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, and

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

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 have one operating segment, the distribution of MRO products. We stock over 90,000 MRO products in the following categories:
plumbing, janitorial and sanitary, electrical, lighting, hardware, security, heating, ventilation and air conditioning and other miscellaneous products. 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 twelve 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, AmSan, Sexauer, Maintenance USA and Trayco brands generally serve our facilities maintenance customers; our Barnett, Copperfield, U.S. Lock, Sun Star and Leran 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 600 field sales representatives and over 375 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"), 65 regional distribution centers, 30 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
months ended March 27, 2009 and March 28, 2008:



                                                  % of Net Sales        % Increase
                                                Three Months Ended      (Decrease)
                                               March 27,   March 28,       2009
                                                 2009        2008      vs. 2008 (1)

Net sales                                          100.0 %     100.0 %        (11.2 )%
Cost of sales                                       62.4        61.9          (10.6 )
Gross profit                                        37.6        38.1          (12.2 )

Operating Expenses:
Selling, general and administrative expenses        32.7        29.4           (1.3 )
Depreciation and amortization                        1.8         1.3           19.5
Total operating expense                             34.5        30.7           (0.4 )
Operating income                                     3.1         7.3          (62.0 )

Gain on extinguishment of debt, net                  0.7           -          100.0
Interest expense                                    (2.1 )      (2.7 )        (30.5 )
Interest income and other income                     0.1         0.2          (58.3 )
Income before income taxes                           1.8         4.9          (66.9 )
Income tax provision                                (0.7 )      (1.9 )        (67.8 )
Net income                                           1.1 %       3.0 %        (66.3 )%

Overview. During the three months ended March 27, 2009, our sales declined 11.2%. 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 72% of our total sales and includes residential multi-family housing and institutional MRO customers, declined 6.7% during the first quarter of 2009 compared to the first quarter of 2008. Demand from our professional contractor and specialty distributor customers, which represent 16% and 12% of our total sales, respectively, declined 27.3% and 9.4%, 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 1.1% in the first quarter compared to 3.0% in the comparable prior year period. The decline in net income is a result of lower sales, increased bad debt expense primarily associated with a customer seeking Chapter 11 bankruptcy protection in March, severance and distribution center closing costs associated with our previously discussed operational initiatives, such as headcount reductions and consolidation of certain distribution centers, and the write-off of deferred acquisition costs due to the adoption of an accounting standard 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 of 2008. These higher costs were offset in part by the net gain from the early extinguishment of debt and the lower interest expense associated with lower debt balances and a lower interest rate environment as well as the cost savings derived from the closing of underperforming professional contractor centers in 2008 and the consolidation of certain distribution centers as mentioned above.

We are continuing to focus on lowering our operating costs in the near term while continuing to invest in our operating platform for the long term. Accordingly, in addition to the operational initiatives such as headcount reductions, the closing of underperforming professional contractor showrooms and the consolidation of distribution centers, some of which have been completed, our plans include continued investments in information technology solutions to optimize customer service.

Three Months Ended March 27, 2009 Compared to Three Months Ended March 28, 2008

Net Sales. Our net sales decreased by $32.4 million, or 11.2%, to $256.8 million in the three months ended March 27, 2009 from $289.1 million in the three months ended March 28, 2008. The decline in sales resulted from the net impact of a 6.7% decrease in sales to our facilities maintenance customers and a continued decline in sales to our professional contractor and specialty distributor customers of 27.3% and 9.4%, respectively. We expect sales to our facilities maintenance, professional contractor and specialty distributor end-markets to remain weak during the remainder of 2009 as the general economic downturn and credit crisis is expected to continue to affect the housing market.

Gross Profit. Gross profit decreased by $13.5 million, or 12.2%, to $96.6 million in the three months ended March 27, 2009 from $110.1 million in the three months ended March 28, 2008 as a direct result of the decrease in sales. Our gross profit margin decreased 50 basis points to 37.6% for the three months ended March 27, 2009 compared to 38.1% for the three months ended March 28, 2008. The decrease in gross margin is primarily due to a decrease in selling margins associated with the decrease in sales demand.

Selling, General and Administrative Expenses. SG&A expenses decreased by $1.1 million, or 1.3%, to $83.9 million in the three months ended March 27, 2009 from $85.0 million in the three months ended March 28, 2008. As a percent of sales, SG&A increased to 32.7% for the three months ended March 27, 2009 compared to 29.4% for the three months ended March 28, 2008. The increase in SG&A expenses as a percent of sales is primarily due to $3.9 million in increased bad debt expense primarily associated with a customer seeking Chapter 11 bankruptcy protection in March, $2.4 million in severance and distribution center closing costs associated with our previously discussed operational initiatives, such as headcount reductions and consolidation of certain distribution centers and the write-off of $0.7 million in deferred acquisition costs due to the adoption of Financial Accounting Standard Board ("FASB") Statement No. 141 (revised 2007), Business Combinations. We have increased our accounts receivable reserve to adjust for higher levels of risk in our portfolio stemming from an unprecedented market environment. These costs were partially offset by the cost savings derived from the closing of underperforming professional contractor centers in 2008 and the consolidation of certain distribution centers during the quarter.

Depreciation and Amortization. Depreciation and amortization expense increased by $0.8 million to $4.6 million in the three months ended March 27, 2009 from $3.9 million in the three months ended March 28, 2008. As a percentage of sales, depreciation and amortization was 1.8% or 50 basis points higher than the 1.3% in the comparable prior year period. These increases were due to higher depreciation resulting from our higher capital spending during 2008 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 $13.1 million, or 62.0%, to $8.0 million in the three months ended March 27, 2009 from $21.2 million in the three months ended March 28, 2008. As a percent of sales, operating income decreased to 3.1% in the three months ended March 27, 2009 compared to 7.3% in the three months ended March 28, 2008.

Gain on Extinguishment of Debt. Gain on extinguishment of debt was $1.7 million in the three months ended March 27, 2009. During the three months ended March 27, 2009, we repurchased $36.4 million of our 81/8% senior subordinated notes at an average of 93.8% of par, or $34.2 million. In addition, we repaid $5.2 million of our term loan ahead of schedule. In connection with the repurchase of our 81/8% senior subordinated notes and the term loan payment, we recorded a gain on extinguishment of debt of $1.7 million net of $0.5 million in original issue discount and deferred financing costs written-off. We did not extinguish debt in the three months ended March 28, 2008.

Interest Expense. Interest expense decreased by $2.4 million in the three months ended March 27, 2009 to $5.4 million from $7.7 million in the three months ended March 28, 2008. This decrease was primarily due to lower interest rates and lower debt balances outstanding associated with the repayment of our term loan and the repurchase of our 81/8% senior subordinated notes.

Interest and Other Income.Interest and other income decreased $0.4 million to $0.3 million in the three months ended March 27, 2009 compared to $0.7 million in the three months ended March 28, 2008. The decrease was primarily attributable to lower interest income earned resulting from lower interest rates on cash held in banks and the decrease in short-term investment balances.

Provision for Income Taxes. The effective tax rate for the three months ended March 27, 2009 was 37.5% compared to 38.5% for the three months ended March 28, 2008. The decrease in the effective tax rate was primarily due to the decrease in a liability associated with previously unrecognized tax benefits partially offset by an increase in state taxes. During the three months ended March 27, 2009, we obtained resolution related to an uncertain state tax position and accordingly we adjusted the accrual previously established. As such, we made the appropriate adjustments, of which $0.1 million favorably impacted our effective tax rate for the three-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 $150.7 million of 81/8% senior subordinated notes due 2014 and a $330.0 million bank credit facility. The 81/8% senior subordinated notes mature on June 15, 2014 and interest is payable on June 15 and December 15 of each year. As of March 27, 2009, the 81/8% senior subordinated notes had an estimated fair market value of $136.7 million or 90¾% of par. 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 March 27, 2009, Interline New Jersey had $8.7 million of letters of credit issued under the revolving loan facility and $209.2 million of aggregate principal outstanding under the term loan facility.

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. In addition, ordinary course distributions for overhead (up to $3.0 million annually) and taxes are permitted, as are 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 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 tax payments; and (3) allowing certain permitted distributions up to $75 million. For further description of the credit facility, see "-Credit Facility" below.

Financial Condition

Working capital decreased by $35.0 million to $319.2 million as of March 27, 2009 from $354.2 million as of December 26, 2008. The decrease in working capital was primarily used to generate cash flows from operating activities and pay down debt.

Cash Flow

Operating Activities. Net cash provided by operating activities was $62.6 million in the three months ended March 27, 2009 compared to net cash provided by operating activities of $29.1 million in the three months ended March 28, 2008.

Net cash provided by operating activities of $62.6 million in the three months ended March 27, 2009 primarily consisted of net income of $2.9 million, adjustments for non-cash items of $11.2 million and cash provided by working capital items of $48.5 million. Adjustments for non-cash items primarily consisted of $4.8 million in depreciation and amortization of property, equipment and intangible assets, $4.9 million in bad debt expense, $1.3 million in deferred income taxes, $0.8 million in share-based compensation and $0.3 million in amortization of debt issuance costs offset by $1.7 million in net gain from the repurchase of $36.4 million of our 81/8% senior subordinated notes and the repayment of $5.2 million of our term debt. The cash provided by working capital items primarily consisted of $8.1 million in lower trade receivables resulting from increased collections and the decline in sales, $11.6 million from decreased inventory levels as a result of decreased purchases associated with expected demand, $5.8 million from decreased prepaid expenses and other current assets primarily from the collection of rebates from vendors, $17.9 million from increased trade payables balances as a result of the timing of purchases and related payments, $3.5 million from accrued expenses primarily from higher accrued compensation and related benefits at period-end and $2.5 million from accrued interest. These items were partially offset by $0.6 million used for income taxes.

Net cash provided by operating activities of $29.1 million in the three months ended March 28, 2008 primarily consisted of net income of $8.7 million, adjustments for non-cash items of $6.3 million and cash provided by working capital items of $12.2 million.

Adjustments for non-cash items primarily consisted of $4.0 million in depreciation and amortization of property, equipment and intangible assets, $1.1 million in bad debt expense, $0.6 million in share-based compensation, $0.4 million in deferred income taxes and $0.3 million in amortization of debt issuance costs. The cash provided by working capital items primarily consisted of $1.3 million in lower trade receivables resulting from increased collections and the decline in sales, $3.2 million from decreased prepaid expenses and other current assets primarily from the collection of rebates from vendors, $4.9 million from increased trade payables balances as a result of the timing of purchases and related payments, $4.1 million from accrued interest and $1.8 million from the decrease in income taxes. These items were partially offset by $3.3 million from accrued expenses primarily from lower accrued compensation and related benefits at period-end.

Investing Activities. Net cash used in investing activities was $2.5 million in the three months ended March 27, 2009 compared to net cash provided by investing activities of $38.0 million in the three months ended March 28, 2008.

Net cash used in investing activities in the three months ended March 27, 2009 was primarily attributable to capital expenditures made in the ordinary course of business of $2.4 million.

Net cash provided by investing activities in the three months ended March 28, 2008 was attributable to net proceeds from sales and maturities of short-term investments of $44.5 million offset by capital expenditures made in the ordinary course of business of $6.5 million.

Financing Activities. Net cash used in financing activities totaled $42.1 million in the three months ended March 27, 2009 compared to net cash used in financing activities of $1.8 million in the three months ended March 28, 2008.

Net cash used in financing activities in the three months ended March 27, 2009 was attributable to our repurchase of $36.4 million of our 81/8% senior subordinated notes at an average of 93.8% of par, or $34.2 million, our repayment of $6.2 million of borrowings on our credit facility and capital lease obligations and the net decrease in purchase card payable of $1.7 million.

Net cash used in financing activities in the three months ended March 28, 2008 was attributable to our repayment of $1.6 million of borrowings on our credit facility and capital lease obligations and the net decrease in purchase card payable of $0.8 million offset by $0.6 million of proceeds from stock options exercised and excess tax benefits from share-based compensation.

Capital Expenditures

Capital expenditures were $2.4 million in the three months ended March 27, 2009 compared to $6.5 million in the three months ended March 28, 2008. In addition, during the three months ended March 27, 2009, we acquired $2.4 million of property through lease incentives and on account. Capital expenditures as a percentage of sales were 0.9% in the three months ended March 27, 2009 compared to 2.2% in the three months ended March 28, 2008. The decrease in capital expenditures is the result of the higher than normal levels of capital expenditures incurred during the three months ended March 28, 2008 to upgrade our telecommunications network, the expansion of our distribution center network, the purchase of warehouse equipment and investments in our information technology systems necessary for the integration of our AmSan acquisition.

Credit Facility

Borrowings under the term loan and the delayed draw facility bear interest, at Interline New Jersey's option, at either LIBOR plus 1.75% or at the alternate base rate, which is the greater of the Prime Rate or the Federal Funds Effective Rate plus 0.50%, plus 0.75%. Borrowings under the revolving credit facility bear . . .