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,

†          the loss of significant customers,

†          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,

†          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 approximately 100,000 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 350 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"), 61 regional distribution centers, 22 professional contractor showrooms located throughout the United States and Canada, 26 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, next-day delivery service to at least 98% of the U.S. population and same-day delivery service to most major metropolitan markets.

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
six months ended June 26, 2009 and June 27, 2008:



                          % of Net Sales       % Increase       % of Net Sales       % Increase
                        Three Months Ended     (Decrease)      Six Months Ended      (Decrease)
                       June 26,    June 27,       2009        June 26,   June 27,       2009
                         2009        2008     vs. 2008 (1)      2009       2008     vs. 2008 (1)

Net sales                  100.0 %    100.0 %        (13.3 )%    100.0 %    100.0 %        (12.3 )%
Cost of sales               63.6       62.8          (12.3 )      63.0       62.4          (11.5 )
Gross profit                36.4       37.2          (15.1 )      37.0       37.6          (13.7 )

Operating Expenses:
Selling, general and
administrative
expenses                    29.2       28.4          (10.9 )      30.9       28.9           (6.2 )
Depreciation and
amortization                 1.6        1.3            7.1         1.7        1.3           13.1
Total operating
expense                     30.9       29.8          (10.1 )      32.6       30.2           (5.4 )
Operating income             5.6        7.4          (35.0 )       4.4        7.4          (47.9 )

(Loss) Gain on
extinguishment of
debt, net                   (0.1 )        -         (100.0 )       0.3          -          100.0
Interest expense            (1.7 )     (2.2 )        (32.7 )      (1.9 )     (2.5 )        (31.5 )
Interest income and
other income                 0.2        0.2          (37.9 )       0.1        0.2          (48.0 )
Income before income
taxes                        3.9        5.4          (37.1 )       2.9        5.1          (50.7 )
Income tax provision        (1.5 )     (1.8 )        (26.5 )      (1.1 )     (1.8 )        (46.7 )
Net income                   2.4 %      3.6 %        (42.5 )%      1.8 %      3.3 %        (52.9 )%

Overview. During the three months ended June 26, 2009, our sales declined 13.3%. 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 74% of our total sales and includes residential multi-family housing and institutional MRO customers, declined 7.8% during the second quarter of 2009 compared to the second quarter of 2008. Demand from our professional contractor and specialty distributor customers, which represent 16% and 10% of our total sales, respectively, declined 28.4% and 20.6%, 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 2.4% in the second quarter compared to 3.6% in the comparable prior year period. The decline in net income is primarily a result of lower sales, lower gross margins, severance and distribution center closing costs associated with our previously discussed operational initiatives, such as headcount reductions, consolidation of certain distribution centers and closing of underperforming professional contractor centers as well as higher fixed costs as a percent of sales, 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 costs were offset in part by 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 June 26, 2009 Compared to Three Months Ended June 27, 2008

Net Sales. Our net sales decreased by $41.5 million, or 13.3%, to $269.9 million in the three months ended June 26, 2009 from $311.4 million in the three months ended June 27, 2008. The decline in sales resulted from the net impact of a 7.8% decrease in sales to our facilities maintenance customers and a continued decline in sales to our professional contractor and specialty distributor customers of 28.4% and 20.6%, 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 our customers and demand in our end-markets.

Gross Profit. Gross profit decreased by $17.5 million, or 15.1%, to $98.3 million in the three months ended June 26, 2009 from $115.8 million in the three months ended June 27, 2008 as a direct result of the decrease in sales. Our gross profit margin decreased 80 basis points to 36.4% for the three months ended June 26, 2009 compared to 37.2% for the three months ended June 27, 2008. The decrease in gross margin is primarily due to heightened competition associated with the decrease in sales demand and a shift in sales mix across various product categories.

Selling, General and Administrative Expenses. SG&A expenses decreased by $9.7 million, or 10.9%, to $78.9 million in the three months ended June 26, 2009 from $88.6 million in the three months ended June 27, 2008. As a percent of sales, SG&A increased to 29.2% for the three months ended June 26, 2009 compared to 28.4% for the three months ended June 27, 2008. The increase in SG&A expenses as a percent of sales is primarily due to $2.1 million in severance and distribution center closing costs associated with our previously discussed operational initiatives, such as headcount reductions, consolidation of certain distribution centers and closing of underperforming professional contractor centers. These costs were offset by the cost savings derived from the reduction in workforce in the fourth quarter of 2008 and the first quarter of 2009, the closing of underperforming professional contractor centers and the consolidation of certain distribution centers during the last six months of 2008 and the first six months of 2009 and various efforts aimed at controlling variable costs.

Depreciation and Amortization. Depreciation and amortization expense increased by $0.3 million to $4.4 million in the three months ended June 26, 2009 from $4.1million in the three months ended June 27, 2008. As a percentage of sales, depreciation and amortization was 1.6% or 30 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 and our Eagle Maintenance Supply, Inc. acquisition in the third quarter of 2008.

Operating Income. As a result of the foregoing, operating income decreased by $8.1 million, or 35.0%, to $15.0 million in the three months ended June 26, 2009 from $23.1 million in the three months ended June 27, 2008. As a percent of sales, operating income decreased to 5.6% in the three months ended June 26, 2009 compared to 7.4% in the three months ended June 27, 2008.

Loss on Extinguishment of Debt. Loss on extinguishment of debt was $0.2 million in the three months ended June 26, 2009. During the three months ended June 26, 2009, we repaid $20.0 million of our term loan ahead of schedule. In connection with the term loan payment, we recorded a loss on extinguishment of debt of $0.2 million associated with the write-off of deferred financing costs. We did not extinguish debt in the three months ended June 27, 2008.

Interest Expense. Interest expense decreased by $2.3 million in the three months ended June 26, 2009 to $4.7 million from $7.0 million in the three months ended June 27, 2008. This decrease was primarily due to lower debt balances outstanding associated with the repayments of our term loan and the repurchase of our 81/8% senior subordinated notes and lower interest rates.

Interest and Other Income.Interest and other income decreased $0.3 million to $0.4 million in the three months ended June 26, 2009 compared to $0.7 million in the three months ended June 27, 2008. The decrease was primarily attributable to lower interest income earned resulting from lower interest rates and lower short-term investment balances.

Provision for Income Taxes. The effective tax rate for the three months ended June 26, 2009 was 39.2% compared to 33.5% for the three months ended June 27, 2008. The increase 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 June 27, 2008, we obtained resolutions related to the uncertain state 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 three-month period ended June 27, 2008.

Six Months Ended June 26, 2009 Compared to Six Months Ended June 27, 2008

Net Sales. Our net sales decreased by $73.9 million, or 12.3%, to $526.7 million in the six months ended June 26, 2009 from $600.6 million in the six months ended June 27, 2008. The decline in sales resulted from the net impact of a 7.4% decrease in sales to our facilities maintenance customers and a continued decline in sales to our professional contractor and specialty distributor customers of 26.0% and 17.4%, 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 our customers and demand in our end-markets.

Gross Profit. Gross profit decreased by $30.9 million, or 13.7%, to $194.9 million in the six months ended June 26, 2009 from $225.9 million in the six months ended June 27, 2008 as a direct result of the decrease in sales. Our gross profit margin decreased 60 basis points to 37.0% for the six months ended June 26, 2009 compared to 37.6% for the six months ended June 27, 2008. The decrease in gross margin is primarily due to heightened competition associated with the decrease in sales demand and a shift in sales mix across various product categories.

Selling, General and Administrative Expenses. SG&A expenses decreased by $10.8 million, or 6.2%, to $162.8 million in the six months ended June 26, 2009 from $173.6 million in the six months ended June 27, 2008. As a percent of sales, SG&A increased to 30.9% for the six months ended June 26, 2009 compared to 28.9% for the six months ended June 27, 2008. The increase in SG&A expenses as a percent of sales is primarily due to $4.1 million in increased bad debt expense primarily associated with a customer seeking Chapter 11 bankruptcy protection in March, $4.5 million in severance and distribution center closing costs associated with our previously discussed operational initiatives, such as headcount reductions, consolidation of certain distribution centers and closing of underperforming professional contractor centersand 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, ("FAS 141R"). 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 reduction in workforce in the fourth quarter of 2008 and the first quarter of 2009, the closing of underperforming professional contractor centers and the consolidation of certain distribution centers during the last six months of 2008 and the first six months of 2009 and various efforts aimed at controlling variable costs.

Depreciation and Amortization. Depreciation and amortization expense increased by $1.0 million to $9.0 million in the six months ended June 26, 2009 from $8.0 million in the six months ended June 27, 2008. As a percentage of sales, depreciation and amortization was 1.7% or 40 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 and our Eagle Maintenance Supply, Inc. acquisition in the third quarter of 2008.

Operating Income. As a result of the foregoing, operating income decreased by $21.2 million, or 47.9%, to $23.1 million in the six months ended June 26, 2009 from $44.3 million in the six months ended June 27, 2008. As a percent of sales, operating income decreased to 4.4% in the six months ended June 26, 2009 compared to 7.4% in the six months ended June 27, 2008.

Gain on Extinguishment of Debt. Gain on extinguishment of debt was $1.5 million in the six months ended June 26, 2009. During the six months ended June 26, 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 $25.2 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 $1.5 million net of $0.1 million and $0.6 million in original issue discount and deferred financing costs written-off, respectively. We did not extinguish debt in the six months ended June 27, 2008.

Interest Expense. Interest expense decreased by $4.7 million in the six months ended June 26, 2009 to $10.1 million from $14.7 million in the six months ended June 27, 2008. This decrease was primarily due to lower debt balances outstanding associated with the repayment of our term loan and the repurchase of our 81/8% senior subordinated notes and lower interest rates.

Interest and Other Income.Interest and other income decreased $0.7 million to $0.7 million in the six months ended June 26, 2009 compared to $1.4 million in the six months ended June 27, 2008. The decrease was primarily attributable to lower interest income earned resulting from lower interest rates and lower short-term investment balances.

Provision for Income Taxes. The effective tax rate for the six months ended June 26, 2009 was 38.7% compared to 35.8% for the six months ended June 27, 2008. The increase 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 six months ended June 26, 2009 and

June 27, 2008, we obtained resolution related to uncertain state tax positions and accordingly we adjusted the accrual previously established. As such, we made the appropriate adjustments, of which $0.1 million and $0.8 million favorably impacted our effective tax rate for the six months ended June 26, 2009 and June 27, 2008, respectively.

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 outstanding $150.7 million of 81/8% senior subordinated notes due 2014 and we have 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 June 26, 2009, the 81/8% senior subordinated notes had an estimated fair market value of $147.7 million or 98% 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 June 26, 2009, Interline New Jersey had $10.2 million of letters of credit issued under the revolving loan facility and $189.2 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 . . .