The following discussion should be read in conjunction with both the information at the end of Item 6 of this Annual Report on Form 10-K appearing under the caption, "Forward Looking Information", and the Company's Consolidated Financial Statements and related notes contained in Item 8 of this Annual Report.

Overview and Recent Results

The Company is North America's largest broad line wholesale distributor of business products, with 2008 net sales of nearly $5.0 billion. The Company sells its products through a national distribution network of 67 distribution centers to approximately 30,000 resellers, who in turn sell directly to end consumers.

Key Company and Industry Trends

The following is a summary of selected trends, events or uncertainties that the Company believes may have a significant impact on its future performance.

º •
º During the fourth quarter of 2008, the recession and related economic conditions contributed to a decline in sales, particularly in the office products division. While it is uncertain how long the current economic downturn will last, the Company expects the market to remain difficult in 2009. Sales year-to-date are trending down in the high single digits compared with the same period last year.

º •
º The Company has set an objective to reduce costs as quickly as possible to align them with lower sales. As a result of the workforce reduction announced January 27, 2009, the Company expects to incur a charge of approximately $3.0 million in the first quarter. The Company has also taken other aggressive steps to manage costs. These include the elimination of vacant positions and those filled by outside contractors, reducing the use of temporary workers and overtime and reducing staff needs due to increased productivity as a result of various strategic initiatives. The Company also expects to lower or avoid cost increases by increasing the use of voluntary time off without pay, eliminating merit increases and incentive pay for senior managers and all officers, reducing merit increases and incentive pay for all other associates and freezing pension service benefits for non-union employees effective March 1, 2009.

º •
º On December 21, 2007, the Company completed the acquisition of ORS Nasco, a pure wholesale distributor of industrial supplies. ORS Nasco sales for 2008 were $307 million and earnings per diluted share for the year included a $0.23 per share contribution from ORS Nasco. This exceeded the Company's targeted full year 15 - 20 cents of earnings per share accretion in 2008 for ORS Nasco.

º •
º On September 2, 2008, the Company completed the acquisition of certain assets and liabilities of Emco Distribution LLC's New Jersey business. The $15 million purchase price was funded under the Company's credit agreement.

º •
º Total Company sales for 2008 grew 7.3% to nearly $5.0 billion. Adjusted for one more sales day in 2008, sales were up 6.9% over 2007. Continued strong growth was seen in janitorial and breakroom supplies with relatively flat sales in traditional office products. These improvements were partially offset by declines in the technology and furniture categories. The 2008 results include ORS Nasco which contributed approximately 6.5% to the growth in 2008.

º •
º Gross margin as a percent of sales for 2008 was 14.9% versus 15.2% in 2007. The gross margin rate in 2008 was negatively impacted by declines of 45 basis points due to reduced supplier

º •
º Operating expenses as a percent of sales for the year were 11.0% compared to 10.9% in 2007. The increase from 2007 to 2008 is due to an increase in bad debt expense for the year or 24 basis points as a percent of sales.

º •
º Operating cash flows for the year were a use of $129.3 million versus a source of $218.1 million in 2007. Adjusted to exclude the effects of accounts receivable sold under the Receivables Securitization Program, the Company's operating cash flows declined to a source of $95.7 million in 2008 from $195.1 million in 2007. This decline represents lower net income and an unusually unfavorable balance of inventories and payables due to the timing of investment buy purchases in the fourth quarter of 2008. Operating cash flows in 2007 were favorably impacted by the liquidation of a high year-end 2006 working capital balance.

º •
º During 2008, the Company acquired approximately 1.2 million shares of common stock for $67.5 million under its publicly announced share repurchase programs. As of February 23, 2009, the Company had approximately $100.9 million remaining of its existing share repurchase authorizations from the Board of Directors.

Acquisition of Emco Distribution LLC

On September 2, 2008, the Company closed the asset acquisition of Emco Distribution LLC's New Jersey business, including certain liabilities. The payment of the base purchase price of $15.1 million and transaction costs of $0.1 million were funded under the Company's credit agreement. The purchase resulted in goodwill and intangible assets of $2.4 million and $3.7 million, respectively. The purchase included $0.7 million of intangible assets with indefinite lives and $3.0 million of amortizable intangibles. Amortization expense associated with the intangible assets is expected to be approximately $0.3 million per year for 10 years. Subsequent adjustments may be made to the purchase price allocation based on, among other things, post-closing purchase price adjustments and finalizing the valuation of tangible and intangible assets.

Acquisition of ORS Nasco Holding, Inc.

On December 21, 2007, the Company's subsidiary, USSC, completed the purchase of 100% of the outstanding shares of ORS Nasco Holding, Inc. (ORS Nasco) from an affiliate of Brazos Private Equity Partners, LLC of Dallas, Texas, and other shareholders. This acquisition was completed with the payment of the base purchase price of $175.0 million plus estimated working capital adjustments, a pre-closing tax benefit payment, and other adjusting items. The purchase price was also subject to certain post-closing adjustments of which approximately $0.4 million was adjusted downward based on the subsequently negotiated working capital calculations in the second quarter of 2008. In total, the purchase price, net of cash acquired, was $180.2 million, including $0.5 million in transaction costs. The acquisition allowed the Company to diversify its product offering and provided an entry into the wholesale industrial supplies market. The purchase price was financed through the addition of a $200 million term loan under the Company's credit agreement.

The acquisition was accounted for under the purchase method of accounting in accordance with Financial Accounting Standards No. 141, Business Combinations, with the excess purchase price over the fair market value of the assets acquired and liabilities assumed allocated to goodwill. Based on the purchase price allocation, the purchase price of $180.2 million, net of cash received, has resulted in goodwill and intangible assets of $86.4 million and $44.9 million, respectively. The purchase included $12.3 million of intangible assets related to trademarks and trade names that have indefinite lives while

the remaining $32.6 million in intangible assets acquired is amortizable and related to customer lists and certain non-compete agreements. Neither the goodwill nor the intangible assets are expected to generate a tax deduction. For financial accounting purposes, the amortizable intangible assets are treated as a temporary difference for which a deferred tax liability of $12.2 million was recorded through purchase accounting. In addition, a deferred tax liability of $4.6 million was recorded for intangible assets with indefinite lives. The amortization expense related to the intangible assets is treated as the reversal of the temporary difference which has no impact on the effective tax rate. The weighted average useful life of amortizable intangibles is expected to be approximately 13 years. The Company recorded amortization expense of $2.1 million in 2008.

Critical Accounting Policies, Judgments and Estimates

The Company's significant accounting policies are more fully described in Note 2 of the Consolidated Financial Statements. As described in Note 2, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results may differ from those estimates. The Company believes that such differences would have to vary significantly from historical trends to have a material impact on the Company's financial results.

The Company's critical accounting policies are most significant to the Company's financial condition and results of operations and require especially difficult, subjective or complex judgments or estimates by management. In most cases, critical accounting policies require management to make estimates on matters that are uncertain at the time the estimate is made. The basis for the estimates is historical experience, terms of existing contracts, observance of industry trends, information provided by customers or vendors, and information available from other outside sources, as appropriate. These critical accounting policies include the following:

Supplier allowances (fixed and variable) are common practice in the business products industry and have a significant impact on the Company's overall gross margin. Gross margin is determined by, among other items, file margin (determined by reference to invoiced price), as reduced by estimated customer discounts and rebates as discussed below, and increased by estimated supplier allowances and promotional incentives. These allowances and incentives are estimated on an ongoing basis and the potential variation between the actual amount of these margin contribution elements and the Company's estimates of them could be material to its financial results. Reported results include management's current estimate of such allowances and incentives.

In 2008, approximately 17% of the Company's estimated annual supplier allowances and incentives were fixed, based on supplier participation in various Company advertising and marketing publications. Fixed allowances and incentives are taken to income through lower cost of goods sold as inventory is sold.

The remaining 83% of the Company's estimated supplier allowances and incentives in 2008 were variable, based on the volume and mix of the Company's product purchases from suppliers. These variable allowances are recorded based on the Company's annual inventory purchase volumes and product mix and are included in the Company's Consolidated Financial Statements as a reduction to cost of goods sold, thereby reflecting the net inventory purchase cost. Supplier allowances and incentives attributable to unsold inventory are carried as a component of net inventory cost. The potential amount of variable supplier allowances often differs based on purchase volumes by supplier and product category. As a result, lower Company sales volume (which reduce inventory purchase

requirements) and product sales mix changes (primarily because higher-margin products often benefit from higher supplier allowance rates) can make it difficult to reach supplier allowance goals.

The Company transitioned to a calendar year program with its 2006 Supplier Allowance Program for product content syndication. This change altered the year-over-year timing on recognizing related income, which resulted in a positive impact to gross margin of $41.6 million during 2006.

Customer rebates and discounts are common in the business products industry and have a significant impact on the Company's overall sales and gross margin. Such rebates are reported in the Consolidated Financial Statements as a reduction of sales.

Customer rebates include volume rebates, sales growth incentives, advertising allowances, participation in promotions and other miscellaneous discount programs. These rebates are paid to customers monthly, quarterly and/or annually. Volume rebates and growth incentives are based on the Company's annual sales volumes to its customers. The aggregate amount of customer rebates depends on product sales mix and customer mix changes.

During 2006, the Company changed the timing of certain marketing programs impacting catalog charges and related customer rebates, which resulted in a favorable impact to gross margin of $19.0 million.

Revenue is recognized when a service is rendered or when title to the product has transferred to the customer. Management establishes a reserve and records an estimate for future product returns related to revenue recognized in the current period. This estimate requires management to make certain estimates and judgments, including estimating the amount of future returns of products sold in the current period. This estimate is based on historical product-return trends and the loss of gross margin associated with those returns. This methodology involves some risk and uncertainty due to its dependence on historical information for product returns and gross margins to record an estimate of future product returns. If actual product returns on current period sales differ from historical trends, the amounts estimated for product returns (which reduce net sales) for the period may be overstated or understated, causing actual results of operations or financial condition to differ from those expected.

To determine an estimate for an allowance for doubtful accounts, the Company makes judgments as to the collectability of accounts receivable based on historical trends and future expectations. This allowance adjusts gross trade accounts receivable downward to its estimated collectible or net realizable value. To determine the appropriate allowance for doubtful accounts, management undertakes a two-step process. First, management reviews specific customer accounts receivable balances and specific customer circumstances to determine whether a further allowance is necessary. As part of this specific-customer analysis, management considers items such as account agings, bankruptcy filings, litigation, government investigations, historical charge-off patterns, accounts receivable concentrations and the current level of receivables compared with historical customer account balances. Second, a set of general allowance percentages are applied to accounts receivable generated as a result of sales. These percentages are based on historical trends for non-specific customer write-offs. Periodically, management reviews these allowance percentages, adjusting for current information and trends.

The primary risks in the methodology used to estimate the allowance for doubtful accounts are its dependence on historical information to predict the collectability of accounts receivable and timeliness

of current financial information from customers. To the extent actual collections of accounts receivable differ from historical trends, the allowance for doubtful accounts and related expense for the current period may be overstated or understated.

The Company is primarily responsible for retained liabilities related to workers' compensation, vehicle, property and general liability and certain employee health benefits. The Company records expense for paid and open claims and an expense for claims incurred but not reported based upon historical trends and certain assumptions about future events. The Company has an annual per-person maximum cap, provided by a third-party insurance company, on certain employee medical benefits. In addition, the Company has both a per-occurrence maximum loss and an annual aggregate maximum cap on workers' compensation claims.

Inventory constituting approximately 81% of total inventory as of both December 31, 2008 and 2007, has been valued under the last-in, first-out ("LIFO") accounting method. LIFO results in a better matching of costs and revenues. The remaining inventory is valued under the first-in, first-out ("FIFO") accounting method. Inventory valued under the FIFO and LIFO accounting methods is recorded at the lower of cost or market. If the Company had valued its entire inventory under the lower of FIFO cost or market, inventory would have been $84.7 million and $60.4 million higher than reported as of December 31, 2008 and December 31, 2007, respectively. The increase in the LIFO reserve, which increased cost of sales by $24.3 million, was partially offset by reduced cost of sales resulting from decrements in certain LIFO pools. During 2008, inventory quantities for the portion of inventory accounted for under the LIFO accounting method were reduced. These reductions resulted in liquidations of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of current year purchases. The effect of these liquidations decreased cost of sales by approximately $5.4 million, which is included in the $24.3 million referenced above.

The Company records adjustments for shrinkage. Inventory that is obsolete, damaged, defective or slow moving is recorded to the lower of cost or market. These adjustments are determined using historical trends and are adjusted, if necessary, as new information becomes available.

The Company's risk management policies allow for the use of derivative financial instruments to prudently manage foreign currency exchange rate and interest rate exposure. The policies do not allow such derivative financial instruments to be used for speculative purposes. At this time, the Company primarily uses interest rate swaps which are subject to the management, direction and control of our financial officers. Risk management practices, including the use of all derivative financial instruments, are presented to the Board of Directors for approval.

All derivatives are recognized on the balance sheet date at their fair value. All derivatives in a net receivable position are included in "Other assets", and those in a net liability position are included in "Other long-term liabilities". The interest rate swaps that the Company has entered into are classified as cash flow hedges in accordance with the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards (SFAS) No. 133 as they are hedging a forecasted transaction or the variability of cash flow to be paid by the Company. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in other comprehensive income, net of tax, until earnings are affected by the forecasted transaction or the variability of cash flow, and then are reported in current earnings.

The Company formally assesses, at both the hedge's inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flow of hedged items. When it is determined that a derivative is not highly effective as a hedge then hedge accounting is discontinued prospectively in accordance with SFAS No. 133. At this time, this has not occurred as all cash flow hedges contain no ineffectiveness. See Note 20, "Derivative Financial Instruments", for further detail.

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. The Company estimates actual current tax expense and assesses temporary differences that exist due to differing treatments of items for tax and financial statement purposes. These temporary differences result in the recognition of deferred tax assets and liabilities.

The current and deferred tax balances and income tax expense recognized by the Company are based on management's interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Company's best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of tax laws, and tax planning. Future changes in tax laws, changes in projected levels of taxable income, and tax planning could impact the effective tax rate and current and deferred tax balances recorded by the Company. Management's estimates as of the date of the Consolidated Financial Statements reflect its best judgment giving consideration to all currently available facts and circumstances. As such, these estimates may require adjustment in the future, as additional facts become known or as circumstances change. Further, in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement 109 ("FIN No. 48"), the tax effects from uncertain tax positions are recognized in the Consolidated Financial Statements, only if it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The Company also accounts for interest and penalties related to uncertain tax positions as a component of income tax expense.

Calculating the Company's obligations and expenses related to its pension and postretirement health benefits requires using certain actuarial assumptions. As more fully discussed in Notes 12 and 13 to the Consolidated Financial Statements included in Item 8 of this Annual Report, these actuarial assumptions include discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation and healthcare costs. To select the appropriate actuarial assumptions, management relies on current market trends and historical information. The expected long-term rate of return on plan assets assumption is based on historical returns and the future expectation of returns for each asset category, as well as the target asset allocation of the asset portfolio. Pension expense for 2008 was $5.6 million, compared to $7.4 million in 2007 and $8.8 million in 2006. A one percentage point decrease in the assumed discount rate would have resulted in an increase in pension expense for 2008 of approximately $2.7 million and increased the year-end projected benefit obligation by $20.7 million.

Costs associated with the Company's postretirement health benefits plan were $0.1 million for each year ended 2008, 2007 and 2006. A one-percentage point decrease in the assumed discount rate would have resulted in incremental postretirement healthcare expenses for 2008 of approximately $0.1 million and increased the year-end accumulated postretirement benefit obligation by $0.6 million. Current rates of medical cost increases are trending above the Company's medical cost increase cap of 3% provided by

the plan. Accordingly, a one percentage point increase in the assumed average healthcare cost trend would not have a significant impact on the Company's postretirement health plan costs.

The following tables summarize the Company's actuarial assumptions for discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation and healthcare costs for the years ended December 31, 2008, 2007

and 2006:

                                                          2008     2007     2006
      Pension plan assumptions:
      Assumed discount rate                                6.25 %   6.00 %   6.00 %
      Rate of compensation increase                        3.75 %   3.75 %   3.75 %
      Expected long-term rate of return on plan assets     8.25 %   8.25 %   8.25 %
      Postretirement health benefits assumptions:
      Assumed average healthcare cost trend                3.00 %   3.00 %   3.00 %
      Assumed discount rate                                6.25 %   6.00 %   6.00 %

To select the appropriate actuarial assumptions, management relied on current market conditions, historical information and consultation with and input from the Company's outside actuaries. The expected long-term rate of return on plan assets assumption is based on historical returns and the future expectation of returns for each asset category, as well as the target asset allocation of the asset portfolio.

The Company expects to freeze pension service benefits for employees not covered by collective bargaining agreements. This action has been approved and is expected to be effective March 1, 2009.

Results for the Years Ended December 31, 2008, 2007 and 2006

The following table presents the Consolidated Statements of Income as a
percentage of net sales:

                                                 Years Ended December 31,
                                              2008          2007         2006
         Net sales                             100.00 %     100.00 %     100.00  %
         Cost of goods sold                     85.15        84.79        83.42

         Gross margin                           14.85        15.21        16.58
         Operating expenses:
            Warehousing, marketing and
            administrative expenses             10.99        10.82        11.35
            Restructuring and other
            charges, net                            -         0.03         0.04

         Total operating expenses               10.99        10.85        11.39

         Operating income                        3.86         4.36         5.19
         Interest expense, net                   0.55         0.26         0.16
         Other expense, net                      0.16         0.31         0.28

         Income from continuing
         operations before income taxes          3.15         3.79         4.75
         Income tax expense                      1.18         1.48         1.77

         Income from continuing
         operations                              1.97         2.31         2.98
         Loss from discontinued
         operations, net of tax                     -            -        (0.07 )

         Net income                              1.97 %       2.31 %       2.91 %

The above table includes all items that are separately itemized in the tables below for 2008 and 2007. Operating expenses for 2006 were also impacted by a charge related to a $6.0 million restructuring charge reflecting the 2006 Workforce Reduction Program, a $6.7 million charge related to the write-off of the Company's internal systems initiative, and a $4.1 million reversal of a prior-period restructuring charge.

. . .