Henry Schein Annual Report 2002

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FY2002 Annual Report · Henry Schein

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THE
COMPLETE
PICTURE
OF HEALTH

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ABOUT HENRY SCHEIN, INC.

Henry Schein, Inc. is the largest distributor of healthcare products and services

to office-based healthcare practitioners in the combined North American and

European markets. Recognized for our excellent customer service, low prices,

and innovative value-added solutions, we serve more than 400,000 customers

worldwide, including:

(cid:2) Over 75% of the estimated 120,000 U.S. office-based dental practices,

nearly 5,000 Canadian dental practices, and 15,000 dental laboratories

(cid:2) Over 40% of the estimated 230,000 U.S. office-based physician practices,

as well as surgical centers and alternate-care settings

(cid:2) Over 70% of the estimated 24,000 U.S. veterinary clinics

(cid:2) Over 170,000 office-based dental, medical, and veterinary practices,

primarily in Western Europe, Australia and New Zealand, and Latin America

(cid:2) Government and other institutions providing healthcare services

We are dedicated to helping our customers operate more efficient and

profitable practices, while providing quality healthcare. Henry Schein has a

sales and marketing approach that is uniquely integrated, with more than

1,350 field sales consultants (including equipment sales specialists), and

800 telesales representatives, supported by 110 equipment sales and service

centers, more than 550 equipment service technicians, and a highly targeted

direct marketing program. Through this program, more than 22 million

catalogs, order stuffers, flyers, newsletters, e-mails, and other materials are

distributed annually.

The Company operates its four business groups – Dental, Medical, International

and Technology – through a centralized and automated distribution network,

which provides customers in more than 125 countries with a comprehensive

selection of over 90,000 national brand and Henry Schein private-brand

products. Henry Schein also offers a wide range of innovative, value-added

practice-management solutions – including such leading practice-management

software systems as DENTRIX® and Easy Dental® for dental practices, and

AVImark® for veterinary clinics, which are installed in over 48,000 practices – and

ARUBA®, Henry Schein’s electronic catalog and ordering system. Headquartered

in Melville, New York, Henry Schein employs over 6,900 people in 16 countries.

THE
FINANCIAL
HIGHLIGHTS

For each of the past five years, Henry Schein, Inc. has shown steady growth in several key

financial metrics, and 2002 was another record-breaking year. Last year, the Company posted

its most impressive results ever for Net Sales, Operating Income, Operating Margin, Return on

Committed Capital, Net Income, Diluted Earnings Per Share, Average Order Size, Total Assets,

and Stockholders’ Equity.

OPERATING RESULTS
Net Sales
Operating Income
Operating Margin
Return on Committed Capital
Net Income
Diluted Earnings Per Share
Diluted Average Shares Outstanding

OPERATING DATA
Number of Orders Shipped
Average Order Size

(In thousands, except per share and operating data)

2002

2001

2000

1999

1998

$ 2,825,001
$ 196,269
6.9%
34.0%
$ 117,253
2.61
$
44,872

$2,558,243
$ 147,750
5.8%
27.2%
87,373
2.01
43,545

$
$

$2,381,721
$ 127,613
5.4%
23.5%
70,147
1.67
42,007

$
$

$2,284,544
$ 119,232
5.2%
22.0%
59,796
1.44
41,438

$
$

$1,922,851
96,196
$
5.0%
20.3%
57,823
1.39
41,549

$
$

7,861,000
359

7,891,000
324

8,280,000
288

7,979,000
286

6,718,000
286

FINANCIAL POSITION AND CASH FLOW
Total Assets
Stockholders' Equity
Cash Flow from Operating Activities

$ 1,558,052
$ 861,217
$ 134,669

$1,385,428
$ 680,457
$ 190,911

$1,231,068
$ 579,060
$ 152,994

$1,204,102
$ 517,867
56,493
$

$ 962,040
$ 463,034
2,693
$

NET SALES

($ in millions)

0
.
5
2
8
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2

2
.
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3
,
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,
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9
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$ 3,000

$ 2,500

$ 2,000

$ 1,500

$ 1,000

$ 500

98 99 00 01 02

OPERATING
MARGIN

DILUTED EARNINGS
PER SHARE

RETURN ON
COMMITTED CAPITAL

CASH FLOW FROM
OPERATING ACTIVITIES

(in dollars)

($ in thousands)

9
.
6

$ 3

$ 3.00

8
.
5

4
.
5

2
.
5

0
.
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$ 2

$ 2.50

$ 2

$ 2.00

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7
6
.
1

$ 1.50

4
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.
1

9
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$ 1.00

$ .50

98 99 00 01 02

35%

30%

25%

20%

15%

10%

0
.
4
3

2
.
7
2

5
.
3
0 2
.
2
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$ 200

$ 150

$ 100

$ 50

$ 25

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98 99 00 01 02

Note: Operating Income, Operating Margin, Net Income, and Diluted Earnings Per Share are
presented as originally reported, and have been adjusted to exclude certain onetime items.
See “Reconciliation of Certain Operating Results” on page 18.

“ Throughout our

history, Henry Schein

has earned a

well-deserved reputation

for innovation as we

have transformed our

Company and the

markets we serve.

”

SHAREHOLDERS
LETTER

To Our Shareholders,

The theme of this year’s report – Henry Schein: The Complete Picture of Health – truly describes
the current state of our business. In 2002, we continued to see outstanding results from the
sound strategies we put in place in prior years, and recorded record financial performance. We
solidified our role as the largest distributor of healthcare products and services to office-based
healthcare practitioners in the combined North American and European markets, and are
anticipating strong growth in the coming years.

One important reason for our success is our dedicated focus on delivering excellent customer
service. We are able to achieve this unparalleled level of service year after year through our
world-class infrastructure, which benefits each of our business groups. We support our customers with a
wide array of products and value-added services that go beyond the traditional role of a distributor, helping
them anticipate and meet the challenges of their evolving practices. By enabling healthcare professionals to
operate more efficient and profitable practices while providing quality healthcare, we strive to become their
true business partner. The benefits of this partnership and the power of our business model can be seen in
the financial health and growth of our Company.

A YEAR OF RECORD FINANCIAL RESULTS

In 2002, we posted record net sales of $2.8 billion, an increase of 10.4% compared with 2001, and sales
growth for the year was essentially all internally generated. Net income for the year was a record $118 million,
or $2.63 per diluted share, representing increases of 35.0% and 30.8% compared with 2001, respectively.
Operating cash flow for 2002 was $134.7 million. Since going public in November 1995, our total market
capitalization has grown from $300 million to more than $2 billion, for a compounded annual growth rate of
37.2%. These metrics underscore that the decisions our management team is making are sound, and reinforce
the fact that we have capitalized on the important business opportunities presented to us.

One of our important Company strengths is our diversity – in the array of products and services that we offer,
in the markets that we serve, and in the geographic areas where we operate. In 2002, 43% of our revenue
came from the Dental Group, 39% from the Medical Group, 16% from the International Group, and 2% from
the Technology and Value-added Services Group. Today, we are in the right markets at the right time with an
unmatched array of product and service offerings, and an infrastructure that is primed for greater capacity
and efficiencies.

OUR BUSINESS GROUPS

Our Dental Group serves an attractive market in which there is increased demand for dental services.
The dentist is being asked to see an increasing number of patients, provide them with quality oral healthcare,
and maintain profitable practices at the same time. There is an opportunity and a need throughout the dental
profession for improvement in productivity. Dentists will need to increasingly rely on technology-driven
products and services, such as practice-management software, digital X-ray, computerized charting, and other
practice-enhancing tools. This challenge to improve productivity is one that we are uniquely positioned to
help dentists achieve. As outlined in “The Dental Picture,” we are also investing in strategic marketing
initiatives, including our Privileges™ and MarketOne programs, designed to focus the organization on helping
our customers succeed, and at the same time strengthening our customer relationships.

The medical market is another excellent illustration of the attractiveness of the sectors we serve. As clinical
procedures continue to move from acute-care settings to physicians’ offices, we believe we are the fastest-
growing distributor among the major competitors in the physician and alternate-care markets, and are well-
positioned to capitalize on this trend. A greater number of vaccines, injectables, and other pharmaceuticals
are being used increasingly in alternate-care settings, and our Medical Group is a leading vaccine supplier
to U.S. office-based medical practitioners, with reliable sources of influenza, tetanus/diphtheria toxoid,
pneumonococcal, and many other vaccines. The ways in which we are capitalizing on these trends are
described in greater detail in “The Medical Picture.” Another important component of our Medical Group is
our veterinary business, which we believe to be the largest direct marketer to companion animal clinics in the
United States, serving 70% of the estimated 24,000 U.S. veterinarian clinics.

Through our Technology and Value-added Services Group, we provide healthcare professionals with
extraordinary software, technology, and other value-added services. Our industry-leading software products,
including DENTRIX®, Easy Dental®, and AVIMark®, have made us a force in the dental and veterinary fields,
and we anticipate adding a medical solution to our offerings in the near future. Perhaps the best example of

the full potential that technology holds is the Digital Dental Office, which
is described in greater detail in “The Technology and Value-added
Services Picture.”

Beyond North America, Henry Schein is a leading Pan-European
healthcare supplier serving office-based dental, medical, and veterinary
practices. As summarized in “The International Picture,” we have a
number of important competitive advantages that we believe will
enable us to continue to grow internationally. One facilitator of this
expansion is the initiative through which we are replicating our
successful U.S. infrastructure in Europe. The goal of achieving greater
efficiency and profitability through a common computer and warehouse
platform for the entire Company is described in greater detail in
“The Infrastructure/Team Schein Picture.”

GROWTH STRATEGIES AND CORE STRENGTHS

Throughout our history, Henry Schein has earned a well-deserved
reputation for innovation as we have transformed our Company and the
markets we serve. We have redefined and expanded the role of a
distributor, and believe we will continue to do so in the future as our
Company grows in four ways.

• We will seek to increase penetration of our existing customer base,
and position Henry Schein as a prime vendor. Currently, we are the
primary vendor to less than 15% of our customers. We intend to
increase this by expanding our dental equipment sales and service
penetration, by providing important value-added services, and by
introducing new technologies including digital X-ray, digital imaging
systems, and cameras to our existing customers.

• Gaining new customers is also a priority. In particular, we estimate
that 60% of the U.S. medical practices and 45% of the Western
European dental practices are not currently active customers, and we
believe there also is substantial opportunity in the Western European
medical and veterinary supply market. To achieve this goal, we are
increasing the number of our field sales consultants and telesales
representatives, and providing them with tools to increase sales
productivity, as well as using our extensive customer database to focus
our marketing efforts, while expanding our European equipment sales
and service network.

• We also anticipate growth through an increase in our cross-selling

efforts with key product lines, such as practice-management software
in the dental and veterinary markets, and vaccines and injectables in
the medical market.

• Lastly, we believe that our growth will be fueled by acquisitions that
enhance our core strategies. There is still great potential for further
consolidation in the markets we serve, and we are well-poised to
capitalize on this opportunity. We have a strong cash position and
significant other capital resources, and there is a focused decision-
making process with dedicated teams already in place to evaluate and
facilitate acquisitions. We are a cultural fit with most entrepreneurial
businesses, and have a track record of success, with 20 successfully
integrated acquisitions in the past five years.

I believe that our eighth decade of business will be our most successful
yet because of the strengths we bring to bear.

• We are in multiple, attractive markets that diversify our risk profile and

increase our opportunities.

• We have important competitive advantages. In addition to our direct
sales and marketing expertise, we have a broad product offering at
competitive prices and a large installed user base of dental and
veterinary practice-management software upon which to build.

• We have clear growth strategies.

• We have one focus – delivering the best possible customer service to

office-based practitioners.

• More than 6,900 Team Schein Members are our Company’s greatest

asset – each of us sharing a dedication to excellent customer service.

With growth comes added responsibility. For more than 70 years, we
have remained committed to the strict sense of corporate responsibility
upon which we were founded, both in terms of the governance of our
Company and our role as a corporate citizen. As part of this ongoing
commitment, we are pleased to welcome three new independent
members to our Board of Directors: Philip A. Laskawy, the former
Chairman of Ernst & Young, Norman S. Matthews, the former President
of Federated Department Stores, and Louis W. Sullivan, M.D., the former
U.S. Secretary of Health and Human Services and Founding Dean,
Director, and President Emeritus of the Morehouse School of Medicine.
As explained further in “The Corporate Responsibility Picture,” we also
have many programs in place to ensure that we meet or exceed our
responsibility to all those we touch – Team Schein Members, our
shareholders, our supplier partners, our customers, and the communities
and industries in which we operate.

THE BEST IS YET TO COME

This is an exciting time for Henry Schein. We are in the right place at the
right time to take advantage of many remarkable opportunities that will
ensure our continued growth. We are expanding the number of
products and services we offer to our customers. We are defying the
current economic trend, and are performing extremely well in a
challenging business environment. We will look to continue the
consolidation in the markets we serve through a healthy balance of
internal growth and acquisitions.

We are a dynamic company driven by a growing number of committed
people who share an entrepreneurial sense, an eagerness to serve our
customers, and an excitement, continuing to build something important
for the future. As a result, I remain absolutely confident in the direction
that Henry Schein is heading, and firmly believe that our best years
lie ahead.

Sincerely,

Stanley M. Bergman
Chairman, Chief Executive Officer and President
May 2003

DENTAL SNAPSHOT

In 2002, the Dental Group recorded sales of
more than $1.2 billion, 43% of total Company
revenues, which represents growth of 9.4%
over 2001. This is about four percentage
points ahead of the estimated market growth
rate, with merchandise sales increasing 7.3%
and equipment sales and service revenues
increasing 18.5%.

Henry Schein’s Dental Group, which includes
Sullivan-Schein Dental in the United States,
Henry Schein Arcona in Canada, and the Zahn
Dental laboratory supply business, has 29%
of the estimated $4.2 billion U.S. and
Canadian dental market. We serve over 75%
of the estimated 120,000 U.S. dental practices,
one-third of the estimated 15,000 Canadian
dental practices, and approximately 15,000
dental laboratories. We are a major supplier
to large group practices, schools, government,
and other institutions, serving, for example,
as a prime vendor for U.S. Army bases and
clinics located throughout the U.S. and Europe.

We believe that we will grow our business by
more deeply penetrating our existing customer
base, obtaining new customers, and cross-
selling key product lines. Our approach to
growth is threefold: strengthen sales leadership,
develop or acquire technology for the future,
and train our team members to provide the
best value and quality in products and services.

Our commitment to education and training
is seen in Career Development programs and
Sullivan-Schein University (SSU), our online
learning environment. Intensive sales training
sessions, product demonstrations, and
technological training on proprietary sales
tools, equip our sales force with the knowledge
they need to succeed. SSU contains educational
development modules that enable individuals
to learn at their own pace. Additionally,
graduates of our Career Development
programs have demonstrated impressive
sales growth. They are counseling dental
practices on marketing, effective scheduling,
practice-management, and problem-solving.

We also provide our sales force with tools to
increase their sales productivity, such as the
Customer Analysis Tool (CAT) system. This
electronic call-planning system displays
customers’ order patterns, helping to make
sales calls as productive and beneficial as
possible. Service technicians keep our
customers’ equipment optimally running with
tools such as FieldCom, which contains a
complete equipment and parts listing,
documents and catalogs customer repair data,
and facilitates ordering and billing for parts.
FieldCom eliminates paperwork, generates
receipts, and helps technicians quickly
determine pricing and availability of parts –
improving our customers’ productivity and
profitability by decreasing equipment downtime.

Meeting the Needs of the
Dental Profession

D
E
N
T
A
L

THE
DENTAL
PICTURE

Tremendous challenges and opportunities face

the dental profession in North America.

Today, the dentist must meet an increase in

patient demand for services, maintain a high

standard of clinical treatment, and keep their

practices financially healthy at the same time.

They rely on Sullivan-Schein Dental in the United

States and Henry Schein Arcona in Canada for products they need in clinical treatment, for

technology to increase their productivity and profitability – while providing quality healthcare, and

for value-added services to enhance their practices.

We support dentists by offering 60,000 SKUs, including Henry Schein exclusives, such as OralCDx®,

an advance in oral cancer testing, which carries the American Dental Association’s Seal of Acceptance.

This computer-assisted brush biopsy test enables dentists to painlessly and easily test patients for

oral cancer, which claims the lives of more than 8,000 Americans annually. Another exclusive is

X-Rite’s ShadeVision™, a significant technological advance in restorative tooth-shading that enables
dentists to easily determine and match tooth-color data. The Debacterol® canker sore treatment is

another example. A single application of Debacterol completely stops the pain of canker sores in

seconds and dramatically reduces a sore’s healing time.

We also provide dentists with several important technology-based value-added services, including
our DENTRIX® and Easy Dental® practice-management software systems, financial services,
continuing education, and dental electronic claims. In addition, we offer ProRepair®, a fast, high

quality, competitively priced service for dental handpieces and small equipment repairs. With

experience on all types of equipment, a full stock of parts, and precision instruments, we also

provide sterilizer repair service, instrument sharpening, dental handpiece repairs, and ultrasonic

inserts. All ProRepair facilities in the United States are ISO Certified, an official international

recognition of our commitment to quality assurance.

To strengthen customer relationships, we have a number of strategic marketing initiatives, such as

MarketOne and Privileges™. Through MarketOne, we seek to sell more DENTRIX practice-

management software to Sullivan-Schein Dental customers, sell more dental consumable

merchandise and equipment to DENTRIX customers, and more effectively reach dental practices that

currently are not Henry Schein customers. Sullivan-Schein Dental sales consultants

work closely with DENTRIX sales representatives, using new tools to expand our customer base and

deepen relationships with current customers. Launched in July 2002, MarketOne is already

showing promising results.

Privileges, our innovative customer loyalty program, helps us attract, reward, and retain customers

for life. Privileges includes personalized, professional service, priority attention on all service calls,

guaranteed emergency response time, free extended warranties, and preferred rate pricing.

Through Privileges, our customers can earn gift certificates toward office-design services, in-office

labor, repairs, preventive maintenance, and a host of technological offerings and service programs.

By the end of 2002, more than 10,000 customers had already enrolled in the successful Privileges

program, and they are increasing their business with Henry Schein at a rate far above that of our

average customer.

One of the tools that Sullivan-Schein Dental Service Technicians use to keep our customers’
equipment optimally running is FieldCom, which documents and catalogs customer repair data
and facilitates ordering and billing for parts. The end result is improved customer productivity
and profitability through decreased equipment downtime.

“ By the end of 2002,

more than 10,000

customers had

already enrolled

in the successful

Privileges™ program,

and they are increasing

their business with

Henry Schein at a rate

far above that of our

average customer.

”

MEDICAL SNAPSHOT

In 2002, the Medical Group posted record
sales of $1.1 billion, 11.3% higher than in
2001, which represents 39% of total
Company revenues.

Henry Schein’s Medical Group serves over
90,000 U.S. office-based physician practices
– approximately 40% of the market – and
has approximately 14% of the estimated
$5–$7 billion market. We reach the physician
marketplace with three brands – Henry
Schein, Caligor, and General Injectables and
Vaccines (GIV). More than 500 field sales
and telesales representatives serve our
medical customers, supported by 13 million
targeted marketing pieces each year.

The Medical Group also serves acute care
facilities in the northeast United States, as
well as over 70% of the estimated 24,000
U.S. veterinary clinics. We are a prime vendor
to VCA Antech, the largest provider of clinical
petcare in the U.S.

We are also a major supplier to organizations
that bundle member purchasing power such
as the American Society of Plastic Surgeons,
the American Academy of Dermatology, and
U.S. Oncology, Inc. One of these formulary
plans, the AMA PurchaseLink® Program with
the American Medical Association, is now in
its eighth year.

We have a number of important competitive
advantages.

• Our 99% fill rate exceeds the estimated
93%–94% fill rates of our competitors.

• We offer approximately 30,000 SKUs to our
medical customers—including generic and
branded pharmaceuticals, vaccines, medical
and surgical supplies, diagnostic kits, and
major equipment; and 40,000 SKUs to our
veterinary customers.

• We ship a wide range of products, and
have the unique cold chain distribution
expertise to ensure the integrity of the
vaccines we provide to our customers.

• Our three-brand strategy enables us to
reach the greatest possible number of
customers, and we have expertise in
pharmaceuticals, vaccines, and injectables
that we believe other distributors cannot
match.

• We believe that our sales consultants are
the best in the industry, and we only hire
experienced representatives to increase the
size of the sales force.

• We have a history of direct marketing
experience that we believe is unsurpassed
in the industry.

M
E
D
I
C
A
L

THE
MEDICAL
PICTURE

Trends and Opportunities
in the Medical Segment

The medical market presents tremendous

opportunities for Henry Schein. With the aging

of the U.S. population, there will be a rise in U.S.

healthcare services and more clinical procedures

done in physicians’ offices. We believe we are the

fastest growing major distributor in this market,

and as such, we anticipate that our growth will

be driven by cross-selling our key product lines, increasing our number of customers, and using

our extensive database to its best advantage.

Our three-brand strategy for serving our office-based physician customers is a unique advantage.

Research indicates that the average physician’s office conducts business with six to eight suppliers.

Some customers prefer working with either a telesales or field sales representative, but not

necessarily both. As such, we are able to reach the greatest number of potential customers by

offering them three brand choices:

“ ...we anticipate

that our growth will be

• Our Henry Schein Medical division has more than 140 telesales representatives offering a total

portfolio of consumable, pharmaceutical, and equipment products and related services in all

driven by cross-selling

50 states, supported by the distribution of 8 million marketing pieces.

• Our Caligor division has 280 full-service field sales consultants in 34 states, offering that same

portfolio of consumable, pharmaceutical, and equipment products and related services, supported

our key product lines,

by over a million marketing pieces annually.

• Our General Injectables and Vaccines (GIV) division has nearly 50 telesales representatives with

expertise in vaccines and injectables selling in all 50 states, supported by over 4 million marketing

pieces. This division ships 25% of the U.S. doses for the Vaccine for Children (VFC) Program, and

provides vaccines and injectables for other governmental institutions.

Customer overlap among our three brands is less than 15%, further supporting our approach

to reaching office-based practitioners.

The use of vaccines, injectables, and other pharmaceuticals in alternate-care settings continues

to build, and we expect future growth to come from vaccines, of which we are a leading U.S.

increasing our number

of customers,

and using our extensive

distributor. Projections call for the global influenza vaccine market to double to $2 billion in the

next five years, and a five-year compounded annual growth rate of 13% is predicted in the global

database to its

vaccine market, which should reach $10 billion in 2006. As a leader in the distribution of flu vaccine

to office-based practitioners in the United States, we continue to focus on the flu vaccine market.

Because we believe existing vaccines and new products will be administered primarily in physicians’

offices and alternate-care settings, we are uniquely positioned to take advantage of this trend. To

ensure our position as a reliable supplier to our customers, we have signed expanded commitments

with our primary influenza, tetanus/diphtheria toxoid manufacturers, and continue to offer a full line

of vaccines and other pharmaceuticals for a variety of disease conditions.

We have also begun an exciting new initiative to expand our pharmaceutical business – one that

focuses on niche pharmaceutical products used in physicians’ offices. As part of this program, we

will continue to carry all of the pharmaceutical products needed by office-based physicians or

veterinarians, and seek to add promising new products and related services coming to market.

Through its three brands, Henry Schein, Caligor, and General Injectables and Vaccines (GIV),
Henry Schein’s Medical Group serves more than 90,000 U.S. office-based physician practices,
delivering an industry leading 99% fill rate.

best advantage.

”

INTERNATIONAL SNAPSHOT

For 2002, the International Group posted
record sales of $437 million; 16% of total
Company revenues, which represented
9.8% growth in U.S. dollars and 4.7%
growth in local currencies. European dental
sales grew by 8.2% in local currencies
for the year. European veterinary operations
grew by more than 10% last year in
local currencies.

The mission of the International Group is
to provide best-in-class capabilities on a
Pan-European basis, offering products and
services to dental, medical, and veterinary
office-based practitioners. The sales model
we use to achieve this is similar to our
U.S. model, and is adapted for differences
present in the European marketplace.
At the foundation of this model is a central
infrastructure to manage our consumable
business. We manage the sales, service, and
marketing functions on a countrywide or
regional basis.

We serve approximately 170,000 practices
in 14 countries outside of North America,
primarily in Western Europe, Australia,
and New Zealand, offering them a selection
of approximately 70,000 SKUs. We are
also expanding our services into the Middle
East, Africa, and Latin America through
Schein Direct™, which provides rapid
door-to-door air package delivery to
healthcare practitioners in 125 countries
around the world.

We have a 9% share of the estimated
$3.2 billion Western European dental market,
and a 4% share of the estimated
$2.2 billion Western European medical
and veterinary markets.

Competitive Advantages
Internationally

THE
INTERNATIONAL
PICTURE

The opportunities for Henry Schein

International are as big as the world itself.

In the countries in which we operate – Austria,

Australia, Belgium, France, Germany, Iceland,

Ireland, Israel, the Netherlands, New Zealand,

Portugal, Spain, and the United Kingdom– we

estimate that there are more than 550,000 potential practitioner customers – 350,000 medical,

150,000 dental, and 50,000 veterinary. The total market potential in the above-mentioned countries

is more than $5.6 billion, and our combined market share for dental, medical, and veterinary

customers ranges from 5% to 13% from country-to-country. The net result is that there is

tremendous growth potential for Henry Schein’s international business.

In Europe, where practitioners generally have a profile similar to their North American counterparts,

we believe that we have a number of important competitive advantages to enable our future

growth. We can more effectively use our database market information and introduce additional

products and services to our European customers. Our superior service delivers a high level of

accuracy and fulfillment to our customers throughout Europe on a consistent basis. We believe we

have the most comprehensive product selection, including the broadest private brand offering in

the industry, enabling us to provide our customers with high quality, low cost alternatives. One

additional advantage that we believe will accelerate our international expansion is our initiative to

bring all of our European businesses onto our core technology platforms. We expect this to

replicate our successful North American infrastructure on a Pan-European scale and enhance our

efficiency throughout Europe.

Using these advantages, we are determined to grow, and see this growth coming through

expansion into medical and veterinary markets where we are not currently present, such as

Australia, New Zealand, and France. We anticipate this growth to come internally, as well as

through acquisitions as we continue to consolidate markets. In Germany, for example, the

potential for future consolidation is great, with small distributors still holding an estimated

43% of the dental category, 87% of the medical market, and 89% of the veterinary market.

Future growth also is expected to come through the expansion of our dental consumable offering

in Germany into a full-service business, which includes equipment sales and service, and by further

expanding our full-service business in France. Finally, we believe that we will see growth through

geographic expansion.

There is tremendous opportunity for expansion and growth for Henry Schein outside of

North America. By capitalizing on our competitive advantages, continually evaluating our strategic

opportunities, and making the most of them on a country-by-country basis, we are well-poised for

continued revenue growth in the coming years.

Henry Schein’s International Group offers 70,000 SKUs to 170,000 healthcare practices in
countries outside of North America. Through ScheinDirect™, we provide rapid door-to-door air
package delivery to healthcare practitioners in 125 countries around the world.

N
T
E
R
N
A
T
I
O
N
A
L

“ By capitalizing

on our competitive

advantages, continually

evaluating our strategic

opportunities, and making

the most of them on a

country-by-country

basis, we are well-poised

for continued revenue

growth in the

coming years.

”

TECHNOLOGY AND VALUE-
ADDED SERVICES SNAPSHOT

The Technology and Value-added Services
Group posted a record $66.7 million in sales
in 2002, growth of 18.7% over 2001, which
represented 2% of total Company revenues.

The Technology and Value-added Services
Group provides extraordinary software,
technology, and other value-added products
and services to healthcare providers in the
dental, medical, and veterinary professions.
We seek to provide practitioners with the
very best in products and services that will
help them better manage their practice and
ultimately increase their bottom line, while
providing quality healthcare. In this way,
we become an essential and valuable partner
to our healthcare-provider customers.

More than one-third of all U.S. dental
practices use our DENTRIX® or Easy Dental®
practice-management software – over 42,000
practices nationwide. Our practice
management software product, AVIMark®,
one of the U.S. market leaders,
is used in over 6,000 companion animal
clinics, and represents more than 25% of the
veterinary clinics around the country.
We anticipate adding a medical practice-
management software offering to our U.S.
customers in the future.

In addition, we provide an increasing number
of value-added services to help practitioners
provide a high level of quality patient care
while operating more efficient and profitable
businesses. We believe we are one of the
industry’s largest processors of dental
electronic claims, with approximately
23 million processed in 2002. Through
Henry Schein Financial Services, we offer
low rates for equipment leasing and
financing, patient-financing options,
electronic credit card processing, and lines
of credit, as well as financial-planning
services. Our services include Henry
Schein’s Continuing Education for Healthcare
Professionals program, through which
participants can access fully accredited
courses on the latest healthcare technology
in person, in print, or online.

Technology is changing the way in which
our customers place orders, as well.
In 2002, the number of electronic orders
our customers placed with us through
the Internet increased by nearly 70%.

THE
TECHNOLOGY AND
VALUE-ADDED
SERVICES PICTURE

Using Technology
to Streamline
Practice
Efficiency

Dental, medical, and veterinary professionals demand

products and services that enhance their practice.

Henry Schein’s Technology and Value-added Services

Group meets this demand by offering tools that help

practitioners operate an efficient and profitable

practice, while providing the highest level of quality

care. These tools address:

• Financial management, moving more to the bottom line

• Clinical management, improving practice effectiveness

• Inventory management, improving practice efficiency

• Patient management, helping practitioners better serve more patients

• Facility and staff management, enhancing the professional image of the practice

Among the various healthcare professions, there also are unique challenges that we help to

address. For example, technological tools that can enhance the efficiency of dental professionals

are the best way for them to effectively treat more patients as they meet the business demands

of their practices. A number of technological tools have been introduced in the dental marketplace

over the past few years, including computerized clinical management; full treatment planning,

including the paperless office and progress notes; intraoral imaging; aesthetic dentistry using

cosmetic dentistry technology; digital X-ray processing; real-time voice dictation and charting;

and others. The challenge has been to integrate these valuable tools together in a dentist’s

limited practice space. We have streamlined the solution through the Digital Dental Office (DDO),

eliminating the need for the dentist to maintain multiple vendor relationships and support contracts.

Using three complementary products, the DDO provides dentists with true seamless integration
of imaging, clinical, and financial applications. DENTRIX® ImageRAY™ delivers incredible clarity
and high-resolution digital X-rays, whereas DENTRIX® ImageCAM™ enables dentists to show

patients their dental problems on screen, requiring less time for explanation and more time for
treatment. Images captured through these two tools can be stored with DENTRIX® practice-

management software, along with front-desk scheduling, billing, ordering, and record-keeping

information. With DDO, there is just one support contract for dentists, and they do not have to

T
E
C
H
N
O
L
O
G
Y

“ Through

forward-looking

solutions ... we have

established

Henry Schein as

deal with third parties. DDO enables dentists to use most of the technology they may already

have in their practice, and we also have very strong connections to our branded manufacturers,

a technological leader in

working hand-in-hand with them to deliver a level of seamless integration that we believe no

other company can provide.

Through forward-looking solutions such as DDO, we have established Henry Schein as a

technological leader in this market, providing for practitioners’ technological needs, as well as

their other practice requirements.

Helping our customers operate more efficiently and profitably, DENTRIX and Easy Dental
software systems are in use in over 42,000 U.S. dental practices.

this market, providing

for practitioners’

technological needs,

as well as their

other practice

requirements.”

INFRASTRUCTURE SNAPSHOT

Each year, Henry Schein processes

approximately 8 million orders, and ships

more than 10 million individual boxes to our

customers. We have more than 1.2 million

square feet of space at five U.S. distribution

centers located in Denver, Pennsylvania;

Indianapolis, Indiana; Jacksonville, Florida;

Grapevine, Texas; and Sparks, Nevada.

The strategic location of these facilities and

the efficiency with which they operate enable

us to provide next-day business delivery for

77% of our orders, and delivery within two

days for 99% of our orders. We offer more

than 90,000 SKUs at these ISO-certified

facilities, which allows us to sell products in

the European Union. In addition, we offer

over 7,400 Henry Schein private brand SKUs

in North America, which we believe is one of

the most extensive offerings in the markets

we serve. Our Canadian customers are

serviced from distribution centers in Delta,

British Columbia and Niagara-on-the-Lake,

Ontario. Distribution centers beyond North

America are located in the United Kingdom,

France, Germany, Spain, Australia, and

New Zealand.

Through strategic investments in physical

infrastructure; in technology, such as radio

frequency, guide-by-wire, and fiber optic

systems; and in special capabilities, such as

cold chain distribution expertise and a drug

order monitoring system, we maintain a level

of customer service that we believe is

unsurpassed in the industry.

TEAM SCHEIN SNAPSHOT

Henry Schein’s greatest asset is Team Schein
– more than 6,900 individuals who recognize
that the way we serve our customers sets us
apart, as it has for more than 70 years.
Fostering this Team Schein culture is an
entrepreneurial environment that thrives in an
atmosphere of mutual respect based on the
Team Schein Wheel of Success – each Team
Schein Member is a spoke in the wheel, and
each member is as important as the next in
achieving ultimate success.

We support this shared belief with programs
that recognize and reward those who
demonstrate excellence, including:

• Competitive compensation

• A performance incentive plan

• Stock option programs

• A 401(k) plan, and

• An exceptional benefits program

We believe that these programs contribute
to a highly motivated Team Schein.

One Company,
One System

THE
INFRASTRUCTURE
AND TEAM SCHEIN
PICTURE

Henry Schein’s North American infrastructure

enables us to deliver a superior level of

customer service including:

• 99% of all our U.S. and Canadian orders

shipped complete.

• 99% of these orders shipped on the same

day they are received.

• 99% of these orders delivered within two days of placement.

• 99% of these orders shipped accurately.

Our North American infrastructure operates effectively for a number of reasons. We are uniquely

devoted to the office-based practitioner, and we focus on shipping small packages with an

average of six to seven items in a box, including pharmaceuticals, medical and surgical supplies,

dental supplies, and other products. Our current infrastructure is poised to handle increasing

volume efficiently and with improved profitability as we expand sales across our broad

customer base.

We are currently in the process of replicating this state-of-the-art North American infrastructure

on a Pan-European scale. This project will bring our European businesses onto our core

technology platform, which we anticipate will facilitate growth and enhance efficiency in the

European markets. This will allow Henry Schein Europe to use the same North American

information technology development for field force automation through our Customer Analysis
Tool (CAT) system, e-commerce solutions through ARUBA®, henryschein.com, database marketing,

and financial management. The move to a single European system also will provide a means to

consolidate our purchasing volume and better manage margins on that continent. It will enable

us to implement an integrated Pan-European distribution network, which we believe will result in

improved customer service, superior inventory management, improved use of working capital,

expanded product offerings for all markets, and lower operating expenses as a percentage of sales.

The strategic investments we have made in our North American infrastructure are already paying

off. We are seeing this in our distribution efficiency and accuracy as we deliver a superior level of

customer service within the markets we serve. We also are seeing this in our potential to expand

operating margins as we increase utilization in the future. Through the strategic investments we

are making, we believe that these dividends will soon extend across the Atlantic.

Henry Schein processes approximately 8 million orders annually. Through strategic investments
in infrastructure and technology, our more than 6,900 Team Schein Members maintain a level of
customer service that is unsurpassed in the industry.

N
F
R
A
S
T
R
U
C
T
U
R
E

“ Our current

infrastructure is poised

to handle increasing

volume efficiently and

with improved

profitability as we

expand sales across

our broad

customer base.

”

CORPORATE CHARTER

To Our Customers

We provide the best quality and value in
products and services, helping them, as
business partners, to:

• Deliver quality healthcare to their patients;

THE
CORPORATE
PICTURE

• Efficiently operate and grow their practices;

Henry Schein’s business practices are based on the firm belief that we must fulfill our

and

• Increase their financial return and

financial security.

responsibility as a corporate citizen. We have always recognized that we must adhere to

ethical business practices and give back to the communities in which we operate. As a result,

Team Schein has always had a culture of ethics and integrity.

To Our Shareholders and Venture Partners

community-based programs throughout the world. Acting with enlightened self-interest, we

Henry Schein has a long history as a socially responsible organization that has sponsored

We are responsible for achieving continued
growth and profitability, resulting in an
excellent return on investment.

To Team Schein

We will continue to foster an entrepreneurial
environment, while offering exciting
opportunities for personal and professional
growth, and treating each individual with
respect and dignity.

believe that we can do well by doing good.

The cornerstone of our multifaceted and coordinated social responsibility and corporate

citizenship program is Henry Schein Cares. The mission of Henry Schein Cares is to assist in

narrowing the disparity in the delivery of healthcare services and information in underserved

communities, both in the United States and abroad, by providing resources to support the

programs of community-based healthcare professionals and their organizations. To achieve

this mission, we provide our products to medical and dental public, private, and not-for-profit

organizations that demonstrate they will use these products effectively at the grass roots level.

For example, we donate supplies to office-based practitioners who volunteer their services in

underserved communities around the globe.

The activities of the Henry Schein Cares program are wide-ranging. We have contributed to

To Our Suppliers

organizations including the American Dental Association (ADA), ADA Foundation,

Together, we will strive to create an
environment that enables us to grow our
respective businesses in the spirit of
partnership, each making a fair profit.

Oral Health America, Academy of General Dentistry Foundation, National Dental Association,

Hispanic Dental Association, American Dental Education Association, American Dental

Hygienists’ Association, American Dental Assistance Association, Alpha Omega, Bureau of

Primary Health Care clinics, Indian Health Service clinics, and Medical Education for South

African Blacks (MESAB).

Henry Schein works closely with most U.S. dental schools and many international schools on

a variety of programs, including oral cancer screening community outreach initiatives, and we

have helped raise in-kind donations to open new facilities at New York University, the

University of Pennsylvania, Nova University, Hebrew University, and other institutions.

As the exclusive distributor of professional products, we were a driving force behind the
ADA’s Give Kids A SmileSM program, through which 10,000 dentists provided oral health

services, including screening and treatment, to nearly one million underserved children,

free of charge. We also are working closely with the ADA to sponsor the creation of a

diversity leadership institute for the dental profession.

Photos one and five below:
Courtesy ADA News
© 2003 American Dental Association

Finally, many of the more than 6,900 Team

Schein Members have the opportunity to

participate in a variety of Henry Schein

sponsored community-based programs in

our hometowns, such as our annual

Back-to-School program, through which

clothing and school supplies are donated

to children heading back to class in September. We are committed to enhancing the quality of

life for Team Schein Members through a variety of wellness programs, including medical

screenings, crisis counseling, and other services.

Henry Schein Cares is an investment that we are pleased to make as our commitment to social

responsibility and corporate citizenship continues into our eighth decade.

Henry Schein Cares Mission Statement

To assist in narrowing the disparity in

the delivery of the healthcare services

and information in underserved

communities, both in the United States

and abroad, by providing resources to

support the programs of community-based

health professionals and their organizations.

Working together with the dental industry...

DIRECTORS AND OFFICERS

BOARD OF DIRECTORS

EXECUTIVE OFFICERS

Stanley M. Bergman
Chairman, Chief Executive Officer and President

Barry J. Alperin (1) (2) (3)
Retired Vice Chairman, Hasbro, Inc.

Gerald A. Benjamin
Executive Vice President and Chief Administrative Officer

James P. Breslawski
Executive Vice President and President, Sullivan-Schein Dental

Leonard A. David
Vice President, Human Resources and Special Counsel

Larry Gibson
Executive Vice President and Chief Technology Officer

Pamela Joseph
Director, MaNose Studios

Donald J. Kabat (1) (2)
Retired Partner, Accenture

Philip A. Laskawy (1) (3)
Retired Chairman, Ernst & Young

Mark E. Mlotek
Senior Vice President, Corporate Business Development

Steven Paladino
Executive Vice President and Chief Financial Officer

Michael Racioppi
President, Medical Group

Norman S. Matthews (2)
Former President, Federated Department Stores

Michael Zack
Senior Vice President, International Group

Mark E. Mlotek
Senior Vice President, Corporate Business Development

Steven Paladino
Executive Vice President and Chief Financial Officer

Marvin H. Schein
Founder, Schein Dental Equipment Corp.

Irving Shafran, Esq.
Attorney at Law

Louis W. Sullivan, M.D. (3)
Former U.S. Secretary of Health and Human Services,
and Founding Dean, Director and President Emeritus
of the Morehouse School of Medicine

(1) Member Audit Committee

(2) Member Compensation Committee

(3) Member Nominating and Governance Committee

First row, from left to right:
Larry Gibson, James P. Breslawski,
Stanley M. Bergman, Michael Zack

Second row, from left to right:
Mark E. Mlotek, Steven Paladino,
Leonard A. David, Michael Racioppi,
Gerald A. Benjamin

FINANCIAL INFORMATION

Table of Contents

18 Market for Registrant’s Common Equity and Related Stockholder Matters

19 Selected Financial Data

21 Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Financial Statements:

30 Report of Independent Certified Public Accountants

31 Balance Sheets as of December 28, 2002 and December 29, 2001

32 Statements of Income and Comprehensive Income for the Years Ended

December 28, 2002, December 29, 2001, and December 30, 2000

33 Statements of Stockholders’ Equity for the Years Ended

December 28, 2002, December 29, 2001, and December 30, 2000

34 Statements of Cash Flows for the Years Ended

December 28, 2002, December 29, 2001, and December 30, 2000

35 Notes to Consolidated Financial Statements

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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 National Market System for each quarterly period in fiscal 2001 and 2002 and for the first quarter of fiscal 2003
through March 18, 2003.

Fiscal 2001:

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Fiscal 2002:

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Fiscal 2003:
1st Quarter (Through March 18, 2003)

High

$37.44

$40.57

$40.00

$41.50

$46.11

$50.59

$54.98

$57.73

$46.60

Low

$27.19

$29.84

$31.61

$31.90

$35.34

$43.10

$39.00

$40.30

$34.17

Our Common Stock is quoted through the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol “HSIC”.
On March 18, 2003, there were approximately 662 holders of record of the Common Stock. On March 18, 2003, the last reported
sales price was $43.41.

DIVIDEND POLICY

We currently do not anticipate paying any cash dividends on our Common Stock. We intend to retain earnings to finance the
expansion of our business and for general corporate purposes, including our stock repurchase program. Any payment 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. Our revolving
credit agreement, as well as the agreements governing our Senior Notes, limit the distribution of dividends without the prior written
consent of the lenders.

RECONCILIATION OF CERTAIN OPERATING RESULTS

The following table sets fourth, for the periods indicated, a reconciliation of Operating income and Net income, as originally
reported to Adjusted operating income and Adjusted net income.

Years ended

December 28,

2002

December 29,
2001

December 30,
2000
(In thousands, except per share data)

December 25,
1999

December 26,
1998

Operating income, as originally reported
Adjust for:

$197,003

$147,750

$112,589

$105,765

$39,530

Merger and integration costs (1,163) –– 585 13,467 56,666
––
Restructuring costs

14,439

429

––

Adjusted operating income

Net income, as originally reported
Adjust for:

$196,269

$117,987

$147,750

$ 87,373

$127,613

$ 56,749

$119,232

$ 50,312

$96,196

$16,327

Merger and integration costs (1,163) –– 585 13,467 56,666
Tax effect on merger and integration costs ––

(3,983)

––

(12,591)

––

––
Restructuring costs
Tax effect on restructuring costs –– –– (5,169) –– ––

14,439

429

––

Loss on sale of Novocol
Loss on sale of UK Technology Business

––
––

1,925
1,616

––
––

Pro forma tax adjustment-Meer acquisition –– –– –– ––

(2,579)

Adjusted net income

$117,253

$ 87,373

$ 70,147

$ 59,796

$57,823

Diluted earnings per share:

As originally reported
Adjusted

$ 2.63
$ 2.61

$
$

2.01
2.01

$
$

1.35
1.67

$ 1.21
$ 1.44

$ 0.39
$ 1.39

Diluted average shares outstanding 44,872 43,545 42,007 41,438 41,549

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 28, 2002, set forth below, has been derived from our consolidated financial statements. The selected financial data
presented below should be read in conjunction with the Consolidated Financial Statements and related notes thereto herein and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. The Selected Operating Data and Net
Sales By Market Data presented below have not been audited.

Years ended

December 28,

2002

December 29,
2001

December 30,
2000
(In thousands, except per share and selected operating data)

December 25,
1999

December 26,
1998

Statements of Operations Data:
Net sales

$2,825,001

$2,558,243

$2,381,721

$2,284,544

$1,922,851

Gross profit

794,904

699,324

647,901

608,596

523,831

Selling, general and administrative

expenses

Merger and integration

598,635

551,574

520,288

489,364

427,635

(credits) costs (1) (1,163)

- 585

13,467

56,666

Restructuring costs (2)

Operating income

Interest income

429

197,003

10,446

147,750

10,078

14,439

112,589

6,279

105,765

7,777

39,530

6,964

Interest expense (17,960) (17,324) (20,409)

(23,593) (12,050)

Other - net 940 (153) (1,925) (166)

1,570

Other income (expense) - net (6,574) (7,399) (16,055) (15,982) (3,516)

Income before taxes on income,
minority interest and equity
in earnings (losses) of affiliates

Taxes on income

Minority interest in net income

of subsidiaries

190,429

70,510

140,351

51,930

96,534

36,150

89,783

35,589

2,591

1,462

1,757

1,690

Equity in earnings (losses) of affiliates 659 414 (1,878) (2,192)

36,014

20,325

145

783

Net income

117,987

87,373

56,749

50,312

16,327

Net income per common share:

Basic
Diluted

Weighted average common

shares outstanding:

Basic
Diluted

$ 2.71
$ 2.63

$ 2.06
$ 2.01

$ 1.38
$ 1.35

$ 1.24
$ 1.21

$ 0.42
$ 0.39

43,489
44,872

42,366
43,545

41,244
42,007

40,585
41,438

39,305
41,549

December 28,

2002

December 29,
2001

December 30,
2000
(In thousands, except per share and selected operating data)

December 25,
1999

December 26,
1998

Years ended

Selected Operating Data:

Number of orders shipped

7,861,000

7,891,000

8,280,000

7,979,000

6,718,000

Average order size

$ 359

$ 324

$ 288

$ 286

Net Sales by Market Data: (3)

Healthcare Distribution:
Dental (4)
Medical (5)
International (6)

$1,227,273
1,093,956
437,046

$1,121,394
982,569
398,071

$1,087,073
851,301
389,946

$1,056,406
767,258
403,140

$1,088,182
563,768
230,792

Total Healthcare Distribution

2,758,275

2,502,034

2,328,320

2,226,804

1,882,742

Technology (7)

66,726

56,209

53,401

57,740

40,109

$2,825,001

$2,558,243

$2,381,721

$2,284,544

$1,922,851

Balance Sheet data:

Working capital

Total assets

Total debt

Minority interest

Stockholders' equity

$ 604,199

$ 489,909

$ 423,547

$ 428,429

$ 403,592

1,558,052

1,385,428

1,231,068

1,204,102

250,013

6,748

861,217

261,417

6,786

680,457

276,693

7,996

579,060

363,624

7,855

517,867

962,040

209,451

5,904

463,034

(1) In 2002, we revised our original estimates of our anticipated merger and integration expenses. This change in estimates is attributable
to facts and circumstances that arose subsequent to the original charges. As a result, we reversed certain of our previously recorded
expenses. In 1998, the merger and integration costs consisted primarily of investment banking, legal, accounting and advisory fees,
compensation, write-off of duplicate management information systems, and other assets and the impairment of goodwill arising from
acquired businesses integrated into our medical and dental businesses, as well as certain other integration costs incurred primarily
in connection with the 1998 acquisition of H. Meer Dental Supply Co., Inc. (“Meer”) and the 1997 acquisitions of Sullivan Dental
Products, Inc. and Micro Bio-Medics, Inc., which were accounted for under the pooling of interests method of accounting. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Acquisition Strategy” herein and the
Consolidated Financial Statements and related notes thereto herein.

(2) In 2002, we revised our original estimates of our anticipated restructuring expenses. This change in estimates is attributable to facts
and circumstances that arose subsequent to the original charges. As a result, we recorded additional expenses. These restructuring
costs consist primarily of employee severance costs, including severance pay and benefits for 2002 and 2000 of approximately $0.1
million and $7.2 million, respectively, facility closing costs, primarily lease termination and asset write-off costs of approximately $0.3
million and $4.4 million, respectively, and professional and consulting fees directly related to the restructuring plan of approximately
$0.0 million and $2.8 million, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Plan of Restructuring” herein and the Consolidated Financial Statements and related notes thereto herein.

(3) Reclassified to conform to current period presentation.

(4) Dental consists of our dental business in the United States and Canada.

(5) Medical consists of our medical and veterinary businesses in the United States.

(6) International consists of our business (primarily dental) outside the United States and Canada, primarily in Europe.

(7) Technology consists of our practice management software business and certain other value-added products and services, which are

distributed primarily to healthcare professionals in the United States and Canada.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

Except for historical information contained herein, the statements in this report (including without limitation, statements indicating
that we “expect,” “estimate,” “anticipate,” or “believe” and all other statements concerning future financial results, product or
service offerings or other events that have not yet occurred) are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements involve known and unknown
factors, risks and uncertainties which may cause our actual results in future periods to differ materially from those expressed in any
forward-looking statements. Those factors, risks and uncertainties include, but are not limited to, the factors described under “Risk
Factors” below.

The following discussion and analysis of our consolidated financial condition and consolidated results of operations should be read
in conjunction with our Consolidated Financial Statements and related notes thereto herein.

Overview

We are the largest distributor of healthcare products and services to office-based healthcare practitioners in the combined North
American and European markets with operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium,
Germany, France, Austria, Spain, Ireland, Portugal, Australia and New Zealand. We sell products and services to over 400,000
customers, primarily dental practices and dental laboratories, as well as physician practices, veterinary clinics and institutions.
Through our comprehensive catalogs and other direct sales and marketing programs, we offer customers a broad product
selection of both branded and private brand products.

We conduct our business through two segments: healthcare distribution and technology. These operations offer different products
and services to the same customer base. The healthcare distribution segment consists of our dental, medical (including
veterinary), and international groups. The international group is comprised of our healthcare distribution business units located
primarily in Europe, and offers products and services to dental and medical (including veterinary) customers located in their
respective geographic regions. The technology segment consists primarily of our practice management software business and
certain other value-added products and services which are distributed primarily to healthcare professionals in the United States
and Canada.

Critical Accounting Policies and Estimates

Securities Exchange Commission Financial Reporting Release No. 60 requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.

We believe that the following critical accounting policies affect the significant judgments and estimates used in the preparation of
our financial statements:

Management’s 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. On an ongoing basis, we
evaluate estimates, including those related to sales allowance provisions, as described below, volume purchase rebates, income
taxes, inventory and bad debts reserves, and contingencies. 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. Actual results may differ from these estimates.

Revenue Recognition

Sales are recorded when products are shipped or services are rendered to customers, as we generally have no significant post
delivery obligations, the product price is fixed and determinable, collection of the resulting receivable is probable and product
returns are reasonably estimable. Revenues derived from post contract customer support for practice management software are
deferred and recognized ratably over the period in which the support is to be provided, generally one year. Revenues from freight
charged to customers are recognized when products are shipped. Provisions for discounts, rebates to customers, customer
returns and other adjustments are provided for in the period the related sales are recorded based upon historical data.

Accounts Receivable and Credit Policies

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects 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 general allowance,
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 those or other factors expected to affect collectability.

Allowances for accounts receivable, comprised primarily of the allowance for doubtful accounts and the allowance for sales returns, were
$36.2 million and $31.9 million at December 28, 2002 and December 29, 2001, respectively.

Long-Lived Assets

Long-lived assets, other than goodwill, are evaluated for impairment when events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When
any such impairment exists, the related assets are written down to fair value.

Other intangible assets are amortized over their estimated useful lives. We have reassessed the estimated useful lives of our intangible
assets, which primarily consist of non-compete agreements, and no changes were deemed necessary.

Goodwill

At December 28, 2002, we had recorded approximately $310.3 million in goodwill and other intangible assets, net of accumulated
amortization, primarily related to acquisitions made in 2002 and prior years. In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, “Business Combinations”, (“FAS 141”), and No. 142, “Goodwill and Other
Intangible Assets”, (“FAS 142”), effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with
FAS 142. We estimated the fair value of our reporting units in accordance with the new standard and compared these valuations with the
respective book values for each of the reporting units to determine whether any goodwill impairment existed. The goodwill is substantially
related to our healthcare distribution segment. In determining the fair value, we consider past, present and future expectations of
performance. As required by FAS 142, we will complete subsequent goodwill impairment tests at least annually. During the fourth quarter
of 2002, we completed the annual test using a methodology similar to the transitional test and determined that there was no impairment
of goodwill as of the first day of the fourth quarter. Changes in market conditions, among other factors, could have a material impact on
these estimates.

Stock-Based Compensation

We account for stock option awards to employees under the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No 25, “Accounting for Stock Issued to Employees”. Under this method, no compensation expense is recorded
so long as the quoted market price of the stock at the date of grant is equal to the exercise price. 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 Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation”, (“FAS 123”). Had we elected to use FAS 123 to account for stock-based compensation under the fair value method, we
would have been required to record compensation expense, and as a result, diluted earnings per common share for the fiscal years ended
December 2002, 2001, and 2000 would have been lower by $0.21, $0.16, and $0.19, respectively.

Plan of Restructuring

On August 1, 2000, we announced a comprehensive restructuring plan designed to improve customer service and increase profitability
by maximizing the efficiency of our infrastructure. In addition to closing or downsizing certain facilities, this worldwide initiative included
the elimination of approximately 300 positions, including open positions, or approximately 5% of the total workforce, throughout all levels
within the organization. The restructuring plan was substantially completed at December 30, 2000.

For the years ended December 28, 2002 and December 30, 2000, we incurred one-time restructuring costs of approximately $0.4 million
($0.4 million after taxes) and $14.4 million, ($9.3 million after taxes), or approximately $0.01 and $0.22 per diluted share, respectively,
consisting primarily of: employee severance costs, including severance pay and benefits of approximately $0.1 million and $7.2 million,
respectively, facility closing costs, primarily lease termination and asset write-off costs of approximately $0.3 million and $4.4 million,
respectively, and outside professional and consulting fees directly related to the restructuring plan of approximately $0.0 million and $2.8
million, respectively.

Acquisition Strategy

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

In connection with certain acquisitions completed during the year ended December 30, 2000, we incurred certain merger and integration
costs of approximately $0.6 million. Net of taxes, merger and integration costs were approximately $0.01 per share, on a diluted basis.
Merger and integration costs for the healthcare distribution and technology segments were $0.0 million and $0.6 million for 2000. Merger
and integration costs consist primarily of investment banking, legal, accounting and advisory fees, severance, and impairment of goodwill
arising from acquired businesses integrated into our medical and dental businesses, as well as certain other integration costs associated
with these mergers. During 2002, we revised our original estimates of our merger and integration costs from prior years. The change in
estimates was attributable to facts and circumstances that arose subsequent to the original charges. As a result, in the fourth quarter of
2002, we reversed $1.2 million of our previously recorded expenses. Net of taxes, merger and integration credits were approximately
$0.03 per share, on a diluted basis.

Results of Operations

The following table sets forth, for the periods indicated, Net Sales, Gross Profit and Adjusted Operating Profit, excluding merger and
integration, and restructuring (credits) costs (in thousands), by business segment for the years ended 2002, 2001, and 2000. Percentages
are calculated on related net sales.

Net Sales by Segment Data:
Healthcare distribution:

Dental (2)
Medical (3)
International (4)

Total healthcare distribution

Technology (5)

Total

Gross Profit by Segment Data:
Healthcare distribution
Technology

2002

2001 (1)

2000 (1)

$1,227,273
1,093,956
437,046

2,758,275
66,726

43.4%
38.7%
15.5%

97.6%
2.4%

$1,121,394
982,569
398,071

2,502,034
56,209

43.8%
38.4%
15.6%

97.8%
2.2%

$1,087,073
851,301
389,946

2,328,320
53,401

45.7%
35.7%
16.4%

97.8%
2.2%

$2,825,001

100.0%

$2,558,243 100.0%

$2,381,721 100.0%

$ 743,880
51,024

27.0%
76.5%

$ 659,092
40,232

26.3%
71.6%

$ 610,082
37,819

26.2%
70.8%

Total

$ 794,904

28.1%

$ 699,324

27.3%

$ 647,901

27.2%

Adjusted Operating Income
(excluding merger and
integration, and restructuring
(credits) costs) by
Segment Data:
Healthcare distribution (6)
Technology (7)

$ 170,253
26,016

6.2%
39.0%

$ 128,337
19,413

5.1%
34.5%

$ 106,944
20,669

4.6%
38.7%

Total

$ 196,269

6.9%

$ 147,750

5.8%

$ 127,613

5.4%

(1) Reclassified to conform to current period presentation.

(2) Dental consists of our dental business in the United States and Canada.

(3) Medical consists of our medical and veterinary businesses in the United States.

(4) International consists of our business (primarily dental) outside the United States and Canada, primarily in Europe.

(5) Technology consists of our practice management software business and certain other value-added products and services, which are

distributed primarily to healthcare professionals in the United States and Canada.

(6) Excludes merger and integration, and restructuring (credits) costs of $(0.7) million, $0.0 million, and $14.0 million in 2002, 2001 and

2000, respectively.

(7) Excludes merger and integration, and restructuring costs of $1.0 million in 2000.

2002 Compared to 2001

For the year ended December 28, 2002, our net sales increased $266.8 million, or 10.4%, to $2,825.0 million in 2002, from $2,558.2 million
in 2001. Of the $266.8 million increase, approximately $256.3 million, or 96.1%, represented a 10.2% increase in our healthcare
distribution business. As part of this increase, approximately $111.4 million represented an 11.3% increase in our medical business,
$105.9 million represented a 9.4% increase in our dental business, and $39.0 million represented a 9.8% increase in our international
business. The increase in medical net sales was primarily attributable to increased sales to core physicians’ offices and alternate care
markets. In the dental market, the increase in net sales was primarily due to increased dental equipment sales and services and increased
penetration to existing customers primarily driven by our Privileges loyalty program. Net sales of dental consumable merchandise
increased by 7.3%, while net sales of dental equipment increased by 18.5%. In the international market, the increase in net sales was
primarily due to increased account penetration in France, the United Kingdom, and Australia and by favorable exchange rates to the U.S.
dollar. Had net sales for the international market been translated at the same exchange rates in 2001, net sales would have increased by
4.7%. The remaining increase in 2002 net sales was due to the technology business, which increased $10.5 million, or 18.7%, to $66.7
million for 2002, from $56.2 million for 2001. The increase in technology and value-added product net sales was primarily due to increased
sales of software products and related services. As part of a new marketing initiative, MarketOne, certain technology and equipment
products were sold directly to end-user customers beginning with the third quarter of 2002, rather than through resellers, which resulted
in a higher growth rate for the technology business. Without this change, the technology business net sales would have increased 13.9%.

Gross profit increased by $95.6 million, or 13.7%, to $794.9 million in 2002, from $699.3 million in 2001. Gross profit margin increased by
0.8% to 28.1%, from 27.3% in the prior year. Healthcare distribution gross profit increased by $84.8 million, or 12.9%, to $743.9 million in
2002, from $659.1 million in 2001. Healthcare distribution gross profit margin increased by 0.7%, to 27.0%, from 26.3% in the prior year
primarily due to changes in sales mix. Technology gross profit increased by $10.8 million, or 26.8%, to $51.0 million in 2002, from $40.2
million in 2001. Technology gross profit margin increased by 4.9%, of which 1.0% was attributable to the MarketOne initiative referred to
above, to 76.5%, from 71.6% in the prior year primarily due to changes in sales mix.

Selling, general and administrative expenses increased by $47.0 million, or 8.5%, to $598.6 million in 2002, from $551.6 million in 2001.
Selling and shipping expenses increased by $36.0 million, or 10.8%, to $370.1 million in 2002, from $334.1 million in 2001. As a
percentage of net sales, selling and shipping expenses remained constant at 13.1% in 2002 compared to 2001. General and
administrative expenses increased $11.0 million, or 5.1%, to $228.5 million in 2002, from $217.5 million in 2001. As a percentage of net
sales, general and administrative expenses decreased 0.4% to 8.1% in 2002, from 8.5% in 2001. The decrease in general and
administrative expenses was primarily due to the elimination of goodwill amortization expense in accordance with FAS 142.

Other income (expense) - net decreased by $0.8 million, to $(6.6) million in 2002, from $(7.4) million for 2001, due primarily to the favorable
settlement of a real estate transaction.

Equity in earnings of affiliates increased $0.3 million to $0.7 million in 2002, from $0.4 million in 2001.

For 2002, our effective tax rate was 37.2%. For 2001, our effective tax rate was 37.0%. The difference between our effective tax rates
and the Federal statutory rates relates primarily to state income taxes.

2001 Compared to 2000

We report financial results on a 52-53 week basis and, as such, the 2000 fiscal year included an additional week. For the year ended
December 29, 2001, net sales increased $176.5 million, or 7.4%, to $2,558.2 million in 2001, from $2,381.7 million in 2000. On a
comparable basis (excluding the additional week in 2000), net sales growth was approximately 8.7%. Of the $176.5 million increase,
approximately $173.7 million, or 98.4%, represented a 7.5% (8.7% on a comparable basis) increase in our healthcare distribution
business. As part of this increase, approximately $131.3 million represented a 15.4% (17.0% on a comparable basis) increase in our
medical business, $34.3 million represented a 3.2% (4.1% on a comparable basis) increase in our dental business, and $8.1 million
represented a 2.1% (3.5% on a comparable basis) increase in our international business. The increase in medical net sales was primarily
attributable to increased sales to core physicians’ offices and alternate care markets. In the dental market, the increase in net sales was
primarily due to increased account penetration. In the international market, the increase in net sales was primarily due to increased
account penetration in Germany, France, and the United Kingdom, somewhat offset by unfavorable exchange rates to the U.S. dollar. Had
net sales for the international market been translated at the same exchange rates in 2000, net sales would have increased by 5.8%. The
remaining increase in 2001 net sales was due to the technology business, which increased $2.8 million, or 5.3% (6.1% on a comparable
basis), to $56.2 million for 2001, from $53.4 million for 2000. The increase in technology and value-added product net sales was primarily
due to increased sales of technology products and related services.

Gross profit increased by $51.4 million, or 7.9%, to $699.3 million in 2001, from $647.9 million in 2000. Gross profit margin increased by
0.1% to 27.3%, from 27.2% in the prior year. Healthcare distribution gross profit increased by $49.0 million, or 8.0%, to $659.1 million in
2001, from $610.1 million in 2000. Healthcare distribution gross profit margin increased by 0.1%, to 26.3%, from 26.2% in the prior year
primarily due to changes in sales mix. Technology gross profit increased by $2.4 million, or 6.4%, to $40.2 million in 2001, from $37.8
million in 2000. Technology gross profit margin increased by 0.8%, to 71.6%, from 70.8% in the prior year primarily due to changes in
sales mix.

Selling, general and administrative expenses increased by $31.3 million, or 6.0%, to $551.6 million in 2001, from $520.3 million in 2000.
Selling and shipping expenses increased by $23.5 million, or 7.6%, to $334.1 million in 2001, from $310.6 million in 2000. As a percentage
of net sales, selling and shipping expenses increased 0.1% to 13.1% in 2001, from 13.0% in 2000. General and administrative expenses
increased $7.8 million, or 3.7%, to $217.5 million in 2001, from $209.7 million in 2000. As a percentage of net sales, general and
administrative expenses decreased 0.3% to 8.5% in 2001, from 8.8% in 2000. The decrease in general and administrative expenses was
primarily due to reductions in expenses associated with our restructuring program.

Other income (expense) - net decreased by $(8.7) million, to $(7.4) million in 2001, from $(16.1) million for 2000, due primarily to higher
interest income on long-term loans receivable and short-term investments, higher finance charge income on trade accounts receivable,
lower interest expense due to reductions in long-term debt and bank credit line balances and lower interest rates, and in 2000, the non-
recurring loss of $1.6 million after tax on the sale of our software development unit in the United Kingdom.

Equity in earnings (losses) of affiliates increased $2.3 million to $0.4 million in 2001, from $(1.9) million in 2000. The increase is primarily
due to a non-recurring net loss of $1.9 million during the fourth quarter of 2000 from the sale of our interest in HS Pharmaceutical, Inc.

For 2001, our effective tax rate was 37.0%. The difference between our effective tax rate and the Federal statutory rate relates primarily
to state income taxes.

For 2000, our effective tax rate was 37.4%. Excluding merger and integration costs, the majority of which are not deductible for income
tax purposes, our effective tax rate would have been 37.3%. The difference between our effective tax rate and the Federal statutory rate
relates primarily to state income taxes.

Seasonality

Our business is subject to seasonal and other quarterly influences. Net sales and operating profits are generally higher in the fourth
quarter due to timing of sales of software and equipment, year end promotions and purchasing patterns of office-based healthcare
practitioners and are generally lower in the first quarter due primarily to the increased purchases in the prior quarter. Quarterly results
also may be materially affected by a variety of other factors, including the timing of acquisitions and related costs, timing of purchases
and/or sales, special promotional campaigns, seasonal products, fluctuations in exchange rates associated with international operations
and adverse weather conditions.

E-Commerce

Traditional healthcare supply and distribution relationships are being impacted by electronic on-line commerce solutions. Our distribution
business is characterized by rapid technological developments and is highly competitive. The rapid evolution of on-line commerce will
require us to provide continuous improvement in performance, features and reliability of Internet content and technology, 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 coupled with our name recognition and large customer base built
on solid customer relationships makes us well situated to participate in this growing aspect of the distribution business. We are exploring
ways and means of improving and expanding our Internet presence and will continue to do so.

Inflation

Management does not believe inflation had a material effect on the financial statements for the periods presented.

Effect of Recently Issued Accounting Standards

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities”, (“FAS 146”). This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force, (“EITF”), Issue No. 94-3, “Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)”, (“EITF 94-3”). The principal difference between this Statement and EITF 94-3 relates to the Statement’s requirements for
recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability was recognized at the date of an
entity’s commitment to an exit plan. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002.
We do not expect the adoption of FAS 146 to have a material impact on our financial position or results of operations.

In September 2002, the EITF reached a consensus on Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables",
(“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. Those arrangements could involve the delivery or performance of multiple products, services, or rights to
use assets, and the performance could occur at different points in time or over different periods of time. The Issue addresses when and,
if so, how a company should divide an arrangement involving multiple deliverables into separate units of accounting. EITF 00-21 is
effective for revenue arrangements entered into in fiscal years beginning after December 15, 2002. We do not expect the adoption of
EITF 00-21 to have a material impact on our financial position or results of operations.

On December 31, 2002, the FASB amended the transition and disclosure requirements of FASB Statement No. 123, “Accounting for Stock-
Based Compensation”, (“FAS 123”), through the issuance of FASB Statement No. 148, “Accounting for Stock-Based Compensation—
Transition and Disclosure”, (“FAS 148”). FAS 148 amends the existing disclosures that a company should make in its annual financial
statements and requires, for the first time, disclosures in interim financial reports. Those disclosures are required regardless of the method
being used to account for stock-based employee compensation. The amended and new disclosure requirements are effective for our
fiscal year ending December 27, 2003. The adoption of the disclosure requirements of FAS 148 will not have a material effect on our
financial statements. As permitted under FAS 123, we apply Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
to Employees”, (“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise
price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is
recognized.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others”, ("FIN 45”). FIN 45 addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending after December 15, 2002. We do not expect this Interpretation to
have an effect on the consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, (“FIN 46”). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do
not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest entities created
after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of FIN 46 are applicable no later
than July 1, 2003. We do not expect this Interpretation to have an effect on our consolidated financial statements.

Risk Management

We have operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Spain,
Ireland, Portugal, Australia and New Zealand. We endeavor to protect substantially all of our operations’ financial results by using foreign
currency forward contracts to hedge intercompany debt and the foreign currency payments to foreign vendors. The total U.S. dollar
equivalent of all foreign currency forward contracts hedging intercompany debt and the purchase of merchandise from foreign vendors
was $73.6 million and $4.4 million, respectively, as of the end of fiscal 2002. As of December 28, 2002, the fair value of these contracts,
which expire through January 2004, is determined by quoted market prices and was not material. For the year ended December 28, 2002,
we recognized an immaterial loss relating to our foreign currency forward contracts.

We consider our investment in foreign operations to be both long-term and strategic. As a result, we do not hedge the long-term
translation exposure to our balance sheet. We have experienced positive and negative translation adjustments of approximately $19.0
million and $(5.7) million in 2002 and 2001, respectively, which were reflected in the balance sheet as a component of stockholders’ equity.
The cumulative translation adjustment at the end of 2002 showed a net negative translation adjustment of $(4.8) million.

Liquidity and Capital Resources

Our principal capital requirements have been to fund (a) capital expenditures, (b) acquisitions, and (c) working capital needs resulting
from increased sales and special inventory forward buy-in opportunities. Since sales tend to be strongest during the fourth quarter and
special inventory forward buy-in opportunities are most prevalent just before the end of the year, our working capital requirements have
been generally higher from the end of the third quarter to the end of the first quarter of the following year. We have financed our business
primarily through our operations, our revolving credit facilities, private placement loans and stock issuances.

Net cash provided by operating activities for the year ended December 28, 2002 of $134.7 million resulted primarily from net income of
$118.0 million and non-cash charges of approximately $36.2 million, offset by a net increase in operating items of working capital of
approximately $19.5 million. The increase in working capital items was primarily due to an increase in inventories of $23.1 million, a $18.4
million increase in other current assets, and a $2.0 million increase in accounts receivable, offset by a $24.0 million increase in accounts
payable and accruals. Our accounts receivable days sales outstanding ratio improved to 48.2 days for the period ending December 28,
2002, from 53.5 days for the period ending December 29, 2001, primarily due to greater focus in this area. Our inventory turns were 6.6
inventory turns for the period ending December 28, 2002 compared to 6.9 inventory turns for the period ending December 29, 2001,
primarily due to an increase in forward buy-ins and inventory stocking for warehouses opened in 2002. We anticipate future increases in
working capital requirements as a result of our continued sales growth, extended payment terms and special inventory forward buy-in
opportunities.

Net cash used in investing activities for the year ended December 28, 2002 of $142.8 million resulted primarily from cash used for the
purchases of United States government and government agency bonds, municipal bonds, and corporate bonds rated AAA by Moody’s
(or an equivalent rating) and commercial paper rated P-1 by Moody’s (or an equivalent rating) with maturities of more than three months,
for which fair values are determined by quoted market prices, of $55.2 million, capital expenditures of $47.5 million, of which
approximately $11.6 million was for the purchase of a building used for our corporate headquarters, and business acquisitions of $36.2
million, of which $27.4 million represented contingent earnout payments associated with acquisitions made in prior years. During the past
three years, we have invested $123.4 million in the development of new computer systems, and for new and existing operating facilities.
In the coming year, we expect to invest in excess of $35.0 million in capital projects to modernize and expand our facilities and
infrastructure computer systems, and integrate operations.

Net cash provided by financing activities for the year ended December 28, 2002 of $18.7 million resulted primarily from proceeds from
the issuance of stock upon exercise of stock options of $34.1 million, offset primarily by net payments on long-term debt of $14.9 million.

Certain holders of minority interests in entities we have acquired have the right at certain times to require us to acquire their interest at a
price that approximates fair value pursuant to a formula price based on earnings of the entity.

Our cash and cash equivalents as of December 28, 2002 of $200.7 million consist of bank balances and investments in money market
funds. These investments have staggered maturity dates, none of which exceed three months, and have a high degree of liquidity since
the securities are actively traded in public markets.

On May 2, 2002, we renewed and increased our revolving credit facility to $200.0 million from $150.0 million. The new facility is a four
year committed line scheduled to terminate on May 2, 2006. There were no borrowings under the credit facility at December 28, 2002.
We also have one uncommitted bank line of $15.0 million, of which no amounts have been borrowed against at December 28, 2002.

On June 30, 1999 and September 25, 1998, we completed private placement transactions under which we issued $130.0 million and
$100.0 million, respectively, in Senior Notes. The $130.0 million notes come due on June 30, 2009 and bear interest at a rate of 6.94%
per annum. Principal payments totaling $20.0 million are due annually starting September 25, 2006 on the $100.0 million notes and bear
interest at a rate of 6.66% per annum. Interest on both notes is payable semi-annually. Certain of our subsidiaries have credit facilities
that totaled $28.2 million at December 28, 2002, under which $4.8 million had been borrowed.

The following table shows our contractual obligations related to fixed and variable rate long-term debt, as well as lease obligations (See
Notes 10 and 15 to the Consolidated Financial Statements):

Payments due by period (in thousands)

Total

< 1 year

1 - 3 years

4 - 5 years

> 5 years

Contractual obligations:

Long-term debt
Capital lease obligations
Operating lease obligations

$243,176
2,047
112,037

$ 2,088
574
23,065

$ 1,810
720
36,232

$40,981
292
23,069

$198,297
461
29,671

Total

$357,260

$25,727

$38,762

$64,342

$228,429

On March 12, 2003, we announced that our Board of Directors had authorized the repurchase of up to two million shares of our Common
Stock, which represented approximately 4.5% of shares outstanding on the announcement date. We expect purchases to be made from
time to time in the open market or through negotiated transactions.

We believe that our cash and cash equivalents of $200.7 million and our investment in short-term marketable securities of $31.2 million
as of December 28, 2002, our ability to access public and private debt and equity markets, and the availability of funds under our existing
credit agreements will provide us with sufficient liquidity to meet our currently foreseeable short-term and long-term capital needs.

Market Risks

We are exposed to market risks, which include changes in U.S. and international interest rates, as well as changes in foreign currency
exchange rates as measured against the U.S. dollar and each other. We attempt to reduce these risks by utilizing financial instruments
that are consistent with our internal policies.

Forward Foreign Currency Contracts

The value of certain foreign currencies as compared to the U.S. dollar may affect our financial results. Changes in exchange rates may
positively or negatively affect our revenues (as expressed in U.S. dollars), gross margins, operating expenses, and retained earnings.
Where we deem it prudent, we engage in hedging programs aimed at limiting, in part, the impact of currency fluctuations. Using primarily
forward exchange contracts, we hedge those transactions that, when remeasured according to accounting principles generally accepted
in the United States, may impact our statement of income. From time to time, we purchase short-term forward exchange contracts to
protect against currency exchange risks associated with of intercompany loans, of a long-term investment nature, due from our
international subsidiaries and the payment of merchandise purchases to foreign vendors. As of December 28, 2002, we had outstanding
foreign currency forward contracts aggregating $78.0 million, of which $73.6 million related to intercompany debt and $4.4 million related
to the purchase of merchandise from foreign vendors. The contracts hedge against currency fluctuations of British Pounds ($38.1 million),
Euros ($34.9 million), Australian Dollars ($3.9 million), Swiss Francs ($0.8 million), Japanese Yen ($0.2 million), and New Zealand Dollars
($0.1 million). As of December 28, 2002, the fair value of these contracts, which are determined by quoted market prices and expire
through January 2004, was not material. For the year ended December 28, 2002, we recognized an immaterial loss relating to our foreign
currency forward contracts.

These hedging activities provide only limited protection against currency exchange risks. Factors that could impact the effectiveness of
our programs include volatility of the currency markets and availability of hedging instruments. All currency contracts that we enter into
are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure,
not for speculation. Although we maintain these programs to reduce the impact of changes in currency exchange rates, when the U.S.
dollar sustains a strengthening position against currencies in which we sell products and services, or a weakening exchange rate against
currencies in which we incur costs, our revenues or costs are adversely affected.

Interest Rates

We are exposed to risk from changes in interest rates from borrowings under certain variable bank credit lines and loan agreements. We
have fixed rate debt of $130.0 million at 6.94% and $100.0 million at 6.66%. If the remaining outstanding debt at December 28, 2002 of
$20.0 million was the average balance for the following twelve month period and we experienced a 1% increase in average interest rates,
the interest expense for that period would have increased by $0.2 million. Based upon current economic conditions, we do not believe
interest rates will increase substantially in the near future. As a result, we do not believe that it is currently necessary to hedge our
exposure against potential future interest rate increases.

Risk Factors

Stockholders and investors should carefully consider the risks described below and other information in this annual report. Our business,
financial condition and operating results, and the trading price of our common stock could be adversely affected if any of these risks
materialize.

• The healthcare products distribution industry is highly competitive, and we compete with numerous companies, including major
manufacturers and distributors that have greater financial and other resources than us. Competitors could obtain exclusive rights to
market particular products or manufacturers could increase their efforts to sell directly to end-users, thereby bypassing distributors like
us. Consolidation among healthcare products distributors could result in existing competitors increasing their market position. In
addition, unavailability of products, whether due to our inability to gain access to products or interruptions in supply of products from
manufacturers, could adversely affect our operating results.

• 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; trends toward managed care; consolidation of healthcare distribution companies; electronic commerce; and collective
purchasing arrangements among office-based healthcare practitioners. If we are unable to react effectively to these and other changes
in the healthcare industry, our operating results could be adversely affected.

• Our technology segment, which primarily sells practice management software and other value-added products, depends upon
continued product development, technical support and marketing. Failures in these and related areas could adversely affect our results
of operations.

• Our business is subject to requirements under various local, state, Federal and foreign governmental laws and regulations applicable
to the manufacture and distribution of pharmaceuticals and medical devices, including the Federal Food, Drug, and Cosmetic Act, the
Prescription Drug Marketing Act of 1987 and the Controlled Substances Act. There is no assurance that current or future government
regulations will not adversely affect our business.

• Our business involves a risk of product liability 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. We have insurance policies,
including product liability insurance, and in many cases we have indemnification rights from manufacturers with respect to the products
we distribute. There is no assurance that insurance coverage or manufacturers' indemnity will be available in all of the pending or any
future cases brought against us, or that an unfavorable result in any such case will not adversely affect our financial condition or results
of operations.

• Our business is dependent upon our ability to hire and retain qualified sales representatives, service specialists and other sales agents.
Due to the relationships developed between our field sales representatives and their customers, upon the departure of a sales
representative we face the risk of losing the representative's customers, especially if the representative becomes an employee of one
of our competitors.

• Our business has been subject to seasonal and other quarterly fluctuations. Net sales and operating profits generally have been higher
in the fourth quarter due to 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 purchases in the prior quarter.

• Our international operations are subject to inherent risks, which could adversely affect our operating results. These risks include
difficulties in opening and managing foreign offices and distribution centers; 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; import/export duties and quotas; and unexpected regulatory, economic and political changes in foreign markets.

• Our expansion through acquisitions and/or joint ventures could result in a loss of customers, diversion of management attention and

increased demands on our operations, information systems and financial resources.

• We rely on third parties to ship products to our customers. Increases in shipping rates or interruptions of service could adversely affect

our operating results.

• Changes in e-commerce could affect our business relationships and could require significant resources. The evolution of on-line
commerce, including business-to-business exchanges, will require us to continuously improve the performance, security, features and
reliability of Internet content and technology.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Henry Schein, Inc. and Subsidiaries as of December 28, 2002 and
December 29, 2001, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows
for each of the three years in the period ended December 28, 2002. 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 auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audits 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 financial position of Henry
Schein, Inc. and Subsidiaries at December 28, 2002 and December 29, 2001, and the results of their operations and their cash flows for
each of the three years in the period ended December 28, 2002 in conformity with accounting principles generally accepted in the United
States of America.

As discussed in Note 5, the Company changed its policy of accounting for goodwill in 2002 as required by Financial Accounting
Standards Board Statement No. 142, “Goodwill and Other Intangible Assets”.

BDO SEIDMAN, LLP

New York, New York
February 27, 2003

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

ASSETS

Current assets:

Cash and cash equivalents

Marketable securities

Accounts receivable, less reserves of $36,200 and $31,929, respectively

Inventories

Deferred income taxes

Prepaid expenses and other

Total current assets

Property and equipment, net

Goodwill

Other intangibles, net of accumulated amortization of
$4,151 and $3,348, respectively

Investments and other

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

Bank credit lines

Accruals:

Salaries and related expenses

Merger, integration, and restructuring costs

Acquisition earnout payments

Taxes and other expenses

Current maturities of long-term debt

Total current liabilities

Long-term debt

Other liabilities

Total liabilities

Minority interest

Commitments and contingencies

Stockholders' equity:

Preferred stock, $.01 par value, authorized 1,000,000,

issued and outstanding 0 and 0, respectively

Common stock, $.01 par value, authorized 120,000,000,

issued: 44,041,591 and 42,745,204, respectively

Additional paid-in capital

Retained earnings

December 28,
2002

December 29,
2001

$ 200,651

$ 193,367

31,209

368,263

323,080

29,919

74,407

1,027,529

142,532

302,687

7,661

77,643

––

363,700

291,231

25,751

52,922

926,971

117,980

279,981

8,023

52,473

$1,558,052

$1,385,428

$ 243,166

4,790

$ 263,190

4,025

53,954

3,044

1,460

114,254

2,662

423,330

242,561

24,196

690,087

6,748

––

440

436,554

430,389

41,602

5,867

26,800

80,355

15,223

437,062

242,169

18,954

698,185

6,786

––

427

393,047

312,402

Treasury stock, at cost, 62,479 shares (1,156) (1,156)

Accumulated comprehensive loss (4,794) (23,922)

Deferred compensation (216) (341)

Total stockholders' equity

861,217

$1,558,052

680,457

$1,385,428

See accompanying notes to consolidated financial statements.

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share data)

Net sales

Cost of sales

Gross profit

Operating expenses:

December 28,
2002

Years ended

December 29,
2001

December 30,
2000

$2,825,001

$2,558,243

$2,381,721

2,030,097

794,904

1,858,919

699,324

1,733,820

647,901

Selling, general and administrative

598,635

551,574

Merger, integration and restructuring costs (credits) (734)

––

520,288

15,024

112,589

197,003

147,750

10,446

10,078

6,279

Operating income

Other income (expense):

Interest income

Interest expense (17,960) (17,324)

(20,409)

Other - net 940 (153) (1,925)

Income before taxes on income, minority interest and equity

in earnings (losses) of affiliates

Taxes on income

Minority interest in net income of subsidiaries

190,429

70,510

2,591

140,351

51,930

1,462

96,534

36,150

1,757

Equity in earnings (losses) of affiliates 659

414 (1,878)

Net income

Comprehensive income:

Net income

$ 117,987

$ 87,373

$ 56,749

$ 117,987

87,373

$ 56,749

Foreign currency translation adjustment 18,989 (5,743) (7,820)

Other

Comprehensive income

Net income per common share:

Basic

Diluted

Weighted average common shares outstanding:

Basic
Diluted

139

––

$ 137,115

$ 81,630

$ 48,929

$ 2.71

$ 2.63

$ 2.06

$ 2.01

$ 1.38

$ 1.35

43,489
44,872

42,366
43,545

41,244
42,007

See accompanying notes to consolidated financial statements.

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)

Total

Common Stock Additional Accumulated Deferred Stock-
Retained Treasury Comprehensive Compen- holders’
$.01 Par Value
Equity
Loss
Earnings
Shares Amount

Paid-in
Capital

sation

Stock

Balance, December 25, 1999

40,768,306

$407

$361,757 $ 167,809

$(1,156) $(10,359) $(591)

$517,867

Retained earnings of one

company acquired under the
pooling of interests method,
not deemed material

Net income
Shares issued for acquisitions

Shares issued to ESOP trust

Amortization of restricted stock

––

––
465,480

121,253

––

––
5

––

––
423

2,192

––

471

56,749
––

––

Foreign currency translation loss –– ––

–– ––

––

––
––

––

––
––

––

––
––

––

125

471

56,749
428

2,193

125

(7,820) ––

(7,820)

Shares issued upon exercise of
stock options by employees,
including tax benefit of $2,758

591,245

9,041

––

9,047

Balance, December 30, 2000 41,946,284 419 373,413 225,029 (1,156) (18,179)

(466) 579,060

Net income

Shares issued to ESOP trust

Amortization of restricted stock

––

61,997

––

Foreign currency translation loss –– ––

2,224

––

125

87,373

2,225

125

––

–– –– (5,743) –– (5,743)

––

87,373

Shares issued upon exercise of
stock options by employees,
including tax benefit of $3,262

736,923

17,410

––

17,417

Balance, December 29, 2001 42,745,204 427 393,047

312,402

(1,156) (23,922) (341) 680,457

Net income

Shares issued to ESOP trust

Amortization of restricted stock

Accumulated comprehensive income:

Foreign currency translation gain

Net unrealized investment gain

Shares issued upon exercise of
stock options by employees,
including tax benefit of $8,058

––

24,859

––

117,987

1,340

––

18,989

139

––

125

––

117,987

1,340

125

18,989

139

1,271,528

42,167

––

42,180

Balance, December 28, 2002

44,041,591 $440

$436,554 $ 430,389

$(1,156) $ (4,794) $(216) $861,217

HENRY SCHEIN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)

Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash provided

by operating activities:

Depreciation and amortization

Provision for losses and allowances on trade and other

receivables

Stock issued to ESOP trust

December 28,
2002

Years ended

December 29,
2001

December 30,
2000

$117,987

$ 87,373

$56,749

28,272

35,642

33,762

4,271

1,340

7,988

2,225

7,165

2,193

Provision (benefit) for deferred income taxes 226 292 (1,335)

Undistributed (earnings) losses of affiliates

(659) (414)

Minority interest in net income of subsidiaries

Write-off of equipment, intangibles and other

Changes in operating assets and liabilities

(net of purchase acquisitions):

2,591

145

1,462

7,067

(Increase) decrease in accounts receivable (2,023)

3,194

(Increase) decrease in inventories (23,075) (17,850)

1,878

1,757

701

5,186

4,630

(Increase) decrease in other current assets (18,445) 8,808 (4,628)

Increase in accounts payable and accruals

Net cash provided by operating activities

Cash flows from investing activities:

24,039

134,669

55,124

190,911

44,936

152,994

Capital expenditures (47,543) (46,127) (29,743)

Business acquisitions, net of cash acquired

of $0, $228, and $0

(36,224) (8,588) (6,838)

Purchase of marketable securities with maturities of

more than three months

(55,211)

––

Other

(3,780) (355) (9,645)

Net cash used in investing activities

(142,758) (55,070) (46,226)

Cash flows from financing activities:

Proceeds from issuance of long-term debt

––

10,166

––

Principal payments on long-term debt (14,941) (13,042) (5,147)

Proceeds from issuance of stock upon exercise

of stock options by employees

Proceeds from borrowing from banks

34,122

3,061

14,155

1,988

6,283

9,714

Payments on borrowings from banks (2,667) (12,740) (89,047)

Other (892)

(156) 346

Net cash provided by (used in) financing activities 18,683

371 (77,851)

Net increase in cash and cash equivalents

10,594

136,212

Effect of exchange rate changes on cash and cash equivalents (3,310) (1,207)

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

193,367

$200,651

58,362

$193,367

28,917

3,426

26,019

$58,362

See accompanying notes to consolidated financial statements.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)

Note 1–Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Henry Schein, Inc. and all of its wholly- owned and majority-owned
subsidiaries (collectively the "Company"). Investments in unconsolidated affiliates, which are greater than or equal to 20% and less than
or equal to 50% owned, are accounted for under the equity method. All intercompany accounts and transactions are eliminated in
consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.

Fiscal Year

The Company reports its operations and cash flows on a 52-53 week basis ending on the last Saturday of December. The fiscal years
ended December 28, 2002 and December 29, 2001 consisted of 52 weeks. The fiscal year ended December 30, 2000 consisted of 53
weeks.

Revenue Recognition

Sales are recorded when products are shipped or services are rendered to customers, as the Company generally has no significant post
delivery obligations, the product price is fixed and determinable, collection of the resulting receivable is probable and product returns are
reasonably estimable. Revenues derived from post contract customer support for practice management software are deferred and
recognized ratably over the period in which the support is to be provided, generally one year. Revenues from freight charged to customers
are recognized when products are shipped. Provisions for discounts, rebates to customers, customer returns and other adjustments are
provided for in the period the related sales are recorded based on historical data.

Marketable Securities

Marketable securities held by the Company are classified as available-for-sale and are recorded at fair value. The fair value of
substantially all securities is determined by quoted market prices. Unrealized gains and losses, net of related taxes, are included as a
separate component of stockholders’ equity.

Accounts Receivable and Credit Policies

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects management’s best estimate of the amounts
that will not be collected. In addition to reviewing delinquent accounts receivable, management considers many factors in estimating its
general allowance, including historical data, experience, customer types, credit worthiness, and economic trends. From time to time,
management may adjust its assumptions for anticipated changes in any of those or other factors expected to affect collectability.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 1–Significant Accounting Policies (Continued)

Allowances for accounts receivable, comprised primarily of the allowance for doubtful accounts and the allowance for sales returns, were
$36,200 and $31,929 at December 28, 2002 and December 29, 2001, respectively.

Direct Shipping and Handling Costs

Freight and other direct shipping costs are included in "Cost of sales". Direct handling costs, which represent primarily direct
compensation costs of employees who pick, pack and otherwise prepare, if necessary, merchandise for shipment to the Company’s
customers are reflected in "Selling, general and administrative" expenses. These costs were approximately $23,200, $21,200, and
$17,700 for the years ended 2002, 2001, and 2000, respectively.

Advertising

The Company generally expenses advertising and promotional costs as incurred. Total advertising and promotional expenses were
approximately $13,900, $14,300, and $13,900 for fiscal years ended 2002, 2001, and 2000, respectively.

Inventories

Inventories consist substantially of finished goods and are valued at the lower of cost or market. Cost is determined primarily by the first-
in, first-out ("FIFO") method.

Property and Equipment and Depreciation and Amortization

Property and equipment are stated at cost. Depreciation is computed primarily under the straight-line method over the following estimated
useful lives:

Buildings and improvements

Machinery and warehouse equipment

Furniture, fixtures and other

Computer equipment and software

Years

5-10

3-10

3-8

Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the assets or the
lease term.

Capitalized software costs consist of costs to purchase and develop software. Costs incurred during the application development stage
for software bought and further customized by outside vendors for the Company’s use and software developed by a vendor for the
Company’s proprietary use have been capitalized. Costs incurred for the Company’s own personnel who are directly associated with
software development are also capitalized.

Taxes on Income

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax
returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of
changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or
expense in the period that includes the enactment date. The Company files a consolidated United States Federal income tax return with
its 80% or greater owned United States subsidiaries.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 1–Significant Accounting Policies (Continued)

Statement of Cash Flows

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments and other short-term investments
with an initial maturity of three months or less to be cash equivalents.

Foreign Currency Translation and Transactions

The financial position and results of operations of the Company’s foreign subsidiaries are determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year end. Income statement
accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of
differing exchange rates from period to period are included in the accumulated comprehensive loss account in stockholders’ equity.
Gains and losses resulting from foreign currency transactions are included in earnings.

Derivative Financial Instruments

On December 31, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("FAS 133"), as amended and interpreted, which requires that all derivative instruments be recorded
on the balance sheet at their fair value. The impact of adopting FAS 133 on the Company’s Statement of Income and Balance Sheet was
not material.

The Company uses derivatives to reduce its exposure to fluctuations in foreign currencies. Derivative products, specifically foreign
currency forward contracts, are used to hedge the foreign currency exposures underlying certain intercompany investments, debt and
interest, and certain forecasted transactions with foreign vendors. The Company does not enter such contracts for speculative purposes.

Most derivative instruments are designated as hedging instruments based on exposure being hedged. Increases or decreases in the
value of hedges (primarily related to intercompany debt of a long-term investment nature) are included in accumulated comprehensive
income or loss. Derivatives that are not hedges are adjusted to fair value through earnings.

The fair value of derivative contracts at December 28, 2002 and December 29, 2001 was immaterial. The amount of net gains and losses
during 2002 and 2001 was immaterial.

Acquisitions

The net assets of businesses purchased are recorded at their fair value at the acquisition date and the consolidated financial statements
include their operations from that date. Any excess of acquisition costs over the fair value of identifiable net assets acquired is included
in goodwill. Certain acquisitions provide for contingent consideration, primarily cash, to be paid in the event certain financial performance
targets are satisfied over future periods. The Company’s policy is to record a liability and adjust goodwill for such amounts when the
targets are met.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 1–Significant Accounting Policies (Continued)

Goodwill

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business
Combinations", ("FAS 141"), and No. 142, "Goodwill and Other Intangible Assets", ("FAS 142"), effective for fiscal years beginning after
December 15, 2001. Under the new standards, goodwill and intangible assets deemed to have indefinite lives are no longer amortized
but are subject to annual impairment tests in accordance with FAS 142. The Company estimates fair value of its reporting units in
accordance with the new standard and compares these valuations with the respective book values for each of the reporting units to
determine whether any goodwill impairment exists. The goodwill is substantially related to the Company’s healthcare distribution segment.
In determining fair value, the Company considers past, present and future expectations of performance. As required by FAS 142, the
Company will complete subsequent goodwill impairment tests at least annually. During the fourth quarter of 2002, the Company
completed the annual test using a methodology similar to the transitional test and determined that there was no impairment of goodwill
as of the first day of the fourth quarter.

Long-Lived Assets

Other intangible assets continue to be amortized over their estimated useful lives. The Company has reassessed the estimated useful
lives of its intangible assets, which primarily consist of non-compete agreements, and no changes have been deemed necessary.

Stock-Based Compensation

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock
options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share has been determined as if the Company and its acquired subsidiaries
had accounted for its employee stock options under the fair value method of Financial Accounting Standards Board Statement No. 123
"Accounting for Stock-Based Compensation", ("FAS 123"). The weighted average fair value of options granted during 2002, 2001, and
2000 was $25.13, $17.05, and $8.85, respectively. The fair value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for 2002, 2001, and 2000: risk-free interest rates of 4.8%
for 2002, 5.0% for 2001, and 6.3% for 2000; volatility factor of the expected market price of the Company’s Common Stock of 49.6% for
2002, 48.0% for 2001, and 45.1% for 2000, assumed dividend yield of 0% for all years and a weighted-average expected life of the option
of 10 years.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 1–Significant Accounting Policies (Continued)

Under the accounting provisions of FAS 123, the Company’s net income and net income per common share would have been
adjusted to the pro forma amounts indicated below:

Net income as reported

December 28,
2002

$117,987

Years ended

December 29,
2001

December 30,
2000

$87,373

$56,749

Deduct: Total stock-based employee
compensation expense determined under
fair value method

(9,340) (6,645) (8,119)

Pro forma net income

$108,647

$80,728

$48,630

Net income per common share - as reported:

Basic

Diluted

Net income per common share - pro forma:

Basic

Diluted

Earnings Per Share

2.71

2.63

2.50

$ 2.42

$ 2.06

$ 2.01

$ 1.91

$ 1.85

$ 1.38

$ 1.35

$ 1.18

$ 1.16

Basic earnings per share includes no dilution and is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per common share reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon exercise of stock options.

Comprehensive Income

Comprehensive income includes certain gains and losses that, under generally accepted accounting principles, are excluded from
net income as these amounts are recorded directly as an adjustment to stockholders’ equity. The Company’s comprehensive
income is comprised of net income, unrealized gains (losses) on marketable securities and foreign currency translation
adjustments.

Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying amount reported for long-term debt approximates fair value
because certain of the underlying instruments are at variable rates, which are repriced frequently. The remaining portion of long-
term debt approximates fair value because the interest approximates current market rates for financial instruments with similar
maturities and terms.

New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities", ("FAS 146"). This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)", ("EITF 94-3"). The principal difference between this Statement and EITF 94-3 relates to the Statement’s
requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability
for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability was
recognized at the date of an entity’s commitment to an exit plan. This Statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of FAS 146 to have a material impact on its financial
position or results of operations.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 1–Significant Accounting Policies (Continued)

New Accounting Pronouncements (Continued)

In September 2002, the EITF reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables", ("EITF 00-21"). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which
it will perform multiple revenue generating activities. Those arrangements could involve the delivery or performance of multiple
products, services, or rights to use assets, and the performance could occur at different points in time or over different periods of
time. The Issue addresses when and, if so, how a company should divide an arrangement involving multiple deliverables into
separate units of accounting. EITF 00-21 is effective for revenue arrangements entered into in fiscal years beginning after
December 15, 2002. The Company does not expect the adoption of EITF 00-21 to have a material impact on its financial position
or results of operations.

On December 31, 2002, the FASB amended the transition and disclosure requirements of FASB Statement No. 123, "Accounting
for Stock-Based Compensation", ("FAS 123"), through the issuance of FASB Statement No. 148, "Accounting for Stock-Based
Compensation—Transition and Disclosure", ("FAS 148"). FAS 148 amends the existing disclosures that a company should make in
its annual financial statements and requires, for the first time, disclosures in interim financial reports. Those disclosures are
required regardless of the method being used to account for stock-based employee compensation. The amended and new
disclosure requirements are effective for the Company for the fiscal year ending December 27, 2003. The adoption of the
disclosure requirements of FAS 148 will not have a material affect on the Company’s financial statements. As permitted under FAS
123, management applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25"),
and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the
Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense
is recognized.

In November 2002, the FASB issued FASB Interpretation No. 45, ("FIN 45"), "Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 addresses the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations under guarantees. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company
does not expect this Interpretation to have an effect on the consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46"), "Consolidation of Variable Interest Entities". FIN 46 clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for
variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the
provisions of FIN 46 are applicable no later than July 1, 2003. The Company does not expect this Interpretation to have an effect
on the consolidated financial statements.

Note 2–Earnings Per Share

A reconciliation of shares used in calculating basic and diluted earnings per common share follows:

Basic

Effect of assumed conversion of

employee stock options

Diluted

December 28,
2002

Years ended

December 29,
2001

December 30,
2000

43,489,229

42,366,048

41,243,600

1,382,965

44,872,194

1,179,061

43,545,109

763,409

42,007,009

Options to purchase approximately 30,000, 1,114,000, and 3,011,000, shares of common stock at prices ranging from $46.80 to
$54.00, $35.50 to $46.00, and $19.73 to $46.00 per share that were outstanding during 2002, 2001, and 2000, respectively, were
excluded from the computation of diluted earnings per common share for each of the respective years because the options’
exercise prices exceeded the fair market value of the Company’s common stock.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 3–Investments in Marketable Securities

Investments in available-for-sale securities at December 28, 2002 were as follows:

Debt Securities recorded at market,
maturing within one year

U.S. government and agency securities

Municipal securities

Corporate notes and bonds

Total short-term

Debt Securities recorded at market,
maturing between one and two years (1)

U.S. government and agency securities

Municipal securities

Corporate notes and bonds

Total long-term

Amortized
Cost

$ 7,517

14,512

9,106

31,135

15,911

1,000

7,000

23,911

Gross
Unrealized
Gain

$ 68

––

Fair
Market
Value

$ 7,585

14,516

9,108

31,209

15,975

1,000

7,001

23,976

Total investments in marketable securities

$55,046

$139

$55,185

(1) Investments maturing between one and two years are recorded in investments and other.

The Company determines cost on the specific identification basis. Proceeds from sales of available-for-sale securities were immaterial in
2002 and 2001. There were no material gains or losses on the sales of securities in 2002. The securities held on December 28, 2002 had
contractual maturities of up to two years. Expected maturities of debt securities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalty.

Note 4–Property and Equipment, Net

Major classes of property and equipment consist of the following:

Land

Buildings and leasehold improvements
Machinery and warehouse equipment
Furniture, fixtures and other
Computer equipment and software

Less accumulated depreciation and amortization

Net property and equipment

December 28,
2002

$ 7,061

62,724
27,165
25,737
121,364

244,051

101,519

$142,532

December 29,
2001

$ 3,540

52,257
24,016
27,096
101,894

208,803

90,823

$117,980

The net book value of equipment held under capital leases amounted to approximately $930 and $1,081 as of December 28, 2002 and
December 29, 2001, respectively (See Note 15(b)).

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(In thousands, except share data)

Note 5–Goodwill and Other Intangibles, Net

The Company completed the transitional goodwill impairment test required by FASB Statement No. 142, "Goodwill and Other Intangible
Assets", ("FAS 142"), in the second quarter of 2002. The Company estimated fair value of its reporting units in accordance with the new
standard and compared these valuations with the respective book values for each of the reporting units to determine whether any goodwill
impairment existed. In determining fair value, the Company considered past, present and future expectations of performance and
determined that there was no goodwill impairment in any of the Company’s reporting units as of the adoption date, December 30, 2001.

As required by FAS 142, the Company will complete subsequent goodwill impairment tests at least annually. During the fourth quarter of
2002, the Company completed the annual test using a methodology similar to the transitional test and determined that there was no
impairment of goodwill as of the first day of the fourth quarter.

The changes in the carrying amount of goodwill for the year ended December 28, 2002 are as follows:

Balance as of December 29, 2001

Adjustments to goodwill:
Acquisition costs incurred during the year

ended December 28, 2002

Foreign currency translation

Healthcare
Distribution

$279,666

10,486

12,442

Technology

$315

Total

$279,981

––

10,506

12,442

Other

(242) –– (242)

Balance as of December 28, 2002

$302,352

$335

$302,687

The acquisition costs incurred during the year ended December 28, 2002 related to contingent earnout payments relating to
acquisitions made in prior years, increased ownership interest in consolidated subsidiaries, and the acquisition of a dental consumable
supply business. The acquisition of the dental consumable supply business was not material.

With the adoption of FAS 142, the Company ceased amortization of goodwill as of December 30, 2001. The following table presents
the results of the Company for all periods presented on a comparable basis:

Net income

$117,987

$87,373

December 28,
2002

Years ended
December 29,
2001

December 30,
2000

$56,749

Add back goodwill amortization, net of

income tax provision

Adjusted net income

Diluted net income per common share:

––

$117,987

7,296

$94,669

6,993

$63,742

Net income

$ 2.63

$ 2.01

$ 1.35

Add back goodwill amortization, net of

income tax provision

––

Adjusted diluted net income per common share

$ 2.63

0.17

$ 2.18

0.17

$ 1.52

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 5–Goodwill and Other Intangibles, Net (Continued)

Other intangible assets as of December 28, 2002 and December 29, 2001 are as follows:

December 28,
2002

December 29,
2001

Cost

Accumulated Accumulated
Amortization
Amortization

Cost

Other intangible assets:

Non-compete agreements $10,826 $ (3,549)
$(2,850)
Other 986 (602) 945 (498)
Total $11,812 $ (4,151) $11,371 $(3,348)

$10,426

Amortization of other intangible assets for the years ended December 28, 2002 and December 29, 2001 was approximately $1,085 and
$1,300, respectively. The annual amortization expense expected for the years 2003 through 2007 is $763, $626, $485, $285, and $268,
respectively.

Note 6–Investments and Other

Investments and other consist of the following:

2002

Long-term notes receivables (1)
Investments in long-term marketable securities
Investment in unconsolidated affiliates (2)

Other

December 28,
2001

December 29,

$39,566
23,976
4,728

9,373

$77,643

$41,214

––

4,201

7,058

$52,473

(1) Long-term notes receivable carry interest rates ranging from 2.8% to 12.0% and are due in varying installments through 2020. Long-
term notes receivables include various notes due arising from the sale of certain businesses of approximately $22,532 in 2002 and
$22,251 in 2001.

(2) The Company’s investment as of December 28, 2002 and December 29, 2001, is a 50% interest in an unconsolidated affiliate, which

is involved in the healthcare distribution business.

Note 7–Business Acquisitions

During the year ended December 28, 2002, the Company completed the acquisition of one healthcare distribution business and
purchased additional interest in three consolidated subsidiaries in Europe. These purchases were not considered material either
individually or in the aggregate.

During the year ended December 29, 2001, the Company completed the acquisition of two healthcare distribution businesses, which
included the purchase of the remaining 50% interest of an affiliate. Neither of these purchases was considered material either individually
or in the aggregate. The two transactions were accounted for under the purchase method of accounting and have been included in the
consolidated financial statements from their respective acquisition dates.

In 2000, the Company completed the acquisition of two healthcare distribution businesses and one technology business, none of which
were considered material either individually or in the aggregate. Of the three completed acquisitions, two were accounted for under the
purchase method of accounting and the remaining acquisition was accounted for under the pooling of interests method of accounting.
The Company issued 465,480 shares of its Common Stock, with an aggregate value of approximately $7,900 in connection with the
pooling transaction. The transactions completed under the purchase method of accounting have been included in the consolidated
financial statements from their respective acquisition dates. The pooling transaction was not material and accordingly, prior period
financial statements have not been restated. Results of the acquired company have been included in the consolidated financial
statements from the beginning of the second quarter of 2000.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(In thousands, except share data)

Note 7–Business Acquisitions (Continued)

Summarized unaudited pro forma results of operations for the acquisitions completed during fiscal 2002, 2001 and 2000, which
were accounted for under the purchase method of accounting, are not presented as the impact of reflecting the Company’s results
of operations, which assumed the acquisitions occurred as of the beginning of the fiscal period, is not material.

During the fourth quarter of 2002, the Company revised some of its estimates of the merger and integration expenses from prior
years. These changes in estimates were attributable to facts and circumstances that arose subsequent to the original charges.

Merger and integration (credits) and costs were as follows:

December 28,

December 29,

December 30,

Years ended

2002

Direct transaction / merger (credits) costs (1) $(1,469)

Integration costs (credits):

Severance and other direct costs
Costs associated with the closure of

distribution centers (2)

257
Long-lived asset write-off and impairment (16)

Total integration costs

306

2001

$ ––

––

––
––

––

2000

$585

––

––
––

––

Total merger and integration (credits) costs $(1,163)

$ ––

$585

(1) Primarily investment banking and professional fees (primarily legal fees resulting from the acquisition).

(2) Primarily rent and consulting fees.

The following table shows the activity in the merger and integration accruals:

Balance at
Beginning
of Year

Provision

Payments

Adjustments
to Reflect
Actual Cost

Balance at
End of
Year

Year ended December 30, 2000:

Severance and other direct costs

$ 1,694 $ –– $ (947)

$ ––

$ 747

Direct transaction and other

integration costs 8,399 585 (4,844) –– 4,140

$10,093 $585 $ (5,791) $ ––

$4,887

Year ended December 29, 2001:

Severance and other direct costs $ 747 $ ––

$ (382) $ ––

$ 365

Direct transaction and other

integration costs 4,140 ––

(1,957) –– 2,183

$ 4,887 $ –– $ (2,339)

$ ––

$2,548

Year ended December 28, 2002:

Severance and other direct costs $ 365 $ –– $ (164) $ 65

$ 266

Direct transaction and other

integration costs 2,183 –– (667) (1,228)

288

$ 2,548 $ –– $

(831) $ (1,163)

$ 554

As a result of the acquisitions and integration of certain businesses into the Company’s infrastructure, 870 employees were
terminated through December 25, 1999. Of the terminated employees, 206 received severance during 1999, 37 received
severance during 2000, 11 received severance during 2001, one received severance during 2002, and one was owed severance
at December 28, 2002.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 8–Plan of Restructuring

On August 1, 2000, the Company announced a comprehensive restructuring plan designed to improve customer service and increase
profitability by maximizing the efficiency of the Company's infrastructure. In addition to closing or downsizing certain facilities, this
worldwide initiative included the elimination of approximately 300 positions, including open positions, or about 5% of the total workforce,
throughout all levels within the organization.

For the year ended December 30, 2000, the Company incurred one-time restructuring costs of approximately $14,439 ($9,270 after taxes),
consisting of employee severance pay and benefits, facility closing costs, representing primarily lease termination and asset write-off
costs, and outside professional and consulting fees directly related to the restructuring plan.

During the fourth quarter of 2002, the Company revised some of the original estimates of its anticipated restructuring expenses. These
changes in estimates are attributable to facts and circumstances that arose subsequent to the original charges. As a result, the Company
recorded additional expenses.

The following table shows amounts expensed and paid in 2002 for restructuring costs that were initially incurred and accrued in 2000:

Balance at
December 29,
2001

Payments

Adjustments to
Reflect Actual
Cost

Balance at
December 28,
2002

Severance costs (1) $ 633 $ (446)
Facility closing costs (2) 2,645 (812)
Other professional and consulting costs

$3,319 $(1,258)

$105
317
7

$429

$ 292
2,150
48

$2,490

(1) Represents salaries and related benefits for employees separated from the Company.

(2) Represents costs associated with the closing of certain equipment branches (primarily lease termination costs) and property

and equipment write-offs.

For the year ended December 30, 2000, 284 employees separated from the Company and received severance payments in 2000. These
employees were from nearly all functional areas of the Company’s operations.

The Company paid severance to 104 of these employees during 2001, and to six of these employees during 2002. At December 28,
2002, one employee was owed severance pay and benefits related to the restructuring plan.

Note 9–Bank Credit Lines

At December 28, 2002, certain subsidiaries of the Company had available various short-term bank credit lines totaling approximately
$28,209, expiring through January 2004. Borrowings of $4,790 under these credit lines, bear interest rates ranging from 3.65% to 6.50%,
and were collateralized by accounts receivable, inventory and property and equipment with an aggregate net book value of $88,504 at
December 28, 2002.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 10–Long-Term Debt

Long-term debt consists of:

Years ended

December 28,

December 29,

Private Placement Loans (a)
Borrowings under Revolving Credit Agreement (b)
Notes payable to banks, interest at 4.15% to 6.94%,

payable in quarterly installments ranging from $43 to $74
through 2019, semi-annual installments of $452 paid through
2002 and a lump sum payment of $5,423 which was repaid
on January 1, 2002

Various loans payable with interest, in varying
installments through 2004, uncollateralized

Note payable, interest payable quarterly

at 5.28% plus a margin; repaid on January 1, 2002 .
Capital lease obligations in various installments through
fiscal 2010; interest at 6.4% to 11.2% or varies with
prime rate (see Note 15 (b))

Total
Less current maturities

Total long-term debt

2002

$ 230,000
––

11,667

1,509

––

2,047

245,223
2,662

$ 242,561

2001

$ 230,000
––

21,091

2,517

1,644

2,140

257,392
15,223

$ 242,169

As of December 28, 2002, the aggregate amounts of long-term debt maturing in each of the next five years are as follows:
2003 - $2,662; 2004 - $1,672; 2005 - $859; 2006 - $20,753; 2007 - $20,520.

(a) Private Placement Loans

On June 30, 1999 and September 25, 1998, the Company completed private placement transactions under which it issued $130,000 and
$100,000, respectively, in Senior Notes. The $130,000 notes come due on June 30, 2009 and bear interest at a rate of 6.94% per annum.
Principal payments on the $100,000 notes totaling $20,000 are due annually starting September 25, 2006 and bear interest at a rate of
6.66% per annum. Interest on both notes is payable semi-annually.

The agreements governing our Senior Notes provide, among other things, that the Company will maintain, on a consolidated basis,
leverage and priority debt ratios and a minimum net worth. The agreements also contain restrictions relating to transactions with affiliates,
annual dividends, mergers and acquisitions, and liens.

(b) Revolving Credit Agreement

On May 2, 2002, the Company renewed and increased its revolving credit facility to $200,000 from $150,000, extending the term to 2006.
The interest rate on any borrowings under the agreement is based on LIBOR, or prime, as defined in the agreement, which were 1.48%,
and 4.25%, respectively, at December 28, 2002. There were no borrowings outstanding at December 28, 2002. The agreement provides,
among other things, that the Company will maintain, on a consolidated basis, as defined, interest coverage ratios, a maximum leverage
ratio, and contains restrictions relating to annual dividends in excess of $25,000, guarantees of subsidiary debt, investments in
subsidiaries, mergers and acquisitions, liens, certain changes in ownership and employee and shareholder loans.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 11–Taxes on Income

Taxes on income are based on income before taxes on income, minority interest and equity in earnings (losses) of affiliates as follows:

December 28, 2002

December 29, 2001

December 30, 2000

Years ended

Domestic

$186,134

$140,675

$102,777

Foreign 4,295 (324) (6,243)

Total

$190,429

$140,351

$ 96,534

The provision (benefit) for taxes on income was as follows:

Current tax expense:

U.S. Federal

State and local

Foreign

Total current

Deferred tax expense (benefit):

December 28, 2002

December 29, 2001

December 30, 2000

Years ended

$ 59,254

$ 46,225

$ 33,989

9,223

1,807

70,284

3,806

1,607

51,638

2,882

614

37,485

U.S. Federal (1,196) (162) (1,046)

State and local (151) 234 90

Foreign 1,573 220 (379)

Total deferred 226 292 (1,335)

Total provision

$ 70,510

$ 51,930

$ 36,150

The tax effects of temporary differences that give rise to the Company’s deferred tax asset (liability) are as follows:

Current deferred tax assets:

Inventory, premium coupon redemptions and accounts receivable

valuation allowances

Uniform capitalization adjustments to inventories

Other accrued liabilities

Total current deferred tax asset

Non-current deferred tax asset (liability):

Years ended

December 28, 2002

December 29, 2001

$18,991

3,473

7,455

29,919

$14,433

3,578

7,740

25,751

Property and equipment

(14,590)

(12,402)

Provision for other long-term liabilities

(17,723) (5,198)

Net operating loss carryforward

Net operating losses of foreign subsidiaries

1,318

11,221

150

2,697

Total non-current deferred tax liability (19,774) (14,753)

Valuation allowance for non-current deferred tax assets (1) (1,842) (1,850)

Net non-current deferred tax liability

(21,616) (16,603)

Net deferred tax asset

$ 8,303

$ 9,148

(1) Primarily relates to operating losses of foreign subsidiaries.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 11–Taxes on Income (Continued)

The net deferred tax asset is realizable as the Company has sufficient taxable income in prior years to realize the tax benefit for
deductible temporary differences. The non-current deferred tax liability is included in "Other liabilities" on the Consolidated Balance
Sheets.

At December 28, 2002, the Company has domestic unconsolidated net operating loss carryforwards of $3,340, which are available to
offset future Federal taxable income through 2022. Foreign net operating losses totaled $32,915 at December 28, 2002. Such losses can
be utilized against future foreign income. Of these foreign net operating losses, $545 expire in 2006, whereas the remaining have an
indefinite life.

The tax provisions differ from the amount computed using the Federal statutory income tax rate as follows:

2002

Provision at Federal statutory rate

State income taxes, net of Federal income tax effect

December 28,
2001

$66,652

5,897

Other (2,039)

Income tax provision

$70,510

Years ended

December 29,
2000

$49,122

2,626

182

$51,930

December 30,

$33,785

1,874

491

$36,150

Provision has not been made for U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries, which have been and
will continue to be reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign
earnings were loaned to the Company or a U.S. affiliate, or if the Company should sell its stock in the foreign subsidiaries. It is not
practicable to determine the amount of additional tax, if any, that might be payable on the foreign earnings; however, the Company
believes that foreign tax credits would substantially offset any U.S. tax. At December 28, 2002, the cumulative amount of reinvested
earnings was approximately $9,510.

Note 12–Financial Instruments and Credit Risk Concentrations

(a) Financial Instruments

To reduce its exposure to fluctuations in foreign currencies, the Company is party to foreign currency forward contracts with
major financial institutions, which are used to hedge the foreign currency market exposures underlying certain intercompany debt and
certain forecasted transactions with foreign vendors.

As of December 28, 2002, the Company had outstanding foreign currency forward contracts aggregating $78,012, of which,
$73,633 related to intercompany debt and $4,379 related to the purchase and sale of merchandise from foreign vendors. The contracts
hedge against currency fluctuations of British Pounds ($38,132), Euros ($34,916), Australian Dollars ($3,854), Swiss Francs ($794),
Japanese Yen ($234), and New Zealand Dollars ($82). As of December 28, 2002, the fair value of these contracts, which are determined
by quoted market prices and expire through January 2004, was not material. For the year ended December 28, 2002, the Company
recognized an immaterial loss relating to its foreign currency forward contracts.

While the Company is exposed to credit loss in the event of non-performance by the counter parties of these contracts, the
Company does not anticipate non-performance by the counter parties. The Company does not require collateral or other security to
support these financial instruments.

(b) Concentrations of Credit Risk

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily
of trade receivables and short-term cash investments. The Company places its short-term cash investments with high credit quality
financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with
respect to trade receivables are limited due to a large customer base and its dispersion across different types of healthcare professionals
and geographic areas. The Company maintains an allowance for doubtful accounts based on the expected collectability of all accounts
receivable.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 13–Segment and Geographic Data

The Company has two reportable segments: healthcare distribution and technology. The healthcare distribution segment, which is
comprised of the Company’s dental, medical, and international business groups, distributes healthcare products (primarily consumable)
and services to office-based healthcare practitioners and professionals in the combined United States, Canada, and international markets.
Products, which are similar for each business group, are maintained and distributed from strategically located distribution centers. The
technology segment consists primarily of the Company’s practice management software business and certain other value-added products
and services that are distributed primarily to healthcare professionals in the United States and Canada.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The
Company evaluates segment performance based primarily on operating income.

The Company’s reportable operations are strategic business units that offer different products and services to the same customer base.
Most of the technology business was acquired as a unit, and the management at the time of acquisition was retained. The following table
presents information about the Company’s business segments:

Net Sales:

Healthcare distribution (2):

Dental

Medical

International (3)

Total healthcare distribution

Technology (4)

Total

December 28,

2002

$1,227,273

1,093,956

437,046

2,758,275

66,726

$2,825,001

Years ended

December 29,

2001 (1)

December 30,

2000 (1)

$1,121,394

$1,087,073

982,569

398,071

2,502,034

56,209

$2,558,243

851,301

389,946

2,328,320

53,401

$2,381,721

(1) Reclassified to conform to current period presentation.

(2) Consists of consumable products, small equipment, laboratory products, large dental equipment, branded and generic

pharmaceuticals, surgical products, diagnostic tests, infection control and vitamins.

(3) Consists of products sold in Dental, Medical and Veterinary markets, primarily in Europe.

(4) Consists of practice management software and other value-added products and services, which are distributed primarily to healthcare

professionals in the United States and Canada.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 13–Segment and Geographic Data (Continued)

Operating Income:

Healthcare distribution (includes merger and integration and

restructuring (credits) costs of $(734), $0, and $14,666, respectively)

$170,987

$128,337

$ 92,278

Years ended

December 28,

December 29,

December 30,

2002

2001 (1)

2000 (1)

26,016

19,413

$197,003

$147,750

20,311

$112,589

$ 10,354

$ 9,565

$ 5,345

4,022

2,494

4,199

$ 14,376

$ 12,059

$ 9,544

$ 18,012

$ 18,814

$ 22,939

3,878

491

735

$ 21,890

$ 19,305

$ 23,674

$ 25,978

$ 34,412

$ 32,756

2,294

1,230

1,006

$ 28,272

$ 35,642

$ 33,762

$ 46,641

$ 45,428

$ 28,358

902

699

1,385

$ 47,543

$ 46,127

$ 29,743

December 28,

December 29,

December 30,

2002

2001 (1)

2000 (1)

$1,533,529

$1,369,241

$1,202,331

106,319

75,030

82,825

$1,639,848

$1,444,271

$1,285,156

Technology (includes merger and integration and restructuring

costs of $0, $0, and $358, respectively)

Total

Interest Income:

Healthcare distribution

Technology

Total

Interest Expense:

Healthcare distribution

Technology

Total

Depreciation and Amortization:

Healthcare distribution

Technology

Total

Capital Expenditures:

Healthcare distribution

Technology

Total

Total Assets:

Healthcare distribution

Technology

Total

(1) Reclassified to conform to current period presentation.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 13–Segment and Geographic Data (Continued)

The following table reconciles segment totals to consolidated totals as of, and for the years ended December 28, 2002, December 29,
2001, and December 30, 2000:

2002

2001 (1)

2000 (1)

Total Assets:

Total assets for reportable segments

$1,639,848

$1,444,271

$1,285,156

Receivables due from healthcare distribution segment (80,855) (57,685) (46,494)

Receivables due from technology segment (941) (1,158) (7,594)

Consolidated total assets

$1,558,052

$1,385,428

$1,231,068

Interest Income:

Total interest income for reportable segments

$ 14,376

$ 12,059

$ 9,544

Interest on receivables due from healthcare distribution segment (3,878) (1,737) (2,887)

Interest on receivables due from technology segment (52) (244) (378)

Total consolidated interest income

$ 10,446

$ 10,078

$ 6,279

Interest Expense:

Total interest expense for reportable segments

$ 21,890

$ 19,305

$ 23,674

Interest on payables due to healthcare distribution segment (52) (244) (378)

Interest on payables due to technology segment (3,878) (1,737) (2,887)

Total consolidated interest expense

$ 17,960

$ 17,324

$ 20,409

(1) Reclassified to conform to current period presentation.

The following table presents information about the Company by geographic area as of, and for the years ended December 28, 2002,
December 29, 2001, and December 30, 2000. Revenues by geographic area are based on the respective locations of the Company’s
subsidiaries. No individual country, except for the United States, generated net sales greater than 10% of consolidated net sales. There
were no material amounts of sales or transfers among geographic areas and there were no material amounts of United States export sales.

2002 2001 2000

Long-Lived

Net Sales

Assets

Net Sales

Assets

Net Sales

Assets

United States and Canada

$2,403,734

$322,315

$2,179,645

$296,858

$2,010,398

$271,188

Europe and other

421,267

130,565

378,598

109,126

371,323

115,493

Consolidated Total

$2,825,001

$452,880

$2,558,243

$405,984

$2,381,721

$386,681

The
Company’s subsidiary located in Germany had long-lived assets of $85,230, $71,825, and $77,995 at December 28, 2002, December
29, 2001, and December 30, 2000, respectively

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 14–Stockholders’ Equity

(a) Common Stock Purchase Rights

On November 30, 1998, the Company’s Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"), and declared a dividend
under the Rights Plan of one Common Stock purchase right (a "Right") on each outstanding share of the Company’s Common Stock. Until
the occurrence of certain events, each share of Common Stock that is issued will also have a Right attached to it. The Rights provide, in
substance, that should any person or group acquire 15% or more of the outstanding Common Stock of the Company after the date of
adoption of the Rights Plan, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a
certain number of shares of Common Stock for 50% of the then-current market value of the Common Stock. Unless a 15% acquisition has
occurred, the Company may redeem the Rights at any time prior to the termination date of the Rights Plan. This Right to purchase the
Common Stock at a discount will not be triggered by a person’s or group’s acquisition of 15% or more of the Common Stock pursuant to
a tender or exchange offer which is for all outstanding shares at a price and on terms that the Board of Directors determines (prior to
acquisition) to be adequate and in the stockholders’ best interests. In addition, the Right will not be triggered by the positions of existing
shareholders.

Certain business combinations with an acquiring person or its affiliates will trigger an additional feature of the Rights. Each Right, other
than Rights held by the acquiring person or group, will entitle its holder to purchase a certain number of shares of the Common Stock of
the acquiring person at a price equal to 50% of the market value of such shares at the time of exercise. Initially, the Rights will be attached
to, and trade with, the certificates representing the Company’s outstanding shares of Common Stock and no separate certificates
representing the Rights will be distributed. The Rights will become exercisable only if a person or group acquires, or commences a tender
or exchange offer for, 15% or more of the Company’s Common Stock.

The Board of Directors may, at its option, redeem all but not less than all of the then outstanding Rights at a redemption price of $0.01 per
Right at any time prior to the earlier of (a) any person or group acquiring 15% or more of the Company’s Common Stock or (b) the final
expiration date of November 30, 2008.

(b) Stock Options

The Company established the 1994 Stock Option Plan (the "Plan") for the benefit of certain employees. As amended in June 2001,
pursuant to this plan the Company may issue up to approximately 4,445,000 shares of its Common Stock. The Plan provides for two
classes of options: Class A options and Class B options. A maximum of 237,897 shares of Common Stock may be covered by Class A
options. Both incentive and non-qualified stock options may be issued under the Plan.

In 1995, Class A options to acquire 237,897 common shares were issued to certain executive management at an exercise price of $4.21
per share, substantially all of which became exercisable upon the closing of the Company’s initial public offering which was on November
3, 1995. The exercise price of all Class B options issued has been equal to the market price on the date of grant, and accordingly, no
compensation cost has been recognized. Substantially all Class B options become exercisable up to the tenth anniversary of the date of
issuance, subject to acceleration upon termination of employment.

On May 8, 1996, the Company’s stockholders approved the 1996 Non-Employee Director Stock Option Plan. As amended in June 2002,
pursuant to this plan the Company may grant options to each director who is not also an officer or employee of the Company, for up to
100,000 shares of the Company’s Common Stock. The exercise price and term, not to exceed 10 years, of each option is determined by
the plan committee at the time of the grant. During 2002, 2001, and 2000, 40,000, 12,000, and 0, options, respectively, were granted to
certain non-employee directors at exercise prices, which were equal to the market price on the date of grant.

Additionally, in 1997 as a result of the Company’s acquisition of Sullivan Dental Products, Inc. and Micro Bio-Medics, Inc., the Company
assumed their respective stock option plans (the "Assumed Plans"). Options granted under the Assumed Plans of 1,218,000 and
1,117,000, respectively, are exercisable for up to ten years from the date of grant at prices not less than the fair market value of the
respective acquirees’ common stock at the date of grant, on a converted basis.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 14–Stockholders’ Equity (Continued)

(b) Stock Options (Continued)

A summary of the status of the Company’s two fixed stock option plans and the Assumed Plans, and the related transactions is presented
below:

2002

December 28,
2001

Years ended

December 29,
2000

December 30,

Weighted
Average
Exercise
Price

Outstanding at beginning of year

4,646,271

$26.04

4,650,722

$24.59

5,439,340

$23.53

Granted

1,017,850

41.37

883,600

28.73

93,500

14.77

Exercised

(1,271,528) 26.69 (736,923) 19.21 (591,245) 11.00

Forfeited (111,168) 37.56 (151,128) 30.26 (290,873) 29.39

Outstanding at end of year

4,281,425

$29.20

4,646,271

$26.04

4,650,722

$24.59

Options exercisable at year end

3,183,593

$26.44

3,722,164

$26.53

3,708,213

$25.98

The following table summarizes information about stock options outstanding at December 28, 2002:

Options Outstanding

Options Exercisable

Weighted
Average
Remaining
Contractual
Life

5.9

7.2

5.4

9.2

7.0

Number
Outstanding

1,048,688

1,306,176

921,209

1,005,352

4,281,425

Weighted
Average
Exercise Price

Number
Exercisable

Weighted
Average
Exercise Price

$13.14

$26.68

$37.73

$41.40

$29.20

1,033,731

974,294

910,563

265,005

3,183,593

$13.11

$26.01

$37.76

$41.16

$26.44

Range of Exercise Prices

$4.21 to $20.16

$21.50 to $28.63

$29.00 to $40.63

$40.82 to $54.00

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 14–Stockholders’ Equity (Continued)

Employee Stock Ownership Plan (ESOP)

In 1994, the Company established an ESOP and a related trust as a benefit for substantially all of its domestic employees. This
plan supplements the Company’s Profit Sharing Plan, whereby a percentage, as defined, of the profit sharing allocation granted to
eligible employees is provided in shares of the Company's Common Stock. Charges to operations related to this plan were $2,656,
$2,378, and $2,537 for 2002, 2001, and 2000, respectively, based on the prevailing market price of the Company’s Common Stock
on the date of issuance. Under this plan, the Company issued 24,859, 61,997, and 121,253 shares of the Company’s Common
Stock to the trust in 2002, 2001, and 2000, to satisfy the 2001, 2000, and 1999 contribution, respectively. The Company expects
to fund the 2002 accrued contribution in 2003 with shares of the Company’s Common Stock. As of April 1, 1998, the Company’s
ESOP was merged into its 401(k) plan. Shares of the Company’s Common Stock are held in trust by the 401(k) plan.

Profit Sharing Plan

Prior to April 1, 1998, the Company had qualified contributory and non-contributory 401(k) and profit sharing plans, respectively,
for eligible employees. As of April 1, 1998, the Company’s profit sharing plan was merged into its 401(k) plan. Assets of the profit
sharing plan are now held in self-directed accounts within the 401(k) plan. Contributions to the plans were determined by the
Board of Directors and charged to operations during 2002, 2001, and 2000 amounted to $5,341, $4,099, and $7,305, respectively.

The Company provides a matching 401(k) contribution of up to 100% of the participants’ contributions for up to the first 7% of the
employees’ base compensation. Forfeitures attributable to participants who leave the Company before becoming fully vested are
used by the Company to reduce the matching contribution.

Supplemental Executive Retirement Plan

In 1994, the Company instituted an unfunded non-qualified supplemental executive retirement plan for eligible employees. The
increases in plan value that were charged to operations, were $707, $426, and $360 for 2002, 2001, and 2000, respectively.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 15–Commitments and Contingencies

(a) Operating Leases

The Company leases facilities and equipment under non-cancelable operating leases expiring through 2016. Management expects that
in the normal course of business, leases will be renewed or replaced by other leases.

Future minimum annual rental payments under the non-cancelable leases at December 28, 2002 are as follows:

2003

2004

2005

2006

2007

Thereafter

Total minimum lease payments

$ 23,065

19,995

16,237

12,415

10,654

29,671

$112,037

Total rental expense for 2002, 2001, and 2000 was $25,837, $26,085, and $29,730, respectively.

(b) Capital Leases

The Company leases certain equipment under capital leases. The following is a schedule of approximate future minimum annual lease
payments under the capitalized leases together with the present value of the net minimum lease payments at December 28, 2002:

2003
2004
2005
2006
2007
Thereafter

Total minimum lease payments

Less: Amount representing interest at 6.4% to 11.2%

$ 639
563
260
202
179
510

2,353

(306)

$2,047

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(In thousands, except share data)

Note 15–Commitments and Contingencies (Continued)

The Company’s business involves a risk of product liability claims and other claims in the ordinary course of business, and from time to
time the Company is named as a defendant in cases as a result of its distribution of pharmaceutical and other healthcare products. As
of December 28, 2002, the Company was named a defendant in approximately 57 product liability cases. Of these claims, 47 involve
claims made by healthcare workers who claim allergic reaction relating to exposure to latex gloves. In each of these cases, the Company
acted as a distributor of both brand name and Henry Schein® private brand latex gloves, which were manufactured by third parties. To
date, discovery in these cases has generally been limited to product identification issues. The manufacturers in these cases have withheld
indemnification of the Company pending product identification; however, the Company is taking steps to implead those manufacturers
into each case in which the Company is a defendant.

On January 27, 1998, in District Court in Travis County, Texas, the Company and one of its subsidiaries were named as defendants in a
matter entitled “Shelly E. Stromboe and Jeanne Taylor, on Behalf of Themselves and all others Similarly Situated vs. Henry Schein, Inc.,
Easy Dental Systems, Inc. and Dentisoft, Inc.”, Case No. 98-00886. The Petition alleges, among other things, negligence, breach of
contract, fraud, and violations of certain Texas commercial statutes involving the sale of certain practice management software products
sold prior to 1998 under the Easy Dental® name. In October 1999, the trial court, on motion, certified both a Windows® sub-class and a
DOS sub-class to proceed as a class action pursuant to Tex. R. Civ. P. 42. It is estimated that 5,000 Windows® customers and 10,000
DOS customers were covered by the class action that was certified by the trial court. In November of 1999, the Company filed an
interlocutory appeal of the trial court’s determination to the Texas Court of Appeals on the issue of whether this case was properly certified
as a class action. On September 14, 2000, the Court of Appeals affirmed the trial court’s certification order. On January 5, 2001, the
Company filed a Petition for Review in the Texas Supreme Court asking the Court to find that it had “conflicts jurisdiction” to permit review
of the trial court’s certification order. The Texas Supreme Court heard oral argument on February 6, 2002. On October 31, 2002, the Texas
Supreme Court issued an opinion in the case holding that it had conflicts jurisdiction to review the decision of the Court of Appeals and
finding that the trial court’s certification of the case as a class action was improper. The Supreme Court further held that the judgment of
the court of appeals which affirmed the class certification order must be reversed in its entirety. Upon reversal of the class certification
order, the Supreme Court remanded the case to the trial court for further proceedings consistent with its opinion. On January 31, 2003,
counsel for the class filed a Motion for Rehearing with the Texas Supreme Court seeking a reversal for the Supreme Court’s earlier opinion
reversing the class certification order. The Motion for Rehearing has not yet been ruled upon and remains pending before the Texas
Supreme Court. Because the Texas Supreme Court has not yet ruled upon the Motion for Rehearing and because this matter has not yet
come before the trial court for consideration consistent with the Texas Supreme Court’s opinion reversing the trial court’s certification order,
it is not possible to determine what the trial court will do if the plaintiffs file another motion for class certification. Further, because of the
decertification of the class by the Texas Supreme Court, the pending Motion for Rehearing before the Texas Supreme Court and other
factors, it is not possible to determine whether the trial court will certify a different class upon motion, if any, and other factors, it is not
possible to determine the possible range of damages or other relief sought by the plaintiffs in the trial court.

In February 2002, the Company was served with a summons and complaint in an action commenced in the Superior Court of New Jersey,
Law Division, Morris County, entitled “West Morris Pediatrics, P.A. vs. Henry Schein, Inc., doing business as Caligor”, Case No. MRSL-
421-02. The complaint by West Morris Pediatrics purports to be on behalf of a nationwide class, but there has been no court determination
that the case may proceed as a class action. Plaintiff seeks to represent a class of all physicians, hospitals and other healthcare providers
throughout New Jersey and across the United States. This complaint, as amended in August 2002, alleges, among other things, breach
of oral contract, breach of implied covenant of good faith and fair dealing, violation of the New Jersey Consumer Fraud Act, unjust
enrichment, conversion, and promissory estoppel relating to sales of a vaccine product in the year 2001. The Company filed an answer
in October 2002. Because damages have not been specified by the plaintiffs, it is not possible to determine the range of damages or
other relief sought by the plaintiffs. The Company intends to vigorously defend itself against this claim, as well as all other claims, suits
and complaints.

The Company has various insurance policies, including product liability insurance, covering risks and in amounts it considers adequate.
In many cases in which the Company has been sued in connection with products manufactured by others, the Company is provided
indemnification by the manufacturer. There can be no assurance that the coverage maintained by the Company is sufficient or will be
available in adequate amounts or at a reasonable cost, or that indemnification agreements will provide adequate protection for the
Company. In the opinion of the Company, all pending matters are covered by insurance or will not otherwise seriously harm the Company’s
financial condition.

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(In thousands, except share data)

Note 15–Commitments and Contingencies (Continued)

(d) Employment, Consulting and Non-compete Agreements

The Company has employment, consulting and non-compete agreements expiring through 2007 (except for a lifetime consulting
agreement with a principal stockholder, which provides for current compensation of $308 per year, increasing $25 every fifth year with the
next increase in 2007). The agreements provide for varying base aggregate annual payments of approximately $3,988 per year, which
decrease periodically to approximately $1,441 per year. In addition, some agreements have provisions for incentive and additional
compensation.

Note 16–Supplemental Cash Flow Information

Cash paid for interest expense and income taxes amounted to the following:

December 28, 2002

December 29, 2001

December 30, 2000

Years ended

Interest expense

Income taxes

$17,217

$63,196

$17,541

$37,222

$19,810

$28,219

The fair value of assets acquired through business acquisitions is indicated in the following table:

December 28, 2002

December 29, 2001

December 30, 2000

Years ended

Fair value of assets

acquired, excluding cash

$36,224

$10,074

$6,838

Less: Liabilities assumed

and created upon acquisition –– (1,486) ––

Net cash paid

$36,224

$ 8,588

$6,838

HENRY SCHEIN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In thousands, except share data)

Note 17–Quarterly Information (Unaudited)

The following presents certain unaudited quarterly financial data:

Net Sales

Gross profit

Operating income

Net income

Net income per common share:

Basic

Diluted

Net Sales

Gross profit

Operating income

Net income

Net income per common share:

Basic

Diluted

March 30,
2002

$647,093

178,390

35,198

19,730

$ 0.46

$ 0.45

March 31,
2001

$ 593,895

159,357

27,583

14,132

$ 0.34

$ 0.33

Quarters ended

June 29,
2002

$671,432

192,396

46,989

28,066

$ 0.65

$ 0.63

September 28,
2002

December 28,
2002

$759,073

216,472

64,285

39,228

$ 0.90

$ 0.87

$747,403

207,646

50,531

30,963

0.70

$ 0.69

Quarters ended

June 30,
2001

$ 606,285

166,892

35,272

20,910

$ 0.49

$ 0.48

September 29,
2001

December 29,
2001

$659,774

178,856

41,875

25,195

$ 0.59

$ 0.58

$ 698,289

194,219

43,020

27,136

0.64

0.62

The Company’s business is subject to seasonal and other quarterly influences. Net sales and operating profits are generally higher in the
fourth quarter due to the timing of sales of software and equipment, year end promotions and purchasing patterns of office-based
healthcare practitioners, and are generally lower in the first quarter due primarily to the increased purchases in the prior quarter. Quarterly
results also may be materially affected by a variety of other factors, including the timing of acquisitions and related costs, timing of
purchases, special promotional campaigns, fluctuations in exchange rates associated with international operations and adverse weather
conditions.

In 2002, influenza vaccine sales occurred earlier than they did in 2001. The timing shift, from the fourth quarter to the third quarter,
equated to approximately $44,000 of third quarter 2002 sales, which net of related costs and expenses, accounted for approximately
$0.11 of the third quarter diluted earnings per common share.

Diluted earnings per share calculations for each quarter include the effect of stock options, when dilutive to the quarter’s weighted average
number of common shares outstanding for each period, and therefore the sum of the quarters may not necessarily be equal to the full
year earnings per share amount.

CORPORATE INFORMATION

Corporate Headquarters
Henry Schein, Inc.
135 Duryea Road
Melville, New York 11747
U.S.A.
(631) 843-5500
henryschein.com

Common Stock

Henry Schein Common Stock trades on the NASDAQ Stock Market® under the symbol “HSIC”.

Annual Shareholders Meeting

Our Annual Meeting of Shareholders will be held on June 18, 2003 at 10:00 a.m. at the Melville Marriott
Long Island Hotel in Melville, New York.

Henry Schein on the Internet

For more information about Henry Schein and its products and services, go to henryschein.com.
Other Company Web sites include: sullivanschein.com; caligor.com; giv.com; dentrix.com; easydental.com;
labnet.net; ident.com; digitaldentaloffice.com; zahndental.com; studentdentist.com; and avimark.com.

Shareholder Reports and Investor Inquiries

For shareholder inquiries, including requests for quarterly and annual reports, contact our Investor
Relations department at (631) 843-5611/5562, or e-mail your request to investor@henryschein.com.
Printed materials can also be requested through the Company’s Web site.

Form 10-K

A copy of the Company’s annual report on Form 10-K for the fiscal year ended December 28, 2002,
is available without charge to shareholders upon request to the Company’s Investor Relations department.
The report is also available on the Company’s Web site.

Independent Auditors

BDO Seidman, LLP
330 Madison Avenue
New York, N.Y. 10017

Legal Counsel

Proskauer Rose, LLP
1585 Broadway
New York, N.Y. 10036

Stock Transfer Agent

For address changes, account consolidation, registration changes, and lost stock certificates, please contact:
Continental Stock Transfer & Trust Company
17 Battery Place
New York, N.Y. 10004
(212) 509-4000

This Annual Report contains forward-looking statements under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and elsewhere. The Company’s results may differ materially
from those expressed in or indicated by such forward-looking statements. The Private Securities Litigation
Reform Act of 1995 provides a “safe harbor” for forward-looking statements.

CORPORATE MISSION

To be the worldwide leader

in providing the best quality and value

in products and services for our

healthcare customers.

Henry Schein, Inc.

135 Duryea Road

Melville, New York 11747

U.S.A.

(631) 843-5500