2008                                2007
                                                                  % of                                % of
                                               Amount           Net Sales          Amount           Net Sales

Net sales
MRO                                           $ 102,692               82.4 %      $ 108,183               84.6 %
OEM                                              21,875               17.6           19,730               15.4

Consolidated total                            $ 124,567              100.0        $ 127,913              100.0

Gross profit
MRO                                           $  68,833               67.0 %      $  72,154               66.7 %
OEM                                               1,459                6.7            4,302               21.8

Consolidated total                               70,292               56.4           76,456               59.8

Operating expenses:
Selling, general and administrative
expenses                                         62,994               50.6           66,251               51.8
Settlement related costs                            394                0.3            1,172                0.9
Severance and other charges                       1,144                0.9            3,671                2.9


Operating income                                  5,760                4.6            5,363                4.2
Other, net                                         (192 )             (0.1 )           (135 )             (0.1 )

Income from continuing operations before
income tax expense                                5,568                4.5            5,228                4.1
Income tax expense                                2,500                2.0            2,818                2.2


Income from continuing operations             $   3,068                2.5 %      $   2,410                1.9 %

Net Sales
Net sales for the three-month period ended September 30, 2008 decreased 2.6% to $124.6 million, from $127.9 million in the same period of 2007.
MRO net sales decreased $5.5 million or 5.1% in the third quarter of 2008, to $102.7 million from $108.2 million in the prior year period. MRO net sales declined primarily as a result of lower sales in metal working products and chemicals which were negatively impacted by a net reduction of approximately 100 sales agents from September 30, 2007 to September 30, 2008.
OEM net sales increased $2.2 million in the third quarter of 2008, to $21.9 million from $19.7 million in the prior year period. The sales increase experienced during the third quarter was primarily attributable to expanding the volume of sales generated from our current customers. Gross Profit
The gross profit margin for the third quarter of 2008 was 56.4%, 3.4 percentage points lower than the 59.8% achieved in the third quarter of 2007. The decline in gross profit margin is primarily attributable to a change in sales mix and increased product and commodity costs.
MRO gross profit decreased $3.3 million or 4.6% in the third quarter of 2008, to $68.8 million from $72.2 million in the prior year period. However, gross profit as a percent of net sales increased slightly to 67.0% for the third quarter of 2008 from 66.7% in the third quarter of 2007. The 2008 gross margin

includes a $2.4 million favorable inventory reserve adjustment. Excluding the inventory adjustment, gross profit as a percent of net sales declined to 64.7% for the third quarter of 2008, reflecting increased product and commodity costs. Additional price increases will be implemented in the fourth quarter period to offset these increased costs.
OEM gross profit decreased $2.8 million in the third quarter of 2008, to $1.5 million from $4.3 million in the prior year period. The decrease was primarily due to a $2.7 million inventory reserve adjustment and increased product and commodity costs. Price increases to cover the increased product and commodity costs have not yet been fully implemented due to existing contractual obligations. Excluding the inventory adjustment, gross profit as a percent of net sales decreased to 18.8% for the third quarter of 2008 from 21.8% in the third quarter of 2007
Selling, General and Administrative Expenses ("SG&A") SG&A expenses were $63.0 million and 50.6% of net sales and $66.3 million and 51.8% of net sales for the quarters ended September 30, 2008 and 2007, respectively. The $3.3 million reduction in third quarter 2008 SG&A expenses primarily reflects lower sales commission and employee compensation costs. Settlement Related Costs
The Company incurred costs of $0.4 million and $1.2 million in the third quarter of 2008 and 2007, respectively, related to the investigation by the U.S. Attorney's Office for the Northern District of Illinois as to whether Company sales representatives provided improper gifts or awards to purchasing agents (including government purchasing agents) through the Company's customer loyalty programs. See Note J in the Condensed Consolidated Financial Statements for further information.
Severance and Other Charges
In the third quarter of 2008, the Company recorded $1.1 million of severance and other charges. Of this amount, $0.8 million related to severance costs associated with the departure of certain executives and operational efficiency improvement initiatives implemented in 2008 and $0.3 million related to unclaimed property liabilities relating primarily to years prior to 2003. In the third quarter of 2007, the Company recorded $3.7 million of severance costs. Income Tax Expense
For the three months ended September 30, 2008, the Company recorded $2.5 million of income tax expense, based on a pre-tax income from continuing operations of $5.6 million, resulting in an effective tax rate of 44.9%. For the three months ended September 30, 2007, income tax expense of $2.8 million was recorded based on pre-tax income of $5.2 million, resulting in an effective tax rate of 53.9%. The higher rate for 2007 was related to the exclusion of tax deductions for expenses related to the Company's customer loyalty programs.

Nine Months ended September 30, 2008 compared to Nine Months ended September 30, 2007
The following table presents a summary of the Company's financial performance for the nine months ended September 30, 2008 and 2007:

                                                          2008                                2007
                                                                  % of                                % of
                                               Amount           Net Sales          Amount           Net Sales

Net sales
MRO                                           $ 312,011               83.0 %      $ 323,344               83.6 %
OEM                                              63,870               17.0           63,416               16.4

Consolidated total                            $ 375,881              100.0        $ 386,760              100.0

Gross profit
MRO                                           $ 205,836               66.0 %      $ 214,216               66.3 %
OEM                                              10,324               16.2           14,764               23.3

Consolidated total                              216,160               57.5          228,980               59.2

Operating expenses:
Selling, general and administrative
expenses                                        192,367               51.2          199,714               51.6
Settlement and related costs                     31,562                8.4            4,947                1.3
Severance and other charges                       7,659                2.0           11,034                2.9


Operating (loss) income                         (15,428 )             (4.1 )         13,286                3.4
Other, net                                         (362 )             (0.1 )           (107 )                -

(Loss) income from continuing operations
before income tax expense                       (15,790 )             (4.2 )         13,179                3.4
Income tax expense                                5,853                1.6            6,063                1.6


(Loss) income from continuing operations      $ (21,643 )              5.8 %      $   7,116                1.8 %

Net Sales
Net sales for the nine-month period ended September 30, 2008 decreased 2.8% to $375.9 million, from $386.8 million in the same period of 2007.
MRO net sales decreased $11.3 million or 3.5% in the first nine months of 2008, to $312.0 million from $323.4 million in the prior year period. MRO net sales declined primarily as a result of lower sales in metal working products and chemicals which were negatively impacted by a net reduction of approximately 100 sales agents from September 30, 2007 to September 30, 2008.
OEM net sales increased $0.5 million in the first nine months of 2008, to $63.9 million from $63.4 million in the prior year period. The sales increase was primarily attributable to expanding the volume of sales generated from our current customers partially offset by customer losses. Gross Profit
Gross profit margins for the first nine months of 2008 were 57.5% down 1.7 percentage points from 59.2% in the first nine months of 2007. The decline in gross profit margin is primarily attributable to a change in sales mix and increased product and commodity costs.
MRO gross profit decreased $8.4 million or 3.9% in the first nine months of 2008, to $205.8 million from $214.2 million in the prior year period. Gross profit as a percent of net sales decreased slightly to 66.0% for the first nine months of 2008 from 66.3% in the prior year period. Excluding a favorable $2.4 million inventory reserve adjustment, gross profit as a percent of net sales was 65.2% for the 2008 period.

OEM gross profit decreased $4.5 million in the first nine months of 2008, to $10.3 million from $14.8 million in the prior year period. The decrease was partially due to a $2.7 million inventory reserve adjustment and increased product and commodity costs. Excluding the inventory adjustment, gross profit as a percent of net sales decreased to 20.3% for the first nine months of 2008 from 23.3% in the first nine months of 2007 reflecting increased product and commodity costs.
Selling, General and Administrative Expenses SG&A expenses were $192.4 million and 51.2% of net sales and $199.7 million and 51.6% of net sales for the nine-months ended September 30, 2008 and 2007, respectively. The $7.3 million reduction in SG&A expenses reflects lower sales commission and employee compensation costs, offset partially by higher supplies expense and consulting fees.
Settlement and Related Costs
The Company incurred penalties and related costs of $31.6 million in the first nine-months of 2008 and investigation costs of $4.9 million in the first nine-months of 2007 in conjunction with the investigation by the U.S. Attorney's Office for the Northern District of Illinois related to whether Company sales representatives provided improper gifts or awards to purchasing agents (including government purchasing agents) through the Company's customer loyalty programs. See Note J in the Condensed Consolidated Financial Statements for further information.
Severance and Other Charges
In the first nine-months of 2008, the Company recorded $7.6 million of severance and other charges. Of this amount, $3.7 million related to severance costs associated with the departure of certain executives and operational efficiency improvement initiatives implemented in 2008 and $3.9 million related to unclaimed property liabilities relating primarily to years prior to 2003. In the first nine-months of 2007, the Company recorded $11.0 million of severance and other charges.
Income Tax Expense
The income tax provision recorded for the nine months ended September 30, 2008 of $5.9 million was affected by approximately $29.2 million of the $30 million provision related to the settlement of the investigation by the U.S. Attorney's Office for the Northern District of Illinois, which was non-deductible. Excluding the effect of the non-deductible settlement, the income tax as a percentage of pre-tax income for the nine months ended September 30, 2008 was 43.6% compared to 46.0% for the nine months ended September 30, 2007.

Liquidity and Capital Resources
Net cash provided by operations was $13.0 million for the first nine months of 2008 compared to $4.1 million in the first nine months of 2007. The $8.9 million increase is primarily due to improved working capital utilization.
Working capital, including cash and cash equivalents, at September 30, 2008, was $83.5 million as compared to $99.1 million at December 31, 2007. The $15.6 million decrease in working capital is primarily attributable to the $10.0 million current liability relating to settlement of the investigation by the U.S. Attorney's Office for the Northern District of Illinois and an $8.0 million reduction in inventory resulting from initiatives taken to improve the inventory management process.
Net cash used for investing activities was $2.7 million for the nine-month period ended September 30, 2008 compared to $13.8 million for the prior year period, reflecting lower capital expenditures in the first nine months of 2008. Capital expenditures in 2008 were principally related to improvement of existing facilities and the purchase of related equipment. For the 2007 period, capital expenditures were principally related to the Reno, Nevada facility expansion, which was completed in 2007.
Net cash used in financing activities in the first nine months of 2008 was $5.6 million compared to net cash provided by financing activities of $7.9 million in the first nine months of 2007, primarily reflecting borrowings and payments on the Company's revolving line of credit.
The Company announced a cash dividend of $.20 per common share in the third quarter of 2008, equal to the cash dividend of $.20 per share announced in the third quarter of 2007.
Cash from operations and a $75.0 million unsecured revolving line of credit have been sufficient to fund operating requirements, cash dividends and capital expenditures. The Company had $10.5 million outstanding as of September 30, 2008 under its revolving line of credit. The line of credit contains certain financial covenants regarding interest coverage, minimum stockholders' equity and working capital. The revolving credit agreement was amended in the third quarter of 2008, to modify certain covenant calculations relating to the $30 million provision made in connection with the settlement of the investigation by the U.S. Attorney's Office. The Company was in compliance with all covenants at September 30, 2008.
Cash from operations and the revolving line of credit are expected to be adequate to finance the Company's future operations including the remaining settlement payments and costs related to the investigation with the U.S. Attorney's Office. However, if market and other conditions change from those we anticipate due to a prolonged economic slowdown, our liquidity may be adversely affected.