UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

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

For the fiscal year ended December 31, 2005

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

HENRY SCHEIN, INC.

DELAWARE (State or other jurisdiction of incorporation or organization) 11-3136595 (I.R.S. Employer Identification No.)		135 Duryea Road Melville, New York (Address of principal executive offices) 11747 (Zip Code)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES: þ      NO: o

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES: o      NO: þ

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

YES: þ       NO: o

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

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

Large accelerated filer: þ      Accelerated filer: o       Non-accelerated filer: o

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

YES: o       NO: þ

     The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price as quoted on the NASDAQ National Market on June 25, 2005 was approximately $3,612,312,000.

     As of February 27, 2006 there were 87,331,228 shares of registrant’s Common Stock, par value $.01 per share, outstanding.

Documents Incorporated by Reference:

     Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year (December 31, 2005) are incorporated by reference in Part III hereof.

 

 

TABLE OF CONTENTS

				Page
				Number
PART I
ITEM 1.		Business		3
ITEM 1A.		Risk Factors		14
ITEM 1B.		Unresolved Staff Comments		20
ITEM 2.		Properties		21
ITEM 3.		Legal Proceedings		21
ITEM 4.		Submission of Matters to a Vote of Security Holders		22
PART II
ITEM 5.		Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		23
ITEM 6.		Selected Financial Data		25
ITEM 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
ITEM 7A.		Quantitative and Qualitative Disclosures About Market Risk		44
ITEM 8.		Financial Statements and Supplementary Data		45
ITEM 9.		Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		83
ITEM 9A.		Controls and Procedures		83
ITEM 9B.		Other		86
PART III
ITEM 10.		Directors and Executive Officers of the Registrant		87
ITEM 11.		Executive Compensation		87
ITEM 12.		Security Ownership of Certain Beneficial Owners and Management		87
ITEM 13.		Certain Relationships and Related Transactions		88
ITEM 14.		Principal Accountant Fees and Services		88
PART IV
ITEM 15.		Exhibits and Financial Statement Schedules		89
		Signatures		90
		Exhibit Index		93
EX-10.2: SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EX-10.8: HENRY SCHEIN MANAGEMENT TEAM 2004 PERFORMANCE INCENTIVE PLAN SUMMARY
EX-10.9: HENRY SCHEIN MANAGEMENT TEAM 2005 PERFORMANCE INCENTIVE PLAN SUMMARY
EX-21.1: LIST OF SUBSIDIARIES
EX-23.1 CONSENT OF BDO SEIDMAN, LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

PART I

ITEM 1. Business

General

     We believe we are the largest distributor of healthcare products and services primarily to office-based healthcare practitioners in the combined North American and European markets. We serve more than 500,000 customers worldwide, including dental practices and laboratories, physician practices and veterinary clinics, as well as government and other institutions. We believe that we have a strong brand identity due to our more than 73 years of experience distributing healthcare products.

     We are headquartered in Melville, New York, employ nearly 11,000 people and have operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Portugal, Spain, the Czech Republic, Luxembourg, Italy, Ireland, Switzerland, Israel, Australia and New Zealand. We also have an affiliate in Iceland.

     We have established strategically located distribution centers to enable us to better serve our customers and increase our operating efficiency. This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.

     We conduct our business through two reportable segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution reportable segment aggregates our dental, medical (including veterinary) and international operating segments. Products distributed consist of consumable products, small equipment, laboratory products, large equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection control products and vitamins.

     Our dental group serves approximately 80% of the estimated 135,000 office-based dental practices in the combined United States and Canadian dental market. Based upon an estimated $5.0 billion combined United States and Canadian dental market, we estimate our share of this market was approximately 38% in 2005.

     Our medical group serves approximately 45% of the estimated 250,000 office-based physician practices, as well as surgical centers and other alternate-care settings throughout the United States. We also serve over 70% of the estimated 26,000 veterinarian clinics in the United States. Based upon an estimated $8.0 billion combined market, we estimate our share of this market was approximately 17% in 2005.

     Our international group serves approximately 230,000 practices in 17 countries outside of North America and is what we believe to be a leading European healthcare supplier serving office-based practices. Based upon an estimated $8.0 billion Western and Central European combined dental, medical and veterinary market in which we operate, we estimate our share of this market was approximately 16% in 2005.

     Our technology group provides software, technology and other value-added services to healthcare providers, primarily in the United States and Canada. Our value-added practice solutions include practice management software systems for dental and medical practices and veterinary clinics. Our technology group offerings also include financial services and continuing education services for practitioners.

Industry

     The healthcare products distribution industry, as it relates to office-based healthcare practitioners, is highly fragmented and diverse. This industry, which encompasses the dental, medical and veterinary markets, was estimated to produce revenues of approximately $21 billion in 2005 in the combined North American and Western and Central European markets. The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.

     Due in part to the inability of office-based healthcare practitioners to store and manage large quantities of supplies in their offices, the distribution of healthcare supplies and small equipment to office-based healthcare practitioners has traditionally been characterized by frequent, small-quantity orders, and a need for rapid, reliable and substantially complete order fulfillment. The purchasing decisions within an office-based healthcare practice are typically made by the practitioner or an administrative assistant, and supplies and small equipment are generally purchased from more than one distributor, with one distributor generally serving as the primary supplier.

     The healthcare products distribution industry continues to experience growth due to the aging population, increased healthcare awareness, the proliferation of healthcare technology and testing, new pharmacology treatments and expanded third-party insurance coverage. In addition, the physician market continues to benefit from procedures and diagnostic testing shifting from hospitals to alternate-care sites, particularly physicians’ offices. As the cosmetic surgery and elective procedure markets continue to grow, physicians are increasingly performing more of these procedures in their offices. The healthcare market continues to benefit from the increasing growth rate of the population of elderly Americans.

     We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial and marketing resources, seeking to combine with larger companies that can provide opportunities for growth. This consolidation may also continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.

Competition

     The distribution and manufacture of healthcare supplies and equipment is highly competitive. Many of the healthcare distribution products we sell are available to our customers from a number of suppliers. In addition, our competitors could obtain exclusive rights from manufacturers to market particular products. Manufacturers could also seek to sell directly to end-users, and thereby eliminate or reduce our role and that of other distributors.

     In the United States, we compete with other distributors, as well as several manufacturers of dental, medical and veterinary products, primarily on the basis of price, breadth of product line, customer service and value-added products and services. In the sale of our dental products, our principal national competitors are Patterson Companies, Inc. (formerly Patterson Dental Company) and Benco Dental Supply Company. In addition, we compete against a number of other distributors that operate on a national, regional and local level. Our principal competitors in the sale of medical products are PSS World Medical, Inc., the General Medical division of McKesson Corp. and the Allegiance division of Cardinal Health, Inc., which are national distributors. In the veterinary market, our principal national competitors are Butler Animal Health Supply, LLC, MWI Veterinary Supply Inc. and the Webster Veterinary division of Patterson Companies, Inc. We also compete against a number of regional and local medical and veterinary distributors, as well as a number of manufacturers that sell directly to physicians and veterinarians. With regard to our dental practice management software, we compete against numerous firms, including firms such as PracticeWorks, Inc., a subsidiary of the Eastman Kodak Company, and Patterson Companies, Inc. In the veterinary practice

management market, our primary competitor is IDEXX Laboratories, Inc. The electronic medical records market is very fragmented and therefore we compete against numerous firms.

     We also face significant competition internationally, where we compete on the basis of price and customer service against several large competitors, including the GACD Group, Pluradent AG & Co., Planmeca Oy, Omega Pharma NV and Billericay Dental Supply Co. Ltd., as well as a large number of dental product distributors and manufacturers in the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Ireland, Italy, Australia, New Zealand, Portugal and Spain.

     Significant price reductions by our competitors could result in a similar reduction in our prices. Any of these competitive pressures may materially adversely affect operating results.

Competitive Strengths

     We have more than 73 years of experience in distributing products to healthcare practitioners resulting in strong awareness of the “Henry Schein” name. Our competitive strengths include:

Direct sales and marketing expertise. Our sales and marketing efforts are designed to establish and solidify customer relationships through personal visits by field sales representatives and frequent direct marketing contact, emphasizing our broad product lines, competitive prices and ease of order placement. The key elements of our direct sales and marketing efforts are:

	•		Field sales consultants. We have approximately 2,200 field sales consultants, including equipment sales specialists, covering major North American and international markets. These consultants complement our direct marketing and telesales efforts and enable us to better market, service and support the sale of more sophisticated products and equipment.
	•		Direct marketing. During 2005, we distributed more than 34 million pieces of direct marketing material, including catalogs, flyers, order stuffers and other promotional materials to existing and potential office-based healthcare customers.
	•		Telesales. We support our direct marketing effort with approximately 1,300 inbound and outbound telesales representatives, who facilitate order processing and generate new sales through direct and frequent contact with customers.

Broad product and service offerings at competitive prices. We offer a broad range of products and services to our customers, at competitive prices, in the following categories:

	•		Consumable supplies and equipment. We offer over 70,000 Stock Keeping Units (“SKUs”) to our customers. Of the SKUs offered, approximately 46,000 are offered to our dental customers, approximately 34,000 to our medical customers and approximately 23,000 to our veterinary customers. We offer over 100,000 additional SKUs to our customers in the form of special order items.
	•		Technology and other value-added products and services. We sell practice management software systems to our dental, medical and veterinary customers. Our practice management software products provide practitioners with patient treatment history, billing, accounts receivable analyses and management, appointment calendars, electronic claims processing and word processing programs. As of December 31, 2005, more than 50,000 of our Dentrix®, Easy Dental®, Enterprise, Labnet (dental laboratory), EMR (medical) and our AVImark® (veterinary) software systems were installed.

	•		Repair services. We have 163 equipment sales and service centers worldwide that provide a variety of repair services for our healthcare customers. Our technicians provide installation and repair services for dental handpieces; dental, medical and veterinary small equipment; table top sterilizers; and large equipment.
	•		Financial services. We offer our customers assistance in operating their practices by providing access to a number of financial services and products at rates that we believe are generally lower than what they would be able to secure independently.

Commitment to superior customer service. We maintain a strong commitment to providing superior customer service. We frequently monitor our customer service through customer surveys, focus groups and statistical reports. Our customer service policy primarily focuses on:

	•		Exceptional order fulfillment. Approximately 99% of items ordered in the United States and Canada are shipped without back ordering and are shipped on the same business day the order is received.
	•		Streamlined ordering process. Customers may place orders 24 hours a day, 7 days a week (“24/7”) by mail, fax, telephone, e-mail, internet and by using our computerized order entry systems.

Integrated management information systems. Our information systems generally allow for centralized management of key functions, including accounts receivable, inventory, accounts payable, payroll, purchasing, sales, and order fulfillment. These systems allow us to manage our growth, deliver superior customer service, properly target customers, manage financial performance and monitor daily operational statistics.

Cost-Effective purchasing. We believe that cost-effective purchasing is a key element to maintaining and enhancing our position as a low-cost provider of healthcare products. We continuously evaluate our purchase requirements and suppliers’ offerings and prices in order to obtain products at the lowest possible cost. In 2005, our top 10 healthcare distribution vendors and our single largest vendor accounted for approximately 25% and 6% of our aggregate purchases.

Efficient distribution. We distribute our products from our strategically located distribution centers. We strive to maintain optimal inventory levels in order to satisfy customer demand for prompt delivery and complete order fulfillment. These inventory levels are managed on a daily basis with the aid of our management information systems. Once an order is entered, it is electronically transmitted to the distribution center nearest the customer’s location and a packing slip for the entire order is printed for order fulfillment.

Products

     The following table sets forth the percentage of consolidated net sales by principal categories of products offered through our healthcare distribution and technology reportable segments:

		2005				2004 (1)				2003 (1)
Healthcare Distribution
Dental:
Consumable dental products and small equipment (2)			42.7	%			41.6	%			41.2	%
Large dental equipment (3)			17.0				14.4				11.4
Dental laboratory products (4)			4.2				4.1				2.7
Total dental			63.9				60.1				55.3
Medical:
Medical products (5)			30.6				33.5				38.1
Veterinary products (6)			3.6				4.3				4.3
Total medical			34.2				37.8				42.4
Total Healthcare Distribution			98.1				97.9				97.7
Technology
Software and related products and other value-added products (7)			1.9				2.1				2.3
Total			100.0	%			100.0	%			100.0	%

Business Strategy

     Our objective is to continue to expand as a value-added distributor of healthcare products and services to office-based healthcare practitioners. To accomplish this, we will apply our competitive strengths in executing the following strategies:

•

Increase penetration of our existing customer base. We intend to increase sales to our existing customer base and enhance our position as their primary vendor. In the North American dental market, total consumable sales per practitioner are estimated to be approximately $27,000, compared to our average dental customer’s sales of approximately $10,500 (or 39%). In the U.S. medical market, total sales per practitioner are estimated to be approximately $11,000, compared to our average U.S. medical customer’s sales of approximately $4,400 (or 40%). In the Western and Central European dental market, total sales per practitioner are estimated to be approximately $20,000, compared to our average Western and Central European dental customer’s sales of approximately $6,400 (or 32%).

•

Increase the number of customers we serve. This strategy includes increasing the number and productivity of field sales consultants, as well as using our customer database to focus our marketing efforts.

•

Leverage our value-added products and services. We intend to increase cross-selling efforts for key

product lines. In the dental business, we have significant cross-selling opportunities between our dental practice management software users and our dental distribution customers. In the medical business, we have opportunities to expand our vaccine, injectables and other pharmaceuticals sales to medical distribution customers, as well as cross-selling core products with these key products.

•

Pursue strategic acquisitions and joint ventures. Our acquisition strategy includes acquiring entities with businesses complementary to ours that will provide, among other things, additional sales to be channeled through our existing distribution infrastructure, access to additional product lines and networks of field sales consultants and an opportunity to further expand internationally.

Markets Served

     Demographic trends indicate that our markets are growing, as an aging U.S. population is increasingly using healthcare services. Between 2005 and 2015, the 45 and older population is expected to grow by approximately 19%. Between 2005 and 2025, this age group is expected to grow by approximately 33%. This compares with expected total U.S. population growth rates of 9% between 2005 and 2015 and 18% between 2005 and 2025.

     In the dental industry, there is predicted to be an attendant rise in oral healthcare expenditures as this segment of the population increases. Cosmetic dentistry is another growing aspect of dental practices as new technologies allow dentists to offer cosmetic solutions patients seek. At the same time, there is an increase in dental insurance coverage. Approximately 55% of the U.S. population now has some form of dental coverage, up from 47% in 1995.

     We support our dental professionals through the many Stock Keeping Units we offer, as well as through important value-added services, including practice management software, electronic claims processing, financial services and continuing education, all designed to help maximize a practitioner’s efficiency.

     There continues to be a migration of procedures from acute-care settings to physicians’ offices, a trend that provides additional opportunities for us. There is also the continuing use of vaccines, injectables and other pharmaceuticals in alternate-care settings. We believe we have established a leading position as a vaccine supplier to the office-based physician practitioner.

     We believe our international group is a leading European healthcare supplier servicing office-based dental, medical and veterinary practices. We are in the process of replicating our U.S. infrastructure across Europe. Additionally, we are expanding our dental full-service model throughout Europe and our medical offerings in countries where opportunities exist. Through our “Schein Direct” program, we have the capability to provide door-to-door air package delivery to practitioners in over 200 countries around the world.

Seasonality and Other Factors Affecting Our Business

     We experience fluctuations in quarterly earnings. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

     Our business is subject to seasonal and other quarterly fluctuations. Net sales and operating profits generally have been higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine, equipment and software products); purchasing patterns of office-based healthcare practitioners; and year-end promotions. Net sales and operating profits generally have been lower in the first quarter, primarily due to increased sales in the prior two quarters. Quarterly results may also be adversely affected by a variety of other factors, including:

•

costs of developing new applications and services;

	•		costs related to acquisitions and/or integrations of technologies or businesses;
	•		timing and amount of sales and marketing expenditures;
	•		loss of sales representatives;
	•		general economic conditions, as well as those specific to the healthcare industry and related industries;
	•		timing of the release of functions of our technology-related products and services;
	•		establishing or maintaining business relationships;
	•		consummating the sale of our Hospital Supply Business;
	•		changes in accounting principles; and
	•		product availability or recalls by manufacturers.

     Any change in one or more of these or other factors could cause our annual or quarterly operating results to fluctuate. If our operating results do not meet market expectations, our stock price may decline.

Governmental Regulations

     Our business is subject to requirements under various local, state, federal and foreign governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices. Among the federal laws applicable to us are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987 and the Safe Medical Devices Act of 1990, as amended, and comparable foreign regulations.

     The Federal Food, Drug, and Cosmetic Act generally regulates the introduction, manufacture, advertising, labeling, packaging, storage, handling, marketing and distribution of, and record keeping for, pharmaceuticals and medical devices shipped in interstate commerce.

     The Prescription Drug Marketing Act of 1987, which amended the Federal Food, Drug, and Cosmetic Act, establishes certain requirements applicable to the wholesale distribution of prescription drugs, including the requirement that wholesale drug distributors be registered with the Secretary of Health and Human Services and be licensed by each state in which they conduct business, and act in accordance with federally established guidelines on storage, handling and record maintenance. The Safe Medical Devices Act, which also amended the Federal Food, Drug and Cosmetic Act, imposes certain reporting and record-keeping requirements in the event of incidents involving serious injury, illness or death caused by a medical device distributed by us.

     Under the Controlled Substances Act, as a distributor of controlled substances, we are required to obtain a registration annually from the Attorney General in accordance with specified rules and regulations and are subject to inspection by the Drug Enforcement Administration acting on behalf of the Attorney General. We are required to maintain licenses and permits for the distribution of pharmaceutical products and medical devices under the laws of the states in which we operate. Our customers are also subject to significant governmental regulation.

     Certain of our businesses are required to register for permits and/or licenses with, and comply with operating and security standards of, the United States Drug Enforcement Administration, United States Food and Drug Administration, the Department of Health and Human Services, and various state boards of

pharmacy, state health departments and/or comparable state agencies as well as foreign agencies, and certain accrediting bodies depending on the type of operations and location of product distribution, manufacturing or sale. These businesses include those that distribute, manufacture and/or repackage prescription pharmaceuticals and/or medical devices, or own pharmacy operations.

     Certain of our businesses are subject to federal and state health care fraud and abuse, referral and reimbursement laws and regulations with respect to their operations. Such laws prohibit, among other things, persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient or ordering or purchasing of items or services which are paid for by government health care programs. Certain of our businesses also maintain contracts with the federal government and are subject to certain regulatory requirements relating to government contractors.

     Certain of our businesses are subject to various additional federal, state and local laws and regulations, including with respect to the sale, transportation, handling and disposal of hazardous or potentially hazardous substances. In recent years, some states have passed or proposed laws and regulations that are intended to protect the integrity of the supply channel. For example, Florida and other states are implementing pedigree requirements that require drugs to be accompanied by paperwork tracing drugs back to the manufacturers. In addition, United States and international import and export laws and regulations require us to abide by certain standards relating to the importation and exportation of products. Certain of our businesses may also be subject to federal and state requirements relating to the protection and privacy of health or other personal information.

     While we believe that we are substantially compliant with the foregoing laws and regulations promulgated thereunder and possess all material permits and licenses required for the conduct of our business, there can be no assurance that regulations that impact our business or customers’ practices will not have a material adverse impact on our business.

Proprietary Rights

     We hold trademarks relating to the “Henry Schein” name and logo, as well as certain other trademarks. Pursuant to agreements executed in connection with our reorganization in 1994, both Henry Schein, Inc., and Schein Pharmaceutical, Inc. (which was acquired by Watson Pharmaceuticals, Inc. in 2000), a company previously engaged in the manufacture and distribution of multi-source pharmaceutical products, are entitled to use the “Schein” name in connection with their respective businesses, but Schein Pharmaceutical, Inc. is not entitled to use the name “Henry Schein”. We intend to protect our trademarks to the fullest extent practicable.

Employees

     As of December 31, 2005, we employed nearly 11,000 full-time employees, including approximately 1,300 telesales representatives, 2,200 field sales consultants, including equipment sales specialists, 1,825 warehouse employees, 425 computer programmers and technicians, 975 management employees and 4,025 office, clerical and administrative employees. Approximately 479 or 4.4% of our employees were subject to collective bargaining agreements. We believe that our relations with our employees are good.

Available Information

     We make available free of charge through our Internet website, www.henryschein.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.

     The above information is also available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or obtainable by calling the SEC at (800) 732-0330. In addition, the SEC maintains an Internet website at www.sec.gov, where the above information can be viewed.

     Our principal executive offices are located at 135 Duryea Road, Melville, New York 11747, and our telephone number is (631) 843-5500. Unless the context specifically requires otherwise, the terms the “Company,” “Henry Schein,” “we,” “us” and “our” mean Henry Schein, Inc., a Delaware corporation, and its consolidated subsidiaries.

Executive Officers of the Registrant

     The following table sets forth certain information regarding our executive officers:

Name		Age				Position
Stanley M. Bergman			56			Chairman, Chief Executive Officer, Director
Gerald A. Benjamin			53			Executive Vice President, Chief Administrative Officer, Director
James P. Breslawski			52			President, Chief Operating Officer, Director
Leonard A. David			57			Senior Vice President, Chief Compliance Officer
Stanley Komaroff			70			Senior Advisor
Mark E. Mlotek			50			Executive Vice President, Corporate Business Development, Director
Steven Paladino			48			Executive Vice President, Chief Financial Officer, Director
Michael Racioppi			51			President, Medical Group
Michael Zack			53			President, International Group

     Stanley M. Bergman has been our Chairman and Chief Executive Officer since 1989 and a Director since 1982. Mr. Bergman held the position of President from 1989 to 2005. Mr. Bergman held the position of Executive Vice President from 1985 to 1989 and Vice President of Finance and Administration from 1980 to 1985. Mr. Bergman is a certified public accountant.

     Gerald A. Benjamin has been our Executive Vice President and Chief Administrative Officer since 2000 and has been a Director since 1994. Prior to holding his current position, Mr. Benjamin was Senior Vice President of Administration and Customer Satisfaction since 1993. Mr. Benjamin was Vice President of Distribution Operations from 1990 to 1992 and Director of Materials Management from 1988 to 1990. Before joining us in 1988, Mr. Benjamin was employed for 13 years in various management positions at Estée Lauder, Inc., where his last position was Director of Materials Planning and Control.

     James P. Breslawski has been our President and Chief Operating Officer since May 2005 and a Director since 1990. Mr. Breslawski held the position of Executive Vice President and President of U.S. Dental from 1990 to April 2005, with primary responsibility for the U.S. Dental Group. Between 1980 and 1990, Mr. Breslawski held various positions with us, including Chief Financial Officer, Vice President of Finance and Administration and Corporate Controller. Mr. Breslawski is a certified public accountant.

     Leonard A. David has been our Senior Vice President and Chief Compliance Officer since March 2006. Mr. David held the position of Vice President and Chief Compliance Officer from March 2005 to March 2006. Mr. David held the position of Vice President of Human Resources and Special Counsel from 1995 to February 2005. Mr. David held the position of Vice President, General Counsel and Secretary from 1990 to 1995 and practiced corporate and business law for eight years prior to joining us.

     Stanley Komaroff has been Senior Advisor since 2003. Prior to joining us, Mr. Komaroff was a partner for 35 years in the law firm of Proskauer Rose LLP, counsel to us. He served as Chairman of that firm from 1991 to 1999.

     Mark E. Mlotek has been Executive Vice President since 2004 and was Senior Vice President of Corporate Business Development from 2000 to 2004. Prior to that, Mr. Mlotek was Vice President, General Counsel and Secretary from 1994 to 1999, and became a Director in 1995. Prior to joining us, Mr. Mlotek was a partner in the law firm of Proskauer Rose LLP, specializing in mergers and acquisitions, corporate reorganizations and tax law from 1989 to 1994.

     Steven Paladino has been our Executive Vice President and Chief Financial Officer since 2000. Prior to holding his current position, Mr. Paladino was Senior Vice President and Chief Financial Officer from 1993 to 2000 and has been a Director since 1992. From 1990 to 1992, Mr. Paladino served as Vice President and Treasurer and from 1987 to 1990 served as Corporate Controller. Before joining us, Mr. Paladino was employed as a public accountant for seven years, most recently with BDO Seidman, LLP. Mr. Paladino is a certified public accountant.

     Michael Racioppi has been President of our Medical Group since 2000 and Interim President since 1999. Prior to holding his current position, Mr. Racioppi was Vice President from 1994 to 1999, with primary responsibility for the Medical Division and the marketing and merchandising groups. Mr. Racioppi served as Vice President and as Senior Director, Corporate Merchandising from 1992 to 1994. Before joining us in 1992, Mr. Racioppi was employed by Ketchum Distributors, Inc. as the Vice President of Purchasing and Marketing.

     Michael Zack has been President of our International Group since March 2006. Mr. Zack held the position of Senior Vice President of our International Group from 1989 to March 2006. Mr. Zack was employed by Polymer Technology (a subsidiary of Bausch & Lomb) as Vice President of International Operations from 1984 to 1989 and by Gruenenthal GmbH as Manager of International Subsidiaries from 1975 to 1984.

ITEM 1A. Risk Factors

The healthcare products distribution industry is highly competitive, and we may not be able to compete successfully.

     We compete with numerous companies, including several major manufacturers and distributors. Some of our competitors have greater financial and other resources than we do, which could allow them to compete more successfully. Most of our products are available from several sources and our customers tend to have relationships with several distributors. Competitors could obtain exclusive rights to market particular products, which we would then be unable to market. Manufacturers could also increase their efforts to sell directly to end-users and bypass distributors like us. Industry consolidation among healthcare products distributors, the unavailability of products, whether due to our inability to gain access to products or interruptions in supply from manufacturers, or the emergence of new competitors could also increase competition. In the future, we may be unable to compete successfully and competitive pressures may reduce our revenues.

The healthcare industry is experiencing changes that could adversely affect our business.

     The healthcare industry is highly regulated and subject to changing political, economic and regulatory influences. In recent years, the healthcare industry has undergone significant change driven by various efforts to reduce costs, including the reduction of spending budgets by government and private insurance programs, such as Medicare, Medicaid and corporate health insurance plans; pressures relating to potential healthcare reform; trends toward managed care; consolidation of healthcare distribution companies; collective purchasing arrangements among office-based healthcare practitioners; and changes in reimbursements to customers. If we are unable to react effectively to these and other changes in the healthcare industry, our operating results could be adversely affected. In addition, the enactment of any significant healthcare reforms could have a material adverse effect on our business.

We must comply with government regulations governing the distribution of pharmaceuticals and medical devices, and additional regulations could negatively affect our business.

     Our business is subject to requirements under various local, state, federal and international governmental laws and regulations applicable to the distribution of pharmaceuticals and medical devices. Among the federal laws with which we must comply are the Controlled Substances Act, the Federal Food, Drug, and Cosmetic Act, as amended, the Prescription Drug Marketing Act of 1987 and the Safe Medical Devices Act of 1990, as amended. Such laws:

•

regulate the storage and distribution, labeling, handling, record keeping, manufacturing and advertising of drugs and medical devices;

•

subject us to inspection by the Federal Food and Drug Administration and the Drug Enforcement Administration;

•

regulate the transportation of certain of our products that are considered hazardous materials;

•

require registration with the Federal Food and Drug Administration and the Drug Enforcement Administration;

•

require us to coordinate returns of products that have been recalled and subject us to inspection of our recall procedures; and

•

impose reporting requirements if a pharmaceutical or medical device causes serious illness, injury or death.

     Applicable federal and state laws and regulations may also require us to meet various standards relating to, among other things, licensure or registration, sales and marketing practices, product supply tracking to the manufacturer of the product, personnel, privacy of health or other personal information, and the importation and exportation of products. Our business is also subject to requirements of foreign governmental laws and regulations affecting our operations abroad.

     The failure to comply with any of these regulations, or new interpretations of existing laws and regulations, or the imposition of any additional laws and regulations could negatively affect our business. There can be no assurance that current or future United States or foreign government regulations will not adversely affect our business. The costs to us associated with complying with the various applicable federal and state statutes and regulations, as they now exist and as they may be modified, could be material. Allegations by a state or the federal government that we have not complied with these laws could have a material adverse impact on our businesses. If it is determined that we have not complied with these laws, or if we enter into settlement agreements to resolve allegations of non-compliance, we could be required to make settlement payments or be subject to civil and criminal penalties, including fines and the loss of licenses or our ability to participate in federal and state healthcare programs. Any of the foregoing could have a material adverse impact on our businesses. We believe that the healthcare services industry will continue to be subject to extensive regulation at the federal, state, and local levels and that we have adequate compliance programs and controls to ensure compliance with the laws and regulations.

If we fail to comply with laws and regulations in respect of healthcare fraud, we could suffer penalties or be required to make significant changes to our operations.

     We are subject to extensive and frequently changing federal and state laws and regulations relating to healthcare fraud. The federal government continues to strengthen its position and scrutiny over practices involving healthcare fraud affecting government healthcare programs. Our relationships with pharmaceutical manufacturers and healthcare providers subject our business to laws and regulations on fraud and abuse which, among other things, (i) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or for inducing the ordering or purchasing of items or services that are in any way paid for by government-sponsored healthcare programs and (ii) impose a number of restrictions upon referring physicians and providers of designated health services under government healthcare programs. While we believe that we are substantially compliant with all applicable laws, many of the regulations applicable to us are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations. If we fail to comply with applicable laws and regulations, we could suffer civil and criminal penalties, including the loss of licenses or our ability to participate in federal and state healthcare programs.

Our international operations are subject to inherent risks that could adversely affect our operating results.

     International operations are subject to risks that may materially adversely affect our business, results of operations and financial condition. The risks that our international operations are subject to include:

•

difficulties and costs relating to staffing and managing foreign operations;

•

difficulties in establishing channels of distribution;

•

fluctuations in the value of foreign currencies;

•

longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions;

•

repatriation of cash from our foreign operations to the United States;

•

regulatory requirements;

•

unexpected difficulties in importing or exporting our products;

•

imposition of import/export duties, quotas, sanctions or penalties; and

•

unexpected regulatory, economic and political changes in foreign markets.

     As a result of our acquisition of the Demedis Group and other foreign companies, our foreign operations are significantly larger and, therefore, our exposure to the risks inherent in international operations has become greater.

We experience fluctuations in quarterly earnings. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

     Our business is subject to seasonal and other quarterly fluctuations. Net sales and operating profits generally have been higher in the third and fourth quarters due to the timing of sales of seasonal products (including influenza vaccine, equipment and software products), purchasing patterns of office-based healthcare practitioners and year-end promotions. Net sales and operating profits generally have been lower in the first quarter, primarily due to increased sales in the prior two quarters. Quarterly results may also be adversely affected by a variety of other factors, including:

•

costs of developing new applications and services;

•

costs related to acquisitions and/or integrations of technologies or businesses;

•

timing and amount of sales and marketing expenditures;

•

loss of sales representatives;

•

general economic conditions, as well as those specific to the healthcare industry and related industries;

•

timing of the release of functions of our technology-related products and services;

•

establishing or maintaining business relationships;

•

consummating the sale of our Hospital Supply Business;

•

changes in accounting principles; and

•

product availability or recalls by manufacturers.

     Any change in one or more of these or other factors could cause our annual or quarterly operating results to fluctuate. If our operating results do not meet market expectations, our stock price may decline.

Because substantially all of the products that we distribute are not manufactured by us, we are dependent upon third parties for the manufacture and supply of substantially all of our products.

     We obtain substantially all of our products from third-party suppliers. Generally, we do not have long-term contracts with our suppliers committing them to supply products to us. Therefore, suppliers may not provide the products we need in the quantities we request. Because we do not control the actual production of the products we sell, we may be subject to delays caused by interruption in production based on conditions outside of our control. In the event that any of our third-party suppliers were to become unable or unwilling to continue to provide the products in required volumes, we would need to identify and obtain acceptable replacement sources on a timely basis. There is no guarantee that we will be able to obtain such alternative sources of supply on a timely basis, if at all. An extended interruption in the supply of our products, including the supply of our influenza vaccine and any other high sales volume product, would have an

adverse effect on our results of operations, which most likely would adversely affect the value of our common stock.

Our expansion through acquisitions and joint ventures involves risks.

     We have expanded our domestic and international markets in part through acquisitions and joint ventures, and we expect to continue to make acquisitions and enter into joint ventures in the future. Such transactions involve numerous risks, including possible adverse effects on our operating results or the market price of our common stock. Some of our acquisitions and future acquisitions may also give rise to an obligation by us to make contingent payments or to satisfy certain repurchase obligations, which payments could have an adverse effect on our results of operations. In addition, integrating acquired businesses and joint ventures:

•

may result in a loss of customers or product lines of the acquired businesses or joint ventures;

•

requires significant management attention; and

•

may place significant demands on our operations, information systems and financial resources.

     There can be no assurance that our future acquisitions or joint ventures will be successful. Our ability to continue to successfully effect acquisitions and joint ventures will depend upon the following:

•

the availability of suitable acquisition or joint venture candidates at acceptable prices;

•

our ability to consummate such transactions, which could potentially be prohibited due to U.S. or foreign antitrust regulations; and

•

the availability of financing on acceptable terms, in the case of non-stock transactions.

We face inherent risk of exposure to product liability and other claims in the event that the use of the products we sell results in injury.

     Our business involves a risk of product liability and other claims and from time to time we are named as a defendant in cases as a result of our distribution of pharmaceutical and other healthcare products. Additionally, we own a majority interest in a company that manufactures dental implants and we are subject to the potential risk of product liability or other claims relating to the manufacture of products by that entity. One of the potential risks we face in the distribution of our products is liability resulting from counterfeit products infiltrating the supply chain. In addition, some of the products that we transport and sell are considered hazardous materials. The improper handling of such materials or accidents involving the transportation of such materials could subject us to liability. We have insurance policies, including product liability insurance, covering risks and in amounts that we consider adequate. Additionally, in many cases we are covered by indemnification from the manufacturer of the product. However, we cannot provide assurance that the coverage maintained by us is sufficient to cover future claims, that it will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide adequate protection for us. A successful claim brought against us in excess of available insurance or indemnification, or any claim that results in significant adverse publicity against us, could harm our business.

Our technology segment depends upon continued product development, technical support and successful marketing.

     Competition among companies supplying practice-management software is intense and increasing. Our future sales of practice-management software will depend on, among other factors:

•

the effectiveness of our sales and marketing programs;

•

our ability to enhance our products; and

•

our ability to provide ongoing technical support.

     We cannot be sure that we will be successful in introducing and marketing new software or software enhancements, or that such software will be released on time or accepted by the market. Our software products, like software products generally, may contain undetected errors or bugs when introduced or as new versions are released. We cannot be sure that future problems with post-release software errors or bugs will not occur. Any such defective software may result in increased expenses related to the software and could adversely affect our relationships with the customers using such software. We do not have any patents on our software, and rely upon copyright, trademark and trade secret laws, as well as contractual and common law protections. We cannot assure you that such legal protections will be available or enforceable to protect our software products.

Our revenues depend on our relationships with capable sales personnel as well as key customers, vendors and manufacturers of the products that we distribute.

     Our future operating results depend on our ability to maintain satisfactory relationships with qualified sales personnel as well as key customers, vendors and manufacturers. If we fail to maintain our existing relationships with such persons or fail to acquire relationships with such key persons in the future, our business may suffer.

Our future success is substantially dependent upon our senior management.

     Our future success is substantially dependent upon the efforts and abilities of members of our existing senior management, particularly Stanley M. Bergman, Chairman and Chief Executive Officer, among others. The loss of the services of Mr. Bergman could have a material adverse effect on our business. We have an employment agreement with Mr. Bergman. We do not currently have “key man” life insurance policies on any of our employees. Competition for senior management is intense, and we may not be successful in attracting and retaining key personnel.

Increases in the cost of shipping or service trouble with our third-party shippers could harm our business.

     Shipping is a significant expense in the operation of our business. We ship almost all of our U.S. orders through United Parcel Service, Inc. and other delivery services, and typically bear the cost of shipment. Accordingly, any significant increase in shipping rates could have an adverse effect on our operating results. Similarly, strikes or other service interruptions by those shippers could cause our operating expenses to rise and adversely affect our ability to deliver products on a timely basis.

We may not be able to respond to technological change effectively.

     Traditional healthcare supply and distribution relationships are being challenged by electronic online commerce solutions. Our distribution business is characterized by rapid technological developments and intense competition. The advancement of online commerce will require us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address changing demands of consumers and our clients on a timely basis, particularly in response to competitive offerings. Our inability to anticipate and effectively respond to changes on a timely basis could have an adverse effect on our business.

We are exposed to the risk of an increase in interest rates.

     In 2003, we entered into interest rate swap agreements to exchange our fixed-rate interest rates for variable interest rates payable on our $230.0 million senior notes. Our fixed interest rates on the senior notes were 6.94% and 6.66% for the $130.0 million and $100.0 million senior notes, respectively. The variable rate is comprised of LIBOR plus the spreads and resets on the interest due dates for the senior notes. As a result

of these interest rate swap agreements, as well as our existing variable rate credit lines, and loan agreements, we are exposed to risk from fluctuations in interest rates.

Our acquisitions may not result in the benefits and revenue growth we expect.

     We are in the process of integrating companies that we acquired, including the Demedis Group, and assimilating the operations, services, products and personnel of each company with our management policies, procedures and strategies. We cannot be sure that we will achieve the benefits of revenue growth that we expect from these acquisitions or that we will not incur unforeseen additional costs or expenses in connection with these acquisitions. To effectively manage our expected future growth, we must continue to successfully manage our integration of these companies and continue to improve our operational systems, internal procedures, accounts receivable and management, financial and operational controls. If we fail in any of these areas, our business could be adversely affected.

The market price for our common stock may be highly volatile.

     The market price for our common stock may be highly volatile. A variety of factors may have a significant impact on the market price of our common stock, including:

•

the publication of earnings estimates or other research reports and speculation in the press or investment community;

•

changes in our industry and competitors;

•

our financial condition, results of operations and cash flows and prospects;

•

any future issuances of our common stock, which may include primary offerings for cash, stock splits, issuances in connection with business acquisitions, restricted stock and the grant or exercise of stock options from time to time;

•

the dilutive impact of convertible debt on our earnings per share;

•

general market and economic conditions; and

•

any outbreak or escalation of hostilities in areas we do business.

     In addition, the Nasdaq National Market can experience extreme price and volume fluctuations that can be unrelated or disproportionate to the operating performance of the companies listed on Nasdaq. Broad market and industry factors may negatively affect the market price of our common stock, regardless of actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business.

Certain provisions in our governing documents and other documents to which we are a party may discourage third-party offers to acquire us that might otherwise result in our stockholders receiving a premium over the market price of their shares.

     The provisions of our certificate of incorporation and by-laws may make it more difficult for a third party to acquire us, may discourage acquisition bids, and may limit the price that certain investors might be willing to pay in the future for shares of our common stock. These provisions, among other things:

•

require the affirmative vote of the holders of at least 60% of the shares of common stock entitled to vote to approve a merger, consolidation, or a sale, lease, transfer or exchange of all or substantially all of our assets; and

•

require the affirmative vote of the holders of at least 66 2/3% of our common stock entitled to vote to:

	•		remove a director; and
	•		to amend or repeal our by-laws, with certain limited exceptions.

     In addition, our 1994 Stock Incentive Plan, 1996 Non-Employee Director Stock Incentive Plan and 2001 Non-Employee Director Incentive Plan provide for accelerated vesting of stock options upon a change in control, and certain agreements between us and our executive officers provide for increased severance payments if those executive officers are terminated without cause within two years after a change in control.

     We also have a stockholder rights plan that could make it more difficult for a third party to acquire us if our Board of Directors does not determine that the acquisition proposal is adequate and in the stockholders’ best interest.

Tax legislation initiatives could adversely affect the Company’s net earnings and tax liabilities.

     We are subject to the tax laws and regulations of the United States federal, state and local governments, as well as foreign jurisdictions. From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions. There can be no assurance that our effective tax rate will not be adversely affected by these initiatives. In addition, tax laws and regulations are extremely complex and subject to varying interpretations. Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.

Item 1B. Unresolved Staff Comments

     We have no unresolved comments from the staff of the United States Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2005 fiscal year.

ITEM 2. Properties

We own or lease the following properties:

				Own or		Approximate				Lease Expiration
Property		Location		Lease		Square Footage				Date
Corporate Headquarters		Melville, NY		Own			105,000			N/A
Corporate Headquarters		Melville, NY		Lease			185,000			July 2020
Administrative Office (1)		Pelham, NY		Lease			108,000			July 2007
Office and Distribution Center		West Allis, WI		Lease			106,000			October 2011
Distribution Center		Denver, PA		Lease			614,000			February 2013
Distribution Center		Indianapolis, IN		Own			287,000			N/A
Distribution Center		Indianapolis, IN		Lease			144,000			June 2009
Distribution Center		Grapevine, TX		Lease			187,000			July 2008
Distribution Center		Gallin, Germany		Own			215,000			N/A
Distribution Center (2)		Secaucus, NJ		Lease			192,000			December 2008
Distribution Center		Jacksonville, FL		Lease			212,000			June 2013
Distribution Center		Niagara on the Lake, Canada		Lease			94,000			September 2016
Distribution Center		Sparks, NV		Lease			271,000			March 2011
Distribution Center		Gillingham, United Kingdom		Lease			103,000			April 2010

     The properties listed in the table above are our principal properties primarily used by our healthcare distribution segment. In addition, we lease numerous other distribution, office, showroom, manufacturing and sales space in locations including the United States, Canada, France, Germany, the Netherlands, Belgium, Luxembourg, Switzerland, Spain, Austria, the Czech Republic, Israel, Italy, Ireland, Portugal, the United Kingdom, Australia and New Zealand. We also are planning to build and occupy a new distribution center in France in 2006.

     We believe that our properties are in good condition, are well maintained and are suitable and adequate to carry on our business. We have additional operating capacity at certain distribution center facilities.

ITEM 3. Legal Proceedings

     Our business involves a risk of product liability claims and other claims in the ordinary course of business, and from time to time we are named as a defendant in cases as a result of our distribution of pharmaceutical and other healthcare products. As a business practice, we generally obtain product indemnification from our suppliers.

     We have various insurance policies, including product liability insurance, covering risks in amounts that we consider adequate. In many cases in which we have been sued in connection with products manufactured by others, the manufacturer provides us with indemnification. There can be no assurance that the insurance coverage we maintain is sufficient or will be available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide us with adequate protection. In our opinion, all pending matters, including those described below, are covered by insurance or will not otherwise seriously harm our financial condition.

     As of December 31, 2005, we had accrued our best estimate of potential losses relating to product liability and other claims that were probable to result in a liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as related expenses, was not material to our financial position, results of

operations or cash flows. Our method for determining estimated losses considers currently available facts, presently enacted laws and regulations and other external factors, including probable recoveries from third parties.

Product Liability Claims

     As of December 31, 2005, we were a defendant in approximately 42 product liability cases. We have obtained defense and indemnification commitments from the manufacturer in many of these cases. The manufacturer has withheld indemnification commitments in some of these cases pending product identification. In our opinion, these cases are covered by insurance or will not otherwise seriously harm our financial condition.

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

     No matters were submitted to a vote of our stockholders during the fourth quarter of fiscal 2005.

PART II

ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

     On January 31, 2005, we announced that our Board of Directors approved a two-for-one stock split effected in the form of a dividend. This stock split became effective on February 28, 2005 and has been retroactively reflected for all periods presented in this Form 10-K.

     Our common stock is quoted through the National Market tier of the NASDAQ Stock Market (“NASDAQ”) under the symbol HSIC. The following table sets forth, for the periods indicated, the high and low reported sales prices of our common stock as reported on the NASDAQ for each quarterly period in fiscal 2005 and 2004:

		High				Low
Fiscal 2005:
1st Quarter		$	40.50			$	32.70
2nd Quarter			42.39				35.66
3rd Quarter			44.13				40.06
4th Quarter			45.93				38.08
Fiscal 2004:
1st Quarter		$	37.01			$	32.96
2nd Quarter			39.72				30.99
3rd Quarter			34.01				29.92
4th Quarter			35.21				28.08

     On February 27, 2006, there were approximately 624 holders of record of our common stock and the last reported sales price was $46.82.

Purchases of Equity Securities by the Issuer

     Our current share repurchase program, announced on June 21, 2004, previously allowed us to repurchase up to $100.0 million in shares of our common stock, which represented approximately 3.5% of shares outstanding at the commencement of the program. On October 31, 2005, our board authorized an additional $100.0 million of shares in our common stock to be repurchased under this program. As of December 31, 2005, we had repurchased $88.5 million or 2,518,110 shares under this initiative, with $111.5 million remaining.

     The following table summarizes repurchases of our common stock under our stock repurchase program during the fiscal quarter ended December 31, 2005:

		Total								Total Number				Maximum Number of
		Number				Average				of Shares Purchased				Shares that May Yet
		of Shares				Price Paid				as Part of Our Publicly				Be Purchased Under
Fiscal Month		Purchased (1)				per Share				Announced Program				Our Program (2)
09/25/05 through 10/29/05			179,300			$	41.09				179,300				759,790
10/30/05 through 11/26/05			452,700				39.30				452,700				2,576,279
11/27/05 through 12/31/05			—				—				—				2,554,436
Total			632,000			$	39.81				632,000

Dividend Policy

     We have not declared any cash dividends on our common stock during fiscal years 2005 or 2004. We currently do not anticipate declaring any cash dividends on our common stock in the foreseeable future. We intend to retain earnings to finance the expansion of our business and for general corporate purposes, including our stock repurchase program. Any declaration of dividends will be at the discretion of our Board of Directors and will depend upon the earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends and other factors. The agreements governing our Senior Notes limit the distribution of dividends without the prior written consent of the lenders (limited to $25.0 million, plus 80% of cumulative net income, plus net proceeds from the issuance of additional capital stock.) As of December 31, 2005, the amount of retained earnings free of restrictions was $412.3 million.

ITEM 6. Selected Financial Data

     The following selected financial data, with respect to our financial position and results of operations for each of the five years in the period ended December 31, 2005, set forth below, has been derived from, should be read in conjunction with and is qualified in its entirety by reference to, our consolidated financial statements and notes thereto. The selected financial data presented below should also be read in conjunction with ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and ITEM 8, “Financial Statements and Supplementary Data.”

		Years ended
		December 31,				December 25,				December 27,				December 28,				December 29,
		2005				2004 (1)				2003 (1)				2002 (1)				2001 (1)
						(in thousands, except per share data)
Income Statement Data:
Net sales		$	4,635,929			$	3,898,485			$	3,194,031			$	2,675,645			$	2,413,050
Gross profit			1,316,936				1,054,465				908,163				771,538				680,919
Selling, general and administrative expenses (2)			1,035,848				844,715				675,867				581,685				537,878
Operating income			281,088				209,750				232,296				189,853				143,041
Other expense, net			(16,534	)			(11,121	)			(8,973	)			(6,933	)			(7,640	)
Income from continuing operations before taxes, minority interest and equity in earnings of affiliates			264,554				198,629				223,323				182,920				135,401
Income taxes from continuing operations			(97,002	)			(73,506	)			(83,373	)			(67,281	)			(49,925	)
Minority interest in net income of subsidiaries			(5,991	)			(1,486	)			(2,807	)			(2,591	)			(1,462	)
Equity in earnings of affiliates			827				1,699				931				659				414
Income from continuing operations			162,388				125,336				138,074				113,707				84,428
Income (loss) from discontinued operations, net of tax (3)			(11,062	)			2,847				(564	)			4,280				2,945
Net income		$	151,326			$	128,183			$	137,510			$	117,987			$	87,373
Earnings from continuing operations per share:
Basic		$	1.87			$	1.44			$	1.58			$	1.31			$	1.00
Diluted			1.82				1.40				1.53				1.27				0.97
Earnings (loss) from discontinued operations per share:
Basic		$	(0.13	)		$	0.03			$	(0.01	)		$	0.05			$	0.03
Diluted			(0.12	)			0.03				0.00				0.04				0.03
Earnings per share:
Basic		$	1.74			$	1.47			$	1.57			$	1.36			$	1.03
Diluted			1.70				1.43				1.53				1.31				1.00
Weighted-average common shares outstanding:
Basic			87,006				87,253				87,417				86,978				84,732
Diluted			89,187				89,462				89,975				89,744				87,090

		Years ended
		December 31,				December 25,				December 27,				December 28,				December 29,
		2005				2004 (1)				2003 (1)				2002 (1)				2001 (1)
										(in thousands)
Net Sales by Market Data:
Healthcare Distribution (4):
Dental (5)		$	1,896,643			$	1,602,457			$	1,364,812			$	1,227,273			$	1,121,394
Medical (6)			1,394,121				1,284,279				1,178,310				944,600				837,376
International (7)			1,256,910				928,207				576,628				437,046				398,071
Total Healthcare Distribution			4,547,674				3,814,943				3,119,750				2,608,919				2,356,841
Technology (8)			88,255				83,542				74,281				66,726				56,209
Total		$	4,635,929			$	3,898,485			$	3,194,031			$	2,675,645			$	2,413,050

		As of
		December 31,				December 25,				December 27,				December 28,				December 29,
		2005				2004				2003				2002				2001
										(in thousands)
Balance Sheet data:
Total assets		$	2,583,120			$	2,433,670			$	1,819,370			$	1,558,052			$	1,385,428
Long-term debt			489,520				525,682				247,100				242,561				242,169
Minority interest			12,353				12,438				11,532				6,748				6,786
Stockholders’ equity			1,229,544				1,106,053				1,004,118				861,217				680,457

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

     In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, we provide the following cautionary remarks regarding important factors which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. All forward-looking statements made by us are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements are identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or other comparable terms.

     Risk factors and uncertainties that could cause actual results to differ materially from current and historical results include, but are not limited to: competitive factors; changes in the healthcare industry; changes in government regulations that affect us; financial risks associated with our international operations; fluctuations in quarterly earnings; our dependence on third parties for the manufacture and supply of our products; transitional challenges associated with acquisitions; regulatory and litigation risks; the dependence on our continued product development, technical support and successful marketing in the technology segment; our dependence upon sales personnel and key customers; our dependence on our senior management; possible increases in the cost of shipping our products or other service trouble with our third-party shippers; risks from rapid technological change; risks from potential increases in variable interest rates; financial risks associated with acquisitions; possible volatility of the market price of our common stock; certain provisions in our governing documents that may discourage third-party acquisitions of us; and changes in tax legislation that affect us. The order in which these factors appear should not be construed to indicate their relative importance or priority.

     We caution that these factors may not be exhaustive and that many of these factors are beyond our ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. We undertake no duty and have no obligation to update forward-looking statements.

Recent Developments

     During the third quarter ended September 24, 2005, we reached a decision to divest our hospital supply business (“Hospital Supply Business”) which is a component of our healthcare distribution business. The primary reason for this decision was that the Hospital Supply Business does not focus on our core customer, namely the office-based practitioner, and therefore provides little or no synergies with our core operations.

     We have classified the operating results of the Hospital Supply Business as a discontinued operation in the accompanying consolidated statements of income for all periods presented. In connection with this divestiture, we assessed our long-lived assets for impairment, which resulted in us recording in the third quarter an impairment charge of $11.9 million ($7.0 million after-tax) for the full write-down of all long-lived assets, including goodwill of $4.6 million.

     On March 6, 2006, we entered into an agreement to sell substantially all of the assets of our Hospital Supply Business, as well as our extended care business the results of which are not material. The purchase price is $40.0 million, with $29.5 million due at closing and $10.5 million due 90 days after closing, subject to certain post-closing contingent payments by us described below. The closing is conditioned upon the buyer obtaining financing and our entering into a transition services agreement with the buyer, as well as other customary closing conditions. Based on this sale agreement, we expect to record a loss on disposal, net

of tax, of between $21.0 million and $24.0 million or $0.24 and $0.27 per diluted share, at the time of closing, which will be presented as part of the results from discontinued operations.

     We agreed to make payments to the buyer, up to a maximum of $13.0 million, contingent upon the collection of specified accounts receivable within one year and contingent upon the maintenance of a specified level of aggregate sales of the Hospital Supply Business during the two-year post-closing period. Any payments made in connection with these contingencies will be presented as part of the results from discontinued operations.

Executive Level Overview

     We believe we are the largest distributor of healthcare products and services primarily to office-based healthcare practitioners in the combined North American and European markets. We serve more than 500,000 customers worldwide, including dental practices and laboratories, physician practices and veterinary clinics, as well as government and other institutions. We believe that we have a strong brand identity due to our more than 73 years of experience distributing healthcare products.

     We are headquartered in Melville, New York, employ nearly 11,000 people and have operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Portugal, Spain, the Czech Republic, Luxembourg, Italy, Ireland, Switzerland, Israel, Australia and New Zealand. We also have an affiliate in Iceland.

     We have established strategically located distribution centers to enable us to better serve our customers and increase our operating efficiency. This infrastructure, together with broad product and service offerings at competitive prices, and a strong commitment to customer service, enables us to be a single source of supply for our customers’ needs. Our infrastructure also allows us to provide convenient ordering and rapid, accurate and complete order fulfillment.

     We conduct our business through two reportable segments: healthcare distribution and technology. These segments offer different products and services to the same customer base. The healthcare distribution reportable segment aggregates our dental, medical (including veterinary) and international operating segments. Products distributed consist of consumable products, small equipment, laboratory products, large dental equipment, branded and generic pharmaceuticals, vaccines, surgical products, diagnostic tests, infection-control products and vitamins.

     Our dental group serves office-based dental practices, schools and other institutions in the combined United States and Canadian dental market. Our medical group serves office-based physician practices, surgical centers, other alternate-care settings, veterinarian clinics and other institutions throughout the United States. Our international group serves 17 countries outside of North America and is what we believe to be a leading European healthcare supplier serving office-based practices.

     Our technology group provides software, technology and other value-added services to healthcare providers, primarily in the United States and Canada. Our value-added practice solutions include practice-management software systems for dental and medical practices and veterinary clinics. Our technology group offerings also include financial services and continuing education services for practitioners.

Industry Overview

     In recent years, the healthcare industry has increasingly focused on cost containment. This trend has benefited distributors capable of providing a broad array of products and services at low prices. It also has accelerated the growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributors

capable of providing specialized management information support. We believe that the trend towards cost containment has the potential to favorably affect demand for practice-management systems and software that can enhance the efficiency and facilitation of practice management.

     Our operating results in recent years have been significantly affected by strategies and transactions we undertook to expand our business, domestically and internationally, in part to address significant changes in the healthcare industry, including consolidation of healthcare distribution companies, potential healthcare reform, trends toward managed care, cuts in Medicare and collective purchasing arrangements.

Industry Consolidation

     The healthcare products distribution industry, as it relates to office-based healthcare practitioners, is highly fragmented and diverse. This industry, which encompasses the dental, medical and veterinary markets, was estimated to produce revenues of approximately $21 billion in 2005 in the combined North American and Western and Central European markets. The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.

     Due in part to the inability of office-based healthcare practitioners to store and manage large quantities of supplies in their offices, the distribution of healthcare supplies and small equipment to office-based healthcare practitioners has been characterized by frequent, small-quantity orders, and a need for rapid, reliable and substantially complete order fulfillment. The purchasing decisions within an office-based healthcare practice are typically made by the practitioner or an administrative assistant, and supplies and small equipment are generally purchased from more than one distributor, with one generally serving as the primary supplier.

     We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial and marketing resources, seeking to combine with larger companies that can provide growth opportunities. This consolidation may also continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.

     Our trend with regard to acquisitions has been to expand our role as a provider of products and services to the healthcare industry. This trend has resulted in expansion into service areas that complement our existing operations and provide opportunities for us to develop synergies with, and thus strengthen, the acquired businesses.

     As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we have the ability to support increased sales through our existing infrastructure. In the U.S. dental market, we estimate that there are currently more than 300 smaller distributors holding approximately 35% of the market. In the U.S. medical market, we estimate that more than 500 smaller distributors hold approximately 50% of the market, and in the European dental market, we estimate that more than 200 competitors hold approximately 80% of the market.

     As the healthcare industry continues to change, we continually evaluate possible candidates for merger or acquisition and intend to continue to seek opportunities to expand our role as a provider of products and services to the healthcare industry. There can be no assurance that we will be able to successfully pursue any such opportunity or consummate any such transaction, if pursued. If additional transactions are entered into or consummated, we would incur additional merger and acquisition-related costs, and there can be no assurance that the integration efforts associated with any such transaction would be successful.

Aging Population and Other Market Influences

     The healthcare products distribution industry continues to experience growth due to the aging population, increased healthcare awareness, the proliferation of medical technology and testing, new pharmacology

treatments and expanded third-party insurance coverage. In addition, the physician market continues to benefit from the shift of procedures and diagnostic testing shifting from hospitals to alternate-care sites, particularly physicians’ offices. As the cosmetic surgery and elective procedure markets continue to grow, physicians are increasingly performing more of these procedures in their offices. The healthcare market continues to benefit from the increasing growth rate of the population of elderly Americans.

     The January 2000 U.S. Bureau of the Census estimates that the elderly population in the United States will more than double by the year 2040. In 2000, four million Americans were aged 85 or older, the segment of the population most in need of healthcare services. By the year 2040, that number is projected to more than triple to more than 14 million. The population aged 65 to 84 years is projected to more than double in the same time period.

     As a result of these market dynamics, the annual expenditures for healthcare services continue to increase in the United States. The Centers for Medicare and Medicaid Services (CMS) published “National Health Care Expenditures Projections: 2005 – 2015” indicating that total national healthcare spending reached $1.9 trillion in 2004, or 16.0% of the nation’s gross domestic product. Healthcare spending is projected to reach $4.0 trillion in 2015, an estimated 20.0% of the nation’s gross domestic product, the benchmark measure for annual production of goods and services in the United States.

Governmental Influences

     The healthcare industry is subject to extensive government regulation, licensure and operating compliance procedures. National healthcare reform has been the subject of a number of legislative initiatives by Congress. Additionally, government and private insurance programs fund a large portion of the total cost of medical care. The Balanced Budget Act passed by Congress in 1997 significantly reduced reimbursement rates for nursing homes and home healthcare providers, affecting spending levels and the overall financial viability of these institutions.

     The Medicare Prescription Drug, Improvement, and Modernization Act (the “Medicare Act”) is the largest expansion of the Medicare program since its inception, and provides participants with voluntary prescription drug benefits through an interim drug discount card. The Medicare Act also includes provisions relating to medication management programs, generic substitution and provider reimbursement. Based upon current information, we believe the Medicare Act may create additional volume demand and provide incentives for additional use of generic drugs, both of which have potentially positive implications for our pharmaceutical distribution business.

Product Integrity

     Certain pharmaceutical and medical-surgical product manufacturers are in discussions with legislators about the risks of counterfeit products in the supply chain and manufacturers’ concerns about the impact of secondary market distribution on counterfeiting. As a distributor of such products, we continue to work with our suppliers to help minimize the risks associated with counterfeit products in the supply chain and potential litigation.

Results of Operations

     The following table summarizes the significant components of our operating results and cash flows for each of the three years ended December 31, 2005, December 25, 2004 and December 27, 2003 (in thousands):

		Years ended
		December 31,				December 25,				December 27,
		2005				2004 (1)				2003 (1)
Operating Results:
Net sales		$	4,635,929			$	3,898,485			$	3,194,031
Cost of sales			3,318,993				2,844,020				2,285,868
Gross profit			1,316,936				1,054,465				908,163
Operating expenses:
Selling, general and administrative (2)			1,035,848				844,715				675,867
Operating income		$	281,088			$	209,750			$	232,296
Other expense, net		$	(16,534	)		$	(11,121	)		$	(8,973	)
Income from continuing operations			162,388				125,336				138,074
Income (loss) from discontinued operations, net of tax			(11,062	)			2,847				(564	)
Net income			151,326				128,183				137,510

		Years ended
		December 31,				December 25,				December 27,
		2005				2004				2003
Cash Flows:
Net cash provided by operating activities		$	265,141			$	190,999			$	132,510
Net cash used in investing activities			(162,866	)			(171,829	)			(126,998	)
Net cash provided by (used in) financing activities			(38,866	)			26,370				(48,375	)

2005 Compared to 2004

Net Sales

     Net sales for 2005 and 2004 were as follows (in thousands):

						% of								% of
		2005				Total				2004 (1)				Total
Healthcare distribution (2):
Dental (3)		$	1,896,643				40.9	%		$	1,602,457				41.1	%
Medical (4)			1,394,121				30.1				1,284,279				33.0
International (5)			1,256,910				27.1				928,207				23.8
Total healthcare distribution			4,547,674				98.1				3,814,943				97.9
Technology (6)			88,255				1.9				83,542				2.1
Total		$	4,635,929				100.0	%		$	3,898,485				100.0	%

     The $737.4 million, or 18.9%, increase in net sales for the year ended December 31, 2005 includes increases of 18.8% local currency growth (8.4% internally generated primarily due to volume growth and 10.4% from acquisitions) and 0.1% related to foreign currency exchange.

     The $294.2 million, or 18.4%, increase in dental net sales for the year ended December 31, 2005 includes increases of 17.9% local currency growth (11.3% internally generated primarily due to increased volume and 6.6% from acquisitions) and 0.5% related to foreign currency exchange. The 17.9% local currency growth was due to dental consumable merchandise sales growth of 15.5% (9.2% internal growth and 6.3% from acquisitions) and dental equipment and service sales growth of 25.7% (18.2% internal growth and 7.5% from acquisitions).

     The $109.8 million, or 8.6%, increase in medical net sales for the year ended December 31, 2005 includes increases of 8.6% local currency growth (7.6% internally generated, of which 4.1% was due to the absence of Fluvirin^® influenza vaccine in 2004 as previously discussed, and 1.0% from acquisitions).

     The $328.7 million, or 35.4%, increase in international net sales for the year ended December 31, 2005 includes increases of 35.7% in local currencies (30.9% from acquisitions, primarily of the Demedis Group, and 4.8% internally generated), offset by a 0.3% decline due to foreign currency exchange.

     The $4.7 million, or 5.6%, increase in technology net sales for the year ended December 31, 2005 includes increases of 5.4% in local currency growth and 0.2% due to foreign currency exchange. The increase was driven by growth in electronic service, financial services and support/maintenance revenue.

Gross Profit

     Gross profit and gross margins for 2005 and 2004 by segment and in total were as follows (in thousands):

						Gross								Gross
		2005				Margin %				2004 (1)				Margin %
Healthcare distribution		$	1,249,836				27.5	%		$	992,537				26.0	%
Technology			67,100				76.0				61,928				74.1
Total		$	1,316,936				28.4			$	1,054,465				27.0

     Gross profit increased $262.5 million, or 24.9%, for the year ended December 31, 2005 compared to the prior year period. As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we realize substantially higher gross margin percentages in our technology segment than in our healthcare distribution segment. These higher gross margins result from being both the developer and seller of software products combined with the nature of the software industry, in which developers realize higher gross margins to recover investments in research and development.

     Healthcare distribution gross profit increased $257.3 million, or 25.9%, for the year ended December 31, 2005 compared to the prior year period. Healthcare distribution gross profit margin increased to 27.5% for the year ended December 31, 2005 from 26.0% for the comparable prior year period, primarily due to the absence of Fluvirin^® influenza vaccine in 2004 as previously discussed. These increases reflect a focus on

margin improvement, including the shedding of certain lower margin pharmaceutical products by our medical business.

     Technology gross profit increased $5.2 million, or 8.4%, for the year ended December 31, 2005 compared to the prior year period. Technology gross profit margin increased to 76.0% for the year ended December 31, 2005 from 74.1% for the comparable prior year period, primarily due to a change in sales mix reflecting a larger percentage of higher margin electronic and financial services sales and other cost improvements, largely in support.

Selling, General and Administrative

     Selling, general and administrative expenses by segment and in total for 2005 and 2004 were as follows (in thousands):

						% of								% of
						Respective								Respective
		2005				Net Sales				2004 (1)				Net Sales
Healthcare distribution		$	1,002,233				22.0	%		$	813,285				21.3	%
Technology			33,615				38.1				31,430				37.6
Total		$	1,035,848				22.3			$	844,715				21.7

1) Adjusted to reflect the effects of discontinued operations.

     Selling, general and administrative expenses increased by $191.1 million, or 22.6%, for the year ended December 31, 2005 compared to the prior year period. As a percentage of net sales, selling, general and administrative expenses increased to 22.3% from 21.7% for the comparable prior year period. This increase of 0.6% was primarily due to payroll and other expenses related to recent acquisitions, partially offset by the absence of the 2004 $13.2 million charge related to Fluvirin^®, as previously discussed.

     As a component of total selling, general and administrative expenses, selling expenses increased $123.0 million, or 23.5%, for the year ended December 31, 2005 from the prior year period. The increase was primarily due to payroll and other expenses related to recent acquisitions. As a percentage of net sales, selling expenses increased to 14.0% from 13.4% for the comparable prior year period.

     As a component of total selling, general and administrative expenses, general and administrative expenses increased $68.1 million, or 21.2%, for the year ended December 31, 2005 from the prior year period. As a percentage of net sales, general and administrative expenses increased to 8.4% from 8.2% for the comparable prior year period primarily due to payroll and other expenses related to recent acquisitions, partially offset by the absence of the 2004 $13.2 million charge related to Fluvirin^®, as previously discussed.

Other Expense, Net

     Other expense, net for the years ended 2005 and 2004 was as follows (in thousands):

		2005				2004 (1)
Interest income		$	7,315			$	6,110
Interest expense			(25,508	)			(17,596	)
Other, net			1,659				365
Other expense, net		$	(16,534	)		$	(11,121	)

     Other expense, net increased $5.4 million to $16.5 million for the year ended December 31, 2005 from the comparable prior year period. This increase was primarily due to increased interest expense related to the costs of financing acquisitions along with increased interest rates, partially offset by an increase in interest income.

Income Taxes

     For the year ended December 31, 2005, our effective tax rate from continuing operations was 36.7% compared to 37.0% for the prior year period. The difference between our effective tax rates and the federal statutory rates for both periods primarily relates to state income taxes.

Income (Loss) from Discontinued Operations

     During the year ended December 31, 2005, we recognized a $11.1 million loss, net of tax, related to discontinued operations (refer to Note 6 in the accompanying financial statements for further discussion).

Net Income

     Net income increased $23.1 million, or 18.1%, for the year ended December 31, 2005 compared to the prior year period. In 2005, net income includes an impairment charge related to long-lived assets of discontinued operations of $7.0 million, net of tax. In 2004, net income includes a charge of $8.4 million, net of tax, related to Chiron Fluvirin^®.

2004 Compared to 2003

Net Sales

     Net sales for 2004 and 2003 were as follows (in thousands):

						% of								% of
		2004 (1)				Total				2003 (1)				Total
Healthcare distribution (2):
Dental (3)		$	1,602,457				41.1	%		$	1,364,812				42.7	%
Medical (4)			1,284,279				33.0				1,178,310				36.9
International (5)			928,207				23.8				576,628				18.1
Total healthcare distribution			3,814,943				97.9				3,119,750				97.7
Technology (6)			83,542				2.1				74,281				2.3
Total		$	3,898,485				100.0	%		$	3,194,031				100.0	%

     The $704.5 million, or 22.1%, increase in net sales for the year ended December 25, 2004 includes increases of 19.9% local currency growth (7.9% internally generated primarily due to volume growth and 12.0% from acquisitions) and 2.2% related to foreign currency exchange.

     The $237.6 million, or 17.4%, increase in dental net sales for the year ended December 25, 2004 includes increases of 16.9% local currency growth (14.1% internally generated primarily due to volume growth and 2.8% from acquisitions) and 0.5% related to foreign currency exchange. The 16.9% local currency growth was due to dental consumable merchandise sales growth of 16.0% (13.6% internal growth, of which 6.3% related to sales of the Colgate and Pentron product lines and 2.4% from acquisitions) and dental equipment and service sales growth of 20.1% (16.6% internal growth and 3.5% from acquisitions). We expect that the Colgate and Pentron product lines, introduced through distribution agreements executed in 2004, will continue to contribute to our overall increase in dental net sales.

     The $106.0 million, or 9.0%, increase in medical net sales for the year ended December 25, 2004 includes increases of 1.0% internally generated and 8.0% from acquisitions (accounting for an increase of $96.8 million). Additionally, medical sales were affected by the absence of Fluvirin^® influenza vaccines in 2004, as previously discussed.

     The $351.6 million, or 61.0%, increase in international net sales for the year ended December 25, 2004 includes increases of 50.0% in local currencies (43.5% from acquisitions and 6.5% internally generated primarily due to volume growth) and 11.0% due to foreign currency exchange. The increase was primarily due to our acquisition of the Demedis Group.

     The $9.3 million, or 12.5%, increase in technology net sales for the year ended December 25, 2004 includes increases of 10.4% internal growth, 1.9% acquisition growth and 0.2% due to foreign currency exchange. The increase was primarily due to growth of our value-added products, including software products and related services.

Gross Profit

     Gross profit and gross margins for 2004 and 2003 by segment and in total were as follows (in thousands):

						Gross								Gross
		2004 (1)				Margin %				2003 (1)				Margin %
Healthcare distribution		$	992,537				26.0	%		$	851,468				27.3	%
Technology			61,928				74.1				56,695				76.3
Total		$	1,054,465				27.0			$	908,163				28.4

     Gross profit increased $146.3 million, or 16.1%, for the year ended December 25, 2004 compared to the prior year period.

     Healthcare distribution gross profit increased $141.1 million, or 16.6%, for the year ended December 25, 2004 compared to the prior year period. Healthcare distribution gross profit margin decreased to 26.0% for the year ended December 25, 2004 from 27.3% for the comparable prior year period, primarily due to the absence of Fluvirin^® influenza vaccine in 2004 as previously discussed.

     Technology gross profit increased $5.2 million, or 9.2%, for the year ended December 25, 2004 compared to the prior year period. Technology gross profit margin decreased to 74.1% for the year ended December 25, 2004 from 76.3% for the comparable prior year period, primarily due to changes in sales mix and increased investment in support services.

Selling, General and Administrative

     Selling, general and administrative expenses by segment and in total for 2004 and 2003 were as follows (in thousands):

						% of								% of
						Respective								Respective
		2004 (1)				Net Sales				2003 (1)				Net Sales
Healthcare distribution		$	813,285				21.3	%		$	647,862				20.8	%
Technology			31,430				37.6				28,005				37.7
Total		$	844,715				21.7			$	675,867				21.2

     Selling, general and administrative expenses increased by $168.8 million, or 25.0%, for the year ended December 25, 2004 compared to the prior year period. As a percentage of sales, selling, general and administrative expenses increased to 21.7% from 21.2% for the comparable prior year period. This increase of 0.5% was due to a $13.2 million charge related to Fluvirin^®, as previously discussed (which accounted for 0.4% of the increase) and the overall growth in our business (which accounted for 0.1% of the increase).

     As a component of total selling, general and administrative expenses, selling expenses increased $98.2 million, or 23.1%, for the year ended December 25, 2004 from the prior year period. The increase was primarily due to an increase in payroll expenses as a percentage of our net sales. As a percentage of net sales, selling expenses increased to 13.4% from 13.3% for the comparable prior year period.

     As a component of total selling, general and administrative expenses, general and administrative expenses increased $70.6 million, or 28.2%, for the year ended December 25, 2004 from the prior year period. As a percentage of net sales, general and administrative expenses increased to 8.2% from 7.8% for the comparable prior year period primarily for the reasons stated above.

Other Expense, Net

     Other expense, net for 2004 and 2003 was as follows (in thousands):

		2004 (1)				2003 (1)
Interest income		$	6,110			$	6,410
Interest expense			(17,596	)			(17,004	)
Other, net			365				1,621
Other expense, net		$	(11,121	)		$	(8,973	)

     Other expense, net increased $2.1 million to $11.1 million for the year ended December 25, 2004 from the comparable prior year period. The $300 thousand decrease in interest income was primarily due to lower invested surplus cash balances over the year. The $592 thousand increase in interest expense was primarily due to our convertible debt issued in 2004, partially offset by lower interest rates in 2004 due to interest rate swap agreements entered into in late 2003. Other, net decreased by $1.3 million, primarily due to a $726 thousand non-recurring real estate related gain and $517 thousand of foreign currency net gains recognized in the prior year.

Income Taxes

     For the year ended December 25, 2004, our effective tax rate from continuing operations was 37.0% compared to 37.4% for the prior year period. The difference between our effective tax rates and the federal statutory rates for both periods primarily relates to state income taxes.

Income (Loss) from Discontinued Operations

     During the year ended December 27, 2003, we recognized a $2.0 million loss on sale, net of tax, of a discontinued operation, in addition to the presentation of our Hospital Supply Business as part of discontinued operations for all periods presented (refer to Note 6 in the accompanying financial statements for further discussion).

Net Income

     Net income decreased $9.3 million, or 6.8%, for the year ended December 25, 2004 compared to the prior year period. A charge of $8.4 million, net of tax, related to Chiron Fluvirin^® was included in 2004 net income. A real estate transaction gain of $454 thousand, net of tax, and a net loss on the sale of a discontinued operation of $2.0 million are included in 2003 net income.

Liquidity and Capital Resources

     Our principal capital requirements include the funding of acquisitions, working capital needs, capital expenditures and repurchases of common stock. Working capital requirements generally result from increased sales, special inventory forward buy-in opportunities, and payment terms for receivables and payables. Because sales tend to be stronger during the third and fourth quarters and special inventory forward buy-in opportunities are most prevalent just before the end of the year, our working capital requirements have generally been higher from the end of the third quarter to the end of the first quarter of the following year.

     We finance our business primarily through cash generated from our operations, revolving credit facilities, private placement debt and stock issuances. Our ability to generate sufficient cash flows from operations is dependent on the continued demand of our customers for, and supply by our vendors of, our products and services. Given current operating, economic and industry conditions, we believe that demand for our products and services will remain consistent in the foreseeable future. We do not expect the loss of cash flows from discontinued operations to have a material impact on our future liquidity or capital resources.

     Net cash flow provided by operating activities was $265.1 million for the year ended December 31, 2005 compared to $191.0 million for the comparable prior-year period. This net change of $74.1 million was due primarily to our increased sales and profit and our management of working capital.

     Net cash used in investing activities was $162.9 million for the year ended December 31, 2005 compared to $171.8 million for the comparable prior year period. The net change of $8.9 million was primarily due to a combination of items including lower payments for business acquisitions and net cash receipts from the settlements of foreign exchange contracts, partially offset by increased capital expenditures and investments. We expect to invest approximately $67.0 million during fiscal year 2006 in capital projects to modernize and expand our facilities and computer systems infrastructure and to integrate certain operations. Approximately $12.3 million of such expected capital expenditures relate to a new distribution center in France.

     Net cash used in financing activities was $38.9 million for the year ended December 31, 2005 compared to net cash provided by financing activities of $26.4 million for the prior-year period. The net change of $65.3 million was primarily due to the issuance of convertible debt in the prior year, partially offset by repayments of debt acquired through acquisitions in the prior year, as well as reduced repurchases of common stock in 2005.

     The following table summarizes selected measures of liquidity and capital resources (in thousands):

		December 31,				December 25,
		2005				2004
Cash and cash equivalents		$	254,498			$	186,621
Available-for-sale securities			80,195				—
Working capital			860,295				736,844
Debt:
Bank credit lines		$	2,093			$	5,969
Current maturities of long-term debt			33,013				3,906
Long-term debt			489,520				525,682
Total debt		$	524,626			$	535,557

     Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity. Our available-for-sale securities consist of short-term tax-efficient auction rate securities, which also have a high degree of liquidity.

     Our business requires a substantial investment in working capital, which is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, special inventory forward buy-in opportunities and our desired level of inventory.

     Our accounts receivable days sales outstanding from continuing operations improved to 41.8 days as of December 31, 2005 from 42.8 days as of December 25, 2004. Our inventory turns from continuing operations increased to 7.0 as of December 31, 2005 from 6.8 as of December 25, 2004. We anticipate future increases in our working capital requirements as a result of continuing sales growth.

     The following table summarizes our contractual obligations related to fixed and variable rate long-term debt, including interest (assuming an average long-term rate of interest of 5.0%), as well as lease obligations and inventory purchase commitments as of December 31, 2005:

		Payments due by period (in thousands)
		< 1 year				1 - 3 years				4 - 5 years				> 5 years				Total
Contractual obligations:
Inventory purchase commitments		$	305,801			$	462,575			$	387,688			$	900,888			$	2,056,952
Long-term debt, including interest			51,784				88,444				62,933				398,890				602,051
Operating lease obligations			43,192				64,807				36,944				61,473				206,416
Capital lease obligations, including interest			6,627				3,566				2,179				5,601				17,973
Capital expenditures			12,000				284				—				—				12,284
Interest rate swap agreements			3,135				4,841				1,480				—				9,456
Total		$	422,539			$	624,517			$	491,224			$	1,366,852			$	2,905,132

     We have obligations to purchase influenza vaccine from GlaxoSmithKline Biologicals (formerly ID Biomedical Corporation) through 2014 which require us to pay an amount per dose based on the prevailing market price in each respective year. Although there are uncertainties surrounding their pending FDA approval to distribute influenza vaccine in the United States for the 2006/2007 influenza season, we have included this purchase obligation in the above table based on current market prices.

     In 2004, we completed an issuance of $240.0 million of convertible debt. These notes are senior unsecured obligations bearing a fixed annual interest rate of 3.0% and are due to mature on August 15, 2034. Interest on the notes is payable on February 15 and August 15 of each year, which commenced on February 15, 2005. The notes are convertible into our common stock at a conversion ratio of 21.58 shares per one thousand dollars of principal amount of notes, which is the equivalent conversion price of $46.34 per share, under the following circumstances:

	•		if the last price of our common stock is above 130% of the conversion price measured over a specified number of trading days;
	•		during the five business-day period following any 10 consecutive trading-day period in which the average of the trading prices for the notes for that 10 trading-day period was less than 98% of the average conversion value for the notes during that period;
	•		if the notes have been called for redemption; or
	•		upon the occurrence of a fundamental change or specified corporate transactions, as defined in the note agreement.

     Upon conversion, we are required to satisfy our conversion obligation with respect to the principal amount of the notes to be converted, in cash, with any remaining amount to be satisfied in shares of our common stock. We currently have sufficient availability of funds through our $300.0 million revolving credit facility (discussed below) along with cash on hand to fully satisfy the cash portion of our conversion obligation. We also will pay contingent interest during any six-month interest period beginning August 20, 2010 if the average trading price of the notes is above specified levels. We may redeem some or all of the notes on or after August 20, 2010. The note holders may require us to purchase all or a portion of the notes on August 15, 2010, 2014, 2019, 2024 and 2029 or, subject to specified exceptions, upon a change of control event.

     Our $130.0 million senior notes come due on June 30, 2009 and bear interest at a fixed rate of 6.94% per annum. Beginning September 25, 2006, principal payments totaling $20.0 million are due annually on our $100.0 million senior notes which bear interest at a fixed rate of 6.66% per annum. Interest on both notes is payable semi-annually.

     In 2003, we entered into agreements relating to our $230.0 million senior notes to exchange their fixed interest rates for variable interest rates. For the year ended December 31, 2005, the weighted-average variable interest rate was 6.29%. This weighted-average variable interest rate comprises LIBOR plus a spread and resets on the interest due dates for such senior notes.

     On May 24, 2005, we entered into a $300.0 million revolving credit facility with a $100.0 million expansion feature. This facility, which expires in May 2010, replaced our previous revolving credit facility of $200.0 million, which was scheduled to expire in May 2006. As of December 31, 2005, there were $8.2 million of letters of credit provided to third parties and no borrowings outstanding under this revolving credit facility.

     On June 21, 2004, we announced that our Board of Directors had authorized a common stock repurchase program. This program previously allowed us to repurchase up to $100.0 million in shares of our common stock, which represented approximately 3.5% of shares outstanding on the announcement date. On October 31, 2005, our board authorized an additional $100.0 million of shares in our common stock to be repurchased under this program. As of December 31, 2005, we had repurchased $88.5 million or 2,518,110 shares under this initiative, with $111.5 million remaining.

     Some minority shareholders in certain of our subsidiaries have the right at certain times to require us to acquire their ownership interest in those entities at a price that approximates fair value pursuant to a formula price as defined in the agreements. Additionally, some prior owners of such acquired subsidiaries are eligible to receive additional purchase price cash consideration if certain profitability targets are met. We accrue liabilities that may arise from these transactions when we believe the outcome of the contingency is determinable beyond a reasonable doubt.

     We finance our business to provide adequate funding for at least 12 months. Funding requirements are based on forecasted profitability and working capital needs, which, on occasion, may change. Consequently, we may change our funding structure to reflect any new requirements.

     We believe that our cash and cash equivalents, our ability to access private debt markets and public equity markets, and our available funds under existing credit facilities provide us with sufficient liquidity to meet our currently foreseeable short-term and long-term capital needs.

E-Commerce

     Traditional healthcare supply and distribution relationships are being challenged by electronic online commerce solutions. Our distribution business is characterized by rapid technological developments and intense competition. The advancement of online commerce will require us to cost-effectively adapt to changing technologies, to enhance existing services and to develop and introduce a variety of new services to address the changing demands of consumers and our customers on a timely basis, particularly in response to competitive offerings.

     Through our proprietary, technologically-based suite of products, we offer customers a variety of competitive alternatives. We believe that our tradition of reliable service, our name recognition and large customer base built on solid customer relationships position us well to participate in this growing aspect of the distribution business. We continue to explore ways and means to improve and expand our Internet presence and capabilities.

Critical Accounting Policies and Estimates

     The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical data, when available, experience, industry and market trends, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, by their nature, estimates are subject to various assumptions and uncertainties. Reported results are therefore sensitive to any changes in our assumptions, judgments and estimates, including the possibility of obtaining materially different results if different assumptions were to be applied.

     We believe that the following critical accounting policies, which have been discussed with our audit committee, affect the significant estimates and judgments used in the preparation of our financial statements:

Revenue Recognition

     We generate revenue from the sale of dental, medical and veterinary consumable products, as well as equipment, software products and services and other sources. Provisions for discounts, rebates to customers, customer returns and other contra-revenue adjustments are recorded based upon historical data and are provided for in the period in which the related sales are recognized.

     Revenue derived from the sale of consumable products is recognized when products are shipped to customers. Such sales typically entail high-volume, low-dollar orders shipped using third-party common carriers. We believe that the shipment date is the most appropriate point in time indicating the completion of the earnings process because we have no post-shipment obligations, the product price is fixed and determinable, collection of the resulting receivable is probable and product returns are reasonably estimable.

     Revenue derived from the sale of equipment is recognized when products are delivered to customers. Such sales typically entail scheduled deliveries of large equipment primarily by equipment service technicians. Some equipment sales require minimal installation, which is completed at the time of delivery.

     Revenue derived from the sale of software products is recognized when products are shipped to customers. Such software is generally installed by customers and does not require extensive training due to the nature of its design. Revenue derived from post-contract customer support for software, including annual support and/or training, is recognized over the period in which the services are provided.

     Revenue derived from other sources including freight charges, equipment repairs and financial services, is recognized when the related product revenue is recognized or when the services are provided.

Accounts Receivable and Reserves

     The carrying amount of accounts receivable reflects a reserve representing our best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, credit worthiness and economic trends. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectibility. Although we believe our judgments, estimates and/or assumptions related to accounts receivable and reserves are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.

Inventory and Reserves

     Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined primarily by the first-in, first-out method. In performing our lower of cost or market valuation, we consider many factors including the condition and salability of the inventory, historical sales, forecasted sales and market and economic trends.

     From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect salability. Although we believe our judgments, estimates and/or assumptions related to inventory and reserves are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.

Goodwill and Other Indefinite-Lived Intangible Assets

     Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment analyses. Such impairment analyses require the comparison of the fair value to the carrying value of reporting units. Measuring fair value of a reporting unit is generally based on valuation techniques using multiples of sales or earnings, unless supportable information is available for using a present value technique, such as estimates of future cash flows. Although we believe our judgments, estimates and/or assumptions used in determining fair value are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect such impairment analyses and our financial results.

     We regard our reporting units to be our operating segments (dental, medical (including veterinary), international and technology). Goodwill was allocated to such reporting units, for the purposes of preparing our impairment analyses, based on a specific identification basis. We assess the potential impairment of goodwill and other indefinite-lived intangible assets annually and on an interim basis whenever events or

changes in circumstances indicate that the carrying value may not be recoverable. Some factors we consider important, which could trigger an interim impairment review, include:

	•		Significant underperformance relative to expected historical or projected future operating results;
	•		Significant changes in the manner of our use of acquired assets or the strategy for our overall business; and
	•		Significant negative industry or economic trends.

     If we determine through the impairment review process that goodwill or other indefinite-lived intangible assets are impaired, we record an impairment charge in our consolidated statement of income.

Vendor Rebates

     Vendor rebates are included as a reduction to cost of sales and are recognized as they are earned. The factors we consider in estimating vendor rebate accruals include forecasted inventory purchases and sales, in conjunction with vendor rebate contract terms, which generally provide for increasing rebates based on either increased purchase or sales volume. Although we believe our judgments, estimates and/or assumptions related to vendor rebates are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect our financial results.

Long-Lived Assets

     Long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of non-compete agreements, trademarks, trade names and customer relationships. When an impairment exists, the related assets are written down to fair value. Although we believe our judgments, estimates and/or assumptions used in determining fair value are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect such impairment analyses and our financial results.

Stock-Based Compensation

     Through December 31, 2005, we accounted for stock option awards to employees under the intrinsic value-based method of accounting prescribed by APB No. 25, “Accounting for Stock Issued to Employees.” Under this method, no compensation expense is recorded provided the exercise price is equal to or greater than the quoted market price of the stock at the grant date.

     We make pro forma disclosures of net income and earnings per share as if the fair value-based method of accounting (the alternative method of accounting for stock-based compensation) had been applied as required by FAS No. 123, “Accounting for Stock-Based Compensation.” The fair value-based method requires us to make assumptions to determine expected risk-free interest rates, stock price volatility, dividend yield and weighted-average option life.

     As of January 1, 2006, in connection with our adoption of FAS 123(R) “Share-Based Payment,” (discussed below) stock-based compensation is included in our results of operations. The method and assumptions used to determine the fair value of stock-based compensation under FAS 123(R) are similar to those used under FAS 123.

Recently Issued Accounting Standards

     In December 2004, the FASB issued FAS No. 123(R), “Share-Based Payment.” This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement changes the accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in FAS 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This Statement is effective for us beginning January 1, 2006 and applies to all outstanding and unvested stock-based payment awards at the date of adoption.

     In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which discussed the SEC’s interpretation of FAS 123(R) and the related valuation of share-based compensation for public companies. We are assessing the requirements of both FAS 123(R) and SAB 107 and the impact that these pronouncements will have on our consolidated results of operations and earnings per share. We anticipate the adoption of FAS 123(R) will affect our results of operations to an extent similar to that as presented in our FAS 123 pro forma disclosure included in the accompanying audited financial statements.

     In May 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections.” FAS 154 is a replacement of APB Opinion No. 20, “Accounting Changes” and FAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This Statement requires voluntary changes in accounting to be accounted for retrospectively and all prior periods to be restated as if the newly adopted policy had always been used, unless impracticable. Previously, APB Opinion No. 20 required most voluntary changes in accounting to be recognized by including the cumulative effect of the change in accounting in net income in the period of change. This Statement also requires a change in method of depreciation, amortization or depletion for a long-lived asset be accounted for as a change in estimate that is affected by a change in accounting principle. FAS 154 is effective for us beginning January 1, 2006. When adopted, this Statement could have an impact on prior year consolidated financial statements if we have a change in accounting.

     In June 2005, the FASB ratified EITF Issue 05-2, The Meaning of “Conventional Convertible Debt Instrument” in EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” This issue attempts to define “conventional convertible debt instrument” to help clarify the appropriate accounting for such instruments. We do not anticipate this issue will have a material effect on our financial position, results of operations or cash flows.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to market risks, which include changes in interest rates, as well as changes in foreign currency exchange rates as measured against the U.S. dollar and each other. We attempt to minimize these risks by using interest rate swap agreements and foreign currency forward and swap contracts. These hedging activities provide only limited protection against interest rate and currency exchange risks. Factors that could influence the effectiveness of our programs include volatility of the interest rate and currency markets and availability of hedging instruments. All interest rate swap and foreign currency forward and swap contracts that we enter into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated interest rate and currency exposure. We do not enter into such contracts for speculative purposes.

Interest Rate Swap Agreements

     We have fixed rate senior notes of $130.0 million at 6.94% and $100.0 million at 6.66%. During 2003, we entered into interest rate swap agreements to exchange these fixed interest rates for variable interest rates. The variable rates are comprised of LIBOR plus the spreads and reset on the interest due dates for the senior notes. As a result of these interest rate swap agreements, as well as our existing variable rate credit lines and loan agreements, we are exposed to risk from changes in interest rates. A hypothetical 100 basis point increase in interest rates would increase our annual interest expense by approximately $2.4 million.

     As of December 31, 2005, the fair value of our interest rate swap agreements recorded in other non-current liabilities was $7.4 million, which represented the amount that would be paid upon unwinding the interest rate swap agreements based on market conditions at that time. Changes in the fair value of these interest rate swap agreements are reflected as an adjustment to non-current assets or liabilities with an offsetting adjustment to the carrying value of the $230.0 million notes as such hedges are deemed fully effective.

Foreign Currency Agreements

     The value of certain foreign currencies as compared to the U.S. dollar may affect our financial results. Fluctuations in exchange rates may positively or negatively affect our revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we engage in hedging programs, using primarily foreign currency forward and swap contracts, aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., twelve months or less) foreign currency forward and swap contracts to protect against currency exchange risks associated with long-term intercompany loans due from our international subsidiaries and the payment of merchandise purchases to foreign vendors. We do not hedge the translation of foreign currency profits into U.S. dollars, as we regard this as an accounting exposure, not an economic exposure.

     As of December 31, 2005, we had outstanding foreign currency forward and swap contracts with notional amounts of $395.6 million, of which $353.5 million related to intercompany debt and $42.1 million related to the purchase of merchandise from foreign vendors. The contracts hedge currency fluctuations against the U.S. Dollar for Euros ($277.4 million), British Pounds ($38.0 million), Australian Dollars ($8.1 million), Swiss Francs ($1.9 million), Japanese Yen ($394 thousand) and Canadian Dollars ($8.4 million). In addition, our international business entered into hedges against currency fluctuations relative to local functional currencies. The notional amount of such contracts was $61.4 million. A hypothetical 5% change of the value of the U.S. Dollar would change the fair value of our foreign currency exchange agreements by $16.3 million.

     As of December 31, 2005, the fair value of our foreign currency exchange agreements, which expire through December 4, 2006, recorded in other current assets was $4.0 million, as determined by quoted market prices. For the year ended December 31, 2005, we had realized net gains of $4 thousand and unrealized gains of $1.4 million relating to such agreements.

ITEM 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS
HENRY SCHEIN, INC.

		Page
Report of Independent Registered Public Accounting Firm			46
Consolidated Financial Statements:
Balance Sheets as of December 31, 2005 and December 25, 2004			47
Statements of Income for the years ended December 31, 2005, December 25, 2004 and December 27, 2003			48
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2005, December 25, 2004 and December 27, 2003			49
Statements of Cash Flows for the years ended December 31, 2005, December 25, 2004 and December 27, 2003			50
Notes to Consolidated Financial Statements			51
Report of Independent Registered Public Accounting Firm			91
Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2005, December 25, 2004 and December 27, 2003			92

All other schedules are omitted because the required information is either inapplicable or is included in the consolidated financial statements or the notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Henry Schein, Inc.
Melville, New York

     We have audited the accompanying consolidated balance sheets of Henry Schein, Inc. as of December 31, 2005 and December 25, 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Henry Schein, Inc. at December 31, 2005 and December 25, 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

     We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Henry Schein, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 21, 2006 expressed an unqualified opinion.

/s/ BDO SEIDMAN, LLP

New York, New York
February 21, 2006, except for Note 6, which is as of March 6, 2006

(in thousands, except share and per share data)

		December 31,				December 25,
		2005				2004
ASSETS
Current assets:
Cash and cash equivalents		$	254,498			$	186,621
Available-for-sale securities			80,195				—
Accounts receivable, net of reserves of $52,308 and $44,852			582,617				554,666
Inventories			505,542				486,494
Deferred income taxes			35,505				28,795
Prepaid expenses and other			126,052				174,167
Total current assets			1,584,409				1,430,743
Property and equipment, net			190,746				176,103
Goodwill			626,869				627,215
Other intangibles, net			123,204				129,285
Investments and other			57,892				70,324
Total assets		$	2,583,120			$	2,433,670
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	371,392			$	367,213
Bank credit lines			2,093				5,969
Current maturities of long-term debt			33,013				3,906
Accrued expenses:
Payroll and related			96,113				89,431
Taxes			65,070				70,970
Other			156,433				156,410
Total current liabilities			724,114				693,899
Long-term debt			489,520				525,682
Deferred income taxes			74,042				66,599
Other liabilities			53,547				28,999
Minority interest			12,353				12,438
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding			—				—
Common stock, $.01 par value, 240,000,000 shares authorized, 87,092,238 outstanding on December 31, 2005 and 120,000,000 shares authorized, 86,650,428 outstanding on December 25, 2004			871				867
Additional paid-in capital			472,960				445,573
Retained earnings			735,079				615,265
Accumulated other comprehensive income			21,059				44,785
Deferred compensation			(425	)			(437	)
Total stockholders’ equity			1,229,544				1,106,053
Total liabilities and stockholders’ equity		$	2,583,120			$	2,433,670

See accompanying notes.

(In thousands, except per share data)

		Years ended
		December 31,				December 25,				December 27,
		2005				2004				2003
Net sales		$	4,635,929			$	3,898,485			$	3,194,031
Cost of sales			3,318,993				2,844,020				2,285,868
Gross profit			1,316,936				1,054,465				908,163
Operating expenses:
Selling, general and administrative			1,035,848				844,715				675,867
Operating income			281,088				209,750				232,296
Other income (expense):
Interest income			7,315				6,110				6,410
Interest expense			(25,508	)			(17,596	)			(17,004	)
Other, net			1,659				365				1,621
Income from continuing operations before taxes, minority interest and equity in earnings of affiliates			264,554				198,629				223,323
Income taxes			(97,002	)			(73,506	)			(83,373	)
Minority interest in net income of subsidiaries			(5,991	)			(1,486	)			(2,807	)
Equity in earnings of affiliates			827				1,699				931
Income from continuing operations			162,388				125,336				138,074
Discontinued operations:
Income (loss) from operations of discontinued components			(18,448	)			4,745				387
Income tax benefit (expense)			7,386				(1,898	)			(951	)
Income (loss) from discontinued operations			(11,062	)			2,847				(564	)
Net income		$	151,326			$	128,183			$	137,510
Earnings from continuing operations per share:
Basic		$	1.87			$	1.44			$	1.58
Diluted		$	1.82			$	1.40			$	1.53
Earnings (loss) from discontinued operations per share:
Basic		$	(0.13	)		$	0.03			$	(0.01	)
Diluted		$	(0.12	)		$	0.03			$	0.00
Earnings per share:
Basic		$	1.74			$	1.47			$	1.57
Diluted		$	1.70			$	1.43			$	1.53
Weighted-average common shares outstanding:
Basic			87,006				87,253				87,417
Diluted			89,187				89,462				89,975