References to "us" and "we" are to the Company. You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements and related notes included in this quarterly report, and our audited consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC").

Forward-Looking Statements

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") that are subject to risks and uncertainties. You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as "may," "believe," "expect," "anticipate," "intend," "plan," "estimate" or similar expressions. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. These factors include:

†          economic slowdowns,

†          general market conditions,

†          credit market contractions,

†          product cost and price fluctuations due to market conditions,

†          consumer spending and debt levels,

†          adverse changes in trends in the home improvement and remodeling and
home building markets,

†          the highly competitive nature of the maintenance, repair and
operations distribution industry,

†          material facilities and systems disruptions and shutdowns,

†          failure to realize expected benefits from acquisitions,

†          our ability to purchase products from suppliers on favorable terms,

†          the length of our supply chains,

†          work stoppages or other business interruptions at transportation
centers or shipping ports,

†          fluctuations in the cost of commodity-based products, raw materials
and fuel prices,

†          currency exchange rates,

†          the loss of significant customers,

†          our ability to accurately predict market trends,

†          failure to locate, acquire and successfully integrate acquisition
candidates,

†          dependence on key employees,

†          our inability to protect trademarks,

†          adverse publicity and litigation,

†          our level of debt,

†          interest rate fluctuations,

†          future cash flows,

†          changes in consumer preferences,

†          labor and benefit costs,

†          weather conditions,

†          the other factors described under "Part II. Item 1A-Risk Factors" in

† the other factors described under "Part I. Item 1A-Risk Factors" in our Annual Report on Form 10-K filed with the SEC.

You should keep in mind that any forward-looking statement made by us in this report, or elsewhere, speaks only as of the date on which we make it. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this report or elsewhere might not occur. Notwithstanding the foregoing, all information contained in this report is materially accurate as of the date of this report.

Overview

We are a leading national distributor and direct marketer of maintenance, repair and operations ("MRO") products. We stock approximately 100,000 plumbing, electrical, hardware, security, heating, ventilation and air conditioning ("HVAC"), janitorial and sanitary and other MRO products and sell to a diversified customer base made up of professional contractors, facilities maintenance professionals and specialty distributors. Our products are primarily used for the repair, maintenance, remodeling and refurbishment of properties and non-industrial facilities. We are able to realize high margins by focusing on repair, maintenance, remodeling and refurbishment customers, who generally make smaller, more frequent purchases and require high levels of service. Our diverse customer base includes facilities maintenance customers, which consist of multi-family housing facilities, educational institutions, lodging and health care facilities, government properties and building service contractors; professional contractors who are primarily involved in the repair, remodeling and construction of residential and non-industrial facilities; and specialty distributors, including plumbing and hardware retailers. Our customers range in size from individual contractors and independent hardware stores to apartment management companies and national purchasing groups.

We market and sell our products primarily through ten distinct and targeted brands, each of which is nationally recognized in the markets we serve for providing premium products at competitive prices with reliable same-day and/or next-day delivery. Our Wilmar, Sexauer, Maintenance USA and AmSan brands generally serve our facilities maintenance customers; our Barnett, U.S. Lock, Sun Star and Copperfield brands generally serve our professional contractor customers; and our Hardware Express and AF Lighting brands generally serve our specialty distributors customers. Our multi-brand operating model, which we believe is unique in the industry, allows us to use a single platform to deliver tailored products and services to meet the individual needs of each respective customer group served. We reach our markets using a variety of sales channels, including a sales force of over 625 field sales representatives and over 450 telesales and customer service representatives, a direct marketing program of approximately five million pieces annually, brand-specific websites and a national accounts sales program. We deliver our products through our network of two national distribution centers ("NDCs"), 71 regional distribution centers, 36 professional contractor showrooms located throughout the United States and Canada, 24 vendor-managed inventory locations at large customer locations and a dedicated fleet of trucks. Our broad distribution network allows us the ability to provide reliable, same-day and/or next-day delivery service to 98% of the U.S. population.

Our information technology and logistics platform supports our major business functions, allowing us to market and sell our products at varying price points depending on the customer's service requirements. While we market our products under a variety of branded catalogs, generally our brands draw from the same inventory within common distribution centers and share associated employee and transportation costs. In addition, we have centralized marketing, purchasing and catalog production operations to support our brands. We believe that our information technology and logistics platform also benefits our customers by allowing us to offer a broad product selection at highly competitive prices while maintaining the unique customer appeal of each of our targeted brands. Overall, our common operating platform has enabled us to improve customer service, maintain lower operating costs, efficiently manage working capital and support our growth initiatives.

Results of Operations



The following table presents information derived from the condensed consolidated
statements of earnings expressed as a percentage of revenues for the three and
nine months ended September 26, 2008 and September 28, 2007:



                                     % of Net Sales            % Increase             % of Net Sales            % Increase
                                   Three Months Ended          (Decrease)           Nine Months Ended           (Decrease)
                             September 26,    September 28,       2008        September 26,    September 28,       2008
                                 2008             2007        vs. 2007 (1)        2008             2007        vs. 2007 (1)
Net sales                            100.0 %          100.0 %         (3.8 )%         100.0 %          100.0 %         (2.2 )%
Cost of sales                         61.9             62.0           (4.0 )           62.2             62.1           (2.0 )
Gross profit                          38.1             38.0           (3.6 )           37.8             37.9           (2.5 )

Operating Expenses:
Selling, general and
administrative expenses               27.7             26.7           (0.3 )           28.5             27.7            0.4
Depreciation and
amortization                           1.4              1.1           22.0              1.3              1.1           14.3
Total operating expense               29.0             27.8            0.5             29.8             28.9            1.0
Operating income                       9.1             10.2          (14.8 )            8.0              9.0          (13.6 )

Interest expense                      (2.2 )           (2.6 )        (17.9 )           (2.4 )           (2.7 )        (15.0 )
Interest income and other
income                                 0.2              0.2          (13.7 )            0.2              0.2           (2.7 )
Income before income taxes             7.1              7.9          (13.7 )            5.8              6.5          (12.7 )
Income tax provision                  (2.7 )           (3.0 )        (13.2 )           (2.2 )           (2.5 )        (16.6 )
Net income                             4.3 %            4.8 %        (14.1 )%           3.7 %            4.0 %        (10.2 )%

Overview. During the three months ended September 26, 2008, our sales declined 3.8%. We believe this decline is associated with the widely reported general economic downturn and credit crisis. Demand from customers in our facilities maintenance end-markets, which make up 70% of our total sales and includes residential multi-family housing and institutional MRO customers, declined 2.4% during the third quarter of 2008 compared to the third quarter of 2007. Demand from our professional contractor and specialty distributor customers, which represent 19% and 11% of our total sales, respectively, declined 10.1% and 3.6%, respectively. Demand from these customers continues to be impacted by the prolonged declines in residential new construction activity and renovations activity. Net income as a percentage of sales was 4.3% in the third quarter compared to 4.8% in the comparable prior year period. The decline in net income is a result of lower sales, costs associated with our previously discussed operational initiatives, such as headcount reductions and closing underperforming professional contractor showrooms as well as higher fixed costs, such as rent expense and other occupancy costs, driven by our Auburn, Massachusetts, and Richmond, Virginia distribution center consolidations and our new NDC in Salt Lake City, Utah, which opened during the third quarter. These higher costs were offset in part by decreases in performance-based bonus and share-based compensation expense and lower interest expense associated with a lower interest rate environment. We will continue to work on lowering our operating costs in the near term while continuing to invest in our operating platform for the long term.

Three Months Ended September 26, 2008 Compared to Three Months Ended September 28, 2007

Net Sales. Our net sales decreased by $12.7 million, or 3.8%, to $317.5 million in the three months ended September 26, 2008 from $330.2 million in the three months ended September 28, 2007. The decline in sales resulted from the net impact of a 2.4% decrease in sales to our facilities maintenance customers and a continued decline in sales to our professional contractor and specialty distributor customers of 10.1% and 3.6%, respectively. We expect sales to our facilities maintenance, professional contractor and specialty distributor end-markets to remain weak during the remainder of 2008 as the general economic downturn and credit crisis is expected to continue to affect the housing market.

Gross Profit. Gross profit decreased by $4.5 million, or 3.6%, to $120.9 million in the three months ended September 26, 2008 from $125.4 million in the three months ended September 28, 2007 as a direct result of the decrease in sales. Our gross profit margin increased 10 basis points to 38.1% for the three months ended September 26, 2008 compared to 38.0% for the three months ended September 28, 2007. The increase in gross margin is primarily due to a change in sales mix as well as an increase in freight revenue, as we continue to manage the increase in rising fuel costs.

Selling, General and Administrative Expenses. SG&A expenses decreased by $0.3 million, or 0.3% to $87.8 million in the three months ended September 26, 2008 from $88.1 million in the three months ended September 28, 2007. As a percent of sales, SG&A increased to 27.7% for the three months ended September 26, 2008 compared to 26.7% for the three months ended September 28, 2007. The increase in SG&A expenses is primarily due to costs associated with our previously discussed operational initiatives, such as headcount reductions and closing underperforming professional-contractor showrooms as well as project expenses associated with the consolidation of certain distribution centers into our Auburn, Massachusetts, and Richmond, Virginia, locations and our investment in a west coast NDC in Salt Lake City, Utah, offset by lower performance-based bonus and share-based compensation expense.

Depreciation and Amortization. Depreciation and amortization expense increased by $0.8 million to $4.3 million in the three months ended September 26, 2008 from $3.5 million in the three months ended September 28, 2007. As a percentage of sales, depreciation and amortization was 1.4% or 30 basis points higher than the 1.1% in the comparable prior year period. These increases were due to higher depreciation resulting from our higher capital spending associated with our information systems infrastructure and distribution center consolidation and integration efforts.

Operating Income. As a result of the foregoing, operating income decreased by $5.0 million, or 14.8%, to $28.8 million in the three months ended September 26, 2008 from $33.8 million in the three months ended September 28, 2007. As a percent of sales, operating income decreased to 9.1% in the three months ended September 26, 2008 compared to 10.2% in the three months ended September 28, 2007.

Interest Expense. Interest expense decreased by $1.5 million in the three months ended September 26, 2008 to $7.1 million from $8.6 million in the three months ended September 28, 2007. This decrease was primarily due to lower interest rates as well as scheduled reductions in the principal balance of our term-debt.

Interest and Other Income. Interest and other income decreased $0.1 million to $0.7 million in the three months ended September 26, 2008 compared to $0.8 million in the three months ended September 28, 2007. The decrease was primarily attributable to lower interest income earned on lower short-term investment balances.

Provision for Income Taxes. The effective tax rate for the three months ended September 26, 2008 was 38.8% compared to 38.5% for the three months ended September 28, 2007. The decrease in the effective tax rate was primarily due to lower tax-free interest income.

Nine Months Ended September 26, 2008 Compared to Nine Months Ended September 28, 2007

Net Sales. Our net sales decreased by $20.8 million, or 2.2%, to $918.1 million in the nine months ended September 26, 2008 from $938.8 million in the nine months ended September 28, 2007. The decline in sales resulted from the net impact of a 1.4% increase in sales to our facilities maintenance customers offset by a decline in sales to our professional contractor and specialty distributor customers of 11.4% and 7.0%, respectively. We expect sales to our facilities maintenance, professional contractor and specialty distributor end-markets to remain weak during the remainder of 2008 as the general economic downturn and credit crisis is expected to continue specifically with respect to the housing market.

Gross Profit. Gross profit decreased by $8.9 million, or 2.5%, to $346.8 million in the nine months ended September 26, 2008 from $355.7 million in the nine months ended September 28, 2007 as a direct result of the decrease in sales as well as the slightly lower gross profit margin on those sales during the period. Our gross profit margin decreased 10 basis points to 37.8% for the nine months ended September 26, 2008 compared to 37.9% for the nine months ended September 28, 2007. The decrease in gross margin is due to an increase in sales of lower margin products, such as HVAC products, offset by continued operating efficiencies at our Nashville NDC.

Selling, General and Administrative Expenses. SG&A expenses increased by $1.1 million, or 0.4% to $261.4 million in the nine months ended September 26, 2008 from $260.3 million in the nine months ended September 28, 2007. As a percent of sales, SG&A increased 80 basis points to 28.5% for the nine months ended September 26, 2008 compared to 27.7% for the nine months ended September 28, 2007. The increase in SG&A expenses is primarily due to project expenses associated with the consolidation of distribution operations in Auburn, Massachusetts, and Richmond, Virginia, as well as investment in a west coast NDC in Salt Lake

City, Utah, and costs associated with our previously discussed operational initiatives, such as headcount reduction and closing underperforming professional-contractor showrooms, costs associated with a previously announced executive's transition and higher fixed costs, such as rent expense and other occupancy costs. These costs were offset in part by lower performance-based bonus and share-based compensation expense.

Depreciation and Amortization. Depreciation and amortization expense increased by $1.5 million to $12.3 million in the nine months ended September 26, 2008 from $10.8 million in the nine months ended September 28, 2007. As a percentage of sales, depreciation and amortization was 1.3% or 20 basis points higher than the 1.1% in the comparable prior year period. These increases were due to higher depreciation resulting from our higher capital spending associated with our information systems infrastructure and distribution center consolidation and integration efforts.

Operating Income. As a result of the foregoing, operating income decreased by $11.5 million, or 13.6%, to $73.1 million in the nine months ended September 26, 2008 from $84.6 million in the nine months ended September 28, 2007. As a percent of sales, operating income decreased to 8.0% in the nine months ended September 26, 2008 compared to 9.0% in the nine months ended September 28, 2007.

Interest Expense. Interest expense decreased by $3.8 million in the nine months ended September 26, 2008 to $21.8 million from $25.6 million in the nine months ended September 28, 2007. This decrease was primarily due to lower interest rates as well as scheduled reductions in the principal balance of our term-debt.

Interest and Other Income. Interest and other income decreased by $0.1 million in the nine months ended September 26, 2008 to $2.1 million from $2.2 million in the nine months ended September 28, 2007. The decrease was primarily attributable to lower interest income earned on lower short-term investment balances.

Provision for Income Taxes. The effective tax rate for the nine months ended September 26, 2008 was 37.1% compared to 38.8% for the nine months ended September 28, 2007. The decrease in the effective tax rate was primarily due to the decrease in a liability associated with previously unrecognized tax benefits. During the nine months ended September 26, 2008, we obtained resolutions on the uncertain tax positions that we took for two states and determined that we no longer needed the full amount of the accruals that we had established. As such, we made the appropriate adjustments, of which $0.8 million favorably impacted our effective tax rate for the nine-month period.

Liquidity and Capital Resources

Overview

We are a holding company whose only asset is the stock of our subsidiaries. We conduct virtually all of our business operations through Interline New Jersey. Accordingly, our only material sources of cash are dividends and distributions with respect to our ownership interests in Interline New Jersey that are derived from the earnings and cash flow generated by Interline New Jersey.

We have $200.0 million of 81/8% senior subordinated notes due 2014 and a $330.0 million bank credit facility. The bank credit facility consists of a $230.0 million 7-year term loan and a $100.0 million 6-year revolving credit facility of which a portion not exceeding $40.0 million is available in the form of letters of credit. As of September 26, 2008, Interline New Jersey had $9.6 million of letters of credit issued under the revolving loan facility and $215.1 million of aggregate principal outstanding under the term loan facility.

The 81/8% senior subordinated notes were priced at 99.3%, or $198.6 million, of their principal amount, representing a yield to maturity of 8¼%. We are amortizing the discount of $1.4 million over the term of the 81/8% senior subordinated notes. As of September 26, 2008, the 81/8% senior subordinated notes had a fair market value of $184.0 million or 92.0% of par. The 81/8% senior subordinated notes mature on June 15, 2014 and interest is payable on June 15 and December 15 of each year.

The debt instruments of Interline New Jersey, primarily the credit facility entered into on June 23, 2006 and the indenture governing the terms of the 81/8% senior subordinated notes, contain significant restrictions on the payment of dividends and distributions to us by Interline New Jersey. Interline New Jersey's credit facility allows it to pay dividends, make distributions to us or make investments in us in an aggregate amount not to exceed $2.0 million during any fiscal year, so long as Interline New Jersey is not in default or would be in default as a result of such payments. The indenture also permits annual payments of up to $7.5 million in respect of our stock option or other benefit plans for management or employees and (provided Interline New Jersey is not in default) aggregate payments of up to $40.0 million depending on the pro forma net leverage ratio as of the last day of the previous quarter. In addition, the indenture for the 81/8% senior subordinated notes generally restricts the ability of Interline New Jersey to pay distributions to us and to make advances to, or investments in, us to an amount generally equal to 50% of the net income of Interline New Jersey, plus an amount equal to the net

proceeds from certain equity issuances, subject to compliance with a leverage ratio and no default having occurred and continuing. The indenture also contains certain permitted exceptions including (1) allowing us to pay our franchise taxes and other fees required to maintain our corporate existence, to pay for general corporate and overhead expenses (up to $3.0 million annually) and to pay expenses incurred in connection with certain financing, acquisition or disposition transactions, in an aggregate amount not to exceed $10.0 million per year; (2) allowing certain other tax payments; and (3) allowing certain permitted distributions up to $75.0 million. For a further description of the credit facility, see "-Credit Facility" below.

Financial Condition

Working capital increased by $23.9 million to $355.1 million as of September 26, 2008 from $331.2 million as of December 28, 2007. The increase in working capital was primarily funded by cash flows from operating activities.

Cash Flow

Net cash provided by operating activities was $14.0 million in the nine months ended September 26, 2008 compared to net cash provided by operating activities of $45.5 million in the nine months ended September 28, 2007. The decrease of $31.5 million in net cash provided by operating activities was primarily a result of lower operating performance compared to the comparable prior year period and an increase in the working capital of the business. Changes in our main working capital components, which include accounts receivable, inventory and accounts payable, used $46.8 million during the nine months ended September 26, 2008 compared to $18.1 million during the nine months ended September 28, 2007. Changes in our main working capital components for the comparable nine-month period includes the increase of inventory of $38.9 million, an increase in trade accounts payable of $11.1 million and a decrease in trade accounts receivable of $21.3 million. The change in inventory is primarily a result of the increased inventory levels to stock $12.7 million of inventory in our new west coast NDC in Salt Lake City, Utah, $7.0 million to support our growing janitorial and sanitary product group and $2.9 million in other new MRO product offerings. The increase in trade accounts payable is reflective of higher year over year purchases of inventory and the decrease in trade accounts receivable is reflective of lower relative sales demand from our customers.

Net cash provided by investing activities was $17.5 million in the nine months ended September 26, 2008 compared to net cash used in investing activities of $39.7 million in the nine months ended September 28, 2007. Net cash provided by investing activities in the nine months ended September 26, 2008 was attributable to our investment of our excess cash balances which provided net proceeds from sales and maturities of short-term investments of $46.6 million offset by capital expenditures made in the ordinary course of business of $18.7 million and $10.3 million in costs related to purchases of businesses, net of cash. Net cash used in investing activities in the nine months ended September 28, 2007 was attributable to capital expenditures made in the ordinary course of business of $11.5 million and $28.2 million in net investments in short-term investments comprised of tax-exempt auction rate securities and variable-rate demand notes.

. . .