jacksonville, Florida, training center
("The University"), a training program specifically tailored for the Long-Term
Care Business; and (vi) expand the GSMS sales force by 35%; (vii) conform the
operations of all its service centers to an efficient best practices model.

The Company views the acquisition of medical products distributors as an
integral part of its growth strategy. The Company intends to continue to
acquire local and regional distributors especially in existing markets where it
can leverage its distribution infrastructure and gain market share. The Company
also plans to pursue strategic geographic acquisition targets to increase the
national presence of all its lines of business.

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SALES, SERVICE, AND DISTRIBUTION

The Company focuses on complete customer satisfaction, which it characterizes
to its customers as "no hassle" service. Consistent with this approach, the
Company offers its customers same-day or next-day delivery service on a regular
basis, highly trained, consultative sales professionals, a broad product line
including medical supplies, sophisticated diagnostic equipment and reagents, and
pharmaceuticals, no minimum order size, and permits returns of unused, saleable
products for instant credit, as well as repair and service of imaging equipment.

The Company has increased its emphasis on national customer accounts,
including large physician group practices, physician practice management
companies, physician-hospital organizations, physician management service
organizations, large long-term care chains, and group purchasing organizations.
In selling to these national accounts, the Company emphasizes its core strengths
of rapid delivery and service, stockless inventory, competitive pricing,
consultative selling, broad product lines, customer usage reporting, and high
service levels.

Physician Supply Business

The Physician Supply Business currently maintains a highly decentralized
distribution network of 58 service centers operating approximately 550 delivery
vans servicing customers throughout the 50 United States. This distribution
network along with the Company's Instant Customer Order Network ("ICON(SM)") has
enabled the Physician Supply Business to provide same-day delivery service on a
consistent basis. Customer orders received by 10:30 a.m. at the local service
center are delivered the same day within a 100-mile radius. Within a 30-mile
radius, orders received by noon are delivered the same day.

Through over 700 sales representatives, the Physician Supply Business
distributes medical supplies and equipment to physicians in over 100,000 office
sites nationally. Generally, each sales representative is responsible for
calling on approximately 150 to 200 physician offices, with a minimum goal of
visiting each office once every one to two weeks.

Imaging Business

The Company's Imaging Business operates in a similar decentralized format as
the Physician Supply Business and distributes over 4,000 types of medical
diagnostic imaging supplies, chemicals, and equipment and provides technical
service to hospitals, other alternate-site providers, and physician offices.
This Imaging Business began operations in November 1996 with the acquisition of
eight service centers, 24 sales representatives and 75 service specialists.
Currently, the Imaging Business provides service to approximately 13,000
customers including approximately 2,500 hospitals and approximately 10,500
alternate-site providers, through 26 service centers, with over 140 sales
representatives.

In addition to providing delivery of over 4,000 imaging products, the Imaging
Business currently provides imaging equipment service through approximately 400
service specialists who provide technical assistance and maintenance on imaging
equipment. Customer service requests for service specialists are guaranteed to
receive a two-hour response in metropolitan areas and a four-hour response in
rural areas. The Company believes this service guarantee coupled with the
significant number of highly qualified service specialists positions it as the
service leader in the industry.

Long-Term Care Supply Business

The Company entered the Long-Term Care Business with the acquisition of Gulf
South Medical Supply, Inc. in March 1998. The Long-Term Care Business currently
operates 14 full-service regional distribution centers. Coupled with a team of
approximately 110 sales representatives, the Long-Term Care Business is able to
provide consistent and reliable service to customers ranging from independent
nursing homes to large national chains, as well as providers of home health care
and subacute, rehabilitation, and transitional care that operate in different

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geographic areas. Currently, the Long-Term Care Business provides service to
approximately 10,000 long-term care facilities nationally; offering a product
line consisting of over 18,000 products.

In addition to distribution of medical and related products, the Company's
Long-Term Care Business provides its customers support services developed to
meet the customer's needs. These services include: (i) usage reports designed to
help customers manage supply requirements, prepare forecasts and track
multifacility purchases; (ii) inventory control processes which enable the
customer to order products on a just-in-time basis and monitor patient's
utilization of products for Medicaid and Medicare reimbursement; and (iii)
customized services including customized invoices, bar code labels, and
customized order guides.

International Business

The Company's International Business distributes medical products to office-
based physicians and hospitals in Belgium, France, Germany, Luxembourg and the
Netherlands and began operations in April 1996 with the acquisition of its
service center in Leuven, Belgium. The International Business currently
operates three European service centers located in Belgium, Germany, and the
Netherlands, employing approximately 30 sales representatives and approximately
80 total employees.

The Company's Physician Supply, Imaging, and International Business service
centers operate as profit centers led by a management team that typically
includes a sales leader and an operations leader, and a service leader in the
Imaging Business service centers. Each service center employs sales
representatives and staff, including purchasing agents, customer service
representatives, and warehouse and delivery personnel. Employees are
compensated based upon both individual and service center performance. Both
leadership and employee bonuses are based largely upon asset management,
attainment of goals, and operating profit performance. These performance
measurements and the performance based compensation plans will be implemented in
the Long-Term Care Business during fiscal 1999.

PRODUCTS

The Company is required to carry a significant investment in inventory to meet
the rapid delivery requirements of its customers. The Company distributes over
45,000 different products manufactured by approximately 5,000 manufacturers.
During the 12 months ended April 3, 1998, no vendor accounted for more than 10%
of the Company's inventory purchases. The Company believes it is not vulnerable
to significant supply interruptions due to the diverse base of products sold and
the significant number of manufacturers supplying those products. However, the
Company's ability to maintain good relations with these vendors will affect the
profitability of the business.

Physician Supply Business

Through its Physician Supply Business, the Company distributes medical
products consisting of medical supplies, diagnostic equipment, and
pharmaceuticals. The following is a discussion of the over 35,000 types of
medical products offered by the Physician Supply Business.

Medical Supplies. The Physician Supply Business sells a broad range of
medical supplies, including various types and sizes of paper goods, needles and
syringes, gauze and wound dressings, sutures, latex gloves, orthopedic soft
goods and casting products, wood tongue blades and applicators, sterilization
and intravenous solutions, specimen containers, diagnostic equipment reagents,
and diagnostic rapid test kits for pregnancy, strep, mononucleosis, chlamydia,
H-Pylori, and bladder cancer.

Medical Equipment. The Physician Supply Business equipment lines include
blood chemistry analyzers, automated cell and differential counters, immunoassay
analyzers, bone densitometers, exam tables and furniture, electrocardiograph
monitors and defibrillators, cardiac stress systems, cardiac and OB/GYN
ultrasound, holter

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monitors, flexible sigmoidoscopy scopes, hyfracators, laser and endoscopy
surgical units, autoclaves, spirometers, pulse oximeters, tympanometers, and
microscopes. Demand for diagnostic equipment has increased recently, reflecting
in part, technological advances that enable increasingly sophisticated
diagnostic tests to be performed in the physician's office. Sales of diagnostic
equipment, while generally lower in gross margin than supplies, normally entail
the ongoing reordering of disposable diagnostic reagents that generally yield
higher margins.

Pharmaceuticals. The Company's pharmaceutical sales include vaccines,
injectables, and ointments. As a result of the changing dynamics in the
pharmaceutical industry, particularly the reduction of sales personnel focused
on the physicians' offices, pharmaceutical manufacturers are increasingly
seeking alternative means of distribution. The Company believes that its
consultative sales approach and its emphasis on training have allowed PSS to be
highly effective in selling pharmaceuticals to the physician-office market.

Imaging Business

The Imaging Business distributes a broad range of 4,000 products consisting of
imaging supplies, equipment, and service.

Imaging Supplies. The Company's product portfolio includes x-ray film,
contrast agents, barium, filing and mailing products, film viewing devices,
darkroom products, protective materials, and other miscellaneous imaging
accessories.

Imaging Equipment. The Imaging Business equipment lines include processes,
wet and dry laser cameras, automated film handling equipment, radiographic
equipment, radiographic and fluoroscopic equipment ("R&F"), digital R&F,
electrophysiology equipment, mammography systems, bone densitometry, C-Arms,
computed tomography scanners ("CT"), vascular labs, and magnetic resonance
imaging ("MRI") equipment.

Imaging Service Specialist. Through approximately 400 service specialists,
the Imaging Business currently provides on-site preventive maintenance,
emergency service, and parts for all of the above-mentioned imaging equipment
sold.

Long-Term Care Business

The Long-Term Care Business offers over 18,000 medical and related products
consisting largely of name brand items including medical supplies, incontinent
supplies, and personal care items, enteral feeding supplies, medical
instruments, and respiratory and ostomy supplies.

Medical Supplies. Medical supplies consist of wound care supplies, needles
and syringes, gauze, sutures, various types of exam gloves, urological supplies,
and blood and urine testing supplies and test kits.

Incontinent Supplies and Personal Care Items. These items include adult
diapers and underpads, as well as soaps and shampoos, personal hygiene items,
various paper products and bedside utensils.

Enteral Feeding Supplies. Enteral feeding supplies include nutritional
supplements, pump sets, and intravenous tubing and solutions.

Other. Other items offered by the Company include, medical instruments,
oxygen supplies, ventilator supplies, trach and suction supplies, over-the-
counter pharmaceuticals, and ostomy supplies.

International Business

The International Business distributes medical supplies, equipment and
pharmaceuticals similar to those provided by the Physician Supply Business to
five European countries. The International Business offers products to the
European physician office and hospital markets.

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RECRUITMENT AND DEVELOPMENT

The Company believes its leaders and sales force are its most valuable assets.
Accordingly, the Company invests significant resources in recruiting, training
and developing these employees. The Company spent approximately $3.0 million
for training and development in fiscal year 1998. Over the past ten years, the
Company has refined its recruitment practices and development procedures for its
Physician Supply Business, and the Company is currently developing a similar
training program for the sales representatives and service specialists of its
Imaging and Long-Term Care businesses. The Company's comprehensive program for
its Physician Supply Business includes the following:

Recruitment. The Company has developed a recruitment program to help provide
it with a source of mobile and committed sales representatives. The Company
believes that it is a leader in its industry in recruiting sales representatives
on college and university campuses. The Company's recruiters use state-of-the-
art marketing materials to attract candidates who demonstrate superior sales
aptitude. The Company also recruits college graduates with up to five years
experience in business, government or the military as operational leadership
trainees.

Initial Development. Each trainee is initially assigned to a service center.
Under the supervision of local leaders, training consists of a combination of
self-study, individual instruction and interaction with customers and vendors.
Such training includes 16 one-week courses providing instruction on products,
procedures, and selling skills. During this development program, the trainee
attends The University for additional training. Individual progress is measured
weekly through formal testing and role playing, resulting in continued
advancement to graduation, usually within 20 weeks. PSS designs the program to
be strenuous and only approximately 70% of the trainees successfully complete
the program. Upon graduation, the newly appointed sales representative assumes
responsibility for the first available sales territory, within a preferred
region regardless of location. The Company typically has approximately 30 sales
candidates at various stages of the training process. The Company believes that
the level of its expenditures in developing new sales representatives and its
ability to place new sales representatives quickly in a new region is unique
within the industry. The new sales graduate is placed on a 15-month salary-to-
commission conversion program. Presently, approximately 95% of Physician Supply
Business' sales force is compensated on a straight commission basis.

Operations Management. The Company's development program for its operations
leadership trainees consists of approximately 12 months of intensive training
and development. After recruitment, the operations management trainee is
transferred to at least three service centers and is given various and gradually
increasing levels of responsibility. The trainee is assigned to an operations
management position when it becomes available at a service center, regardless of
location. The Company has available approximately five operations management
trainees to support its growth at any given time.

Technical Service Specialists. The Company has started its training program
for advancing the capabilities of its current 400 imaging service specialists.
This year, the Company will train and develop over 200 of its current service
specialists on approximately 6 imaging programs. In addition, the Company has
implemented a training and development program for new service specialists.

Continued Development. The Company provides several programs to continue
development of its sales and leadership organization. The programs provided by
The University include a leadership program, senior sales representatives and
general, a program emphasizing creativity and innovation for first-year leaders,
and a leadership development program. In addition, the Company encourages its
sales representatives to participate in industry-accredited self-study programs.
Every sales representative routinely attends local sales meetings, annual sales
and marketing meetings, key vendor product conferences and continuing education
programs at The University. Additionally, the Company is developing training
programs on customer service, purchasing and other field operations.

On April 3, 1998, the Company had approximately 950 sales representatives, 390
imaging service specialists and 4,000 total employees. The Company considers
its employee relations to be excellent.

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INFORMATION SYSTEMS

The Physician Supply Business maintains a decentralized information system
with data acquisition at the local service centers and a central data base that
is accessible from all of the service centers. The information systems were
designed to allow the service center to have both the hardware and software to
conduct operations independently. The failure of a computer system at a service
center would not affect the operations of any other service center or the
corporate system. Likewise, the short-term failure of the corporate system
would not affect the operations of any service center.

ICON(SM) is a sales force automation tool which allows the Physician Supply
Business sales representatives to access critical customer information and place
orders from any location using a pen-based, hand-held computer system. ICON(SM)
provides the sales representatives with customer pricing, contracts, backorders,
inventory levels, account status and instant ordering. The customer's order is
transmitted via wireless transmission to the corporate system and then
transmitted from the corporate system to the local service center in less than
two minutes. ICON(SM) has increased time available for selling, decreased
operating expenses in the service centers and enhanced the Company's ability to
provide same-day delivery to customers. Utilizing ICON(SM), sales
representatives can give product demonstrations, provide equipment feasibility
studies and perform revenue and return-on-investment analyses for specific
equipment. ICON(SM) also gives the sales representative the ability to provide
quotes and bids to the larger accounts.

To enable the Company to maintain high customer order fill rates on a
consistent basis, the Company utilizes its BEAR system. Each service center
reports its inventory quantities on a daily basis. The separate service center
reports are combined into one company-wide inventory report containing product
number, quantity on hand and historical usage. This system reduces back-orders
to customers and reduces the Company's total inventory through increased
inventory efficiencies. BEAR also displays the on-hand usage quantities of
neighboring service centers that are within one commercial-shipping day of the
service center.

During fiscal year 1997, the Physician Supply Business developed and test-
marketed the CustomerLink system. The Company believes this system is the first
Internet-based health care information system designed and used specifically for
inventory management and purchasing for the medical practice. Company customers
can access CustomerLink through the Internet at http://www.pssd.com after
receiving their personal password from the Company. All company customers,
regardless of size, with access to the Internet, will be given access to
services and on-line information, including: (i) on-line order placement and
confirmation; (ii) customer-specific pricing, product availability, back orders
and utilization reports; (iii) working capital management reports; and (iv)
practice compliance assistance for OSHA and CLIA, including a database of
medical safety sheets.

PSS is implementing a delivery automation system that is scheduled for
completion in fiscal year 1999. The system will provide electronic signature
recognition and delivery routing which the Company believes will improve its
distribution efficiency.

The Company developed and is currently implementing a new system in its
Imaging Business which it expects to be completed by August 1998. The Company
is also developing a system for both its Physician Supply and Long-Term Care
businesses which is the second version of the system almost complete for the
Imaging Business. When the second version is complete and implementation has
started, the Imaging Business will convert to the new version. The Company
expects these systems to be implemented by December 1999.

PURCHASING AND VENDOR RELATIONSHIPS

The Company aggressively seeks to purchase the medical supplies and equipment
it distributes at the lowest possible price through volume discounts, rebates
and product line consolidation. The Company's materials management group
negotiates all of its contract terms with vendors. Individual orders are placed
by the Company's

-9-

purchasing agents, located at the Company's service centers, who are responsible
for purchasing and maintaining the inventory. Supplies and equipment are
delivered directly from vendors to the service centers.

The Company aggressively pursues the opportunity to market and sell medical
equipment and supplies on an exclusive basis. Manufacturers of medical
diagnostic equipment and supplies typically offer distribution rights only to a
selected group of distributors and are increasingly seeking to reduce the number
of distributors selling their products to end users in an effort to reduce the
cost associated with marketing and field support. The Company has been
successful in assisting manufacturers in their development and marketing plans
and in obtaining the exclusive right to sell certain products. The Company
believes that its ability to capture such distribution rights represents a
significant barrier to the entry of competitors.

In addition, the Company continually seeks vendor relationships on an
exclusive or semiexclusive basis providing the Company with a competitive
advantage and providing the manufacturer with one distribution channel comprised
of nearly 1,000 highly-trained, consultative sales representatives. Following
is a list of manufacturers which the Company currently maintains such
relationships and the type of product offered.

Manufacturer Product
- --------------------------------------------------- -----------------------------------------------------

Abbott Laboratories, Inc........................... Blood chemistry analyzers, hematology products,
immunoassay analyzers, rapid tests, and reagents
Critikon (a Johnson & Johnson Company)............. Vital signs monitors
Hewlett Packard Company............................ Ultrasound equipment
Hologic, Inc....................................... Bond densitometry analyzers
HumaScan Inc....................................... Breast tumor detection tests
Leisegang Medical, Inc............................. OB/GYN diagnostic instruments, ultrasonic tissue
aspirator (liposuction)
Roche/Boehringer Mannheim Corporation.............. Hematology, chemistry analyzers, and reagents
Siemens............................................ Ultrasound equipment
Sonosight.......................................... Hand-held ultrasound equipment

Vendor relationships are an integral part of the Company's businesses.
Marketing and sales support, performance incentives, product literature,
samples, demonstration units, training, marketing intelligence, distributor
discounts and rebates, and new products are strategic to the Company's future
success.

In the Imaging Business, prices of consumable imaging products, primarily
films and film related products, are influenced significantly by manufacturers
through distributor discounts and rebates. These distributor/manufacturer
relationships affect the profitability of the Company's Imaging Business.
Additionally, the development of new technology may change the manner in which
diagnostic imaging services are provided. In the event of such technological
changes, the Company's ability to obtain distribution agreements or develop
vendor relationships to distribute such new technology will impact the Company's
operations.

COMPETITION

The Company operates in a highly competitive environment. The Company's
principal competitors are the few multimarket medical distributors that are
full-line, full-service medical supply companies, most of which are national in
scope. These national companies have sales representatives competing directly
with PSS, are substantially larger in size, and have substantially greater
financial resources than the Company. There are also numerous local dealers and
mail order firms that distribute medical supplies and equipment within the same
market as the Company. Most local dealers are privately owned and operate with
limited product lines. There are several mail order firms that distribute
medical supplies on a national or regional basis. The Company also competes
with certain manufacturers that sell their products both to distributors and
directly to users, including office-based physicians.

-10-

REGULATORY MATTERS

The Company's business is subject to regulation under the Federal Food, Drug,
and Cosmetic Act, the Prescription Drug Marketing Act of 1987, the Controlled
Substances Act, and other regulation by the U.S. Food and Drug Administration
and state laws applicable to the distribution and manufacture of medical devices
and over-the-counter pharmaceutical products, as well as the distribution of
prescription pharmaceutical products.

The Federal Food, Drug, and Cosmetic Act generally regulates the manufacture
of drug and medical devices shipped in interstate commerce, including such
matters as labeling, packaging, storage and handling of such products. The
Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug
and Cosmetic Act, establishes certain requirements applicable to the wholesale
distribution of prescription drugs, including the requirements that wholesale
drug distributors be registered with the Secretary of Health and Human Services
or be licensed in each state in which they conduct business in accordance with
federally established guidelines on storage, handling, and records maintenance.
Under the Controlled Substances Act, the Company, as a distributor of controlled
substances, is required to obtain annually a registration from the Attorney
General in accordance with specified rules and regulations and is subject to
inspection by the Drug Enforcement Administration acting on behalf of the
Attorney General. The Company is required to maintain licenses and permits for
the distribution of pharmaceutical products and medical devices under the laws
of the states in which it operates. In addition, the Company's physician
customers are subject to significant federal and state regulation. There can be
no assurance that regulations that impact the physicians' practices will not
have a material adverse impact on the Company's business.

The Company is also subject to regulation in the European countries where its
International Business markets its products. Many of the regulations applicable
in such countries are similar to those of the U.S. Food and Drug Administration.
The national health or social security organizations of certain countries
require the products distributed by the Company to be qualified before they can
be marketed in those countries.

Federal, state and foreign regulations regarding the sale and distribution of
medical supplies, equipment and devices by the Company are subject to change.
The Company cannot predict what impact, if any, such changes might have on its
business.

-11-

Item 2. Properties

At April 3, 1998, the Company maintained 111 service centers providing service
to 50 states throughout the United States, as well as Belgium, France, Germany,
and the Netherlands. All locations are leased by the Company with the exception
of the Imaging Business service center located in Syracuse, New York, the
International Business service center located in Leuven, Belgium, and the Long-
Term Care Business service center located in Indianapolis, Indiana, and
administrative offices in Sunbury, Pennsylvania and Madison, Mississippi. The
following table identifies the locations of the Company's service centers and
the areas that they service.

Physician Supply Business

Service Center Location States Serviced Service Center Location States Serviced
- ------------------------- ----------------------- ---------------------------- -----------------------

Albany, NY CT, NY, VT Louisville, KY IN, KY
Albuquerque, NM CO, NM, TX Lubbock, TX TX
Atlanta, GA AL, GA Memphis, TN AR, MS, TN
Baltimore, MD MD, PA, VA, WV Milwaukee, WI WI
Beaumont, TX TX Minneapolis, MN IA, MN, MT, ND, SD, WI
Birmingham, AL AL, MS Mobile, AL AL, FL, MS
Boise, ID (2) ID, MT Nashville, TN (2) IL, KY, TN
Charlotte, NC NC, SC, TN, VA New Orleans, LA LA, MS, TX
Chattanooga, TN AL, GA, TN Norfolk, VA NC, VA, WV
Chicago, IL IL, IN, WI Omaha, NE CO, IA, NE, WY
Cincinnati, OH IN, KY, OH, WV Orlando, FL FL
Cleveland, OH OH Philadelphia, PA DE, NJ, NY, PA
Columbia, SC GA, SC Phoenix, AZ AZ
Dallas, TX OK, TX Pittsburgh, PA MD, NY, OH, PA, WV
Davenport, IA (2) IA, IL Portland, OR CA, OR, WA
Deerfield Beach, FL FL Raleigh, NC NC, VA
Denver, CO CO, NM, WY Richmond, VA VA
Detroit, MI MI Roanoke, VA TN, VA
Honolulu, HI HI Rochester, NY NY
Houston, TX OK, TX Salt Lake City, UT CO, ID, MT, NV, UT
Indianapolis, IN IL, IN San Antonio, TX TX
Jackson, MS LA, MS San Diego, CA CA
Jacksonville, FL FL, GA, SC San Francisco, CA CA
Kansas City, KS IA, IL, KS, MO Seattle, WA AK, WA
Knoxville, TN KY, NC, TN St. Louis, MO IL, MO
Lafayette, LA LA St. Petersburg, FL FL
Las Vegas, NV AZ, NV, UT Tallahassee, FL AL, FL, GA
Little Rock, AR AR, TX Tulsa, OK AK, MO, OK
Long Island, NY MA, NJ, NY Union, NJ NJ, NY
Los Angeles, CA (North) CA Wareham, MA CT, MA, ME, NH, RI
Los Angeles, CA (South) CA

-12-

Imaging Business

Service Center Location States Serviced Service Center Location States Serviced
- ------------------------- ----------------------- ---------------------------- -----------------------

Albany, NY MA, NY, VT Memphis, TN AR, MS, TN
Albuquerque, NM AZ, CO, NM, TX Mobile, AL AL, FL, MS
Atlanta, GA GA, SC Nashville, TN KY, TN
Birmingham, AL AL, FL, MS, TN Newburgh, NY CT, MA, NJ, NY, PA
Buffalo, NY NY, OH, PA Pompano Beach, FL FL
Charlotte, NC NC, SC Raleigh, NC NC
Chicago, IL IL, IN, WI Richmond, VA MD, NC, PA, VA, WV
Columbia, SC SC Roanoke, VA TN, VA, WV
Danville, PA (3) NJ, PA Rochester, NY NY, PA
Denver, CO CO, NE, WY St. Louis, MO IL, KY, MO
Indianapolis, IN IL, IN, KY Syracuse, NY NY, PA
Jacksonville, FL FL, GA Tallahassee, FL (2) FL, GA
Kansas City, KS (4) KS, MO Tampa, FL FL
Little Rock, AR (3) AK, LA, MS, OK, TN Winston Salem, NC (2) NC, VA

Long-Term Care Business (1)

Service Center Location States Serviced Service Center Location States Serviced
- ------------------------- ----------------------- ---------------------------- -----------------------

Atlanta, GA AL, GA, SC, TN Madison, WI IA, MD, MN, NE, WI
Chattanooga, TN (3) KY, TN Manchester, NH ME, NH, RI
Cincinnati, OH (2) IN, KY, MI, OH, WV Orlando, FL FL, GA
Clearwater, FL (2) FL, GA Warren, RI (2) CT, MA, NH, NJ, RI
Columbus, OH IN, OH, PA, WV Phoenix, AZ AZ, NM
Dallas, TX KS, LA, NM, OK, TX Raleigh, NC NC, SC, VA, WV
Fort Worth, TX (2) AR, OK, TX Richmond, VA (2) NC, VA, WV
Harrisburg, PA NJ, NY, OH, PA, VA, WV Roanoke, VA (2) NC, VA, WV
Indianapolis, IN (2) IL, IN, KY, OH Sacramento, CA CA, OR, WA
Jackson, MS AL, LA, MS, TN San Antonio, TX LA, NM, TX
Kennesaw, GA (2) AL, FL, GA, SC, TN Memphis, TN AL, AR, KY, MO, MS, TN
Los Angeles, CA CA, NV

International Business

Service Center Location Country Services Service Center Location Country Serviced
- ------------------------- ----------------------- ---------------------------- -----------------------

Lueven, Belgium Belgium, France, Dusseldorf, Germany Germany
Germany, Luxembourg Utrecht, Netherlands Netherlands

(1) Gulf South Medical Supply, Inc. service centers presented as of December 31,
1997
(2) Merged into existing service centers subsequent to April 3, 1998
(3) Acquired subsequent to April 3, 1998
(4) Start-up service center formed subsequent to April 3, 1998

In the aggregate, the Company's service centers consist of approximately 2.1
million square feet, of which all is leased, with the exception of the locations
in Leuven, Belgium, Indianapolis, Indiana, Sunbury, Pennsylvania, and Madison,
Mississippi, under lease agreements with expiration dates ranging from 1999 to
2005. The Company's service centers range in size from approximately 5,000
square feet to 91,000 square feet.

The corporate offices of PSS consist of approximately 65,000 square feet of
leased office space located at 4345 Southpoint Boulevard, Jacksonville, Florida
32216. The lease for this space expires in April 2002.

At April 3, 1998, the Company's facilities provided adequate space for the
Company's operations. Throughout the Company's history of growth, the Company
has been able to secure the required facilities.

-13-

Item 3. Legal Proceedings

The Company and certain of its current officers and directors are named as
defendants in a purported securities class action lawsuit entitled Jack Hirsch
v. PSS World Medical, Inc., et al., Civil Action No. 98-502-cv-5-20A. The
action, which was filed on May 28, 1998, is pending in the United States
District Court for the Middle District of Florida. The plaintiff alleges, for
himself and for a purported class of similarly situated stockholders that
allegedly purchased the Company's stock between December 27, 1997 and May 8,
1998, that the defendants engaged in violations of certain provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5
promulgated thereunder. The plaintiff seeks damages, including costs and
expenses. The Company believes that the allegations contained in the complaint
are without merit and intends to defend vigorously against the claims. However,
the lawsuit is in the earliest stages, and there can be no assurance that this
litigation will be ultimately resolved on terms that are favorable to the
Company.

Gulf South Medical Supply, Inc. ("Gulf South"), a wholly owned subsidiary of
the Company, and certain of its current and former officers and directors, among
others, are named as defendants in two purported securities class action
lawsuits entitled Ernest Klein v. Gulf South Medical Supply, Inc., et al., Civil
Action No. 3:97cv526WS, and Ann Krupnick v. Gulf South Medical Supply, Inc., et
al., Civil Action No. 3:97cv525BN. Both actions, which were filed on July 21,
1997, are pending in the United States District Court for the Southern District
of Mississippi. The plaintiff in the Klein action alleges, for himself and for
a purported class of similarly situated stockholders that allegedly purchased
stock in Gulf South's June 1996 public offering of three million shares of its
common stock (the "June 1996 Offering"), that the defendants engaged in
violations of certain provisions of the Securities Act of 1933, as amended, and
Mississippi state law. The plaintiff in the Krupnick action alleges for herself
and for a purported class of similarly situated stockholders who purchased Gulf
South Common Stock between May 2, 1996 and July 22, 1996, that the defendants
engaged in certain violations of the Exchange Act, Rule 10b-5 promulgated
thereunder and Mississippi state law. Both lawsuits relate to disclosures made
in the prospectus issued by Gulf South in connection with its June 1996
Offering. Plaintiffs seek damages, including costs and expenses. The Company
believes that the allegations contained in these complaints are also without
merit and intends to defend vigorously against the claims. However, these
lawsuits are in their earliest stages, and there can be no assurance that this
litigation will ultimately be resolved on terms that are favorable to the
Company.

The Company is named as a defendant in a purported patent infringement claim
filed by Bayer Corp. ("Bayer") in the United States District Court for the
Middle District of Florida 98-235 Civ. J-21A. In this lawsuit, Bayer alleges
that the urinalysis test strips sold by the Company under the Penny Saver(TM)
label infringe four Bayer patents. The Company is contesting the claim of
infringement. In addition, the Company has obtained a written agreement from
the manufacturer of the product, YeongDong Pharmaceuticals of Seoul, Korea,
indemnifying the Company for the costs of defense of the suit and for the
underlying liability. To date, YeongDong has fulfilled its obligation to
reimburse the Company for the fees and costs incurred in defending this case.
The Company further has indemnity rights against the U.S. distributor of the
YeongDong product, BioSys Laboratories ("BioSys"), pursuant to its vendor
agreement with BioSys. The Company believes that the allegations contained in
the complaint are without merit and intends to defend vigorously against the
claims. However, this lawsuit is in its earliest stages and there can be no
assurance that this litigation will ultimately be resolved on terms that are
favorable to the Company.

Although the Company does not manufacture products, the distribution of
medical supplies and equipment entails inherent risks of product liability. The
Company has not experienced any significant product liability claims and
maintains product liability insurance coverage. In addition, the Company is a
party to various legal and administrative legal proceedings and claims arising
in the normal course of business. While any litigation contains an element of
uncertainty, management believes that, other than as discussed above, the
outcome of any proceedings or claims which are pending or known to be threatened
will not have a material adverse effect on the Company's consolidated financial
position, liquidity, or results of operations.

-14-

Item 4. Submission of Matters to a Vote of Security Holders

During the fourth quarter of the Company's fiscal year covered by this report,
a Special Meeting of the Company's shareholders was held on March 26, 1998. The
following proposals were adopted: (1) the issuance of common stock, $.01 par
value per share, of the Company ("Common Stock") pursuant to the Agreement and
Plan of Merger, dated December 14, 1997, by and among the Company, PSS Merger
Corp., a wholly owned subsidiary of the Company, and Gulf South Medical Supply,
Inc. ("Gulf South"), with Gulf South being the surviving corporation and
becoming a wholly owned subsidiary of the Company (the "Merger"); (2) the
amendment to the Amended and Restated Articles of Incorporation, as amended, of
the Company to increase the number of authorized shares of Common Stock from
60,000,000 to 150,000,000 (the "Stock Amendment"); and (3) the amendment to the
Amended and Restated Articles of Incorporation, as amended, of the Company to
change the corporate name of the Company from Physician Sales & Service, Inc. to
PSS World Medical, Inc. (the "Name Amendment").

Proposal For Against/Abstained
- ------------------------- -------------------- -----------------

1) The Merger 25,114,880 118,389
2) The Stock Amendment 24,956,218 516,258
3) The Name Amendment 30,308,327 87,116

PART II

Item 5. Market for the Registrant's Common Shares and Related Shareholder
Matters

Shares of PSS World Medical, Inc.'s Common Stock are quoted on the NASDAQ
National Market under the ticker symbol "PSSI." The following table reflects
the range of the NASDAQ reported high and low closing sale prices of the
Company's Common Stock during the periods indicated:

Quarter Ended High Low
- --------------------------------------------------------------------------------------- -------- -------

June 30, 1996.......................................................................... $33.00 $22.75
September 30,1996...................................................................... 25.63 15.00
December 31, 1996...................................................................... 26.88 13.75
March 28, 1997......................................................................... 19.75 13.00
June 30, 1997.......................................................................... 19.00 12.00
September 30, 1997..................................................................... 19.50 16.75
December 31, 1997...................................................................... 24.00 18.06
April 3, 1998.......................................................................... 26.00 18.31

As of April 3, 1998, there were 1,774 holders of record and approximately
16,000 beneficial holders of the Company's Common Stock.

Since inception, the Company has neither declared nor paid cash dividends on
the Common Stock. The Company expects that earnings will be retained for the
growth and development of the Company's business. Accordingly, the Company does
not anticipate that any dividends will be declared on the Common Stock for the
foreseeable future. An imaging division company paid distributions to S-
corporation shareholders in the amounts of $516,000, $455,000, and $1,100,000
during fiscal years 1995, 1996, and 1997, respectively, prior to the acquisition
by the Company.

On January 30, 1998, the Company issued an aggregate of 201,299 shares of the
Company's Common Stock, including 35,947 shares which are being held in escrow
pending the resolution of potentially identifiable claims, to the former
shareholders of Southwest Radiographics, Inc. ("Southwest") in exchange for all
of the shares of Southwest common stock. The issuance of securities was made in
reliance on the exemption from registration provided under Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
All

-15-

of the securities were acquired by the recipients for investment with no view
toward public resale or distribution thereof without registration. The
recipients qualified as accredited investors, the offers and sales were made
without any public solicitation, and the stock certificates bear restrictive
legends.

Item 6. Selected Financial Data

The following selected financial data of the Company for fiscal years 1994
through 1998 have been derived from the Company's audited Consolidated Financial
Statements which give retroactive effect to the mergers with Taylor, X-Ray
Georgia, S&W, and GSMS. Due to differing fiscal year ends of Gulf South Medical
Supply, Inc. and PSS World Medical, Inc., the 12 months ended December of GSMS
were consolidated with the 12 months ended March of the Company for all periods
presented.

Fiscal Year Ended
---------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- -----------
(Dollars in Thousands, Except Per Share Data)

Income Statement Data:
Net sales $ 470,654 $ 564,136 $ 719,214 $ 940,764 $1,289,065
Gross profit (3) 133,625 156,344 194,711 257,042 351,836
Selling and G&A expenses (3) 118,553 135,320 159,578 217,077 280,027
Merger and other nonrecurring costs and
expenses (1) 827 5,221 18,238 17,950 39,233
Net income $ 4,639 $ 5,856 $ 9,295 $ 13,922 $ 15,970
---------- ---------- ---------- ---------- -----------
Earnings per share:
Basic N/A N/A $ 0.17 $ 0.22 $ 0.23
Diluted $ 0.12 $ 0.12 $ 0.16 $ 0.21 $ 0.23
---------- ---------- ---------- ---------- -----------
Unaudited pro forma net income excluding
merger and other nonrecurring costs
and expenses and 1997 other operating
charges (1) (3) $ 4,879 $ 10,621 $ 21,003 $ 27,437 $ 44,304
---------- ---------- ---------- ---------- -----------
Unaudited pro forma net income per share
excluding merger and other
nonrecurring costs and expenses and
1997 other operating charges (1) (3) $ 0.13 $ 0.22 $ 0.37 $ 0.42 $ 0.64
---------- ---------- ---------- ---------- -----------
Weighted average shares outstanding (2)
Basic N/A N/A 55,813 64,248 68,727
Diluted 37,746 47,979 57,360 64,998 69,697
---------- ---------- ---------- ---------- -----------
Balance Sheet Data:
Working capital $ 64,329 $ 88,011 $ 211,835 $ 270,018 $ 384,133
Total assets 161,561 189,866 351,553 512,640 676,782
Long-term liabilities 81,772 39,927 10,622 8,459 130,734
Total equity 18,679 79,114 242,091 352,661 387,897

Other Historical Financial Data(4):
EBIT 38,070 45,692 79,832
EBITDA 42,700 52,165 90,832
Pro forma interest expense 14,392 12,042 11,957
EBITDA Coverage 3.0 4.3 7.6
EBITDA Margin 5.9% 5.5% 7.0%

(1) Merger and other nonrecurring costs and expenses include merger costs and
expenses, restructuring costs related to acquisitions, impairment charges,
and other nonrecurring charges. Refer to Note 3 of the accompanying
financial statements for further discussion of these amounts.
(2) Adjusted to give effect to a three-for-one stock split in fiscal year 1996.
(3) Excludes fiscal 1997 other operating charges representing write-offs of
inventory of $4,100 and accounts receivable of $500 at branches involved in
mergers.
(4) Excludes merger and other nonrecurring costs and expenses.
(5) Pro forma interest expense includes interest on the $125.0 million 8 1/2%
senior subordinated notes issued in fiscal 1998 as if outstanding for all
periods presented.

-16-

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion and analysis of the consolidated financial condition
and consolidated results of operations of PSS should be read in conjunction with
the more detailed information contained in the Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K.

Company Overview

The Company, through its wholly owned subsidiary Diagnostic Imaging, Inc.
("DI"), is the leading distributor of medical diagnostic imaging supplies,
chemicals, equipment, and service to the acute care and alternate-care markets
in the United States. DI currently operates 26 imaging service distribution
centers ("Imaging Business") serving over 13,000 customer sites in 32 states.
The Imaging Business' primary market is the approximately 5,000 hospitals and
other alternate-site imaging companies operating approximately 50,000 office
sites throughout the United States.

Company Growth

The Company has grown rapidly in recent years through mergers and
acquisitions, same-center growth and new-center development. From the end of
fiscal year 1994 through the end of fiscal year 1998, the Company's net sales,
excluding the pre-acquisition revenues of four companies acquired as pooling of
interests, grew at a compound annual rate of approximately 55.9%, and including
pre-acquisition revenues of four companies acquired as pooling of interests, the
Company's net sales grew at a compound annual rate of approximately 28.6%. The
number of company service centers has grown from two at the end of fiscal year
1984 to 101 currently, including 58 Physician Supply Business service centers,
26 Imaging Business service centers, 14 Long-Term Care Business Service centers
and three International Business service centers. In order of priority, the
Company's growth has been accomplished through: (i) acquiring local and
regional Imaging Business medical products distributors; (ii) acquiring local
and regional Physician Supply Business medical-products distributors; (iii)
acquiring Gulf South

-17-

Medical Supply, Inc. thereby forming the basis of the Company's Long-Term Care
Business; (iv) increasing sales from existing service centers; and (v) opening
start-up service centers.

The following table depicts the number of service centers, sales
representatives and states served by the Company for the fiscal years indicated.
See "Item 2.--Properties" for a list of the Company's service centers.

Fiscal Year Ended
----------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----

Total Company:
Sales representatives............................. 420 523 813 924 957
Service Specialists............................... 98 104 112 223 390
Service centers (1)............................... 58 70 90 103 111
States served..................................... 50 50 50 50 50
Physician Supply Business:
Sales representatives............................. 362 455 692 720 703
Service centers (1)............................... 45 54 64 61 61
States served..................................... 44 48 50 50 50
Imaging Business (2):
Sales representatives............................. 24 26 30 73 116
Service specialists............................... 98 104 112 223 390
Service centers................................... 7 7 8 21 25
States served..................................... 9 9 9 16 27
Long-Term Care Business:
Sales representatives............................. 34 42 91 107 110
Service centers (3)............................... 6 9 18 19 22
States served..................................... 50 50 50 50 50
International Business:
Sales representatives............................. -- -- -- 24 28
Service centers................................... -- -- -- 2 3
Countries served.................................. -- -- -- 5 5

(1) Excludes Taylor service centers prior to their acquisition.
(2) All Imaging Business data for periods prior to November 1996 reflect pre-
merger financial data of companies acquired through pooling-of-interests
transactions.
(3) All Long-Term Care Business data is presented based on a calendar year end.

Acquisition Program

The Company views the acquisition of medical products distributors as an
integral part of its growth strategy. The Physician Supply Business has grown
from one service center located in Jacksonville, Florida in 1983 to 58
currently. The Imaging Business and International Business began with
acquisitions in fiscal year 1997 and have grown primarily through acquisitions
to 26 and three service centers, respectively, to date. The Long-Term Care
Business was developed through the acquisition of Gulf South Medical Supply,
Inc. in March 1998. Since fiscal year 1994 the Company has accelerated its
acquisition of medical products distributors both in number and in size of the
operations acquired.

The following table sets forth the number of acquisitions of the Company and
the prior revenues of the companies acquired for the periods indicated (in
thousands):

Fiscal Year Ended (1)
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- ---------

Number of acquisitions............................ 4 9 11 10 15
Prior year revenues for acquired companies (2).... $26,300 $37,600 $167,600 $241,700 $498,942

(1) Excludes companies previously acquired by companies subsequently acquired by
PSS World Medical, Inc.
(2) Reflects 12-month trailing revenues for companies prior to their acquisition
by PSS World Medical, Inc. and is not necessarily reflective of the revenues
of continued operations following their acquisition.

-18-

Sales Mix

The following table sets forth information regarding the Company's net sales
by business for the periods indicated (in millions):

Fiscal Year Ended
-------------------------
1996 1997 1998
------ ------ ---------

Net Sales
Physician Supply Business.......................... $483.3 $601.3 $ 659.8
Imaging Business................................... 105.8 146.1 319.7
Long-Term Care Business............................ 130.1 177.7 287.6
International Business............................. -- 15.7 22.0
------ ------ ---------
Total company................................. $719.2 $940.8 $1,289.1
====== ====== =========

Fiscal Year Ended
--------------------------
1996 1997 1998
------- ------- --------

Percentage of Net Sales
Physician Supply Business.......................... 67.2% 63.9% 51.2%
Imaging Business................................... 14.7 15.5 24.8
Long-Term Care Business............................ 18.1 18.9 22.3
International Business............................. -- 1.7 1.7
------ ------ ---------
Total company................................. 100.0% 100.0% 100.0%
====== ====== =========

Fiscal Year Ended
-------------------------
1996 1997(4) 1998
------ -------- -------

Gross Margin Trends
Total Company...................................... 27.1% 27.3% 27.3%

(4) Including fiscal year 1997 Physician Supply Business operating write-offs
of inventory of branches involved in mergers of approximately $4.1
million, the Company's gross margin was 26.9%.

The following table sets forth certain operating trends of the Company for the
periods indicated:

Fiscal Year Ended
-----------------
1997 1998
------- -------

Operating Trends:
Average Days Sales Outstanding........................... 59.9 54.3
Average Inventory Turnover............................... 7.6x 8.3x

Accounts receivable, net of allowances, were $210.0 million and $178.8 million
at April 3, 1998 and March 28, 1997, respectively. Inventories were $122.5
million and $102.4 million as of April 3, 1998 and March 28, 1997, respectively.

-19-

The following table sets forth certain liquidity trends of the Company for the
periods presented (in millions):

Fiscal Year Ended
-----------------
1997 1998
------- -------

Liquidity Trends:
Cash and Investments..................................... $112.1 $164.0
Working Capital.......................................... 270.0 384.1

Results of Operations

The table below sets forth for each of the fiscal years 1996 through 1998
certain financial information as a percentage of net sales. The following
financial information includes the pre-acquisition financial information of
Taylor, X-Ray Georgia, and S&W, and GSMS. Due to differing fiscal year ends of
Gulf South Medical Supply, Inc. and PSS World Medical, Inc., the 12 months ended
December of GSMS were consolidated with the 12 months ended March of the Company
for all periods presented. Refer to "Note 2--Business Acquisitions" in the
accompanying financial statements for GSMS results for the three months ended
April 3, 1998.

Fiscal Year Ended
------------------------
1996 1997 1998
------- ------ --------

Income Statement Data
Net sales.................................................................... 100.0% 100.0% 100.0%
Gross profit (1)............................................................. 27.1 27.3 27.3
General and administrative expenses.......................................... 14.5 15.3 14.1
Selling expenses............................................................. 7.7 7.8 7.6
Merger and other nonrecurring costs and expenses............................. 2.5 1.9 3.0
Net income................................................................... 1.3 1.5 1.2
Unaudited pro forma net income excluding merger and other nonrecurring costs
and expenses and fiscal 1997 other operating charges (2).................... 2.9 2.9 3.4

(1) Excludes fiscal year 1997 Physician Supply Business operating write-offs
of inventory of branches involved in mergers of approximately $4.1
million.
(2) Fiscal year 1997 other operating charges represent write-offs of
inventory and accounts receivable at branches involved in mergers.

Fiscal Year Ended April 3, 1998 Versus Fiscal Year Ended March 28, 1997

Net Sales. Net sales increased $348.3 million, or 37.0%, to $1.3 billion for
fiscal year 1998 compared to fiscal year 1997 net sales of $940.8 million.
Although there has been a migration of significantly lower hospital medical
product pricing into the physician office market which reduces revenues for the
same units previously sold, the increase in net sales was attributable to: (i)
net sales of companies acquired during fiscal year 1997; (ii) the Company's
focus on diagnostic equipment sales; (iii) internal sales growth of centers
operating at least two years; (iv) net sales from the acquisition of imaging
companies during fiscal year 1998; and (v) incremental sales generated in
connection with exclusive and semiexclusive vendor relationships. The current
Physician Supply Business same center sales growth approximated 13.5% for fiscal
year 1998.

Net sales contributed from acquisitions completed in fiscal 1998 totaled
approximately $5.0 million and $68.0 million for the Physician Supply Business
and Imaging Business, respectively. In addition, Imaging Business and Long-Term
Care Business acquisitions completed during fiscal 1997 contributed
approximately $104.0 million and $60.0 million, respectively, in incremental
fiscal 1998 sales.

Gross Profit. Gross profit increased $98.9 million, or 39.1%, for fiscal year
1998 compared to fiscal year 1997. The increase in gross profit dollars is
attributable to the sales growth described above. Gross profit as a percentage
of net sales was 27.3% and 26.9% for fiscal years 1998 and 1997, respectively.
Excluding the Physician Supply

-20-

Business 1997 other operating charge of $4.1 million related to inventory of
branches involved in mergers, the Company's gross profit would have been 27.3%
in fiscal 1997. Although there has been considerable gross margin pressure from
competition and a consolidating customer base, the Company has successfully
maintained its overall gross margins.

General and Administrative Expenses. General and administrative expenses
increased $37.4 million, or 25.9%, for fiscal year 1998 compared to fiscal year
1997. General and administrative expenses as a percentage of net sales,
decreased to 14.1% for fiscal year 1998 from 15.3% for fiscal year 1997. The
decrease in general and administrative expenses as a percentage of net sales was
a result of the continued leveraging of fixed costs of mature service center
operations and the increased contribution by the Imaging division which operates
at lower general and administrative expenses as a percentage of sales.

Selling Expenses. Selling expenses increased $25.0 million, or 34.1%, for
fiscal year 1998 compared to fiscal year 1997 as a result of an increase in net
sales. Selling expense as a percentage of net sales was approximately 7.6% and
7.8% for fiscal years 1998 and 1997, respectively. The Company utilizes a
variable commission plan, which pays commissions based on gross profit as a
percentage of net sales.

Merger and Other Nonrecurring Costs and Expenses. During fiscal 1998, the
Company recorded merger and other nonrecurring costs and expenses of
approximately $39.2 million related to merger costs and expenses resulting from
mergers accounted for as poolings of interests, restructuring costs related to
recent acquisitions, impairment charges, and other nonrecurring charges. The
following table sets forth the primary components of these
costs and expenses for fiscal year 1997 and 1998.

1997 1998
------- ------

Merger and restructuring costs and expenses..................... $14.5 $21.8
Information systems impairment.................................. -- 6.1
Goodwill impairment............................................. -- 5.8
Nonrecurring tax adjustment..................................... 2.0 3.0
Nonrecurring ESOP cost of acquired company...................... 1.5 2.5
------- ------
$18.0 $39.2
======= ======

Merger costs and expenses consist primarily of direct costs such as investment
banking, legal, accounting, and filing fees as well as consolidation costs from
the closing of duplicate service center locations, realigning regional and
corporate functions, and reducing personnel. Further, a restructuring charge
was taken in fiscal year 1998 related to the consolidation of distribution and
administrative functions as a result of the merger with Gulf South. This
consolidation will result in a realignment of the Company from five regions to
three regions and will include consolidation and closure of certain service
centers.

The information systems impairment charge relates to a decision made by
management in the fourth quarter of 1998 to replace its current information
systems. Due to the merger with Gulf South, management concluded that its
existing information systems were not compatible with those of Gulf South. In
addition, the existing systems were determined to be inadequate to support the
future growth of the combined companies and expected growth resulting from
future acquisitions. As a result of this change in the utilization of the
Company's existing systems, management determined that the value of the related
assets had been impaired and an impairment loss has been recognized.

The goodwill impairment charge is a noncash accounting charge resulting from
the Company's ongoing review process that includes an analysis to determine the
existence of impaired intangible assets. Intangible assets determined to be
impaired were associated with previous acquisitions made by the Physician Supply
Business and International Business. The revised carrying values of these
assets were calculated on the basis of undiscounted estimated future cash flows.

-21-

The Company recorded tax accruals for fiscal years 1997 and 1998 primarily
related to state and local tax compliance matters. These tax adjustments relate
only to Gulf South and, due to changes in operational procedures, will be
nonrecurring.

The nonrecurring ESOP charge is a result of the merger with S&W. Refer to
Note 12 of the accompanying financial statements for a discussion of the S&W
ESOP.

Operating Income. Operating income increased $15.2 million, or 87.4%, to
$32.6 million for fiscal year 1998 from $17.4 million for fiscal year 1997. As
a percentage of net sales, operating income for fiscal year 1998 increased to
2.5% from 1.8% for fiscal year 1997 primarily due to the expansion of gross
margins coupled with a reduction of general and administrative expenses as a
percentage of sales. On a pro forma basis, excluding the effects of merger and
other nonrecurring costs and expenses and fiscal 1997 other operating charges,
operating income for fiscal year 1998 would have increased $31.8 million, or
79.5%, to $71.8 million for fiscal year 1998 from $40.0 million for fiscal year
1997 due to operating income of acquired companies and increased profitability
described above.

Interest Expense. Interest expense for fiscal year 1998 increased
approximately $5.2 million, or 371.4%, compared to fiscal year 1997. Interest
expense increased due to the $125.0 million 8 1/2% senior subordinated debt
outstanding approximately six months of fiscal 1998. Interest expense for
fiscal year 1997 primarily results from the debt of the pooled Imaging Business
companies.

Interest and Investment Income. Interest and investment income for fiscal
year 1998 increased approximately $1.0 million, or 23.8%, compared to fiscal
year 1997 due to the investment of the net proceeds from the debt offering.

Other Income. Other income for fiscal 1998 increased $1.3 million, or 86.7%,
compared to fiscal year 1997.

Provision for Income Taxes. Provision for income taxes increased $10.3
million, or 132.1%, for fiscal year 1998 compared to fiscal year 1997 due to
higher pretax income of $34.0 million in fiscal year 1998 compared to $21.7
million in fiscal year 1997 as a result of the factors discussed above and was
also affected by lower nontaxable investment income of $0.7 million in fiscal
year 1998 compared to $1.1 million in fiscal year 1997, higher nondeductible
merger costs and expenses of $1.9 million in fiscal year 1998 compared to $0.7
million in fiscal year 1997, and $0.5 million of nondeductible goodwill
amortization recorded during fiscal 1998. The effective income tax rate was
53.1% in fiscal year 1998 primarily due to nondeductible merger costs.

Net Income. Net income increased $2.1 million, or 15.1%, to $16.0 million for
fiscal year 1998 from $13.9 million for fiscal year 1997 for the reasons
discussed above. As a percentage of net sales, net income decreased to 1.2% for
fiscal year 1998 from 1.5% for fiscal year 1997. On a pro forma basis,
excluding the effects of merger and other nonrecurring costs and expenses and
fiscal 1997 other operating charges, pro forma net income would have increased
$16.9 million, or 61.7%, to $44.3 million for fiscal year 1998 from $27.4
million for fiscal year 1997.

Fiscal Year Ended March 28, 1997 Versus Fiscal Year Ended March 29, 1996

Net Sales. Net sales increased $221.6 million, or 30.8%, to $940.8 million
for fiscal year 1997 compared to fiscal year 1996 net sales of $719.2 million.
The increase in net sales was attributable to: (i) internal sales growth of
centers operating at least two years; (ii) the Company's focus on diagnostic
equipment sales; (iii) incremental sales generated in connection with the Abbott
Agreement; (iv) net sales of Physician Supply Business centers and International
Business centers acquired during fiscal year 1997; and (v) net sales from the
acquisitions of the imaging companies during fiscal year 1997. The net sales
increase was slowed by the Company's efforts in the last six months of fiscal
year 1997 to reduce low gross margin sales of the Physician Supply Business.
Physician Supply Business same center sales growth approximated 18% for fiscal
year 1997.

-22-

Fiscal year 1997 net sales resulting from the acquisitions of the Imaging
Business totaled $146.0 million, an increase of $40.2 million over the fiscal
year 1996 Imaging Business revenues of $105.8 million. Fiscal year 1997 net
sales resulting from the acquisition of two Physician Supply Business medical
supply companies and three International Business medical supply companies
totaled approximately $25.5 million and $15.7 million, respectively.

Gross Profit. Gross profit increased $58.2 million, or 29.9%, for fiscal year
1997 compared to fiscal year 1996. The increase in gross profit dollars is
attributable to the sales growth described above. Gross profit as a percentage
of net sales was 26.9% and 27.1% for fiscal years 1997 and 1996, respectively.
Excluding the Physician Supply Business 1997 other operating charge of $4.1
million related to inventory of branches involved in mergers, the Company's
gross profit would have been 27.3% in fiscal 1997.

General and Administrative Expenses. General and administrative expenses
increased $40.1 million, or 38.5%, for fiscal year 1997 compared to fiscal year
1996. General and administrative expenses as a percentage of net sales,
increased to 15.3% for fiscal year 1997 from 14.5% for fiscal year 1996. The
increase in general and administrative expenses as a percentage of net sales was
a result of operating costs associated with transitioning merged and acquired
operations offset by the continued leveraging of fixed costs of mature service
center operations.

Selling Expenses. Selling expenses increased $17.9 million, or 32.3%, for
fiscal year 1997 compared to fiscal year 1996 as a result of an increase in net
sales. Selling expense as a percentage of net sales was approximately 7.8% and
7.7% for fiscal years 1997 and 1996, respectively. The Company utilizes a
variable commission plan, which pays commissions based on gross profit as a
percentage of net sales.

Merger and Other Nonrecurring Costs and Expenses. During fiscal 1997, the
Company recorded merger and other nonrecurring costs and expenses of
approximately $18.0 million in connection with mergers accounted for as poolings
of interests. The following table sets forth the primary components of these
costs and expenses for fiscal 1997 and 1996.

1996 1997
------- -------

Merger costs and expenses.................................. $15.7 $14.5
Nonrecurring tax adjustment................................ 1.7 2.0
Nonrecurring ESOP cost with acquired company............... 0.8 1.5
------- -------
$18.2 $18.0
======= =======

The Company recorded tax accruals for fiscal years 1996 and 1997 primarily
related to sales and use tax compliance matters. These tax adjustments are
nonrecurring and relate only to Gulf South.

The nonrecurring ESOP charge is a result of the merger with S&W. Refer to
Note 12 of the accompanying financial statements for a discussion of the S&W
ESOP.

Operating Income. Operating income increased $0.5 million, or 3.0%, to $17.4
million for fiscal year 1997 from $16.9 million for fiscal year 1996. As a
percentage of net sales, operating income for fiscal year 1997 decreased to 1.8%
from 2.3% for fiscal year 1996 primarily due to operating costs and asset write-
offs associated with transitioning merged and acquired operations. On a pro
forma basis, excluding the effect of merger and other nonrecurring costs and
expenses and fiscal 1997 other operating charges, operating income for fiscal
year 1997 would have increased $4.9 million, or 14.0%, to $40.0 million for
fiscal year 1997 from $35.1 million for fiscal year 1996.

-23-

Interest Expense. Interest expense for fiscal year 1997 decreased
approximately $2.4 million, or 63.2%, compared to fiscal year 1996. Interest
expense decreased due to the use of the net proceeds from an equity offering
during the three months ended December 31, 1995 to repay all outstanding debt
other than capital lease obligations. Interest expense for fiscal year 1997
primarily results from the debt of the pooled Imaging Business companies.

Interest and Investment Income. Interest and investment income for fiscal
year 1997 increased approximately $2.8 million, or 200.0%, compared to fiscal
year 1996. The Company earned interest income of $3.7 million in 1997 from the
short-term investment of the remaining net proceeds from the equity offering in
fiscal year 1996 and recorded an unrealized gain of $0.5 million on equity
securities.

Other Income. Other income slightly decreased for fiscal year 1997 compared
to fiscal year 1996.

Provision for Income Taxes. Provision for income taxes increased $1.0
million, or 14.7%, for fiscal year 1997 compared to fiscal year 1996 due to
higher pretax income of $21.7 million in fiscal year 1997 compared to $16.1
million in fiscal year 1996 as a result of the factors discussed above and was
also affected by higher nontaxable investment income of $1.1 million in fiscal
year 1997 compared to $0.2 million in fiscal year 1996 and lower nondeductible
merger costs and expenses of $0.7 million in fiscal year 1997 compared to $2.2
million in fiscal year 1996. The effective income tax rate was 35.9% in fiscal
year 1997 primarily due to an income tax benefit resulting from a reduction in
the deferred tax asset valuation allowance of $0.9 million.

Net Income. Net income increased $4.6 million, or 49.5%, to $13.9 million for
fiscal year 1997 from $9.3 million for fiscal year 1996 for the reasons
discussed above. As a percentage of net sales, net income increased to 1.5% for
fiscal year 1997 from 1.3% for fiscal year 1996. On a pro forma basis,
excluding the effect of merger and costs and expenses, and other nonrecurring
charges, pro forma net income would have increased $6.4 million, or 30.5%, to
$27.4 million for fiscal year 1997 from $21.0 million for fiscal year 1996.

Quarterly Results of Operations (Unaudited)

The following table presents summarized unaudited quarterly results of
operations for the Company for fiscal years 1997 and 1998. The Company believes
all necessary adjustments have been included in the amounts stated below to
present fairly the following selected information when read in conjunction with
the Consolidated Financial Statements of the Company and notes thereto included
elsewhere herein. Future quarterly operating results may fluctuate depending on
a number of factors, including the timing of acquisitions of service centers,
the timing of the opening of start-up service centers, and changes in customer's
buying patterns of supplies, diagnostic equipment and pharmaceuticals. Results
of operations for any particular quarter are not necessarily indicative of
results of operations for a full year or any other quarter.

Fiscal Year 1997 Fiscal Year 1998
-------------------------------------- --------------------------------------
(In Thousands, Except Per Share Data) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- -------- -------- -------- --------

Net sales........................................ $209,491 $234,940 $244,567 $251,766 $288,182 $320,123 $330,615 $350,145
Gross profit..................................... 56,489 63,405 67,940 65,108 76,784 86,615 90,696 97,741
Merger and other nonrecurring costs and expenses. 8,245 900 1,166 7,639 1,385 4,444 4,552 28,852
Net income (loss)................................ 655 6,796 7,508 (1,037) 7,920 7,757 9,325 (9,032)
Basic earnings (loss) per share.................. $ 0.01 $ 0.11 $ 0.11 $ (0.02) $ 0.12 $ 0.11 $ 0.14 $ (0.13)
Diluted earnings (loss) per share................ $ 0.01 $ 0.11 $ 0.11 $ (0.02) $ 0.12 $ 0.11 $ 0.13 $ (0.13)
Pro forma net income, excluding merger and other
nonrecurring costs and expenses................. 5,994 7,116 7,933 3,157 8,836 10,664 12,277 12,595
Pro forma diluted earnings per share, excluding
merger and other nonrecurring costs and
expenses........................................ 0.10 0.11 0.12 0.05 0.13 0.15 0.18 0.19

The fourth quarter of fiscal year 1997 includes a $4.1 million write-off of
inventories at branches involved in mergers, a $1.0 million increase in bad debt
expense and a reduction in the deferred tax asset valuation allowance of $0.9
million.

-24-

Liquidity And Capital Resources

As the Company's business grows, its cash and working capital requirements
will also continue to increase as a result of the need to finance acquisitions
and anticipated growth of the Company's operations. This growth will be funded
through a combination of cash flow from operations, revolving credit borrowings
and proceeds from any future public offerings.

Net cash (used in) provided by operating activities was $(27.5) million,
$(10.4) million, and $26.2 million in fiscal years 1996, 1997, and 1998,
respectively. The increase in fiscal 1998 operating cash flow over prior years
was primarily attributable to: (i) sales expansion coupled with improving gross
profit margins; (ii) control of inventory and accounts receivable asset growth
relative to sales growth; and (iii) continued leveraging of fixed operating
costs. In fiscal year 1997, a significant portion of operating cash flow was
used for the closing of duplicate service center locations, realigning regional
and corporate functions, consolidating information systems, and reducing
personnel in conjunction with acquisitions.

Net cash used in investing activities was $35.4 million, $74.8 million, and
$48.0 million in fiscal years 1996, 1997, and 1998, respectively. These funds
were primarily utilized to finance the acquisition of new service centers and
capital expenditures including the use of the net proceeds from sales and
maturities of marketable securities.

Net cash provided by financing activities was $120.2 million, $56.4 million,
and $65.2 million for fiscal years 1996, 1997, and 1998, respectively. Fiscal
1997 cash provided by Gulf South Medical Supply's net proceeds from a public
offering of approximately $91.5 million of its common stock was partially offset
by the use of cash to pay off debt assumed through fiscal 1997 acquisitions.
Fiscal 1998 cash provided by the issuance of the $125.0 million senior
subordinated notes was partially offset by cash used to retire debt of acquired
companies.

The Company had working capital of $384.1 million and $270.0 million as of
April 3, 1998 and March 28, 1997, respectively. Accounts receivable, net of
allowances, were $210.0 million and $178.8 million at April 3, 1998 and March
28, 1997, respectively. The average number of days sales in accounts receivable
outstanding was approximately 54.3 and 59.9 days for the years ended April 3,
1998 and March 28, 1997, respectively. For the year ended April 3, 1998, the
Company's Physician Supply and Imaging Businesses had days sales in accounts
receivable of approximately 52.5 and 41.7 days, respectively.

Inventories were $122.5 million and $102.4 million as of April 3, 1998 and
March 28, 1997, respectively. The Company had annualized inventory turnover of
8.3x and 7.6x for the years ended April 3, 1998 and March 28, 1997. For the year
ended April 3, 1998, the Company's Physician Supply and Imaging Business had
annualized inventory turnover of 9.0x and 9.6x, respectively. Inventory
financing historically has been achieved through negotiating extended payment
terms from suppliers.

The Company has historically been able to finance its liquidity needs for
expansion through lines of credit provided by banks and proceeds from the public
and private offering of stock and debt. In May 1994, the Company completed an
initial public offering of Common Stock resulting in proceeds of approximately
$15.8 million. In November 1995, the Company completed a secondary offering of
Common Stock. The Company used approximately $58.2 million and $26.9 million of
the total secondary offering net proceeds of $142.9 million to repay Company
debt and debt assumed through acquisitions in fiscal years 1996 and 1997,
respectively. Management used the remaining proceeds in connection with
acquisitions for the Imaging, Physician Supply, and International Businesses,
and general corporate purposes, including capital expenditures during fiscal
years 1997 and 1998.

The Company has historically maintained an asset-backed, revolving credit
facility. This credit facility recently expired. The Company is currently in
the process of negotiating a new credit facility with a syndicate of banks. The
Company's wholly owned subsidiary, GSMS, has available a $15.0 million revolving
credit facility which matures September 25, 1998. GSMS had no outstanding debt
under its credit facility.

-25-

On October 7, 1997, the Company issued, in a private offering under Rule 144A
of the Securities Act of 1933, an aggregate principal amount of $125.0 million
of its 8 1/2% senior subordinated notes due in 2007 (the "Private Notes") with
net proceeds to the Company of $119.5 million after deduction for offering
costs. The Private Notes are unconditionally guaranteed on a senior subordinated
basis by all of the Company's domestic subsidiaries. On February 10, 1998, the
Company closed its offer to exchange the Private Notes for senior subordinated
notes (the "Notes") of the Company with substantially identical terms to the
Private Notes (except that the Notes do not contain terms with respect to
transfer restrictions). Interest on the Notes accrues from the date of original
issuance and is payable semiannually on April 1 and October 1 of each year,
commencing on April 1, 1998, at a rate of 8 1/2% per annum.

The Company believes that the expected cash flows from operations, bank
borrowings, the net proceeds of the debt offering, and capital markets should be
adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments of interest on its debts
for the foreseeable future.

Year 2000

The Company is currently replacing a majority of its internal information
systems hardware and software with new systems ("New Systems") that are year
2000 compliant. These New Systems will be used in several key areas of the
Company's business, including inventory management, purchasing, sales, shipping,
accounts payable, accounts receivable, and financial reporting. The Company
expects to incur internal payroll costs, consulting fees, and hardware and
software costs for preparation and implementation of these New Systems. The
total expected cost of implementation is estimated to be approximately $10.0
million. Although the Company believes it will complete all phases of
implementation of these New Systems by December 1999, there can be no assurance
that full implementation will occur by the year 2000. Failure to complete
certain phases of the implementation would have a material adverse affect on the
Company's systems and results of operations.

Implementation of the New System entails contacting suppliers to ensure
compatibility with the Company's information systems and to discuss year 2000
compliance issues. There can be no assurance that the systems of other companies
which the Company's systems rely upon will be timely converted, or that such
failure to convert by another company would not have a material adverse effect
on the Company's systems and results of operations.

All statements contained herein that are not historical facts, including, but
not limited to, statements regarding anticipated growth in revenue, gross
margins and earnings, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; competitive factors; the ability of the
Company to adequately defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business and
economic conditions; and other factors described from time to time in the
Company's reports filed with the Securities and Exchange Commission. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.

-26-

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Financial Statements:
Report of Independent Certified Public Accountants--PSS World Medical, Inc............................ F-2

Report of Independent Auditors--Gulf South Medical Supply, Inc........................................ F-3

Consolidated Balance Sheets--April 3, 1998 and March 28, 1997......................................... F-4

Consolidated Statements of Income for the Years Ended April 3, 1998, March 28, 1997, and March 29,
1996................................................................................................. F-5

Consolidated Statements of Shareholders' Equity for the Years Ended April 3, 1998, March 28, 1997,
and March 29, 1996................................................................................... F-6

Consolidated Statements of Cash Flows for the Years Ended April 3, 1998, March 28, 1997, and March
29, 1996............................................................................................. F-7

Notes to Consolidated Financial Statements............................................................ F-8

Schedule II--Valuation and Qualifying Accounts for the Years Ended March 29, 1996, March 28, 1997,
and April 3, 1998.................................................................................... F-30

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
PSS World Medical, Inc.:

We have audited the accompanying consolidated balance sheets of PSS World
Medical, Inc. (a Florida corporation) and subsidiaries as of April 3, 1998 and
March 28, 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended April 3,
1998. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the consolidated financial statements of Gulf South Medical Supply,
Inc., for the years ended December 31, 1997, 1996, and 1995, a company acquired
during fiscal year 1998 in a transaction accounted for as a pooling of
interests, as discussed in Note 2. Such statements are included in the
consolidated financial statements of PSS World Medical, Inc. and reflect total
assets of 29% and 39% as of April 3, 1998 and March 28, 1997, respectively, and
total revenues of 22%, 19%, and 18% for each of the three years in the period
ended April 3, 1998 of the related consolidated totals. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for Gulf South Medical Supply, Inc.,
is based solely upon the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of PSS World Medical, Inc. and subsidiaries as of April
3, 1998 and March 28, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended April 3, 1998 in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 8, Financial
Statements and Supplementary Data, is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, based on our audits and the report of the other auditors, fairly states
in all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Jacksonville, Florida
June 30, 1998

F-2

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of
Gulf South Medical Supply, Inc.:

We have audited the consolidated balance sheets of Gulf South Medical Supply,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997 (not presented
separately herein). Our audits also included the financial statement schedule,
Valuation and Qualifying Accounts (not presented separately herein). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gulf South Medical
Supply, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presented fairly in all material respects the
information set forth therein.

ERNST & YOUNG LLP

Jackson, Mississippi
June 30, 1998

F-3

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

April 3, 1998 and March 28, 1997

(Dollars in Thousands, Except Share Data)

ASSETS

1998 1997
--------- ---------
Current Assets:

Cash and cash equivalents......................................................... $ 82,491 $ 39,099
Marketable securities............................................................. 81,550 73,014
Accounts receivable, net.......................................................... 210,042 178,830
Inventories, net.................................................................. 122,502 102,375
Prepaid expenses and other........................................................ 45,699 28,220
--------- ---------
Total current assets.......................................................... 542,284 421,538

Property and equipment, net......................................................... 24,871 24,075
Other Assets:
Intangibles, net.................................................................. 90,134 56,908
Other............................................................................. 19,493 10,119
--------- ---------
Total assets.................................................................. $676,782 $512,640
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Accounts payable.................................................................. $105,642 $ 75,332
Accrued expenses.................................................................. 42,657 32,637
Current maturities of long-term debt and capital lease obligations................ 2,794 38,420
Other............................................................................. 7,058 5,131
--------- ---------
Total current liabilities..................................................... 158,151 151,520
Long-term debt and capital lease obligations, net of current portion................ 128,113 3,825
Other............................................................................... 2,621 4,634
--------- ---------
Total liabilities............................................................. 288,885 159,979
--------- ---------
Commitments and contingencies (Notes 1, 6, 7, 13, 14, and 16)

Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued
and outstanding................................................................. -- --

Common stock, $.01 par value; 150,000,000 and 90,000,000 shares authorized,
69,563,937 and 67,534,289 shares issued and outstanding at April 3, 1998 and
March 28, 1997, respectively.................................................... 696 675
Additional paid-in capital........................................................ 341,679 323,230
Retained earnings................................................................. 45,522 30,031
Cumulative foreign currency translation adjustment................................ -- 93
--------- ---------
387,897 354,029
Unearned ESOP shares.............................................................. -- (1,368)
--------- ---------
Total shareholders' equity.................................................... 387,897 352,661
--------- ---------
Total liabilities and shareholders' equity.................................... $676,782 $512,640
========= =========

The accompanying notes are an integral part of these consolidated balance
sheets.

F-4

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended April 3, 1998, March 28, 1997, and March 29, 1996

(Dollars in Thousands, Except Per Share Data)

1998 1997 1996
---------- ---------- ----------

Net sales.......................................................... $1,289,065 $940,764 $719,214
Cost of goods sold................................................. 937,229 687,822 524,503
---------- ---------- ----------
Gross profit................................................. 351,836 252,942 194,711
General and administrative expenses................................ 181,579 144,182 104,066
Selling expenses................................................... 98,448 73,395 55,512
Merger and other nonrecurring costs and expenses................... 39,233 17,950 18,238
---------- ---------- ----------
Income from operations....................................... 32,576 17,415 16,895
Other income (expense):
Interest expense.................................................. (6,556) (1,417) (3,767)
Interest and investment income.................................... 5,234 4,190 1,351
Other income...................................................... 2,789 1,537 1,586
---------- ---------- ----------
1,467 4,310 (830)
---------- ---------- ----------
Income before provision for income taxes........................... 34,043 21,725 16,065
Provision for income taxes......................................... 18,073 7,803 6,770
---------- ---------- ----------
Net income......................................................... $ 15,970 $ 13,922 $ 9,295
---------- ---------- ----------
Earnings per share:
Basic............................................................. $0.23 $0.22 $0.17
---------- ---------- ----------
Diluted........................................................... $0.23 $0.21 $0.16
---------- ---------- ----------

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

F-5

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the Years Ended April 3, 1998, March 28, 1997, and March 29, 1996

(Dollars in Thousands, Except Share Data)

Cumulative
Foreign
Common Stock Additional Currency Unearned
------------------- Paid-In Retained Translation ESOP
Shares Amount Capital Earnings Adjustment Shares Totals
---------- -------- --------- ---------- ------------ -------- --------

Balance at March 30, 1995........................... 50,534,944 $505 $ 69,876 $11,754 $ -- $(3,021) $ 79,114
Net income......................................... -- -- -- 9,295 -- -- 9,295
Issuance of common stock........................... 10,391,083 104 148,038 -- -- -- 148,142
Tax benefits related to stock option plans......... -- -- 3,867 -- -- -- 3,867
Distributions to former S-Corporation shareholders. -- -- -- (455) -- -- (455)
Release of unallocated shares to ESOP.............. -- -- 207 -- -- 643 850
Immaterial poolings................................ 290,586 3 8 1,267 -- -- 1,278
---------- -------- --------- ---------- ------------ -------- --------
Balance at March 29, 1996........................... 61,216,613 612 221,996 21,861 -- (2,378) 242,091
Net income......................................... -- -- -- 13,922 -- -- 13,922
Issuance of common stock........................... 4,580,934 46 94,325 -- -- -- 94,371
Tax benefits related to stock option plans......... -- -- 3,449 -- -- -- 3,449
Distributions to former S-Corporation shareholders. -- -- -- (1,100) -- -- (1,100)
Release of unallocated shares to ESOP.............. -- -- 436 -- -- 1,010 1,446
Immaterial poolings................................ 1,736,742 17 3,024 (4,652) -- -- (1,611)
Cumulative foreign currency translation adjustment. -- -- -- -- 93 -- 93
---------- -------- --------- ---------- ------------ -------- --------
Balance at March 28, 1997........................... 67,534,289 675 323,230 30,031 93 (1,368) 352,661
Net income......................................... -- -- -- 15,970 -- -- 15,970
Issuance of common stock........................... 1,539,807 16 16,279 -- -- -- 16,295
Tax benefits related to stock option plans......... -- -- 842 -- -- -- 842
Release of unallocated shares to ESOP.............. -- -- 1,089 -- -- 1,368 2,457
Immaterial poolings................................ 489,841 5 239 (479) -- -- (235)
Cumulative foreign currency translation adjustment. -- -- -- -- (93) -- (93)
---------- -------- --------- ---------- ------------ -------- --------
Balance at April 3, 1998............................ 69,563,937 $696 $341,679 $45,522 $ -- $ -- $387,897
---------- -------- --------- ---------- ------------ -------- --------

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

F-6

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Years Ended April 3, 1998, March 28, 1997, and March 29, 1996

(Dollars in Thousands)

1998 1997 1996
----------- ------------ ------------

Cash Flows From Operating Activities:
Net income .................................................... $ 15,970 $ 13,922 $ 9,295
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization .............................. 10,861 6,473 4,630
Provision for doubtful accounts ............................ 3,289 3,965 2,333
Benefit for deferred income taxes .......................... (3,886) (5,891) (1,544)
Merger and other nonrecurring costs and expenses ........... 28,440 4,879 6,285
Deferred compensation expense .............................. 630 -- --
Unrealized loss (gain) on marketable securities ............ 3 (457) --
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Accounts receivable, net ................................ (18,358) (11,962) (34,343)
Inventories ............................................. (3,325) (535) (25,385)
Prepaid expenses and other assets ....................... (10,817) (7,333) (4,446)
Other assets ............................................ (3,504) (4,784) (1,008)
Accounts payable, accrued expenses,
and other liabilities ................................ 6,942 (8,683) 16,697
----------- ------------ ------------
Net cash provided by (used in) operating activities .. 26,245 (10,406) (27,486)
----------- ------------ ------------
Cash Flows From Investing Activities:
Purchases of marketable securities ............................ (318,166) (256,824) (317,770)
Proceeds from sales and maturities of marketable securities ... 309,628 205,117 297,002
Capital expenditures .......................................... (10,519) (7,171) (5,940)
Purchases of businesses, net of cash acquired ................. (22,481) (11,985) (7,123)
Payments on noncompete agreements ............................. (6,431) (3,980) (1,546)
----------- ------------ ------------
Net cash used in investing activities ................ (47,969) (74,843) (35,377)
----------- ------------ ------------
Cash Flows From Financing Activities:
Proceeds from public debt offering, net of debt issuance costs. 119,459 -- --
Proceeds from borrowings ...................................... 4,349 6,131 290,473
Repayments of borrowings ...................................... (56,014) (42,180) (317,052)
Repayments on revolving line of credit ........................ (5,000) -- --
Principal payments under capital lease obligations ............ (306) (795) (900)
Proceeds from issuance of common stock ........................ 2,721 94,371 148,142
Distributions to former S-Corporation shareholders ............ -- (1,100) (455)
----------- ------------ ------------
Net cash provided by financing activities ............ 65,209 56,427 120,208
----------- ------------ ------------
Foreign currency translation adjustment .......................... (93) 93 --
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents ............. 43,392 (28,729) 57,345
Cash and cash equivalents, beginning of year ..................... 39,099 67,828 10,483
Cash and cash equivalents, end of year ........................... $ 82,491 $ 39,099 $ 67,828
----------- ------------ ------------
Supplemental Disclosures:
Interest paid ................................................. $ 5,195 $ 1,237 $ 3,862
----------- ------------ ------------

Income taxes paid ............................................. $ 21,170 $ 10,000 $ 8,120
----------- ------------ ------------

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

F-7

PSS WORLD MEDICAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 3, 1998, March 28, 1997, and March 29, 1996

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA, UNLESS OTHERWISE NOTED)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company and Nature of Business

Physician Sales & Service, Inc. was incorporated in 1983 in Jacksonville,
Florida. On March 26, 1998, the corporate name of Physician Sales & Service,
Inc. was changed to PSS World Medical, Inc. (the "Company" or "PSS").

The Company, through its Physician Supply Business, is a distributor of
medical supplies, equipment and pharmaceuticals to primary care and other
office-based physicians in the United States. As of April 3, 1998, the Company
operated 61 service centers distributing to over 100,000 physician office sites
in all 50 states.

In November 1996, PSS established a new subsidiary, Diagnostic Imaging, Inc.
("DI" or "imaging division"). DI is a distributor of medical diagnostic
imaging supplies, chemicals, equipment, and service to the acute and alternate
care markets in the United States. As of April 3, 1998, DI operated 25 imaging
division service centers distributing to approximately 13,000 medical imaging
sites in 27 states.

In March 1996, PSS established two new subsidiaries, WorldMed International,
Inc. ("WorldMed Int'l") and WorldMed, Inc. These subsidiaries were
established to manage and develop PSS' European medical equipment and supply
distribution market. As of April 3, 1998, the European operation included 3
service centers distributing to approximately 2,000 acute and alternate care
sites in Belgium, Germany, France, Holland, and Luxembourg.

With its recent acquisition of Gulf South Medical Supply, Inc. ("Gulf South"),
refer to Note 2, the Company entered the long-term care market for the
distribution of medical supplies and other products. Gulf South is a wholly
owned subsidiary of PSS and is a distributor of medical and related products to
nursing homes in all 50 states. As of December 31, 1997, Gulf South operated 22
long-term care distribution service centers serving over 10,000 long-term care
facilities in all 50 states.

Basis of Presentation

The accompanying consolidated financial statements give retroactive effect to
the mergers (the "Mergers") with X-Ray of Georgia ("X-Ray Georgia"), S&W X-Ray,
Inc. ("S&W"), and Gulf South. These transactions were accounted for under the
pooling-of-interests method of accounting, and accordingly, the accompanying
consolidated financial statements have been retroactively restated as if PSS, X-
Ray Georgia, S&W, and Gulf South had operated as one entity since inception.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. In consolidation, all intercompany accounts and
transactions have been eliminated. Prior period financial statements have been
restated to include the accounts of companies acquired in transactions accounted
for as poolings-of-interests. Results of operations of companies acquired in
asset purchase and immaterial pooling transactions are included in the
accompanying financial statements from the dates of acquisition.

F-8

Gulf South historically prepared its financial statements on a December 31
year end. In preparing the consolidated financial statements, the Company has
consolidated the December 31, 1997, December 31, 1996, and December 31, 1995
financial statements of Gulf South with the April 3, 1998, March 28,1997, and
March 29, 1996 financial statements of PSS, respectively.

Certain amounts for prior years have been reclassified to conform to the
current year presentation.

Stock Split

All stock-related data has been retroactively adjusted to reflect a three-for-
one stock split effective on September 22, 1995 which was distributed on October
5, 1995.

Fiscal Year

The Company's fiscal year ends on the Friday closest to March 31 of each year.
Fiscal years 1998, 1997, and 1996 consist of 53, 52, and 52 weeks, respectively.

Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management makes 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 as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Concentration of Credit Risk

The Company's trade accounts receivable are exposed to credit risk.
Although the majority of the market served by the Company is comprised of
numerous individual accounts, none of which is individually significant, the
Company's subsidiary Gulf South depends on a limited number of large customers.
Specifically, approximately 37% of Gulf South's revenues for the year ended
December 1997 represented sales to its top five customers. The Company monitors
the creditworthiness of its customers on an ongoing basis and provides reserves
for estimated bad debt losses and sales returns. The Company had allowances for
doubtful accounts of approximately $13,177 and $6,253 as of April 3, 1998 and
March 28, 1997, respectively. Provisions for doubtful accounts were
approximately $3,289, $3,965, and $2,333 for fiscal years ended 1998, 1997, and
1996, respectively.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash held at banks, short-term
government obligations, commercial paper and money market instruments. The
Company invests its excess cash in high-grade investments and, therefore, bears
minimal risk. These instruments have original maturity dates not exceeding three
months.

Marketable Securities

The Company classifies its marketable securities either as trading securities
or held-to-maturity and carries such securities at fair market value or
amortized cost, respectively. Marketable securities include obligations of
states and political subdivisions, preferred stock, corporate debt securities,
and other equity securities, generally with an original maturity greater than
three months. Changes in net unrealized gains and losses on trading securities
are included in interest and investment income in the accompanying statements of
income. Gains and losses are based on the specific identification method of
determining cost.

Inventories

Inventories are comprised principally of medical and related products and
are stated at the lower of cost (first-in, first-out) or market. Market is
defined as net realizable value.

F-9

Property and Equipment

Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty years. Leasehold
improvements are amortized over the lease terms or the estimated useful lives,
whichever is shorter. Gain or loss upon retirement or disposal of property and
equipment is recorded in other income in the accompanying consolidated
statements of income.

The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows. At the time such evaluations indicate that the
future undiscounted cash flows of certain long-lived assets are not sufficient
to recover the carrying value of such assets, the assets are adjusted to their
fair values. Based on these evaluations, there was an adjustment to the
carrying value of long-lived assets in fiscal year 1998 (refer to Note 3).

Intangibles

Noncompete agreements are amortized on a straight-line basis over the lives of
the agreements, which range from 3 to 15 years. The Company has classified as
goodwill the cost in excess of the fair value of net identifiable assets
purchased in business acquisitions that are accounted for as purchase
transactions. Goodwill is being amortized over 15 to 30 years using the
straight-line method.

The Company periodically evaluates intangible assets to determine if there is
impairment. Based on these evaluations, there was an adjustment to the carrying
value of certain intangible assets in fiscal year 1998 (refer to Note 3).

Self-Insurance Coverage

The Company maintains a self-insurance program for employee health costs. A
third party provides additional coverage for stop-loss based on maximum costs of
$100 per participant and approximately $6,700 in the aggregate. Claims that
have been incurred but not reported are recorded based on estimates of claims
provided by a third-party administrator and are included in accrued expenses in
the accompanying consolidated balance sheets.

Income Taxes

The Company uses the asset and liability method in accounting for income
taxes. Deferred income taxes result primarily from the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.

Shareholders' Equity

Effective November 13, 1995, the Company completed a secondary offering of
11,500,000 shares of common stock at $17 per share, 8,800,000 of which were
offered by the Company.

Gulf South completed a public offering in June 1996 pursuant to which Gulf
South received net proceeds of approximately $91,500 from the sale of 3,890,733
shares of its common stock. A portion of the net proceeds from the offering
were used to repay the outstanding balance under Gulf South's revolving credit
facility, with the remaining balance used for general corporate purposes,
including the subsequent acquisitions.

Refer to Note 2 for a description of the mergers in which the accompanying
consolidated financial statements have not been restated for periods prior to
the pooling due to immateriality.

The Company realizes an income tax benefit from the exercise or early
disposition of certain stock options. This benefit results in a decrease in
current income taxes payable and a direct increase in additional paid-in capital
(refer to Note 8).

F-10

During fiscal year 1998, the Company committed to release the remaining shares
to the S&W ESOP participants. Approximately $2.5 million of related expense was
recognized during fiscal year 1998 (refer to Note 12).

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, marketable securities (refer to Note 4), short-term trade
receivables, and accounts payable approximate their fair values due to the
short-term nature of these assets and liabilities. The fair value of the senior
subordinated debt is estimated using quoted market prices. The carrying value
of the Company's senior subordinated debt at April 3, 1998 was $125.0 million,
and the market value was $128.4 million. The carrying value of the Company's
other long-term debt was $3,113 and $3,825, at April 3, 1998 and March 28, 1997,
respectively, which approximates fair value.

Foreign Currency Translation

Financial statements for the Company's subsidiary outside the United States
are translated into U.S. dollars at year-end exchange rates for assets and
liabilities and weighted average exchange rates for income and expenses. The
resulting translation adjustments are recorded as a separate component of
shareholders' equity.

Stock-Based Compensation

The Company accounts for its stock-based compensation plans using the
intrinsic value method. The Company adopted the disclosure only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation. In accordance with SFAS No. 123, for footnote
disclosure purposes only, the Company computes its earnings and earnings per
share on a pro forma basis as if the fair value method had been applied.

Earnings Per Common Share

Basic and diluted earnings per common 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 shares outstanding.
Diluted earnings per common share includes the dilutive effect of stock options
(refer to Note 9).

Statements of Cash Flows

The Company's noncash investing and financing activities were as follows:

1998 1997 1996
------ ------ -----
Business acquisitions:

Fair value of assets acquired............................................ 49,725 37,648 1,278
Liabilities assumed...................................................... 32,684 39,258 --
Notes payable issued..................................................... -- 25,321 --
Noncompetes issued....................................................... 7,574 4,300 --
Tax benefits related to stock option plans................................ 842 3,499 3,867
Capital lease obligations incurred........................................ 325 -- --

Recent Accounting Pronouncements

During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, Reporting Comprehensive Income. This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that changes in comprehensive income be shown
in a financial statement that is displayed

F-11

with the same prominence as other financial statements. This statement is
effective for the Company's fiscal year 1999. The Company is in the process of
determining its preferred disclosure format.

Additionally, during 1997, the FASB issued SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. This statement, which is
based on the management approach to segment reporting, establishes standards for
the way that public business enterprises report information about operating
segments in annual and interim financial statements. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This statement is effective for the Company's fiscal year
1999. The Company is in the process of evaluating the disclosure requirements
under this standard.

During 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 is effective for the
Company's fiscal year 2000. Management believes that the Company is
substantially in compliance with this pronouncement and that the implementation
of this pronouncement will not have a material effect on the Company's
consolidated financial position, results of operations, or liquidity.

2. BUSINESS ACQUISITIONS

On March 26, 1998, the Company completed a merger with Gulf South. The
Company issued 28,810,747 shares of its common stock for all of the outstanding
common stock of Gulf South valued at $662.6 million at the time of merger. Each
share of Gulf South was exchanged for 1.75 shares of PSS common stock. In
addition, outstanding Gulf South stock options were converted at the same
exchange factor into stock options to purchase 2,206,461 shares of PSS common
stock. This merger constituted a tax-free reorganization and has been accounted
for as a pooling-of-interests; therefore, the historical financial statements of
the Company have been restated. Gulf South historically prepared its financial
statements on a December 31 year end. In recording the business combination,
the Company combined the December 31, 1997, December 31, 1996, and December 31,
1995 financial statements of Gulf South with the April 3, 1998, March 28,1997,
and March 29, 1996 financial statements of PSS, respectively.

As a result, the results of operations for Gulf South for the period from
January 1, 1998 to April 3, 1998 are not reflected in any of the periods
presented. The unaudited results of Gulf South's operations for this period are
summarized as follows:

For the
Three-Month
Period
Ended
April 3, 1998
--------------
(Unaudited)

Net sales..................................................................................... $ 87,018
Cost of goods sold............................................................................ 69,202
--------------
Gross profit.............................................................................. 17,816
General and administrative expenses........................................................... 21,058
Selling expenses.............................................................................. 2,939
Merger and other nonrecurring costs and expenses.............................................. 26,905
--------------
Loss from operations...................................................................... (33,086)
Other income, net............................................................................. 321
--------------
Loss before benefit for income taxes.......................................................... (32,765)
Benefit for income taxes...................................................................... 11,862
--------------
Net loss...................................................................................... $(20,903)
--------------

Gulf South recorded merger and other nonrecurring costs and expenses of
$26,905 for the period from January 1, 1998 to April 3, 1998. Merger costs and
expenses consist primarily of investment banking, legal,

F-12

accounting, and filing fees related to the merger with the Company. Other
nonrecurring costs and expenses include Gulf South's portion of the
restructuring costs, impairment and other nonrecurring charges discussed in Note
3.

Cost of goods sold and general and administrative expenses include amounts
recorded to apply accounting methods at Gulf South consistent with that of the
Company.

On September 23, 1997, the Company acquired S&W in a merger pursuant to which
the Company issued 1,737,458 shares of common stock to the former shareholders
of S&W (of which 154,700 shares are being held in escrow) in exchange for all of
the outstanding shares of capital stock of S&W valued at $26.0 million at the
time of the merger. The merger constituted a tax-free reorganization and has
been accounted for as a pooling-of-interests, and accordingly, the Company's
consolidated financial statements have been restated to include the accounts and
operations of S&W for all periods prior to the merger.

On December 20, 1996, the Company acquired X-Ray Georgia in a merger pursuant
to which the Company issued 593,672 shares of common stock to the former
shareholders of X-Ray Georgia in exchange for all of the outstanding shares of
capital stock of X-Ray Georgia valued at $11.0 million at the time of the
merger. The merger constituted a tax-free reorganization and has been accounted
for as a pooling-of-interests, and accordingly, the Company's consolidated
financial statements have been restated to include the accounts and operations
of X-Ray Georgia for all periods prior to the merger.

The results of operations for the acquired companies through their respective
acquisition dates and the combined amounts presented in the consolidated
financial statements follow:

Fiscal Year Ended April 3, 1998
------------------------------------------
PSS Gulf South S&W Combined
-------- ----------- -------- ------------

Net sales .................................................................... $963,480 $287,582 $38,003 $1,289,065
Net income (loss)............................................................. 5,009 13,056 (2,095) 15,970
Other changes in shareholders' equity......................................... 15,723 753 2,790 19,266

Fiscal Year Ended March 28, 1997
-------------------------------------------------------
PSS Gulf South S&W X-Ray Georgia Combined
-------- ----------- -------- -------------- ----------

Net sales....................................................... $657,838 $177,710 $72,034 $33,182 $940,764
Net income...................................................... 3,435 9,495 54 938 13,922
Other changes in shareholders' equity........................... 2,776 93,651 1,321 (1,100) 96,648

Fiscal Year Ended March 29, 1996
-------------------------------------------------------
PSS Gulf South S&W X-Ray Georgia Combined
-------- ----------- -------- -------------- ----------

Net sales........................................................ $483,294 $130,094 $60,096 $45,730 $719,214
Net income....................................................... 186 7,166 790 1,153 9,295
Other changes in shareholders' equity............................ 152,340 1,292 505 (455) 153,682

F-13

Immaterial Poolings

The Company merged with certain other medical supply and equipment
distributors in stock mergers accounted for under the pooling-of-interests
method of accounting. The number of companies acquired and the common stock
issued follows.

Fiscal Year
---------------------------
1998 1997 1996
------- ---------- --------

Number of acquisitions................................................ 4 4 3
Common stock issued................................................... 490,000 1,737,000 291,000

Due to the immaterial effect of these acquisitions on prior periods, the
Company's historical financial statements have not been restated. Accordingly,
the results of operations have been reflected in the consolidated financial
statements prospectively from the acquisition date. The accumulated retained
earnings (deficit) of the acquired companies as of their acquisition dates of
approximately ($0.5) million, ($4.7) million, and $1.3 million have been
recorded as adjustments to the retained earnings of the Company during fiscal
years as of 1998, 1997, and 1996, respectively.

Purchase Acquisitions

The Company acquired certain assets, including accounts receivable,
inventories, and equipment of the following medical supplies and equipment
distributors accounted for under the purchase method of accounting. The excess
of the purchase price over the estimated fair value of the net assets acquired
have been recorded as goodwill and will be amortized over 15 to 30 years.

Fiscal Year
-------------------------
1998 1997 1996
-------- -------- -------

Number of acquisitions................................................ 13 9 9
Issuance of shares of common stock.................................... 933,000 3,000 6,000
Total consideration................................................... $ 35,739 $36,613 $7,170
Cash paid............................................................. 22,909 11,252 7,049
Issuance of note payable.............................................. -- 25,321 --
Goodwill recorded..................................................... 32,944 40,125 2,871
Noncompete payments................................................... 2,982 220 1,300

The operations of the acquired companies have been included in the Company's
results of operations subsequent to the dates of acquisition. Supplemental pro
forma information is not presented because the impact on the Company's results
of operations would not be material.

3. MERGER AND OTHER NONRECURRING COSTS AND EXPENSES

The Company recorded pre-tax charges to operating expenses of $39,233,
$17,950, and $18,238 for the years ended April 3, 1998, March 28, 1997, and
March 29, 1996, respectively. Merger costs and expenses, restructuring costs
related to the acquisitions, impairment charges, and other nonrecurring charges
of $33,426, $17,950, and $18,238 for the years ended April 3, 1998, March 28,
1997, and March 29, 1996, respectively, were recorded in connection with the
acquisitions described in Note 2. The remaining amounts relate to impairment
charges taken as a result of the Company's evaluation of the fair value of long-
lived assets. The following represents a detail of the merger and other
nonrecurring costs and expenses:

F-14

1998 1997 1996
------- ------- -------

Merger and restructuring costs and expenses............................. $21,802 $14,506 $15,732
Information systems impairment charge................................... 6,100 -- --
Nonrecurring tax adjustment............................................. 3,067 1,998 1,656
Nonrecurring ESOP cost of acquired company.............................. 2,457 1,446 850
------- ------- -------
33,426 17,950 18,238
Goodwill impairment charge.............................................. 5,807 -- --
------- ------- -------
Total............................................................. $39,233 $17,950 $18,238
======= ======= =======

Merger costs and expenses consist primarily of direct costs such as investment
banking, legal, accounting, and filing fees as well as consolidation costs from
the closing of duplicate service center locations, realigning regional and
corporate functions, and reducing personnel. Further, a restructuring charge was
taken in fiscal year 1998 related to the consolidation of distribution and
administrative functions as a result of the merger with Gulf South. This
consolidation will result in a realignment of the Company from five regions to
three regions and will include consolidation and closure of certain service
centers.

At April 3, 1998 and March 28, 1997, the accompanying consolidated balance
sheets include accrued merger and restructuring costs and expenses of $16,900
and $7,000, respectively, classified as accrued expenses. A summary of the
merger and restructuring activity is as follows:

Balance at March 29, 1996............................................. $ 1,222
Additions............................................................ 12,901
Utilized............................................................. (7,086)
--------
Balance at March 28, 1997............................................. 7,037
Additions............................................................ 17,481
Utilized............................................................. (7,586)
--------
Balance at April 3, 1998.............................................. $16,932
========

Accrued merger and restructuring costs and expenses at April 3, 1998 consist
of direct costs of mergers ($8,100), involuntary employee relocation costs
($1,100), involuntary employee termination benefits ($2,500), lease termination
and other facility exit costs ($2,400), and other costs ($2,800). Accrued
merger costs and expenses at March 28, 1997 consisted primarily of direct costs
of mergers.

The information systems impairment charge relates to a decision made by
management in the fourth quarter of 1998 to replace its current information
systems. Due to the merger with Gulf South, management concluded that its
existing information systems were not compatible with those of Gulf South's. In
addition, the existing systems were determined to be inadequate to support the
future growth of the combined companies and expected growth resulting from
future acquisitions. As a result of this change in the utilization of the
Company's existing systems, management determined that the value of the related
assets had been impaired and an impairment loss has been recognized in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.

The Company recorded tax accruals for fiscal years 1998, 1997, and 1996
primarily related to state and local tax compliance matters. These tax
adjustments relate only to Gulf South, and due to changes in operational
procedures, will be nonrecurring.

The nonrecurring ESOP charge is a result of the merger with S&W. Refer to
Note 12 for a discussion of the S&W ESOP.

The goodwill impairment charge is a noncash accounting charge. As a result of
the Company's ongoing review process, updated analyses were prepared to
determine if there was any impairment of intangible assets. Intangible assets
determined to be impaired were associated with previous acquisitions made by the
Physician Sales & Service

F-15

and WorldMed Int'l divisions. The revised carrying values of these assets were
calculated on the basis of undiscounted estimated future cash flows.

4. MARKETABLE SECURITIES

At April 3, 1998, the Company held investments in marketable
securities that were classified as either trading or held-to-maturity, depending
on the security and management's intent.

Securities classified as trading at April 3, 1998 and March 28, 1997
consisted of obligations of states and political subdivisions, preferred stock,
and other equity securities. The investments are carried at their fair values
based upon the quoted market prices, with changes in unrealized gains or losses
included in interest and investment income. At April 3, 1998 and March 28, 1997,
securities classified as trading consisted of the following:

Changes in
Fair Unrealized
Value Gain (Loss)
----------- ------------

April 3, 1998:
Obligations of states and political subdivisions....... $11,000 $ --
Preferred stock........................................ 25,000 (3)
Other equity securities................................ 576 --
----------- ------------
$36,576 $ (3)
----------- ------------

March 28, 1997:
Obligations of states and political subdivisions....... $43,938 $ (63)
Preferred stock........................................ 28,500 --
Other equity securities................................ 576 520
----------- ------------
$73,014 $ 457
----------- ------------

Securities classified as held-to-maturity consist of corporate debt
securities for which the Company has the positive intent and ability to hold to
maturity. Held-to-maturity securities are stated at cost with corresponding
premiums or discounts amortized over the life of the investment to interest
income. All commerical paper is due within one year and are classified as
current in the accompanying consolidated balance sheets. The fair value of
commercial paper is $44,974, which is based on quoted market prices and
approximates amortized cost at April 3, 1998.

5. PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, are summarized as follows:

1998 1997
----------- ------------

Land...................................................... $ 838 $ 950
Building 3,568 4,112
Equipment................................................. 27,429 27,248
Furniture, fixtures, and leasehold improvements........... 8,987 7,703
----------- ------------
40,822 40,013
Accumulated depreciation.................................. (15,951) (15,938)
----------- ------------
$24,871 $24,075
----------- ------------

Equipment includes equipment acquired under capital leases with a cost of
$434 and $109 and related accumulated depreciation of $171 and $38 at April 3,
1998 and March 28, 1997, respectively. Depreciation expense aggregated
approximately $5,231, $3,856, and $2,710 for 1998, 1997, and 1996, respectively,
and is included in general and administrative expenses.

F-16

6. INTANGIBLES

Intangibles, stated at cost, consist of the following:

1998 1997
------- -------

Goodwill.............................................................................. $76,867 $47,341
Noncompete agreements and other....................................................... 22,310 15,150
------- -------
99,177 62,491
Accumulated amortization.............................................................. (9,043) (5,583)
------- -------
$90,134 $56,908
======= =======

Future minimum payments required under noncompete agreements at April 3, 1998
are as follows:

Fiscal Year:

1999............................................................................................ $3,383
2000............................................................................................ 1,527
2001............................................................................................ 563
2002............................................................................................ 399
2003............................................................................................ 74
Thereafter...................................................................................... 58
------
$6,004
======

Amortization expense aggregated approximately $5,062, $2,617, and $1,920 for
fiscal years 1998, 1997, and 1996, respectively, and is included in general and
administrative expenses.

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consist of the following:

April 3, March 28,
1998 1997
-------- ---------

Senior subordinated notes........................................................... $125,000 $ --
Capital lease obligations........................................................... 532 457
Long-term debt of acquired company.................................................. 249 41,013
Other notes......................................................................... 5,126 775
-------- ---------
130,907 42,245
Less current maturities............................................................. 2,794 38,420
-------- ---------
$128,113 $ 3,825
======== =========

Senior Subordinated Notes

During October 1997, the Company issued 8.5% unsecured senior subordinated
notes due in 2007 (the "Notes") in the amount of $125.0 million. Interest on
the Notes accrues from their date of original issuance and is payable semi-
annually on April 1 and October 1 of each year, commencing on April 1, 1998, at
a rate of 8.5% per annum. The notes are subject to certain covenants, including
restrictions on indebtedness, investments, payments of dividends, purchases of
treasury stock, and sales of assets.

F-17

Capital Lease Obligations

As of April 3, 1998, future minimum payments, by fiscal year and in the
aggregate, required under capital leases are approximately as follows:

Fiscal Year:

1999................................................................................................ $354
2000................................................................................................ 208
2001................................................................................................ 16
-----
Net minimum lease payments........................................................................... 578
Less amount representing interest.................................................................... 46
-----
Present value of net minimum lease payments under capital leases..................................... 532
Less amounts due in one year......................................................................... 320
-----
Amounts due after one year..................................................................... $212
=====

Long-term Debt of Acquired Companies

Gulf South has a $15,000 revolving credit facility that matures September 25,
1998, of which $15,000 and $10,000 were available at December 31, 1997 and 1996,
respectively. Borrowings bear interest at prime of LIBOR plus 1% to 2.5% per
annum. A facility fee of 0.125% per annum is charged on the unused portion of
the revolving credit facility.

In addition, Gulf South had a note payable to the former shareholders of an
acquired company outstanding at December 31, 1996 of $25,321. This note was
repaid during fiscal year 1998.

S&W had available three line of credit agreements which provide for borrowings
of up to $10,000 for working capital, bulk inventory purchases, and equipment
purchases as well as a note payable and a mortgage note payable due to a bank.
These lines of credits and notes were repaid in conjunction with the merger.

X-Ray Georgia maintained various other notes which were repaid by the Company
in fiscal year 1997 in conjunction with the merger.

Other Notes

At April 3, 1998, other notes consist of various debt maintained by WorldMed
Int'l, including a working capital line of credit, a mortgage on facilities in
Leuven, Belgium, and debt to acquire certain international business service
centers.

Lines of Credit

The Company had a financing and security agreement (the "Agreement") with a
bank (the "Bank"). The Agreement allowed the Company to obtain loans from the
Bank on a revolving basis. The Agreement provided for loans in the amount of
85% of the outstanding amount of eligible accounts receivable plus the lesser of
$30,000 or 50% of eligible inventory. The total amount of loans outstanding
under the Agreement could not exceed the lesser of $60,000 or amounts available
subject to eligible collateral. The loans were collateralized by all of the
Company's assets. The Agreement provided for an option, on the part of the
Company, to increase the availability to $75,000. There was no balance
outstanding at April 3, 1998 and March 28, 1997. The Agreement expired on April
30, 1998. The Company is currently in the process of negotiating a new credit
facility with a syndicate of banks.

F-18

As of April 3, 1998, future minimum payments of long-term debt, excluding
capital lease obligations, are approximately as follows:

Fiscal Year:

1999.................................................................. $ 2,474
2000.................................................................. 522
2001.................................................................. 476
2002.................................................................. 476
2003.................................................................. 476
Thereafter............................................................ 125,951
-----------
Total........................................................ $130,375
-----------

8. INCOME TAXES

The provisions for income taxes are detailed below:

1998 1997 1996
---------- ---------- ---------

Current tax provision:
Federal................................... $18,367 $11,230 $6,732
State..................................... 3,592 2,464 1,582
---------- ---------- ---------
Total current....................... 21,959 13,694 8,314
---------- ---------- ---------
Deferred tax benefit:
Federal................................... (3,313) (4,776) (1,289)
State..................................... (573) (1,115) (255)
---------- ---------- ---------
Total deferred..................... (3,886) (5,891) (1,544)
---------- ---------- ---------
Total income tax provision.......... $18,073 $7,803 $6,770
---------- ---------- ---------

The difference between income tax computed at the federal statutory rate
and the actual tax provision is shown below:

1998 1997 1996
---------- ---------- ---------

Income before provision for taxes............ $34,043 $21,725 $16,065
---------- ---------- ---------
Tax provision at the statutory rate.......... 11,915 7,604 5,623
---------- ---------- ---------
(Decrease) increase in taxes:
State income tax, net of federal benefit.. 1,962 877 863
Effect of foreign subsidiary.............. 2,179 (174) --
Merger costs and expenses................. 1,958 721 2,216
Goodwill amortization..................... 512 15 8
Meals and entertainment................... 207 180 167
Nontaxable interest income................ (688) (1,102) (198)
Change in valuation allowance for
deferred taxes. -- (900) (956)
Income of S-Corporation................... -- (319) (392)
Utilization of tax net operating losses... -- -- (776)
Other, net................................ 28 901 215
---------- ---------- ---------
Total increase in taxes.......... 6,158 199 1,147
---------- ---------- ---------
Total income tax provision....... $18,073 $ 7,803 $ 6,770
---------- ---------- ---------
Effective tax rate 53.1% 35.9% 42.1%
---------- ---------- ---------

F-19

Deferred income taxes for 1998 and 1997 reflect the impact of temporary
differences between the financial statement and tax bases of assets and
liabilities. The tax effect of temporary differences which create deferred tax
assets and liabilities at April 3, 1998 and March 28, 1997 are detailed below:

1998 1997
------- -------
Deferred tax assets:

Merger and other nonrecurring costs and expenses.................................... $ 7,582 $ 2,916
Allowance for doubtful accounts and sales returns................................... 2,799 2,555
Impairment charges.................................................................. 2,353 --
Accrued expenses.................................................................... 1,671 881
Inventory uniform cost capitalization............................................... 1,438 1,007
Net operating loss carryforwards.................................................... 1,187 2,938
Reserve for inventory obsolescence.................................................. 514 509
Intangibles......................................................................... -- 1,224
Other............................................................................... 628 393
------- -------
Gross deferred tax assets...................................................... 18,172 12,423
------- -------
Deferred tax liabilities:
Excess of tax depreciation and amortization over book depreciation and amortization.
-- (1,326)
Other............................................................................... (228) --
------- -------
Gross deferred tax liabilities................................................. (228) (1,326)
------- -------
Net deferred tax assets.............................................................. $17,944 $11,097
======= =======

The income tax benefit related to the exercise or early disposition of certain
stock options reduces taxes currently payable and is credited directly to
additional paid-in capital. Such amounts were $842, $3,449, and $3,867 for
fiscal years 1998, 1997, and 1996, respectively.

At April 3, 1998, the Company had net operating loss carryforwards for income
tax purposes arising from mergers of approximately $3,106 which expire from 1999
to 2007. The utilization of the net operating loss carryforwards is subject to
limitation in certain years.

All deferred tax assets as of April 3, 1998 and March 28, 1997 are considered
to be realizable due to the projected future taxable income. Therefore, no
valuation allowance has been recorded as of April 3, 1998 and March 28, 1997.

F-20

9. EARNINGS PER SHARE

In accordance with SFAS No. 128, Earnings Per Share, the calculation of basic
net earnings per common share and diluted earnings per common share is presented
below (share amounts in thousands, except per share data):

1998 1997 1996
------- ------- -------

Net income................................................. $15,970 $13,922 $ 9,295
------- ------- -------
Earnings per share:
Basic..................................................... $ 0.23 $ 0.22 $ 0.17
------- ------- -------

Diluted................................................... $ 0.23 $ 0.21 $ 0.16
======= ======= =======
Weighted average shares outstanding:
Common shares............................................. 68,727 64,248 55,813
Assumed exercise of stock options......................... 970 750 1,547
------- ------- -------
Diluted shares outstanding................................ 69,697 64,998 57,360
======= ======= =======

10. RELATED-PARTY TRANSACTION

The Company loaned its Chairman of the Board and Chief Executive Officer
$3,000 to refinance debt incurred in connection with previous purchases of
common stock. The loan is unsecured, bears interest at the applicable federal
rate for long-term obligations (6.55% at April 3, 1998), and is due September
2007. The remaining principal amount outstanding as of April 3, 1998 was
approximately $2,700.

11. STOCK-BASED COMPENSATION PLANS

Incentive Stock Option Plan

Under the Company's qualified 1986 Incentive Stock Option Plan, 6,570,000
shares of the Company's common stock are reserved for sale to officers and key
employees. Options may be granted at prices not less than fair market value at
the date of grant and are exercisable during periods of up to five years from
that date. The exercisability of the options is not subject to future
performance.

F-21

Information regarding this plan is summarized below (share amounts in
thousands):

Weighted
Average
Exercise
Shares Price
------ --------

Balance, March 30, 1995................................................................. 1,359 $2.89
Granted................................................................................ -- --
Exercised.............................................................................. (607) 2.68
Canceled............................................................................... (30) 1.48
------ --------
Balance, March 29, 1996................................................................. 722 2.94
Granted................................................................................ -- --
Exercised.............................................................................. (346) 2.83
Canceled............................................................................... (12) 3.28
------ --------
Balance, March 28, 1997................................................................. 364 3.05
Granted................................................................................ -- --
Exercised.............................................................................. (248) 2.77
Canceled............................................................................... (3) 2.10
------ --------
Balance, April 3, 1998.................................................................. 113 $3.67
====== ========

All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. As of April 3, 1998, the
range of exercise prices and the weighted-average remaining contractual life of
outstanding options was $2.10-$5.46 and 1 year, respectively and approximately
1,177,502 shares of common stock are available for issuance under the plan. The
Company does not intend to issue any more options under this plan.

Long-Term Stock Plan

In March 1994, the Company adopted the 1994 Long-Term Stock Plan under which
the Compensation Committee has discretion to grant nonqualified stock options
and restricted stock to any employee of the Company. A total of 1,790,000
shares of the Company's common stock, as adjusted by stock splits,
consolidations, or other changes in capitalization, have been reserved for
issuance under this plan. The exercise price of options granted under this plan
may be no less than the fair market value of the Company's common stock on the
date of grant.

F-22

Information regarding the stock option component of this plan is summarized
below (share amounts in thousands):

Weighted
Average
Exercise
Shares Price
------ --------

Balance, March 30, 1995................................................................. 160 $ 5.32
Granted................................................................................ 492 16.96
Exercised.............................................................................. (37) 13.07
Canceled............................................................................... - -
------ --------
Balance, March 29, 1996................................................................. 615 14.17
Granted................................................................................ 203 23.90
Exercised.............................................................................. (27) 13.35
Canceled............................................................................... (3) 5.79
------ --------
Balance, March 28, 1997................................................................. 788 16.52
Granted................................................................................ 332 14.53
Exercised.............................................................................. (112) 13.20
Canceled............................................................................... (56) 14.89
------ --------
Balance, April 3, 1998.................................................................. 952 $16.19
====== ========

All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $5.60, $11.08, and $6.91 in fiscal years
1998, 1997, and 1996, respectively. As of April 3, 1998, the range of exercise
prices and the weighted-average remaining contractual life of outstanding
options were $5.29-$24.75 and 4.8 years, respectively. As of April 3, 1998,
approximately 664,000 shares of common stock were available for issuance under
the plan.

Long-Term Incentive Plan

In March 1994, the Company adopted the 1994 Long-Term Incentive Plan which
provides officers with performance awards, consisting of cash or registered
shares of common stock, or a combination thereof, based primarily upon the
Company's total shareholder return as ranked against the companies comprising
the NASDAQ Composite Index over a three-year period. The maximum payable under
this plan to an eligible employee, whether in the form of cash or common stock,
may not exceed $1 million per fiscal year. At April 3, 1998, the Company has
accrued approximately $407 related to awards granted under this plan. During
fiscal year 1998, the Company made cash payments of $832. No cash or restricted
stock was issued during fiscal years 1997 and 1996.

The plan also provides for nonqualified stock options or restricted stock to
be granted at the full discretion of the Compensation Committee of the Board of
Directors. The exercise price of options granted under this plan may be no less
than the fair market value of the Company's common stock on the date of grant,
and accordingly, no compensation expense is recorded on the date the stock
options are granted. The aggregate number of shares of common stock, including
shares reserved for issuance pursuant to the exercise of options, which may be
granted or issued may not exceed 1,130,000 shares.

F-23

Information regarding the stock option component of the plan is summarized
below (share amounts in thousands):

Weighted
Average
Exercise
Shares Price
------- -------
Balance, March 30, 1995 - -

Granted................................................................................ 351 $14.88
Exercised.............................................................................. (32) 14.88
Canceled............................................................................... - -
------- -------
Balance, March 29, 1996.................................................................. 319 14.88
Granted................................................................................ 68 23.94
Exercised.............................................................................. (61) 14.88
Canceled............................................................................... - -
------- -------
Balance, March 28, 1997.................................................................. 326 16.78
Granted................................................................................ 633 16.92
Exercised.............................................................................. - -
Canceled............................................................................... (4) 23.94
------- -------
Balance, April 3, 1998................................................................... 955 $15.90
======= =======

All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $5.72, $11.08, and $6.73 in fiscal years
1998, 1997, and 1996, respectively. As of April 3, 1998, the range of exercise
prices and the weighted-average remaining contractual life of outstanding
options were $14.75-$23.94 and 8.7 years, respectively.

Directors' Stock Plan

In March 1994, the Company adopted the Directors' Stock Plan under which
nonemployee directors receive an annual grant of an option to purchase 2,000
shares of common stock. A total of 135,000 shares of the Company's common stock,
as adjusted for stock splits, consolidations, or other changes in
capitalization, have been reserved for issuance under this plan. The exercise
price of options granted under this plan may be no less than the fair market
value of the Company's common stock on the date of grant.

F-24

Information regarding the stock option component of this plan is summarized
below (share amounts in thousands):

Weighted
Average
Exercise
Shares Price
------- -------

Balance, March 30, 1995................................................................. 27 $ 5.48
Granted................................................................................ 23 14.75
Exercised.............................................................................. (5) 5.48
Canceled............................................................................... - -
------- -------
Balance, March 29, 1996................................................................. 45 10.12
Granted................................................................................ 12 23.94
Exercised.............................................................................. (3) 5.48
Canceled............................................................................... - -
------- -------
Balance, March 28, 1997................................................................. 54 13.44
Granted................................................................................ 70 14.75
Exercised.............................................................................. - -
Canceled............................................................................... - -
------- -------
Balance, April 3, 1998.................................................................. 124 $15.70
======= =======

All options are fully vested at the date of grant; therefore, all outstanding
options at the end of each period are exercisable. The weighted-average per
share fair value of options granted was $5.72, $13.22, and $6.67 in fiscal years
1998, 1997, and 1996, respectively. As of April 3, 1998, the range of exercise
prices and the weighted-average remaining contractual life of outstanding
options were $5.48-$23.94 and 8.2 years, respectively.

Gulf South's Stock Option Plans

Under Gulf South's Stock Option Plans of 1997 and 1992, 850,000 and 1,300,000
shares, respectively, of common stock have been reserved for grant to key
management personnel and to members of the former Board of Directors. The
options granted have ten-year terms with vesting periods of either three or five
years from either the date of grant or the first employment anniversary date. At
December 31, 1997, 601,200 shares were available for grant under the 1997 plan.
At December 31, 1997 and 1996, 82,488 and 224,888 shares, respectively, were
available for grant under the 1992 plan.

A summary of the Gulf South's stock option activity and related information is
as follows (share amounts in thousands):

Weighted
Average
Exercise
Shares Price
------- -------

Balance, January 1, 1996................................................................ 976 $ 4.57
Granted................................................................................ 355 16.53
Exercised.............................................................................. (216) 2.68
Forfeited.............................................................................. (20) 9.57
------- -------
Balance, December 31, 1996.............................................................. 1,095 8.57
Granted................................................................................ 833 11.89
Exercised.............................................................................. (144) 2.90
Forfeited.............................................................................. (149) 13.38
------- -------
Balance, December 31, 1997.............................................................. 1,635 10.39
======= =======

F-25

The weighted average fair value of options granted during 1997, 1996, and 1995
was $5.83, $5.94, and $3.75, respectively.

Following is a summary of the status of options outstanding at December 31,
1997:

Outstanding Options Exercisable Options
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life Price Number Price
- ------------------- ----------- ------------ ---------- --------- ----------

$0.1210-$0.2773 307,113 5.3 years $ 0.21 307,113 $ 0.21
$3.69-$4.71 50,864 7.8 years $ 4.55 23,734 $ 4.43
$9.214-$13.28 988,400 8.7 years $12.06 285,600 $11.99
$16.285-$17.91 288,050 8.2 years $16.58 110,950 $16.59

The Company granted warrants for 450,000 shares of its common stock on January
2, 1997 at an exercise price of $25.90 in connection with the purchase of
Gateway. All of the warrants were exercisable upon the date of grant and expire
January 2, 2002.

Fair Value of Stock Options

Under SFAS No. 123, pro forma information regarding net income and earnings
per share has been determined as if the Company had accounted for its employee
stock options under the fair value method. The fair value of stock options
granted has been estimated using a Black-Scholes option pricing model.

The fair value of PSS' stock options (Incentive Stock Option Plan, Long-Term
Stock Plan, Long-Term Incentive Plan, and Directors' Stock Plan) granted during
the fiscal years 1998, 1997, and 1996 have been estimated based on the following
weighted average assumptions: risk-free interest rates ranging from 6.1% to
6.8%, expected option life ranging from 2.5 to 5 years; expected volatility of
55.0%, 55.0% and 40.0% for fiscal years 1998, 1997, and 1996, respectively; and
no expected dividend yield. Using these assumptions, the estimated fair values
of options granted for fiscal years 1998, 1997, and 1996 were approximately
$4,814, $2,897, and $6,000, respectively, and such amounts would be included in
compensation expense.

The fair value of Gulf South's stock options granted during the fiscal years
1998, 1997, and 1996 have been estimated based on the following weighted average
assumptions: risk-free interest rates of 6.0%, 6.5%, and 6.5% for fiscal years
1998, 1997, and 1996, respectively; expected option life of 3 years; expected
volatility of 65.2%, 41.8%, and 41.8% for fiscal years 1998, 1997, and 1996,
respectively; and no expected dividend yield. Using these assumptions, the
estimated fair values of options granted for fiscal years 1998, 1997, and 1996
were approximately $1,568, $633, and $235, respectively, and such amounts would
be included in compensation expense.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significabtly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employees stock options.

F-26

Pro forma net income and net income per share for the fiscal years ended 1998,
1997, and 1996, assuming the Company had accounted for the plans under the fair
value approach, are as follows (in thousands, except per share data):

1998 1997 1996
------- ------- -------
Net income:

As reported.............................................................. $15,970 $13,922 $9,295
Pro forma................................................................ 12,141 11,804 5,554
Earnings per share:
As reported
Basic.................................................................. $ 0.23 $ 0.22 $ 0.17
Diluted................................................................ 0.23 0.21 0.16
Pro forma
Basic.................................................................. 0.18 0.18 0.10
Diluted................................................................ 0.17 0.18 0.10

Because the fair value method of accounting has not been applied to options
granted prior to March 31, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

12. EMPLOYEE BENEFIT PLANS

The Company has an employee stock ownership plan ("ESOP") available to all
employees with at least one year of service. Effective January 1, 1996, the
Company amended the plan to allow participants to direct the investment of a
portion of their plan balances. Prior to this change, the trustees directed the
investment of the participants' balances. As of April 3, 1998, the ESOP owns
approximately 1,999,000 shares of the Company's common stock. Company
contributions to the plan were approximately $352, $160, and $120 for 1998,
1997, and 1996, respectively, and are made at the discretion of the Company.

The Company also has an employee stock purchase plan available to employees
with at least one year of service. The plan allows eligible employees to
purchase company stock over the counter through payroll deductions.

S&W sponsored a leveraged employee stock ownership plan ("S&W ESOP") that
covered all employees with one year of service. The Company accounted for this
ESOP in accordance with SOP 93-6. Accordingly, the debt of the ESOP was recorded
as debt of the Company, and the shares pledged as collateral were reported as
unearned ESOP shares in the balance sheet. As shares were released from
collateral, the Company reported compensation expense equal to the then current
market price of the shares, and the shares became outstanding for the earnings-
per-share (EPS) computation.

The S&W ESOP shares were as follows:

April 3, March 28, March 29,
1998 1997 1996
--------- ----------- -----------

Allocated shares.................................................. 398,727 278,490 202,052
Shares released for allocation.................................... 162,769 120,237 76,438
Unreleased shares................................................. -- 162,769 283,006
--------- ----------- -----------
Total ESOP shares........................................... 561,496 561,496 561,496
--------- ----------- -----------
Fair value of unreleased shares................................... $ -- $1,512,495 $2,392,661

During fiscal year 1998, the Company released the remaining shares to the S&W
ESOP participants, and it is management's intention to terminate this plan.
Accordingly, approximately $2.5 million of related expense was recognized in
fiscal year 1998.

F-27

13. OPERATING LEASE COMMITMENTS

The Company leases various facilities and equipment under operating leases
which expire at various dates through 2005. Certain lease commitments provide
that the Company pay taxes, insurance, and maintenance expenses related to the
leased assets.

Rent expense approximated $19,019, $8,083, and $6,745 for fiscal years 1998,
1997, and 1996, respectively. As of April 3, 1998, future minimum payments, by
fiscal year and in the aggregate, required under noncancelable operating leases
are as follows:

Fiscal Year:
1999.................................................................. $17,975
2000.................................................................. 15,398
2001.................................................................. 12,085
2002.................................................................. 5,698
2003.................................................................. 2,505
Thereafter............................................................ 940
--------
Total............................................................ $54,601
--------
14. COMMITMENTS AND 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 continue salary payments and provide
insurance for a period ranging from 12 to 36 months for the chief executive
officer and from 3 to 12 months for other executives and to repurchase a portion
or all of the shares of common stock held by the executives upon their demand.
The period of salary and insurance continuation and the level of stock
repurchases are based on the conditions of the termination or resignation.

Gulf South and certain of its former officers and directors were named as
defendants in two purported class action lawsuits filed on July 21, 1997 related
to disclosures made in the prospectus issued by Gulf South in connection with
its public offering of common stock during 1996. The Company believes that the
allegations contained in the complaints are without merit and intends to defend
vigorously against the claims. However, the lawsuits are in early stages, and
there can be no assurances that this litigation will ultimately be resolved on
terms that are favorable to the Company.

The Company is named as a defendant in a purported patent infringement claim.
In this lawsuit, the claimant alleges that the urinalysis test strips sold by
the Company under the Penny Saver(TM) label infringe certain patents. The
Company is contesting the claim of infringement and has obtained a written
agreement from the manufacturer of the product indemnifying the Company for the
costs of defense of the suit and for the underlying liability. The Company
believes that the allegations contained in the complaint are without merit and
intends to defend vigorously against the claims. However, this lawsuit is in its
early stages and there can be no assurance that this litigation will ultimately
be resolved on terms that are favorable to the Company.

While any litigation contains an element of uncertainty, management believes
that the outcome of any proceedings or claims which are pending or known to be
threatened will not have a material adverse effect on the Company's consolidated
financial position, liquidity, or results of operations.

F-28

15. ABBOTT LABORATORIES DISTRIBUTION AGREEMENT

On March 27, 1995, the Company signed a Distribution Agreement with Abbott
Laboratories providing for the exclusive distribution of certain Abbott
diagnostic products. The Abbott Agreement, effective April 1, 1995, has a five-
year term, although it may be terminated earlier if the Company fails to meet
certain performance objectives. Simultaneous with the closing of the Abbott
Agreement, Abbott purchased 825,000 unregistered, restricted shares of PSS
common stock. A three-year irrevocable proxy to the PSS Board of Directors and a
perpetual stand still agreement were provided by Abbott in the Stock Purchase
Agreement.

16. SUBSEQUENT EVENTS

Subsequent to year-end, the Company merged with a medical supply and equipment
distributor in a stock merger accounted for under the pooling-of-interests
method.

1999
---------

Number of acquisitions............................................... 1
Common stock issued.................................................. 314,000

Subsequent to year end, the Company acquired certain assets, including
accounts receivable, inventories, and equipment of the following medical
supplies and equipment distributors accounted for under the purchase method of
accounting.

1999
---------
Number of acquisitions............................................... 6
Total consideration.................................................. $7,622
Cash paid............................................................ 7,622
Goodwill recorded.................................................... 4,702
Noncompete payments.................................................. 1,005

In May 1998, the Company and certain of its present directors and officers
were named as defendants in a purported securities class action lawsuit related
to alleged damages suffered by purchasers of the Company's common stock during
the period from December 27, 1997 to May 8, 1998. The claimant seeks an
unspecified amount of damages, including costs and expenses. The Company
believes this lawsuit is without merit and intends to defend it vigorously.
However, this lawsuit is in its early stages and there can be no assurances that
this litigation will ultimately be resolved on terms that are favorable to the
Company.

F-29

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS
ENDED MARCH 29, 1996, MARCH 28, 1997, AND APRIL 3, 1998

(Dollars in Thousands)

Additions
----------------------------
Balance Provision
at Charged Transfers Balance
Valuation Allowance for Beginning to From at End of
Accounts Receivable of Period Expense Acquisitions Write-offs Period
- ----------------------------- ------------- ----------- ---------------- ------------- ----------

Year Ended March 29, 1996 $2,547 $2,333 $ 400 $1,245 $ 4,035
Year Ended March 28, 1997 4,035 3,965 1,249 2,996 6,253
Year Ended April 3, 1998 6,253 3,289 7,166 3,531 13,177

Additions
----------------------------
Balance Provision
at Charged Transfers Balance
Valuation Allowance for Beginning to From at End of
Inventory Obsolescence of Period Expense Acquisitions Write-offs Period
- ----------------------------- ------------- ----------- ---------------- ------------- ----------

Year Ended March 29, 1996 $ 512 $ 543 $ 765 $1,046 $ 774
Year Ended March 28, 1997 774 1,204 2,478 1,033 3,423
Year Ended April 3, 1998 3,423 833 3,822 2,955 5,123

F-30

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

There were no changes in or disagreements with accountants on accounting and
financial disclosures during the two years ended April 3, 1998.

PART III

Item 10. Directors and Executive Officers of the Registrant

Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by August 1, 1998 for its fiscal year 1998 Annual Meeting of Shareholders
under the caption "Directors and Executive Officers of the Registrant."

Item 11. Executive Compensation

Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by August 1, 1998 for its fiscal year 1998 Annual Meeting of Shareholders
under the caption "Executive Compensation."

Item 12. Security Ownership of Certain Beneficial Owners

Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by August 1, 1998 for its fiscal year 1998 Annual Meeting of Shareholders
under the caption "Beneficial Ownership of Certain Stockholders" and "Stock
Ownership of Directors and Officers."

Item 13. Certain Relationships and Related Transactions

Incorporated by reference from the Company's Definitive Proxy Statement to be
filed by August 1, 1998 for its fiscal year 1998 Annual Meeting of Shareholders
under the caption "Certain Relationships and Related Transactions."

-27-

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this Registration Statement:

1. Consolidated Financial Statements

Refer to Item 8 "Financial Statements and Supplementary Data" for a listing of
the Consolidated Financial Statements included therein.

2. Supplementary Data

Refer to Item 8 "Financial Statements and Supplementary Data" for a listing of
the Supplementary Data included therein.

Exhibit
Number Description
- ------- -----------------------------------------------------------------------

3.1 Amended and Restated Articles of Incorporation dated March 15, 1994,
as amended.(13)

3.2 Amended and Restated Bylaws dated March 15, 1994.(1)

4.1 Form of Indenture, dated as of October 7, 1997, by and among the
Company, the Subsidiary Guarantors named therein, and SunTrust Bank,
Central Florida, National Association, as Trustee.(2)

4.2 Registration Rights Agreement, dated as of October 7, 1997, by and
among the Company, the Subsidiary Guarantors named therein, BT Alex.
Brown Incorporated, Salamon Brothers Inc. and NationsBanc Montgomery
Securities, Inc.(2)

4.3 Form of 8 1/2% Senior Subordinated Note due 2007, including Form of
Guarantee (Private Notes).(2)

4.4 Form of 8 1/2% Senior Subordinated Note due 2007, including Form of
Guarantee (Exchange Notes).(2)

4.5 Shareholder Protection Rights Agreement, dated as of April 20, 1998,
between PSS World Medical, Inc. and Continental Stock Transfer & Trust
Company, as Rights Agent.(12)

10.1 Financing and Security Agreement between the Company and NationsBank
of Georgia, N.A. (as successor to NCNB National Bank of Florida),
dated as of September 26, 1991, as amended.(3)

10.2 Registration Rights Agreement between the Company and Tullis-Dickerson
Capital Focus, LP, dated as of March 16, 1994.(3)

10.3 Employment Agreement for Patrick C. Kelly.

10.4 Incentive Stock Option Plan dated May 14, 1986.(3)

10.5 Shareholders Agreement dated March 26, 1986, between the Company, the
Charthouse Co., Underwood, Santioni and Dunaway.(3)

10.6 Shareholders Agreement dated April 10, 1986, between the Company and
Clyde Young.(3)

10.7 Shareholders Agreement between the Company and John D. Barrow.(3)

10.8 Amended and Restated Directors Stock Plan.(8)

-28-

10.9 Amended and Restated 1994 Long-Term Incentive Plan.(8)

10.10 Amended and Restated 1994 Long-Term Stock Plan.(8)

10.11 1994 Employee Stock Purchase Plan.(4)

10.12 1994 Amended Incentive Stock Option Plan.(3)

10.13 Amended and Restated Loan and Security Agreement between the Company
and NationsBank of Georgia, N.A. dated December 21, 1994.(5)

10.14 Distributorship Agreement between Abbott Laboratories and Physician
Sales & Service, Inc. (Portions omitted as confidential--Separately
filed with Commission).(6)

10.15 Stock Purchase Agreement between Abbott Laboratories and Physician
Sales & Service, Inc.(6)

10.16 Amendment to Employee Stock Ownership Plan.(8)

10.16a Amendment and Restatement of the Physician Sales and Service, Inc.
Employee Stock Ownership and Savings Plan.(8)

10.16b First Amendment to the Physician Sales and Service, Inc. Employee
Stock Ownership and Savings Plan.(8)

10.17 Third Amended and Restated Agreement and Plan of Merger By and Among
Taylor Medical, Inc. and Physician Sales & Service, Inc. (including
exhibits thereto).(7)

10.18 Agreement and Plan of Merger by and Among Physician Sales & Service,
Inc., PSS Merger Corp. and Treadway Enterprises, Inc.(9)

10.19 Amended and Restated Agreement and Plan of Merger, dated as of August
22, 1997, among the Company, Diagnostic Imaging, Inc., PSS Merger
Corp. and S&W X-ray, Inc.(10)

10.20 Agreement and Plan of Merger dated December 14, 1997 by and among the
Company, PSS Merger Corp. and Gulf South Medical Supply, Inc.(11)

23.1 Consent of Independent Certified Public Accountants

23.2 Consent of Independent Auditors

27 Financial Data Schedule (for SEC use only)

(1) Incorporated by Reference to the Company's Registration Statement on Form
S-3, Registration No. 33-97524.
(2) Incorporated by Reference to the Company's Registration Statement on Form
S-4, Registration No. 333-39679.
(3) Incorporated by Reference from the Company's Registration Statement on Form
S-1, Registration No. 33-76580.
(4) Incorporated by Reference to the Company's Registration Statement on Form
S-8, Registration No. 33-80657.
(5) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 1994.
(6) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 30, 1995.
(7) Incorporated by Reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 29, 1996.
(8) Incorporated by Reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
(9) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed January 3, 1997.
(10) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-33453.
(11) Incorporated by Reference from Annex A to the Company's Registration
Statement on Form S-4, Registration No. 333-44323.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 22, 1998.
(13) Incorporated by Reference to the Company's Current Report on Form 8-K,
filed April 8, 1998.

(b) Reports on Form 8-K

There were no reports filed on Form 8-K during the quarter ended April 3,
1998.

-29-

SIGNATURES

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 July 9, 1998.

PSS WORLD MEDICAL, INC.

By: /s/ Patrick C. Kelly
--------------------------
Patrick C. Kelly,
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signatures Title Date
---------- ----- ----

/s/ Patrick C. Kelly Chairman of the Board of Directors, Chief Executive Officer,
- ------------------------- and Director (Principal Executive Officer) July 9, 1998
Patrick C. Kelly

/s/ David A. Smith Executive Vice President, Chief Financial Officer, and
- ------------------------- Director (Principal Financial and Accounting
David A. Smith Officer) July 9, 1998

/s/ Thomas G. Hixon
- ------------------------- Director July 9, 1998
Thomas G. Hixon

- ------------------------- Director July 9, 1998
Hugh M. Brown

/s/ T. O'Neal Douglas
- ------------------------- Director July 9, 1998
T. O'Neal Douglas

/s/ Melvin L. Heckman
- ------------------------- Director July 9, 1998
Melvin L. Heckman

- ------------------------- Director July 9, 1998
Delores Kesler

- ------------------------- Director July 9, 1998
Charles R. Scott

/s/ James L. L. Tullis
- ------------------------- Director July 9, 1998
James L. L. Tullis

/s/ Donna Williamson
- ------------------------- Director July 9, 1998
Donna Williamson

-30-