UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from                      to                     

HENRY SCHEIN, INC.

Delaware		11-3136595
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

135 Duryea Road
Melville, New York
(Address of principal executive offices)
11747
(Zip Code)

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

Yes þ                No o

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

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

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

Yes o                 No þ

     As of August 1, 2007, there were 89,128,523 shares of the registrant’s common stock outstanding.

 

 

HENRY SCHEIN, INC.
INDEX

		Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Balance Sheets as of June 30, 2007 and December 30, 2006		3
Statements of Income for the three and six months ended June 30, 2007 and July 1, 2006		4
Statements of Cash Flows for the three and six months ended June 30, 2007 and July 1, 2006		5
Notes to Consolidated Financial Statements		6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		27
ITEM 4. Controls and Procedures		27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings		28
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		29
ITEM 4. Submission of Matters to a Vote of Security Holders		30
ITEM 6. Exhibits		30
Signature		31
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

PART I. FINANCIAL INFORMATION

		June 30,				December 30,
		2007				2006
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	190,971			$	248,647
Available-for-sale securities			88,000				47,999
Accounts receivable, net of reserves of $40,287 and $40,536			637,229				610,020
Inventories, net			579,474				584,103
Deferred income taxes			29,338				28,240
Prepaid expenses and other			123,846				125,839
Total current assets			1,648,858				1,644,848
Property and equipment, net			223,227				225,038
Goodwill			771,834				773,801
Other intangibles, net			155,623				161,542
Investments and other			97,110				75,917
Total assets		$	2,896,652			$	2,881,146
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	361,031			$	414,062
Bank credit lines			2,367				2,528
Current maturities of long-term debt			27,830				41,036
Accrued expenses:
Payroll and related			104,099				110,401
Taxes			56,303				59,007
Other			181,875				183,054
Total current liabilities			733,505				810,088
Long-term debt			450,260				455,806
Deferred income taxes			57,957				62,334
Other liabilities			62,962				60,209
Minority interest			24,687				21,746
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none outstanding			—				—
Common stock, $.01 par value, 240,000,000 shares authorized, 89,062,402 outstanding on June 30, 2007 and 88,499,321 outstanding on December 30, 2006			891				885
Additional paid-in capital			643,033				614,551
Retained earnings			867,213				808,164
Accumulated other comprehensive income			56,144				47,363
Total stockholders’ equity			1,567,281				1,470,963
Total liabilities and stockholders’ equity		$	2,896,652			$	2,881,146

See accompanying notes.

HENRY SCHEIN, INC.

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Net sales		$	1,387,017			$	1,192,989			$	2,697,145			$	2,326,574
Cost of sales			973,240				835,744				1,892,322				1,633,808
Gross profit			413,777				357,245				804,823				692,766
Operating expenses:
Selling, general and administrative			322,925				280,887				640,250				555,771
Operating income			90,852				76,358				164,573				136,995
Other income (expense):
Interest income			4,269				3,954				8,388				8,495
Interest expense			(6,223	)			(7,238	)			(12,165	)			(14,603	)
Other, net			547				(344	)			425				(129	)
Income from continuing operations before taxes, minority interest and equity in earnings (losses) of affiliates			89,445				72,730				161,221				130,758
Income taxes			(30,636	)			(26,250	)			(56,106	)			(47,367	)
Minority interest in net income of subsidiaries			(3,842	)			(1,706	)			(6,757	)			(3,266	)
Equity in earnings (losses) of affiliates			(528	)			227				(505	)			335
Income from continuing operations			54,439				45,001				97,853				80,460
Discontinued operations:
Income (loss) from operations of discontinued components (including write-down of long-lived assets of $32.7 million in 2007 and a loss on sale of discontinued operation of $32.3 million in 2006 - Note 4)			(32,700	)			346				(32,560	)			(31,660	)
Income tax benefit (expense)			12,098				(129	)			12,038				12,677
Income (loss) from discontinued operations			(20,602	)			217				(20,522	)			(18,983	)
Net income		$	33,837			$	45,218			$	77,331			$	61,477
Earnings from continuing operations per share:
Basic		$	0 .62			$	0 .51			$	1 .11			$	0. 92
Diluted		$	0 .60			$	0 .50			$	1. 08			$	0 .90
Loss from discontinued operations per share:
Basic		$	(0. 24	)		$	0. 00			$	(0 .23	)		$	(0. 22	)
Diluted		$	(0. 23	)		$	0 .00			$	(0 .22	)		$	(0 .21	)
Earnings per share:
Basic		$	0. 38			$	0 .51			$	0. 88			$	0. 70
Diluted		$	0 .37			$	0. 50			$	0. 86			$	0. 69
Weighted-average common shares outstanding:
Basic			88,390				88,381				88,154				87,713
Diluted			90,591				89,823				90,344				89,344

See accompanying notes.

HENRY SCHEIN, INC.

		Six Months Ended
		June 30,				July 1,
		2007				2006
Cash flows from operating activities:
Net income		$	77,331			$	61,477
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of discontinued operation, net of tax			—				19,363
Depreciation and amortization			35,227				30,158
Stock-based compensation expense			10,725				9,374
Impairment from write down of long-lived assets of discontinued operations			32,667				—
Provision for losses on trade and other accounts receivable			232				679
Provision for (benefit from) deferred income taxes			(18,688	)			5,937
Undistributed earnings (losses) of affiliates			505				(335	)
Minority interest in net income of subsidiaries			6,757				3,266
Other			(570	)			(412	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(16,756	)			(3,023	)
Inventories			15,446				(31,755	)
Other current assets			4,469				8,146
Accounts payable and accrued expenses			(66,604	)			(102,258	)
Net cash provided by operating activities			80,741				617
Cash flows from investing activities:
Purchases of fixed assets			(21,336	)			(32,654	)
Payments for equity investment and business acquisitions, net of cash acquired			(41,823	)			(105,187	)
Cash received from business divestiture			—				36,527
Purchases of available-for-sale securities			(88,001	)			(147,340	)
Proceeds from sales of available-for-sale securities			48,000				168,961
Proceeds from maturities of available-for-sale securities			—				1,280
Net payments for foreign exchange forward contract settlements			(11,613	)			(14,805	)
Other			(4,609	)			165
Net cash used in investing activities			(119,382	)			(93,053	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			483				—
Repayments of bank borrowings			(281	)			—
Principal payments for long-term debt			(17,925	)			(6,475	)
Proceeds from issuance of stock upon exercise of stock options			23,620				25,600
Payments for repurchases of common stock			(30,689	)			(23,439	)
Excess tax benefits related to stock-based compensation			8,022				9,788
Other			(1,457	)			2,049
Net cash provided by (used in) financing activities			(18,227	)			7,523
Net change in cash and cash equivalents			(56,868	)			(84,913	)
Effect of exchange rate changes on cash and cash equivalents			(808	)			12,564
Cash and cash equivalents, beginning of period			248,647				210,683
Cash and cash equivalents, end of period		$	190,971			$	138,334

See accompanying notes.

HENRY SCHEIN, INC.

(unaudited)

Note 1. Basis of Presentation

     Our consolidated financial statements include our accounts, as well as those of our wholly-owned and majority-owned subsidiaries. Certain prior period amounts have been reclassified to conform to the current period presentation.

     Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by U.S. GAAP for complete financial statements.

     The consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 30, 2006.

     The preparation of financial statements in conformity with U.S. GAAP requires us 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. The results of operations for the six months ended June 30, 2007 are not necessarily indicative of the results to be expected of any other interim period or for the year ending December 29, 2007.

Note 2. Segment Data

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

     Our dental group serves office-based dental practitioners, schools and other institutions in the combined United States and Canadian dental market. Our medical group serves office-based medical practitioners, surgical centers, other alternate-care settings, animal health clinics and other institutions throughout the United States. Our international group serves 17 countries outside of North America.

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

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 2. Segment Data (Continued)

     The following tables present information about our business segments:

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006 (1)				2007 (1)				2006 (1)
Net Sales:
Healthcare distribution (2):
Dental (3)		$	601,217			$	511,870			$	1,163,818			$	993,906
Medical (4)			358,780				321,232				707,067				627,667
International (5)			395,145				336,533				765,970				658,839
Total healthcare distribution			1,355,142				1,169,635				2,636,855				2,280,412
Technology (6)			31,875				23,354				60,290				46,162
Total		$	1,387,017			$	1,192,989			$	2,697,145			$	2,326,574

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006 (1)				2007 (1)				2006 (1)
Operating Income:
Healthcare distribution		$	78,728			$	67,225			$	141,613			$	119,106
Technology			12,124				9,133				22,960				17,889
Total		$	90,852			$	76,358			$	164,573			$	136,995

Note 3. Stock-Based Compensation

     Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“FAS 123(R)”). We previously applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and provided the required pro forma disclosures of FAS 123, “Accounting for Stock-Based Compensation” in our consolidated financial statements. We elected to adopt the modified retrospective application method provided by FAS 123(R).

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 3. Stock-Based Compensation (Continued)

     Our accompanying unaudited consolidated statements of income reflect pre-tax share-based compensation expense of $6.6 million ($4.3 million after-tax) and $10.7 million ($7.0 million after-tax) for the three and six months ended June 30, 2007 and $5.5 million ($3.5 million after-tax) and $9.4 million ($6.0 million after-tax) for the three and six months ended July 1, 2006.

     Our accompanying unaudited consolidated statements of cash flows present our stock-based compensation expense as an adjustment to reconcile net income to net cash provided by operating activities for all periods presented. Benefits of $8.0 million and $9.8 million associated with tax deductions in excess of recognized compensation expense are presented as a cash inflow from financing activities for the six months ended June 30, 2007 and July 1, 2006.

     Stock-based compensation represents the cost related to stock-based awards granted to employees and non-employee directors. We measure stock-based compensation at the grant date, based on the estimated fair value of the award, and recognize the cost as compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Our stock-based compensation expense is reflected in selling, general and administrative expenses in our consolidated statements of income.

     Stock-based awards are provided to certain employees and non-employee directors under the terms of our 1994 Stock Incentive Plan, as amended, and our 1996 Non-Employee Director Stock Incentive Plan, as amended (together, the “Plans”). The Plans are administered by the Compensation Committee of the Board of Directors. Awards under the Plans principally include a combination of at-the-money stock options and restricted stock (including restricted stock units). As of June 30, 2007, there were 23,777,270 shares authorized and 5,022,952 shares available to be granted under the 1994 Stock Incentive Plan and 800,000 shares authorized and 266,837 shares available to be granted under the 1996 Non-Employee Director Stock Incentive Plan.

     Stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price. Stock options are granted at an exercise price equal to our closing stock price on the date of grant. These awards, which generally vest 25% per year based on the recipient’s continued service, are fully vested four years from the grant date and have a contractual term of ten years from the grant date. Additionally, recipients may not sell any shares that they acquire through exercising their options until the third anniversary of the date of grant of such options. We estimate the fair value of stock options using the Black-Scholes valuation model.

     Grants of restricted stock are common stock awards granted to recipients with specified vesting provisions. We issue restricted stock that vests based on the recipient’s continued service over time (four-year cliff vesting) and restricted stock that vests based on our achieving specified performance measurements (three-year cliff vesting).

     With respect to time-based restricted stock, we estimate the fair value on the date of grant based on our closing stock price. With respect to performance-based restricted stock, the number of shares that ultimately vest and are received by the recipient is based upon our earnings per share performance measured against specified targets over a three-year period. We estimate the fair value of performance-based restricted stock, based on our closing stock price, assuming that performance targets will be achieved. Over the performance period, the number of shares of common stock that will ultimately vest and be issued is adjusted upward or downward based upon our estimation of achieving such performance targets. The ultimate number of shares delivered to recipients and the related compensation cost recognized as expense will be based on our actual performance metrics.

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 3. Stock-Based Compensation (Continued)

     Restricted stock units (“RSUs”) are unit awards we grant to certain non-U.S. employees that entitle the recipient to shares of common stock upon vesting after four years for time-based awards or three years for performance-based awards. The fair value of RSUs is determined on the date of grant, based on our closing stock price.

     We record deferred tax assets for awards that result in deductions on our income tax returns, based on the amount of compensation cost recognized and our statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on our income tax return are recorded in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) or in earnings (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).

     Stock-based compensation expense for the six months ended June 30, 2007 and July 1, 2006 was generated through stock options, restricted stock and restricted stock unit grants. The weighted-average grant date fair value of stock-based awards granted was $22.66 and $24.46 per share during the three months ended June 30, 2007 and July 1, 2006 and $21.59 and $23.40 per share during the six months ended June 30, 2007 and July 1, 2006. For the three and six months ended June 30, 2007, the fair value of stock-based awards issued was evenly divided between stock options and restricted stock (including RSUs).

     Total unrecognized compensation cost related to non-vested awards as of June 30, 2007 was $53.5 million, which is expected to be recognized over a weighted-average period of approximately three years. There were no significant capitalized stock-based compensation costs as of June 30, 2007.

     The following table summarizes stock option activity under the Plans during the six months ended June 30, 2007:

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual Life				Aggregate Intrinsic
		Shares				Exercise Price				in Years				Value
Outstanding at beginning of period			7,477,321			$	30.54
Granted			926,607				51.25
Exercised			(1,012,605	)			23.70
Forfeited			(27,506	)			40.46
Outstanding at end of period			7,363,817				34.06				6.7			$	142,662,809
Options exercisable at end of period			5,022,819			$	28.89				5.8			$	123,260,572

     The following weighted-average assumptions were used in determining the fair values of stock options using the Black-Scholes valuation model:

		2007				2006
Expected dividend yield			0	%			0	%
Expected stock price volatility			20	%			25	%
Risk-free interest rate			4.75	%			4.75	%
Expected life of options (years)			4.5				5

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 3. Stock-Based Compensation (Continued)

     We have not declared cash dividends on our stock in the past and we do not anticipate declaring cash dividends in the foreseeable future. The expected stock price volatility is based on the evaluation of implied volatilities from traded call options on our stock and from call options embedded in our existing convertible debt, historical volatility of our stock and other factors. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant in conjunction with considering the expected life of options. The expected life of options represents the approximate period of time that granted options are expected to be outstanding and is based on historical data, including option exercises, forfeitures and cancellations. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by recipients of stock options, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by us.

     The total intrinsic value, the amount by which the fair value of the underlying stock exceeds the exercise price of the option, of stock options exercised was $7.9 million and $11.1 million for the three months ended June 30, 2007 and July 1, 2006 and $29.5 million and $36.6 million for the six months ended June 30, 2007 and July 1, 2006. The total cash received as a result of stock option exercises for the six months ended June 30, 2007 and July 1, 2006 was approximately $23.6 million and $25.6 million. In connection with these exercises, the tax benefits that we realized for the six months ended June 30, 2007 and July 1, 2006 were $6.8 million and $9.1 million. We settle employee stock option exercises with newly issued common shares.

     The total intrinsic value of restricted stock (including RSUs) that vested was $42 and $36 during the three months ended June 30, 2007 and July 1, 2006 and $81 and $72 during the six months ended June 30, 2007 and July 1, 2006. The following table summarizes the status of our non-vested restricted shares/units for the six months ended June 30, 2007:

		Time-Based Restricted Stock/Units
						Weighted Average
						Grant
		Shares/Units				Date Fair Value
Outstanding at beginning of period			113,994			$	5,042,725
Granted			99,394				5,071,328
Vested			(1,545	)			(48,561	)
Forfeited			(2,420	)			(88,985	)
Outstanding at end of period			209,423			$	9,976,507
		Performance-Based Restricted Stock/Units
						Weighted Average
		Shares/Units				Grant Date Fair Value
Outstanding at beginning of period			225,543			$	10,657,767
Granted			94,325				5,006,568
Forfeited			(2,420	)			(88,985	)
Outstanding at end of period			317,448			$	15,575,350

Note 4. Business Acquisitions, Divestiture, Discontinued Operations and Other Transactions

Acquisitions

     In June 2007, we entered into a definitive agreement to acquire the remaining 50% of Becker-Parkin Dental Supply Co. (“Becker-Parkin”) for an expected purchase price of approximately $22 million. The acquisition was completed in July 2007 and we plan to merge the full service and special markets portion

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 4.		Business Acquisitions, Divestiture, Discontinued Operations and Other Transactions (Continued)

of this business into our existing operations and we plan to contribute the telesales portion into an unconsolidated equity-owned investment. The non-core subsidiaries of Becker-Parkin were immediately sold to third-party individuals. We expect to record a nominal gain in the third quarter of 2007 as a result of the sale of these businesses.

     Upon completing the contribution of the telesales portion of Becker-Parkin into an unconsolidated equity-owned investment, our equity ownership of such unconsolidated equity-owned investment will be 45%, and we will continue to account for this investment using the equity method. We also expect to record a gain in the third quarter of 2007 of approximately $2.0 million on the contribution of the telesales portion.

     We completed certain other acquisitions during the three months ended June 30, 2007. The operating results of our acquisitions are reflected in our financial statements from their respective acquisition dates. Such acquisitions were immaterial to our financial statements individually and in the aggregate.

Divestiture

     On April 1, 2006, we sold substantially all of the assets of our hospital supply business, previously reported as part of our healthcare distribution reportable segment. The sale price was $36.5 million, which was received during the second quarter of 2006. As a result of this sale, included in the operating results from discontinued operations for the six months ended July 1, 2006 is a $32.3 million ($19.4 million after-tax) loss on the sale, including $3.5 million ($2.1 million after-tax) of transitional service obligations and selling costs.

     As part of the sale agreement, we remain obligated to make payments to the buyer, up to a maximum of $5.0 million, contingent upon the buyer’s maintenance of a specified level of aggregate sales of the hospital supply business during the two-year post-closing period. Any payments made in connection with these contingencies will be presented as part of our results from discontinued operations.

Discontinued Operations

     During the three month period ended June 30, 2007, we reached a decision to divest our lower-margin oncology pharmaceutical and specialty pharmacy businesses, which are components of our healthcare distribution business. These businesses were not strategic to the medical group and their divestiture will allow us enhanced focus on the sale of more profitable products.

     We expect to sell these businesses within the next 12 months and consequently have classified the operating results of these businesses as discontinued operations in the accompanying consolidated statements of income for all periods presented. In connection with this decision, we assessed our long-lived assets for impairment, which resulted in the recording of an impairment charge of $32.7 million ($20.6 million after-tax) for the write-down of all long-lived assets, including goodwill of $30.1 million. We expect to incur an additional pre-tax loss of $3 million to $5 million upon the sale of these businesses.

     Net sales generated by these businesses were $26.2 million and $27.4 million for the three month periods ended June 30, 2007 and July 1, 2006 and $50.2 million and $55.6 million for the six month periods ended June 30, 2007 and July 1, 2006.

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 4.		Business Acquisitions, Divestiture, Discontinued Operations and Other Transactions (Continued)

     The carrying amounts of the major classes of the assets held-for-sale for these businesses as of June 30, 2007 included accounts receivable, net of reserves, of $10.4 million and inventories, net of reserves, of $3.9 million.

Loan and Investment Agreement

     As of June 30, 2007, we loaned D4D Technologies, LLC (“D4D”) $10.4 million and, if remaining operational milestones are achieved, an additional $5.4 million loan is expected to be made during 2007. The loans are repayable between December 2007 and July 2013.

     We also agreed to make equity investments in D4D totaling $27.7 million contingent upon the achievement of specified D4D operational milestones. We have the option to fund a portion of our second equity investment in D4D by utilizing the loan amounts due to us from D4D. We expect to account for such investments under the equity method prospectively from the date of our first equity investment.

Note 5. Earnings Per Share

     Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Our diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the effect of common shares issuable upon vesting of restricted stock and upon exercise of stock options using the treasury stock method in periods in which they have a dilutive effect.

     For the three and six months ended June 30, 2007 and July 1, 2006, diluted earnings per share includes the effect of common shares issuable upon conversion of our convertible debt. During the period, the debt was convertible at a premium as a result of the conditions of the debt. As a result, the amount in excess of the principal is presumed to be settled in common shares and is reflected in our calculation of diluted earnings per share.

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

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Basic			88,389,714				88,381,298				88,154,454				87,712,692
Effect of assumed exercise of stock options			989,038				1,172,219				1,160,898				1,455,679
Effect of assumed vesting of restricted stock			523,932				252,992				437,406				169,083
Effect of assumed conversion of convertible debt			688,105				16,266				591,088				7,032
Diluted			90,590,789				89,822,775				90,343,846				89,344,486

     Weighted-average options to purchase 5,266 shares of common stock at an exercise price of $55.18 per share and 818,213 shares of common stock at an exercise price of $47.31 per share that were outstanding during the three months ended June 30, 2007 and July 1, 2006, respectively, were excluded

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 5. Earnings Per Share (Continued)

from the computation of diluted earnings per share. Weighted-average options to purchase 2,691 shares of common stock at an exercise price of $55.18 per share and 548,473 shares of common stock at an exercise price of $47.31 per share that were outstanding during the six months ended June 30, 2007 and July 1, 2006, respectively, were excluded from the computation of diluted earnings per share. In each of these periods, such options’ exercise prices exceeded the average market price of our common stock, thereby causing the effect of such options to be anti-dilutive.

Note 6. Comprehensive Income

     Comprehensive income includes certain gains and losses that, under accounting principles generally accepted in the United States, are excluded from net income as such amounts are recorded directly as an adjustment to stockholders’ equity. Our comprehensive income is primarily comprised of net income and foreign currency translation adjustments, but also includes unrealized gains and losses on hedging activity and pension adjustments. Comprehensive income totaled $44.2 million and $86.1 million for the three and six months ended June 30, 2007 and $63.3 million and $85.2 million for the three and six months ended July 1, 2006.

Note 7. Income Taxes

     In July 2006, the Financial Accounting Standards Board issued FAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FAS No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognitions and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate audit settlement. The adoption of FIN 48, effective December 31, 2006, resulted in a decrease to stockholders’ equity of approximately $0.3 million.

     The total amount of unrecognized tax benefits as of the date of adoption was approximately $12.7 million, all of which would affect the effective tax rate if recognized. The total amount of unrecognized tax benefits as of June 30, 2007 was approximately $10.1 million, all of which would affect the effective tax rate if recognized. It is expected that the amount of unrecognized tax benefits will change in the next twelve months; however, we do not expect the change to have a material impact on our consolidated financial statements.

     The total amounts of interest and penalties, which are classified as a component of the provision for income taxes, were approximately $2.0 million and $0, respectively, as of the date of adoption. The total amount of interest and penalties classified as a component of income tax expense was insignificant. It is expected that the amount of interest will change in the next twelve months. However, we do not expect the change to have a material impact on our consolidated financial statements.

     The tax years subject to examination by major tax jurisdictions include the years 2004 and forward by the U.S. Internal Revenue Service, the years 1996 and forward for certain states and the years 1997 and forward for certain foreign jurisdictions.

HENRY SCHEIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except share and per share data)
(unaudited)

Note 8. Supplemental Cash Flow Information

     Cash paid for interest and income taxes was:

		Six Months Ended
		June 30,				July 1,
		2007				2006
Interest		$	14,324			$	18,233
Income taxes			40,361				49,169

     During the six months ended July 1, 2006, we had a $5.6 million non-cash net unrealized loss related to hedging activities. Further, in connection with our sale of our hospital supply business, we received $34.5 million of the $36.5 million sales proceeds on April 3, 2006, with the balance received during the remainder of 2006.

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

Cautionary Note Regarding Forward-Looking Statements

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

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

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

Executive-Level Overview

     We believe we are the largest distributor of healthcare products and services primarily to office-based healthcare practitioners in the combined North American and European markets. We serve more than 500,000 customers worldwide, including dental practitioners and laboratories, physician practices and animal health clinics, as well as government and other institutions. We believe that we have a strong brand identity due to our more than 75 years of experience distributing healthcare products.

     We are headquartered in Melville, New York, employ nearly 12,000 people and have operations in the United States, Canada, the United Kingdom, the Netherlands, Belgium, Germany, France, Austria, Portugal, Spain, the Czech Republic, Luxembourg, Italy, Ireland, Switzerland, Israel, Australia and New Zealand. We also have an affiliate in Iceland.

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

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

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

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

Industry Overview

     In recent years, the healthcare industry has increasingly focused on cost containment. This trend has benefited distributors capable of providing a broad array of products and services at low prices. It also has accelerated the growth of HMOs, group practices, other managed care accounts and collective buying groups, which, in addition to their emphasis on obtaining products at competitive prices, tend to favor distributors capable of providing specialized management information support. We believe that the trend towards cost containment has the potential to favorably affect demand for technology solutions, including software, which can enhance the efficiency and facilitation of practice management.

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

Industry Consolidation

     The healthcare products distribution industry, as it relates to office-based healthcare practitioners, is highly fragmented and diverse. This industry, which encompasses the dental, medical and animal health markets, was estimated to produce revenues of approximately $22.0 billion in 2006 in the combined North American and European markets. The industry ranges from sole practitioners working out of relatively small offices to group practices or service organizations ranging in size from a few practitioners to a large number of practitioners who have combined or otherwise associated their practices.

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

     We believe that consolidation within the industry will continue to result in a number of distributors, particularly those with limited financial and marketing resources, seeking to combine with larger

companies that can provide growth opportunities. This consolidation also may continue to result in distributors seeking to acquire companies that can enhance their current product and service offerings or provide opportunities to serve a broader customer base.

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

     As industry consolidation continues, we believe that we are positioned to capitalize on this trend, as we believe we have the ability to support increased sales through our existing infrastructure. In the U.S. dental market, we estimate that there are currently more than 300 smaller distributors holding approximately 25% of the market. In the U.S. medical market, we estimate that more than 500 smaller distributors hold approximately 50% of the market, and in the European dental market, we estimate that more than 200 smaller distributors hold approximately 80% of the market.

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

Aging Population and Other Market Influences

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

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

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

Results of Operations

     The following table summarizes the significant components of our operating results from continuing operations for the three and six months ended June 30, 2007 and July 1, 2006, and cash flows for the six months ended June 30, 2007 and July 1, 2006 (in thousands):

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006 (1)				2007 (1)				2006 (1)
Operating Results:
Net sales		$	1,387,017			$	1,192,989			$	2,697,145			$	2,326,574
Cost of sales			973,240				835,744				1,892,322				1,633,808
Gross profit			413,777				357,245				804,823				692,766
Operating expenses:
Selling, general and administrative			322,925				280,887				640,250				555,771
Operating income		$	90,852			$	76,358			$	164,573			$	136,995
Other expense, net		$	(1,407	)		$	(3,628	)		$	(3,352	)		$	(6,237	)
Income from continuing operations			54,439				45,001				97,853				80,460
Cash Flows:
Net cash provided by operating activities										$	80,741			$	617
Net cash used in investing activities											(119,382	)			(93,053	)
Net cash provided by (used in) financing activities											(18,227	)			7,523

Three Months Ended June 30, 2007 Compared to Three Months Ended July 1, 2006

Net Sales

     Net sales from continuing operations for the three months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

		June 30,				% of				July 1,				% of
		2007				Total				2006 (1)				Total
Healthcare distribution (2):
Dental (3)		$	601,217				43.3	%		$	511,870				42.9	%
Medical (4)			358,780				25.9				321,232				26.9
International (5)			395,145				28.5				336,533				28.2
Total healthcare distribution			1,355,142				97.7				1,169,635				98.0
Technology (6)			31,875				2.3				23,354				2.0
Total		$	1,387,017				100.0	%		$	1,192,989				100.0	%

     The $194.0 million, or 16.3%, increase in net sales for the three months ended June 30, 2007 includes increases of 13.9% local currency growth (8.3% internally generated primarily due to volume growth and 5.6% from acquisitions) and 2.4% related to foreign currency exchange.

     The $89.4 million, or 17.5%, increase in dental net sales for the three months ended June 30, 2007 includes increases of 17.2% local currency growth (10.5% internally generated primarily due to increased volume and 6.7% from acquisitions) and 0.3% related to foreign currency exchange. The 17.2% local currency growth was due to dental consumable merchandise sales growth of 14.7% (6.8% internal growth and 7.9% from acquisitions) and dental equipment sales and service growth of 25.1% (22.3% internal growth and 2.8% from acquisitions).

     The $37.5 million, or 11.7%, increase in medical net sales for the three months ended June 30, 2007 includes internal growth of 7.7% and acquisition growth of 4.0%.

     The $58.6 million, or 17.4%, increase in international net sales for the three months ended June 30, 2007 includes increases of 9.4% in local currencies (5.0% from acquisitions and 4.4% internally generated), and 8.0% related to foreign currency exchange.

     The $8.5 million, or 36.5%, increase in technology net sales for the three months ended June 30, 2007 includes increases of 36.4% in local currency growth (25.5% internally generated and 10.9% from acquisitions) and 0.1% related to foreign currency exchange. The increase was driven by growth in electronic services, software and financial services revenue.

Gross Profit

     Gross profit and gross margin percentages from continuing operations by segment and in total for the three months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

		June 30,				Gross				July 1,				Gross
		2007				Margin %				2006 (1)				Margin %
Healthcare distribution		$	390,187				28.8	%		$	339,245				29.0	%
Technology			23,590				74.0				18,000				77.1
Total		$	413,777				29.8			$	357,245				29.9

     For the three months ended June 30, 2007, gross profit increased $56.5 million, or 15.8%, from the comparable prior year period. As a result of different practices of categorizing costs associated with distribution networks throughout our industry, our gross margins may not necessarily be comparable to other distribution companies. Additionally, we realize substantially higher gross margin percentages in our technology segment than in our healthcare distribution segment. These higher gross margins result from being both the developer and seller of software products combined with the nature of the software industry, in which developers typically realize higher gross margins to recover investments in research and development.

     Healthcare distribution gross profit increased $50.9 million, or 15.0%, for the three months ended June 30, 2007 from the comparable prior year period. Healthcare distribution gross profit margin decreased to 28.8% for the three months ended June 30, 2007 from 29.0% for the comparable prior year period.

     Technology gross profit increased $5.6 million, or 31.1%, for the three months ended June 30, 2007 from the comparable prior year period. Technology gross profit margin decreased to 74.0% for the three months ended June 30, 2007 from 77.1% for the comparable prior year period primarily due to changes in the product sales mix.

Selling, General and Administrative

     Selling, general and administrative expenses from continuing operations by segment and in total for the three months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

						% of								% of
		June 30,				Respective				July 1,				Respective
		2007				Net Sales				2006 (1)				Net Sales
Healthcare distribution		$	311,459				23.0	%		$	272,022				23.3	%
Technology			11,466				36.0				8,865				38.0
Total		$	322,925				23.3			$	280,887				23.5

     Selling, general and administrative expenses increased $42.0 million, or 15.0%, to $322.9 million for the three months ended June 30, 2007 from the comparable prior year period. As a percentage of net sales, selling, general and administrative expenses decreased to 23.3% from 23.5% for the comparable prior year period.

     As a component of selling, general and administrative expenses, selling expenses increased $25.4 million, or 13.3%, to $216.4 million for the three months ended June 30, 2007 from the comparable prior year period. As a percentage of net sales, selling expenses decreased to 15.6% from 16.0% for the comparable prior year period.

     As a component of selling, general and administrative expenses, general and administrative expenses increased $16.6 million, or 18.4%, to $106.5 million for the three months ended June 30, 2007 from the comparable prior year period. As a percentage of net sales, general and administrative expenses increased to 7.7% from 7.5% for the comparable prior year period.

Other Expense, Net

     Other expense, net, from continuing operations for the three months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

		June 30,				July 1,
		2007				2006 (1)
Interest income		$	4,269			$	3,954
Interest expense			(6,223	)			(7,238	)
Other, net			547				(344	)
Other expense, net		$	(1,407	)		$	(3,628	)

     Other expense, net, decreased $2.2 million for the three months ended June 30, 2007 from the comparable prior year period. This decrease was primarily due to lower interest expense resulting from the conversion of U.S. LIBOR based borrowings to Euro LIBOR based borrowings, as well as increases in late fee income and net foreign currency gains.

Income Taxes

     For the three months ended June 30, 2007, our effective tax rate from continuing operations decreased to 34.3% from 36.1% for the comparable prior year period. The difference was impacted by additional tax planning, settlements of tax audits and higher income from lower taxing countries. The difference between our effective tax rates and the federal statutory tax rates for both periods related primarily to foreign and state income taxes. We expect our effective tax rate to be in the 34% to 35% range for the remainder of 2007.

Six Months Ended June 30, 2007 Compared to Six Months Ended July 1, 2006

Net Sales

     Net sales from continuing operations for the six months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

		June 30,				% of				July 1,				% of
		2007 (1)				Total				2006 (1)				Total
Healthcare distribution (2):
Dental (3)		$	1,163,818				43.2	%		$	993,906				42.7	%
Medical (4)			707,067				26.2				627,667				27.0
International (5)			765,970				28.4				658,839				28.3
Total healthcare distribution			2,636,855				97.8				2,280,412				98.0
Technology (6)			60,290				2.2				46,162				2.0
Total		$	2,697,145				100.0	%		$	2,326,574				100.0	%

     The $370.6 million, or 15.9%, increase in net sales for the six months ended June 30, 2007 includes increases of 13.5% local currency growth (6.6% internally generated primarily due to volume growth and 6.9% from acquisitions, net of divestiture) and 2.4% related to foreign currency exchange.

     The $169.9 million, or 17.1%, increase in dental net sales for the six months ended June 30, 2007 is all in local currency (10.2% internally generated primarily due to increased volume and 6.9% from acquisitions). The 17.1% local currency growth was due to dental consumable merchandise sales growth of 14.7% (6.5% internal growth and 8.2% from acquisitions) and dental equipment sales and service growth of 25.3% (22.8% internal growth and 2.5% from acquisitions).

     The $79.4 million, or 12.7%, increase in medical net sales for the six months ended June 30, 2007 includes acquisition growth of 9.0% and 3.7% in internal growth, net of a divestiture.

     The $107.2 million, or 16.3%, increase in international net sales for the six months ended June 30, 2007 includes increases of 7.8% in local currencies (5.0% from acquisitions and 2.8% internally generated), and 8.5% related to foreign currency exchange.

     The $14.1 million, or 30.6%, increase in technology net sales for the six months ended June 30, 2007 is all in local currency (21.6% internally generated and 9.0% from acquisitions). The increase was driven by growth in electronic services, software and financial services revenue.

Gross Profit

     Gross profit and gross margin percentages from continuing operations by segment and in total for the six months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

		June 30,				Gross				July 1,				Gross
		2007 (1)				Margin %				2006 (1)				Margin %
Healthcare distribution		$	759,523				28.8	%		$	657,279				28.8	%
Technology			45,300				75.1				35,487				76.9
Total		$	804,823				29.8			$	692,766				29.8

     For the six months ended June 30, 2007, gross profit increased $112.1 million, or 16.2%, from the comparable prior year period.

     Healthcare distribution gross profit increased $102.3 million, or 15.6%, for the six months ended June 30, 2007 from the comparable prior year period. Healthcare distribution gross profit margin remained constant at 28.8%.

     Technology gross profit increased $9.8 million, or 27.7%, for the six months ended June 30, 2007 from the comparable prior year period. Technology gross profit margin decreased to 75.1% for the six months ended June 30, 2007 from 76.9% for the comparable prior year period primarily due to changes in the product sales mix.

Selling, General and Administrative

     Selling, general and administrative expenses from continuing operations by segment and in total for the six months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

						% of								% of
		June 30,				Respective				July 1,				Respective
		2007 (1)				Net Sales				2006 (1)				Net Sales
Healthcare distribution		$	617,910				23.4	%		$	538,173				23.6	%
Technology			22,340				37.1				17,598				38.1
Total		$	640,250				23.7			$	555,771				23.9

     Selling, general and administrative expenses increased $84.5 million, or 15.2%, to $640.3 million for the six months ended June 30, 2007 from the comparable prior year period. As a percentage of net sales, selling, general and administrative expenses decreased to 23.7% from 23.9% for the comparable prior year period.

     As a component of selling, general and administrative expenses, selling expenses increased $50.5 million, or 13.4%, to $428.0 million for the six months ended June 30, 2007 from the comparable prior year period. As a percentage of net sales, selling expenses decreased to 15.9% from 16.2% for the comparable prior year period.

     As a component of selling, general and administrative expenses, general and administrative expenses increased $34.0 million, or 19.1%, to $212.3 million for the six months ended June 30, 2007 from the comparable prior year period. As a percentage of net sales, general and administrative expenses increased to 7.9% from 7.7% for the comparable prior year period.

Other Expense, Net

     Other expense, net, from continuing operations for the six months ended June 30, 2007 and July 1, 2006 were as follows (in thousands):

		June 30,				July 1,
		2007 (1)				2006 (1)
Interest income		$	8,388			$	8,495
Interest expense			(12,165	)			(14,603	)
Other, net			425				(129	)
Other expense, net		$	(3,352	)		$	(6,237	)

     Other expense, net, decreased $2.9 million for the six months ended June 30, 2007 from the comparable prior year period. This decrease was primarily due to lower interest expense resulting from the conversion of U.S. LIBOR based borrowings to Euro LIBOR based borrowings and net foreign currency gains.

Income Taxes

     For the six months ended June 30, 2007, our effective tax rate from continuing operations decreased to 34.8% from 36.2% for the comparable prior year period. The difference was impacted by additional tax planning, settlements of tax audits and higher income from lower taxing countries. The difference between our effective tax rates and the federal statutory tax rates for both periods related primarily to foreign and state income taxes. We expect our effective tax rate to be in the 34% to 35% range for the remainder of 2007.

Liquidity and Capital Resources

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

     We finance our business primarily through cash generated from our operations, revolving credit facilities, debt placements and stock issuances. Our ability to generate sufficient cash flows from operations is dependent on the continued demand of our customers for, and provision by our suppliers of, our products and services. Given current operating, economic and industry conditions, we believe that demand for our products and services will remain consistent with recent trends in the foreseeable future.

     Net cash flow provided by operating activities was $80.7 million for the six months ended June 30, 2007, compared to $0.6 million for the comparable prior year period. This net change of $80.1 million was primarily due to improved working capital, as well as increased income from continuing operations.

     Net cash used in investing activities was $119.4 million for the six months ended June 30, 2007, compared to $93.1 million for the comparable prior year period. The net change of $26.3 million was primarily due to an increase in net security purchases and cash received from a business divestiture in the prior year, partially offset by a reduction in payments for business acquisitions. We expect to invest

approximately $25.0 million to $30.0 million during the remainder of the fiscal year in capital projects to modernize and expand our facilities and computer systems infrastructure and to integrate certain operations into our core structure.

     Net cash used in financing activities was $18.2 million for the six months ended June 30, 2007, compared to $7.5 million provided by financing activities for the comparable prior year period. The net change of $25.7 million was primarily due to increased payments for long-term debt and increased repurchases of our common stock during the six months ended June 30, 2007.

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

		June 30,				December 30,
		2007				2006
Cash and cash equivalents		$	190,971			$	248,647
Available-for-sale securities			88,000				47,999
Working capital			915,353				834,760
Debt:
Bank credit lines		$	2,367			$	2,528
Current maturities of long-term debt			27,830				41,036
Long-term debt			450,260				455,806
Total debt		$	480,457			$	499,370

     Our cash and cash equivalents consist of bank balances and investments in money market funds representing overnight investments with a high degree of liquidity. At June 30, 2007 and December 30, 2006, our available-for-sale securities consisted of highly liquid tax-efficient securities, including primarily auction-rate securities and variable-rate demand notes.

     Our business requires a substantial investment in working capital, which is susceptible to fluctuations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity, special inventory forward buy-in opportunities and our desired level of inventory. We anticipate future increases in our working capital requirements as a result of continuing sales growth.

     Our accounts receivable days sales outstanding from continuing operations improved to 41.3 days for the six months ended June 30, 2007 from 42.6 days for the comparable prior year period. During the six months ended June 30, 2007, we wrote-off approximately $3.3 million of fully reserved accounts receivable against our trade receivable reserve, which had no effect on our earnings. Our inventory turnover from continuing operations for the six months ended June 30, 2007 was 6.6 turns compared to 6.4 turns for the six months ended July 1, 2006.

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

	•		if the price of our common stock is above 130% of the conversion price measured over a specified number of trading days;
	•		during the five business-day period following any 10 consecutive trading-day period in which the average of the trading prices for the notes for that 10 trading-day period was less than 98% of the average conversion value for the notes during that period;

	•		if the notes have been called for redemption; or
	•		upon the occurrence of a fundamental change or specified corporate transactions, as defined in the note agreement.

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

     Our $130.0 million senior notes are due on June 30, 2009 and bear interest at a fixed rate of 6.9% per annum. On September 25, 2006, we made our first annual principal payment of $20.0 million on our $100.0 million senior notes, which bear interest at a fixed rate of 6.7% per annum. Remaining principal payments are due annually on September 25, 2007 through 2010. Interest on both notes is payable semi-annually.

     In 2003, we entered into agreements relating to our $230.0 million senior notes to exchange their fixed interest rates for variable interest rates. The value of debt exchanged to a variable rate of interest reduces according to the repayment schedule of the senior notes. As of June 30, 2007, there was $210.0 million of principal remaining with a weighted-average variable interest rate of 8.4%. This weighted-average variable interest rate is comprised of LIBOR plus a spread and resets on the interest due dates for such senior notes.

     On May 24, 2005, we entered into a $300.0 million revolving credit facility with a $100.0 million expansion feature. This facility expires in May 2010. As of June 30, 2007, there were $9.2 million of letters of credit provided to third parties and no borrowings outstanding under this revolving credit facility.

     On June 21, 2004 and on October 31, 2005, we announced that our Board of Directors had authorized $100.0 million common stock repurchase programs. On March 28, 2007, our Board of Directors authorized an additional $100.0 million common stock repurchase program. As of June 30, 2007, we had repurchased $159.5 million or 4,012,242 shares under these initiatives, with $140.5 million available for future common stock share repurchases.

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

     In June 2007, we announced our intent to make an offer to acquire Software of Excellence International Ltd. (NZX: SOE), a New Zealand publicly listed company. We have since offered NZ$2.70 per share to Software of Excellence shareholders, after payment of a dividend of NZ$.03 per share. If completed at that price, the total purchase price excluding transaction costs will be approximately $58.0 million, and is expected to be paid in cash.

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

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

E-Commerce

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

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

Critical Accounting Policies and Estimates

     There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 30, 2006.

Recently Issued Accounting Standards

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 applies under other previously issued accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of FAS 157 on our consolidated financial statements.

     In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”), including an amendment to FASB No. 115. FAS 159 gives entities the irrevocable option to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions. FAS 159 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. We are currently evaluating the impact of FAS 159 on our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There have been no material changes in our exposure to market risk from that disclosed in Item 7A of our Annual Report on Form 10-K for the year ended December 30, 2006.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Under the supervision and with the participation of management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of June 30, 2007 to ensure that all material information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to them as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported as specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

     There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Internal Control

     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

PART II. OTHER INFORMATION

     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. As a business practice, we generally obtain product indemnification from our suppliers.

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

     As of June 30, 2007, we had accrued our best estimate of potential losses relating to product liability and other claims that were probable to result in a liability and for which we were able to reasonably estimate a loss. This accrued amount, as well as related expenses, was not material to our financial position, results of operations or cash flows. Our method for determining estimated losses considers currently available facts, presently enacted laws and regulations and other external factors, including probable recoveries from third parties.

Product Liability Claims

     As of June 30, 2007, we were a defendant in approximately 15 product liability cases. In many of these cases, the manufacturers have agreed to defend and indemnify us. The manufacturers have withheld defense and indemnification in some of these cases pending product identification. In our opinion, these cases are covered by insurance or will not otherwise have a material adverse effect on our financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of equity securities by the issuer

     Our current share repurchase program, announced on June 21, 2004, originally allowed us to repurchase up to $100.0 million in shares of our common stock, which represented approximately 3.5% of the shares outstanding at the commencement of the program. On October 31, 2005, our Board of Directors authorized an additional $100.0 million of shares in our common stock to be repurchased under this program. On March 28, 2007, our Board of Directors authorized an additional $100.0 million of shares in our common stock to be repurchased under this program. As of June 30, 2007, we had repurchased $159.5 million or 4,012,242 shares under this initiative, with $140.5 million available for future common stock share repurchases.

     During the fiscal quarter ended June 30, 2007, we did not repurchase any of our common stock. The maximum number of shares that may yet be purchased under this program, as shown below, is determined at the end of each month based on the closing price of our common stock at that time.

		Maximum Number
		of Shares
		that May Yet
		Be Purchased Under
Fiscal Month		Our Program
04/01/07 through 04/28/07		2,672,063
04/29/07 through 06/02/07		2,601,811
06/03/07 through 06/30/07		2,630,054

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At our Annual Meeting of Stockholders held on May 15, 2007, our stockholders took the following actions:

     (i) Re-elected the following individuals to our Board of Directors:

Barry J. Alperin		(77,488,552 shares voting for, 1,800,346 shares withheld)
Gerald A. Benjamin		(77,062,013 shares voting for, 2,226,885 shares withheld)
Stanley M. Bergman		(77,414,144 shares voting for, 1,874,754 shares withheld)
James P. Breslawski		(77,063,575 shares voting for, 2,225,323 shares withheld)
Paul Brons		(79,001,297 shares voting for, 287,601 shares withheld)
Dr. Margaret A. Hamburg		(78,957,829 shares voting for, 331,069 shares withheld)
Donald J. Kabat		(77,542,402 shares voting for, 1,746,496 shares withheld)
Philip A. Laskawy		(75,919,859 shares voting for, 3,369,039 shares withheld)
Norman S. Matthews		(78,825,608 shares voting for, 463,290 shares withheld)
Mark E. Mlotek		(77,062,783 shares voting for, 2,226,115 shares withheld)
Steven Paladino		(74,291,309 shares voting for, 4,997,589 shares withheld)
Marvin H. Schein		(74,536,987 shares voting for, 4,751,911 shares withheld)
Dr. Louis W. Sullivan		(78,921,540 shares voting for, 367,358 shares withheld)

ITEM 6. EXHIBITS

     Exhibits.

     31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Henry Schein, Inc.
		(Registrant)
		By: /s/ Steven Paladino
		Steven Paladino
		Executive Vice President and
		Chief Financial Officer
		(Authorized Signatory and Principal Financial and Accounting Officer)

Dated: August 8, 2007