**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**
| **(Mark One)**                                       | ** ** | ** **                                                                                              |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| x                                                    |       | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| **For the fiscal year ended December 29, 2006** |
| **or**                                               |
| o                                                    | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                       to                       **

Commission file number:  001-32380

**INTERLINE BRANDS, INC.**

(Exact name of registrant as specified in its charter)

| **Delaware**                     |   | **03-0542659**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

| **801 West Bay Street, Jacksonville,  Florida** |   | **32204**  |
|-------------------------------------------------|--------|------------|
| (Address of  principal executive offices)       |   | (Zip Code) |

 

**(904) 421 1400**

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

| Title of each class                     | ** ** | **Name of each exchange on which registered** |
|-----------------------------------------|------------|-----------------------------------------------|
| Common Stock, $.01  par value per share |       | New York Stock  Exchange                      |

 

Securities registered pursuant to Section 12(g) of theAct:  None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes   o   No  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes  o    No  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x    No  o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o     Accelerated filer  x     Non-accelerated filer  o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o    No  x

As ofJune 30, 2006, the aggregate market value of the registrant’s common stockheld by non-affiliates of the registrant was $669.2 million based on theclosing sale price as reported on the New York Stock Exchange.

As of March 9, 2007,there were 32,285,884 shares of the registrant’s common stock outstanding(excluding 39,398 shares held in treasury), par value $0.01.

**DOCUMENTSINCORPORATED BY REFERENCE**

Theregistrant’s definitive Proxy Statement for its Annual Meeting of Stockholdersto be held May 10, 2007 is incorporated by reference in Part III ofthis Form 10-K.

 

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**TABLEOF CONTENTS**
| ITEM   | ** ** | ** **      | ** ** | **PAGE**                                                                                                            |
|--------|------------|-----------------|------------|---------------------------------------------------------------------------------------------------------------------|
|   |       | **PART I** |       |                                                                                                                |
|   | 1.         |            |       | Business                                                                                                            |   |   | 2 |   |
|   | 1A.        |            |       | Risk Factors                                                                                                        |   |   | 13 |   |
|   | 1B.        |            |       | Unresolved Staff  Comments                                                                                          |   |   | 21 |   |
|   | 2.         |            |       | Properties                                                                                                          |   |   | 22 |   |
|   | 3.         |            |       | Legal  Proceedings                                                                                                  |   |   | 24 |   |
|   | 4.         |            |       | Submission of  Matters to a Vote of Security Holders                                                                |   |   | 24 |   |
|   |       |            | ** ** | **PART II**                                                                                                    |   |   |   |   |
|   | 5.         |            |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   |   | 24 |   |
|   | 6.         |            |       | Selected Financial  Data                                                                                            |   |   | 27 |   |
|   | 7.         |            |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   |   | 29 |   |
|   | 7A.        |            |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |   |   | 45 |   |
|   | 8.         |            |       | Financial  Statements and Supplementary Data                                                                        |   |   | 46 |   |
|   | 9.         |            |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                               |   |   | 46 |   |
|   | 9A.        |            |       | Controls and Procedures                                                                                             |   |   | 46 |   |
|   | 9B.        |            |       | Other Information                                                                                                   |   |   | 46 |   |
|   |       |            | ** ** | **PART III**                                                                                                   |   |   |   |   |
|   | 10.        |            |       | Directors,  Executive Officers and Corporate Governance                                                             |   |   | 47 |   |
|   | 11.        |            |       | Executive  Compensation                                                                                             |   |   | 47 |   |
|   | 12.        |            |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters     |   |   | 47 |   |
|   | 13.        |            |       | Certain  Relationships and Related Transactions, and Director Independence                                          |   |   | 47 |   |
|   | 14.        |            |       | Principal  Accounting Fees and Services                                                                             |   |   | 47 |   |
|   |       |            | ** ** | **PART IV**                                                                                                    |   |   |   |   |
|   | 15.        |            |       | Exhibits, Financial Statement Schedules                                                                             |   |   | 48 |   |
|   | 16.        |            |       | Signatures                                                                                                          |   |   | 49 |   |

 

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**PART I**

**Forward-LookingStatements**

This reportcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934 (the “Exchange Act”) that are subject to risks and uncertainties. Youshould not place undue reliance on those statements because they are subject tonumerous uncertainties and factors relating to our operations and businessenvironment, all of which are difficult to predict and many of which are beyondour control. Forward-looking statements include information concerning ourpossible or assumed future results of operations, including descriptions of ourbusiness 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 ourexperience in the industry as well as our perceptions of historical trends,current conditions, expected future developments and other factors we believeare appropriate under the circumstances. As you read and consider this report,you should understand that these statements are not guarantees of performanceor results. They involve risks, uncertainties and assumptions. Although webelieve that these forward-looking statements are based on reasonableassumptions, you should be aware that many factors could affect our actualfinancial results or results of operations and could cause actual results todiffer materially from those in the forward-looking statements. These factorsinclude:

·       materialfacilities and systems disruptions and shutdowns,

·       economicslowdowns,

·       generalmarket conditions,

·       adversechanges in trends in the home improvement and remodeling and home building markets,

·       thehighly competitive nature of the maintenance, repair and operationsdistribution industry,

·       failureto realize expected benefits from acquisitions,

·       ourability to purchase products from suppliers on favorable terms,

·       thelength of our supply chains,

·       fluctuationsin the cost of commodity-based products, raw materials and fuel prices,

·       currencyexchange rates,

·       theloss of significant customers,

·       ourability to accurately predict market trends,

·       productcost and price fluctuations due to market conditions,

·       failureto locate, acquire and successfully integrate acquisition candidates,

·       dependenceon key employees,

·       ourinability to protect trademarks,

·       adversepublicity and litigation,

·       ourlevel of debt,

·       interestrate fluctuations,

·       futurecash flows,

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·       changesin consumer preferences,

·       laborand benefit costs,

·       theother factors described under “Part I. Item 1A—Risk Factors” in thisAnnual Report on Form 10-K.

You should keep in mindthat 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 uncertaintiesarise from time to time, and it is impossible for us to predict these events orhow they may affect us. In light of these risks and uncertainties, you shouldkeep in mind that any forward-looking statement made in this report orelsewhere might not occur. Notwithstanding the foregoing, all informationcontained in this report is materially accurate as of the date of this report.

**ITEM1.****               **Business

**Our Company**

We are a leading national distributor and directmarketer of maintenance, repair and operations, or MRO, products. We stock over80,000 plumbing, electrical, hardware, security, heating, ventilation and airconditioning, janitorial and sanitary and other MRO products and sell toapproximately 200,000 active customer accounts. Our products are primarily usedfor the repair, maintenance, remodeling and refurbishment of properties andnon-industrial facilities. We are able to realize higher operating margins byfocusing on repair, maintenance, remodeling and refurbishment customers, whogenerally make smaller, more frequent purchases and require high levels ofservice. Our diverse customer base includes facilities maintenance customers,which consist of multi-family housing facilities, educationalinstitutions, lodging and health care facilities, government properties andbuilding service contractors; professional contractors who are primarily involvedin the repair, remodeling and construction of residential and non-industrialfacilities; and specialty distributors, including plumbing and hardwareretailers. Our customers range in size from individual contractors andindependent hardware stores to apartment management companies and nationalpurchasing groups.

We market and sell our products primarily through tendistinct and targeted brands, each of which is nationally recognized in themarkets we serve for providing premium products at competitive prices withreliable same-day or next-day delivery. Wilmar, Sexauer, Maintenance USA andAmSan brands generally serve our facilities maintenance customers; Barnett,U.S. Lock, Sun Star and Copperfield brands generally serve our professionalcontractor customers; Hardware Express and AF Lighting brands generally serveour specialty distributors customers. Our multi-brand operating model, which webelieve is unique in the industry, allows us to use a single platform todeliver tailored products and services to meet the individual needs of eachrespective customer group served. We reach our markets using a variety of saleschannels, including a sales force of over 650 field sales representatives, over525 telesales and customer service representatives, a direct marketing programof approximately five million pieces annually, brand-specific websitesand a national accounts sales program. We deliver our products through ournetwork of 77 regional distribution centers, 38 professional contractorshowrooms located throughout the United States and Canada, a nationaldistribution center, or NDC, in Nashville, Tennessee, 14 vendor managedinventory locations at large professional contractor customer locations and adedicated fleet of trucks. Our broad distribution network allows us the abilityto provide reliable, same-day or next-day delivery service to 98% of the U.S.population.

Our information technology and logistics platformsupports our major business functions, allowing us to market and sell ourproducts at varying price points depending on the customer’s servicerequirements. While we market our products under a variety of branded catalogs,generally our brands draw from the same inventory within common distributioncenters and share associated employee and transportation 

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costs. In addition, wehave centralized marketing, purchasing and catalog production operations tosupport our brands. We believe that our information technology and logisticsplatform also benefits our customers by allowing us to offer a broad product selectionat highly competitive prices while maintaining the unique customer appeal ofeach of our targeted brands. Overall, our common operating platform has enabledus to improve customer service, maintain lower operating costs, efficientlymanage working capital and support our growth initiatives.

In this document, unlessotherwise indicated, “we” refers to Interline Brands, Inc., a Delawarecorporation, and its consolidated subsidiaries; and “Interline New Jersey”refers to Interline Brands, Inc., a New Jersey corporation through whichwe conduct our business.

**Strategy**

Our objective is tobecome the leading supplier of MRO products to our three principal end markets:facilities maintenance, professional contractor and specialty distributor. Inpursuing this objective, we plan to increase our net sales, earnings and returnon invested capital by capitalizing on our information technology and logisticsplatform to successfully execute our organic growth, geographic expansion,operating efficiency and strategic acquisition initiatives.

·       *Organic Growth Initiatives.* We seek tofurther penetrate the markets we serve and expand into new product areas byutilizing and expanding a number of our already successful marketingstrategies, including: expanding our national accounts program, increasingcustomer use of our supply chain management services, continuing to developproprietary products under our exclusive brands and selectively adding newproducts and new categories to our various brand offerings.

·       *Geographic Expansion Opportunities*. Webelieve we can further penetrate the markets we serve and expand into newmarkets by increasing the number of our field sales and telesales territoriesto serve additional sales regions and other initiatives.

·       *Increased Operating Efficiencies*. We willcontinue to focus on enhancing our operating efficiency, which will increaseprofitability, improve our cash conversion cycle and increase our return oninvested capital.

·       *Strategic Acquisitions*. We will continueto maintain a disciplined acquisition strategy of adding new customers incurrently served markets and pursuing acquisitions of established brands in newor existing markets in an effort to leverage our operating infrastructure.

**Industry and MarketOverview**

The MRO distribution industry is over $300 billion insize according to a U.S. Bancorp—Piper Jaffray Research Report and encompassesthe supply of a wide range of products, including plumbing and electricalsupplies, hand-tools, janitorial supplies, safety equipment and many othercategories. Customers served by the MRO distribution industry include heavyindustrial manufacturers that use MRO supplies for the repair and overhaul ofproduction equipment and machinery; owners and managers of facilities such asapartment complexes, office buildings, schools, hotels and hospitals that useMRO supplies largely for maintenance, repair and refurbishment; andprofessional contractors. The size of our addressable market in facilitiesmaintenance, including janitorial and sanitation, and repair and remodelingmarket, which generally excludes new commercial and residential constructionand heavy industrial manufacturing, is approximately $53 billion.

Within the MRO distribution industry, we focus onserving customers in three principal end markets: facilities maintenance,professional contractors and specialty distributors. Our customers areprimarily engaged in the repair, maintenance, remodeling, refurbishment andconstruction of properties and non-industrial facilities, as opposed to themaintenance of heavy industrial facilities and machinery. Our 

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facilities maintenancecustomers are individuals and entities responsible for the maintenance andrepair of various commercial properties, including apartment buildings,schools, hotels and health care facilities. Our professional contractorcustomers buy our products to provide plumbing, electrical, heating,ventilation and air conditioning (“HVAC”), and mechanical services to theirresidential and commercial customers. Our specialty distributor customersconsist primarily of hardware stores and small plumbing and electricaldistributors that purchase our products for resale.

As MRO customers grow insize and sophistication, they continue to seek new ways to generate additionalefficiencies. The application of information technology to supply chainmanagement has become increasingly important for this purpose. We believe thatour supply chain management solutions result in material savings for our MROcustomers. For example, we offer our customers the option of receiving invoiceselectronically. For customers that place frequent orders and have the abilityto receive electronic invoices, this program can dramatically reduce orderingcosts by eliminating invoice handling and automating the matching and paymentprocess. We believe that by offering services such as electronic purchasing andinvoicing, which remove transaction costs from the supply chain, we encourageour customers to use us as their single source for MRO supplies.

**Our Products**

We stock over 80,000standard and specialty MRO products in a number of product categories,including plumbing, electrical, hardware, HVAC, security hardware, appliancesand parts, janitorial chemicals and sanitary supplies, window and floorcoverings and paint and paint accessories. We offer a broad range of brand nameand exclusive brand products.

*Product Categories*

Theapproximate percentages of our net sales for the fiscal year ended December 29,2006 by product category were as follows:

| **Product Category**                  | ** ** | **Percent of**

**Net Sales** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| Plumbing                                   |       |                                    | 35         | % |   |
| Janitorial and  Sanitary                   |       |                                    | 14         |   |   |
| Electrical                                 |       |                                    | 12         |   |   |
| Heating,  Ventilation and Air Conditioning |       |                                    | 12         |   |   |
| Appliances                                 |       |                                    | 6          |   |   |
| Security                                   |       |                                    | 5          |   |   |
| Hardware                                   |       |                                    | 5          |   |   |
| Other                                      |       |                                    | 11         |   |   |
| Total                                      |       |                                    | 100        | % |   |

 

The following is a discussion of our principal productcategories:

*PlumbingProducts.**  *We sella broad range of plumbing products, from individual faucet parts to completebathroom renovation kits. We sell a number of brand name products of leadingplumbing supply manufacturers, including Delta, Moen and Price Pfister. We alsosell a number of exclusive brand plumbing products under various proprietarytrademarks, including Premier faucets and water heaters, DuraPro tubularproducts and ProPlus retail plumbing accessories.

*Janitorialand Sanitary Products.*   Our comprehensiveselection of janitorial and sanitary products includes over 20,000 SKUs ofbrooms, mops, trash can liners, cleaning chemicals, paper towels and bathtissue. We offer a number of products from leading janitorial and sanitarymanufacturers, such as 

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Kimberly-Clark andGeorgia-Pacific. We also offer exclusive brand janitorial and sanitaryproducts, such as Renown branded products.

*ElectricalProducts.**  *Ourcomprehensive selection of electrical products range from items such as ceilingfans to light fixtures and light bulbs. We offer a number of brand nameproducts of leading electrical supply manufacturers, including Philips,Westinghouse, Honeywell and General Electric, as well as a number of exclusivebrand electrical products, such as Powerworks switches and Lumina light bulbs.

*Heating,Ventilation and Air Conditioning Products.**  *We offer a variety of HVACproducts, including condenser units, thermostats, fans and motors. Some ofthese are brand name products of manufacturers such as York and Janitrol andsome are our own exclusive brand products and Copperfield specialty ventilationand chimney maintenance products.

*Appliancesand Parts.**  *Ourcomprehensive range of appliances and parts includes washer/dryer components,garbage disposers, refrigerators and range hoods. We sell a number of brand nameproducts of leading appliance manufacturers, including General Electric andWhirlpool. We also sell a number of high-quality generic replacement parts.

*SecurityProducts.**  *Wesell a broad range of security hardware products, from individual lock-sets to computerizedmaster-key systems. We sell a number of brand name products of leading securityhardware manufacturers, including Kwikset and Schlage. We also sell a number ofexclusive brand security hardware products, such as U.S. Lock hardware, Legendlocks and Rx master keyways.

*Hardware Products.**  *We sell a variety of hardware products, from powertools to mini blinds. Our brand name products include DAP sealants and caulks,Rustoleum paints and Milwaukee power tools. Our exclusive brand hardwareproducts include Legend door and window hardware and Anvil Mark fasteners.

*Exclusive*Brand Products

Our size and reputationhave enabled us to develop and market various lines of exclusive brandproducts, which we believe offer our customers high quality, low-costalternatives to the brand name products we sell. Third-party manufacturers,primarily in China and Southeast Asia, using our proprietary branding andpackaging design, manufacture our exclusive brand products to ourspecifications. Our sales force, catalogs and promotional flyers emphasize thecomparative value of our exclusive brand products. Since our exclusive brandproducts are typically less expensive for us to purchase from suppliers, we areable to improve our profit margin with the sale of these products, despite thefact that we sell them to our customers at a discount to our non-exclusivebrand product offerings. In addition, we have found that we develop strongrelationships with our exclusive brand customers and generate increased repeatbusiness, as exclusive brand customers generally return to us for futureservice and replacement parts on previously purchased products.

*New ProductOfferings*

We constantly monitor andevaluate our product offerings both to assess the sales performance of ourexisting products and to discontinue products that fail to meet specified salescriteria. We also create new product offerings in response to customerrequirements by adjusting our product portfolio within existing product linesas well as by establishing new product line categories. Through these efforts,we are able to address our customers’ changing product needs and thereby retainand attract customers. Further, by introducing new product lines, we provideour customers with additional opportunities for cost savings and a one-stopshopping outlet with broad product offerings. We believe that introducing newproducts in existing product lines and creating new product lines are bothstrategies which enable us to increase penetration of existing customeraccounts, as well as attract new customers to our brands.

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**Our Brands**

We market and sellproducts to our customers primarily through ten distinct and targeted brands:Wilmar®, Sexauer®, Maintenance USA®, AmSanTM, Barnett®, Hardware Express®, U.S.Lock®, SunStar®, CopperfieldTM and AF LightingTM. Each of our brands is focusedon serving a particular customer group. Wilmar, Sexauer, Maintenance USA andAmSan brands generally serve facilities maintenance customers; Barnett, U.S.Lock, SunStar and Copperfield brands generally serve our professionalcontractor customers; Hardware Express and AF Lighting brands generally serveour specialty distributor customers. Our brands are distinguished not only bythe type of products offered, but also by the levels of service provided tocustomers. We have brands that market a wide range of product categories, suchas Wilmar, as well as brands that specialize in a particular group of products,such as U.S. Lock, which focuses on security hardware, SunStar, which focuseson specialty lighting, and Copperfield, which focuses on chimney repair andmaintenance products. We have brands that market complementary services to ourcustomers, including inventory management and technical assistance, and brandsthat offer products without support services. We believe that our brand-basedbusiness model effectively allows us to offer a deep product offering to verytargeted customer end market. We have core competencies in almost all of thesales channels available to a distributor including national account salesprofessionals, outside sales representatives, outbound and inbound telesalesand customer service representatives, direct marketing via catalog and flyers,professional contractor showroom, vendor managed inventory locations, andinternet-based service capabilities. This allows us to effectively compete fora broad range of customers across our industry by offering our customers theservice and delivery platform they prefer and often require.

*FacilitiesMaintenance Brands*

We serve our facilities maintenance customers primarilythrough our Wilmar, Sexauer and Maintenance USA brands. Facilities maintenancecustomers buy our products for maintenance, repair and remodeling, and oftenneed to obtain products with minimal delay. In many cases, our facilitiesmaintenance customers also look to us for support services such as inventory management,management of procurement contracts, technical advice and assistance andequipment servicing and training.

*Wilmar.**  *Our Wilmar brand specializes in sales of maintenanceproducts to the multi-family housing market. Through its master catalog,Wilmar is able to act as a one-stop shopping resource for multi-familyhousing maintenance managers by offering one of the industry’s most extensiveselections of standard and specialty plumbing, hardware, electrical, janitorialand related products. Wilmar provides same-day or next-day delivery in localmarkets on our own trucks served by our distribution centers, and ships byparcel delivery services or other carriers to other areas. The Wilmar brandsells primarily through field sales representatives, as well as through directmarketing and telesales. We also have a successful national accounts program atWilmar where national account managers market to high level officers at realestate investment trusts, or REITs, and other property management companies.Through this program, we assist large multi-location customers inreducing total supply chain costs.

*Sexauer.**  *Our Sexauer brand markets and sells specialtyplumbing and facility maintenance products to institutional customers,including education, lodging, health care and other facilities maintenancecustomers. We believe that the catalog of Sexauer products is well known in theindustry as a comprehensive source of specialty plumbing and facilitymaintenance products. In addition to a broad product portfolio, Sexauer offerscustomers an extensive selection of service and procurement solutions, drawingupon our product and supply management expertise.

*MaintenanceUSA.**  *Throughour Maintenance USA brand, we offer a broad portfolio of MRO products tofacilities, including multi-family housing, lodging and institutionalcustomers. Since Maintenance USA sells our products primarily through telesalesand direct marketing, it represents a low 

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cost supply alternative tosmaller property managers and more cost-conscious customers requiring minimalsupport services.

*AmSan.*   OurAmSan brand markets and sells a comprehensive range of janitorial and sanitaryproducts to institutional facilities, such as schools and universities, healthcare sites, lodging and government properties and building service contractors.We sell AmSan products primarily through field sales representatives supportedby a full line catalog, which includes national brand product offerings as wellas AmSan’s exclusive brand product line RenownTM. In addition, AmSan providescustomers with reliable technical support, equipment repair services, andcustomized training programs, all of which make AmSan an important supplier toour customers. AmSan provides same-day or next-day delivery in local marketsserved by our distribution centers and ships by parcel delivery services orother carriers to other areas.

*ProfessionalContractor and Specialty Distributor Brands*

We serve our professional contractor customers throughour Barnett, U.S. Lock, SunStar and Copperfield brands and our specialtydistributor customers through our Hardware Express and AF Lighting brands.Professional contractors generally purchase our products for specific jobassignments and/or to resell the product to end-customers.

*Barnett.**  *Our Barnett brand markets and sells a broad range ofMRO products to professional contractors, including plumbing, electrical,building and HVAC contractors, typically for repair, remodeling andconstruction applications. The Barnett brand also sells its products tospecialty distributors, which are generally smaller and carry fewer productsthan Barnett. Sales are made primarily through catalogs, telesales, field salesand direct marketing. In addition, Barnett has field sales representatives andregional sales managers in select markets throughout the United States.Customers can also receive technical support and assistance in selectingproducts by calling our customer service centers. In addition to next-daydelivery, Barnett also offers customers the convenience of a network of localprofessional contractor showrooms or Pro Centers as well as on-site vendormanaged inventory capabilities.

*U.S.Lock.**  *Our U.S.Lock brand sells security hardware products to professional locksmiths. Ourprimary marketing vehicle for U.S. Lock products is our U.S. Lock dealerprogram, in which professional locksmiths receive incentives such as rebatesand favored pricing on proprietary items in return for paying an annualmembership, guaranteeing annual purchase volume, displaying our U.S. Lock logoin their stores and assisting in other promotional activities. Sales are madeprimarily through telesales and direct marketing.

*Copperfield.*   OurCopperfield brand markets and sells specialty ventilation and chimneymaintenance products to chimney professionals and hearth retailers, throughdirect marketing, outbound telesales and field sales representatives.Copperfield offers more than 5,000 brand name and exclusive brand repair andreplacement items including chimney replacement and relining products,specialty ventilation components, hearth products, gas and electricalappliances and an assortment of gas and solid fuel burning appliances.

*HardwareExpress.**  *OurHardware Express brand markets and sells our full range of products primarilyto retail hardware stores. While Hardware Express customers may order ourproducts for general inventory purposes, we also specialize in working withindependent stores to sell our exclusive brand products through custom designedretail display sets. We believe that our retail hardware store customers preferour exclusive brand products because they are priced more competitively thannon-exclusive brand products. In addition, our retail display program enablesour hardware customers to present an entire line of products in a professionaland organized manner. Hardware Express sells its products through a catalog,supplemented by direct marketing and telesales personnel, and a specialtydisplay sales program of exclusive brand products which is coordinated by fieldsales representatives.

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*SunStar/AF Lighting.**  *Our SunStar and AF Lighting brands sell residentiallighting and electrical products to electrical contractors, electricaldistributors, lighting showrooms and mass merchants through direct marketing,outbound telesales and a network of manufacturer’s representatives.

**Sales and Marketing**

We market our products nationally and internationallythrough a variety of channels. The majority of our sales to facilitiesmaintenance customers are made through field sales representatives, and themajority of our sales to professional contractors and specialty distributorsare made through telesales supported by catalog and promotional mailings, andfield sales in major metropolitan markets. We also serve our facilitiesmaintenance and professional contractor customers with brand-specificwebsites, though the majority of customer orders are received through the otherchannels discussed above. For a more detailed description of our approach toe-commerce, see “Management Information System.”

Our marketing strategyinvolves targeting our marketing channels and efforts to specific customergroups. As a result of our long-standing relationships with customers, we havebeen able to assemble a database of customer purchasing information, such asend market purchasing trends, product and pricing preferences and supportservice requirements. In addition, we are able to track information such ascustomer retention and reactivation as well as new account acquisitions. We arealso able to track the success of a particular marketing effort once it isimplemented by analyzing the purchases of the customers targeted by thateffort. Our information systems allow us to use this data to develop moreeffective sales and marketing programs. For example, our understanding of thepreferences of our large, multi-family housing customers led to ourdevelopment of a national accounts program, through which field salesrepresentatives focus on developing contacts with national accounts. We willcontinue to leverage our customer knowledge and shared brand information systemto develop successful sales and marketing strategies.

*Field SalesRepresentatives*

Our direct sales force markets and sells to all levelsof the customer’s organization, including senior property managementexecutives, local and regional property managers, on-site maintenance managers,and owners and managers of professional plumbing, electrical and HVACcontractors. Our direct sales force marketing efforts are designed to establishand solidify customer relationships through frequent contact, while emphasizingour broad product selection, reliable same-day or next-day delivery, high levelof customer service and competitive pricing.

We maintain one of the largest direct sales forces inour industry, with over 650 field sales representatives covering marketsthroughout the United States, Canada and Central America. We have found that weobtain a greater percentage of our customers’ overall spending on MRO productsin markets serviced by local sales representatives, particularly in regionswhere these representatives are supported by a nearby distribution center thatenables same-day or next-day delivery of our product line.

Our field salesrepresentatives are expected not only to generate orders, but also to act asproblem solving customer service representatives. Our field salesrepresentatives are trained and qualified to assist customers in shoporganization, special orders, part identification and complaint resolution. Wecompensate the majority of our field sales representatives based on a commissionprogram or on a combination of salary and bonus program. Increasingly, theserepresentatives target senior management at multi-location companies inorder to acquire long-term customers that make large volume purchases. We willcontinue to seek additional opportunities where we can leverage the strength ofour field sales force to generate additional sales from our customers.

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*Telesales*

Our telesales operationhas been designed to make ordering our products as convenient and efficient aspossible. We divide our telesales staff into outbound and inbound groups. Ouroutbound telesales representatives are responsible for maintainingrelationships with existing customers and prospecting for new customers. Theserepresentatives are assigned individual accounts in specified territories andhave frequent contact with existing and prospective customers in order to maketelesales presentations, notify customers of current promotions and encourageadditional purchases. Our inbound telesales representatives are trained toprocess orders quickly from existing customers, provide technical support andexpedite and process new customer applications, as well as handle all othercustomer service requests. We offer our customers nationwide toll-freetelephone numbers and brand-specific telesales representatives who arefamiliar with a particular brand’s markets, products and customers. Our callcenters are staffed by over 525 telesales, customer service and technicalsupport personnel, who utilize our proprietary, on-line order processingsystem. This sophisticated software provides the telesales staff with detailedcustomer profiles and information about products, pricing, promotions andcompetition.

*Catalogs and DirectMarketing*

Our catalogs and direct marketing promotional flyersare key marketing tools that allow us to communicate our product offerings toboth existing and potential customers. We create catalogs, some of which exceed1,000 pages, for most of our brands and mail them on an annual or semi-annualbasis to our existing customers. We often supplement these catalog mailings bysending our customers promotional flyers. Most of our branded catalogs havebeen distributed for over three decades and we believe that these catalogtitles have achieved a high degree of recognition among our customers.

In targeting potential direct marketing customers, wesometimes make our initial contact through promotional flyers, rather than bysending a complete catalog. We obtain mailing lists of prospective customersfrom outside marketing information services and other sources. We are able togauge the effectiveness of our promotional flyer mailings through the use ofproprietary database analysis methods, as well as through our telesalesoperations. Once customers begin to place orders with us, we typically send aninitial catalog and include the customer on our periodic mailing list forupdated catalogs and promotional materials. We believe that this approach is acost-effective way for us to contact large numbers of potential customers andto determine which customers should be targeted for continuous marketing.

We produce the design andlayout for our catalogs and promotional mailings using a sophisticated catalogcontent database and software system. Our catalogs are indexed and illustratedto provide simplified pricing information and to highlight new productofferings. Our promotional mailings introduce new product offerings,sale-promotion items and other periodic offerings. Illustrations, photographsand copy are shared among brand catalogs and mailings or customized for aspecific brand, allowing for fast and efficient production of multi-brandedmedia. In addition, we frequently build custom catalogs designed specificallyfor the needs of our larger customers.

**Operations andLogistics**

*DistributionNetwork*

We have a network of 77 regional distribution centersand 38 professional contractor showrooms strategically located to serve thelargest metropolitan areas throughout the United States and Canada, and anational distribution center, or NDC, in Nashville, Tennessee. In addition, wealso have 14 vendor managed inventory locations at large professionalcontractor customer locations. We also maintain a dedicated fleet of trucks toassist in local delivery of products. The geographic scope of our distributionnetwork and the efficiency of our information system enable us to providereliable, same-day or next-day delivery service to over 98% of the U.S.population.

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Our regional distributioncenters are central to our operations and range in size from approximately3,000 square feet to approximately 127,000 square feet. Our regionaldistribution centers are typically maintained under operating leases incommercial or industrial centers, and primarily consist of warehouse andshipping facilities. We have also had success with opening professionalcontractor showrooms in existing distribution centers and in freestandinglocations, which allow customers to obtain products from a fixed locationwithout ordering in advance. 

*Inbound Logistics*

In July 2000, weopened our NDC in Nashville, Tennessee, which we later expanded toapproximately 317,000 square feet. Our NDC receives the majority of oursupplier shipments and efficiently re-distributes products to our regionaldistribution centers. Some over-sized or seasonal products are directly shippedto regional distribution centers by suppliers. Our use of the NDC hassignificantly reduced regional distribution center replenishment lead timeswhile simultaneously improving our customer fill rates.

*Outbound Logistics*

Once a telesales orcustomer service representative enters an order into our computer system, itemswithin the order are automatically arranged by warehouse location to facilitateease of picking within the distribution center. For customers located withinthe local delivery radius of a distribution center, our own trucks or third-partycarriers will deliver the products directly to the customer either on the sameday or the next day. For customers located outside the local delivery radius ofa distribution center, we deliver products via UPS or another parcel deliverycompany or, in the case of large orders, by common carriers. We generally arrangefor pick-up of returns at no charge to the customer in the local deliveryradius. For customers outside the local delivery radius, we provide parcelservice pick-up of the returns at no charge and also provide a full refund ifthe return is the result of our error. Portions of our sales are delivereddirect from the supplier.

**Suppliers and Purchasing**

We enjoy long-standing relationships with many of oursuppliers. In most cases, we have a number of competitive sources of supply forany particular product that we sell. Due to our high volume of purchases, weare able to obtain purchase terms we believe to be more favorable than thoseavailable to most local suppliers of MRO products. We buy our products from approximately3,500 suppliers located domestically and throughout the world. The largestmajority of our purchases are from primarily domestically based supplierpartners. However, a significant portion of our purchases are from foreignbased suppliers located in China and Southeast Asia and therefore have longersupply lead times than domestically based suppliers.

We aggressively manage ourinventory levels through our common information technology and logisticsplatform. For instance, our purchasing process is driven by an inventorymanagement system that forecasts demand based on customer ordering patterns.This system monitors our inventory and alerts our purchasing managers of itemsapproaching low stocking levels. We balance ordering and carrying costs in aneffort to minimize total inventory costs. Forecasting is automated and is basedon historical demand or seasonally adjusted projected demand. Our systemassists in determining which items fit seasonal demand patterns. Demandforecasts are adjusted by trend factors that reflect changes in expected salesor general business trends. Automated procedures recommend safety stock levelsbased on frequency of item sales. When an item reaches re-order point, oursystem can automatically generate a replenishment purchase, the purchasingmanager can initiate an automatic purchase order or the purchasing manager canmanually build a purchase order.

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**Management InformationSystems**

We operate a customer service and inventory managementsystem that allows us to manage customer relationships and to administer anddistribute thousands of products. Our systems encompass all major businessfunctions for each of our main brands and enable us to receive and processorders, manage inventory, verify credit and payment history, generate customerinvoices, receive payments and manage our proprietary customer lists. We haveconsistently invested in our information technology, as we believe that theefficiency and flexibility of our information system are critical to thesuccess of our business.

Our information systems have been instrumental in ourefforts to streamline our inventory management processes. Our informationsystems track each item of our inventory and its location within ourdistribution network. By monitoring inventory levels, we are able to quicklyre-order products or shift inventory through our distribution network in orderto ensure product availability. Our systems also allow us to monitor sales ofproducts, enabling us to eliminate products that do not perform to our salestargets. Our information systems have also allowed us to create a moreefficient order fulfillment process. Our local distribution centers are linkedto our information systems, which provide them with real-time access toinventory availability, order tracking and customer creditworthiness.

We constantly seek newways to generate additional efficiencies, such as by utilizing e-commerce. Withbrand-specific websites, our customers can browse our catalogs and usethe internet to send electronic purchase orders to our order entry system. Ourcustomers can integrate this system into their own purchase order systems,thereby making their supply chain operate more seamlessly. In addition, weoffer our customers the option of receiving invoices electronically. Forcustomers that place frequent orders and have the ability to receive electronicinvoices, this program can dramatically reduce ordering costs by eliminatinginvoice handling and automating the matching and payment process. We believethat by offering services like electronic purchasing and invoicing, whichremove transaction costs from the supply chain, we encourage our customers touse us as their single source for MRO supplies.

**Competition**

The MRO product distribution industry is highlycompetitive. Competition in our industry is primarily based upon product linebreadth, product availability, service capabilities and price. We facesignificant competition from national and regional distributors, such as HomeDepot Supply, Inc. and Ferguson. Each of these competitors markets theirproducts through the use of direct sales forces as well as direct marketing andcatalogs. In addition, we face competition from traditional channels ofdistribution such as retail outlets, small dealerships and large warehousestores, including Home Depot and Lowe’s. We also compete with buying groupsformed by smaller distributors, internet-based procurement servicecompanies, auction businesses and trade exchanges.

We expect that competitionin our industry will continue to be strong in the future. The MRO productdistribution industry is consolidating, as traditional MRO product distributorsattempt to achieve economies of scale and increase efficiency. Furthermore, MROproduct customers are continuing to seek low cost alternatives to replacetraditional methods of purchasing and sources of supply. We believe that thecurrent trend is for customers to reduce the number of suppliers and rely onlower cost alternatives such as direct marketing and/or integrated supplyarrangements, which will contribute to competition in our industry.

**EnvironmentalMatters**

Some of the products wehandle and sell, such as cleaning chemicals, are considered hazardousmaterials. Accordingly, we are subject to certain federal, state and localenvironmental laws and regulations, including those governing the managementand disposal of, and exposure to, hazardous materials and the cleanup ofcontaminated sites. While we could incur costs as a result of liabilitiesunder, or violations of, such environmental laws and regulations or arising outof the presence of hazardous 

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materialsin the environment, including the discovery of any such materials resultingfrom historical operations at our sites, we do not believe that we are subjectto any such costs that are material. Furthermore, we believe that we are incompliance in all material respects with all environmental laws and regulationsapplicable to our facilities and operations.

**Trademarks andOther Intellectual Property**

We have registered andnonregistered trade names and trademarks covering the principal brand names andproduct lines under which our products are marketed, including Wilmar®,Sexauer®, Maintenance USA®, AmSanTM, Barnett®, Hardware Express®, U.S. Lock®,SunStar®, CopperfieldTM and AF LightingTM. We believe that our trademarks andother proprietary rights are important to our success and our competitiveposition. Accordingly, our policy is to pursue and maintain registration of ourtrade names and trademarks whenever possible and to oppose vigorously anyinfringement or dilution of our trade names and trademarks.

**Employees**

As of December 29,2006, we had 3,763 employees, of whom 109 were unionized. Currently, we havetwo labor agreements in place: one for our Mt. Laurel, New Jersey distributioncenter and one for our Elkridge, Maryland distribution center. The Mt. Laurel,New Jersey agreement was renegotiated on October 18, 2004 and will expireon October 17, 2007. The total number of employees within this bargainingunit is 61. The Elkridge, Maryland agreement was renegotiated on November 1,2004 and will expire on October 31, 2007. The total number of employeeswithin this bargaining unit is 48. We have not experienced any work stoppages resultingfrom management or union disagreements and believe that our employee relationsare satisfactory.

**AvailableInformation**

Our internet address iswww.interlinebrands.com. We make available, free of charge, through ourinternet site, via a hyperlink to the 10KWizard.com web site, our annualreports on Form 10-K; quarterly reports on Form 10-Q;current reports on Form 8-K; and any amendments to those reportsfiled or furnished pursuant to the Securities Exchange Act of 1934, as amended(the “Exchange Act”), as soon as reasonably practicable after such material iselectronically filed with, or furnished to, the Securities and ExchangeCommission (“SEC”).

**Recent Events**

*Change in ControlSeverance Agreements*

On March 1, 2007, the Compensation Committee ofthe Board approved change in control severance agreements for certain of theCompany’s executives. The change in control severance agreements serve to offerthese executives appropriate incentive to remain with the Company before,during and after any change-in-control transaction and to ensure that theseexecutives support any potential change in control transaction that may be inthe best interests of the Company’s shareholders, even while the transactionmay create uncertainty for the executives’ personal employment situation.

The change in control severance agreements providethat in the event an executive’s employment is terminated, without cause or forgood reason within two years following a change in control, each executive willbe entitled to (1) a cash severance amount equal to the sum of (a) 1.5times the executive’s base salary, (b) 1.5 times the average of the annualbonus earned by the executive with respect to the last three completed fiscalyears and (c) the pro-rated bonus for the year in which the terminationoccurs and (2) continuation of medical benefits for a period of 18 monthsfollowing termination. Assuming the closing date of a change in control occurson March 13, 2007, the estimated severance benefits payable to theseexecutives is approximately $3.5 million in cash and the continuation ofmedical benefits for a period of 18 

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months followingtermination of these executives is estimated to cost the Company approximately$0.1 million.

The change in controlagreements also provide for tax gross-ups for any amounts due or paid to theexecutives under the change in control agreement, or any other Company plans orarrangements that are considered an “excess parachute payment” under the U.S.Internal Revenue Code, provided that the “excess parachute payment” is at least110% of the “safe harbor” amount that would result in no excise tax liability.

***Amendment to theInterline Brands, Inc., 2004 Equity Incentive Plan***

Our Compensation Committee approved an amendment,effective as of December 30, 2006, to the definition of “fair market value” inthe 2004 Equity Incentive Plan. Pursuant to this amendment, the exercise priceof options granted by us will be equal to the fair market value of a share ofour common stock on the grant date where the “fair market value” will be theclosing price of our common stock on the day on which the stock option was granted,or if there was no such sale on that date, the last preceding date on which asale of our common stock was reported.

**ITEM 1A.**        Risk Factors

*The following risk factors should be read carefully inconnection with evaluating us and this annual report on Form 10-K.Certain statements in “Risk Factors” are forward-looking statements. See “Forward-LookingStatements” above.*

**Risks Relating toOur Business**

***Slowdowns ingeneral economic activity and other unforeseen events may detrimentally impactour customers and thereby significantly reduce our revenues and profitability.***

The MRO productdistribution industry is affected by changes in economic conditions outside ourcontrol, including national, regional and local slowdowns in general economicactivity and job markets, which can result in increased vacancies in theresidential rental housing market and a general decrease in product demand fromprofessional contractors and specialty distributors. For example, the recentslow down in economic activity in the residential housing and remodeling markethas resulted in lower average order sizes and depressed revenue growth in ourprofessional contractor and specialty distributor business. In addition, theslowdown in economic activity during 2002 and 2003 resulted in less apartmentunit refurbishment and renovation which reduced demand for our products anddepressed revenue growth during that period. Economic slowdowns, adverseeconomic conditions or cyclical trends in our customer markets and otherunforeseen events, such as terrorist attacks or armed hostilities, couldnegatively affect our industry or the industries in which our customers operateand significantly reduce our revenues and profitability.

***One of the key markets inwhich we operate is impacted by trends in home improvement, home remodeling andhome building.*Adverse changes in economic factors specificto these industries may negatively impact the rate of growth of our net sales.**

The professionalcontractor market is impacted by trends in home improvement, home remodelingand new home construction. Trends in these areas are in turn dependent upon anumber of factors, including demographic trends, interest rates, tax policy,employment levels, consumer confidence and the economy generally. Unfavorablechanges in demographics or a weakening of the national economy or of anyregional or local economy in which we operate could adversely affect consumerspending, result in decreased demand for repair, improvement, remodeling orconstruction products and adversely affect our business. For example, in thefourth quarter of 2006, our average organic daily sales rate in theprofessional contractor and specialty distributor markets was down 2.5% and7.9%, respectively.

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***We operate in ahighly competitive industry, and if we are unable to compete successfully wecould lose customers, and our sales may decline.***

*The MRO product distributionindustry is highly competitive. We face significant competition from nationaland regional distributors which market their products through the use of directsales forces as well as direct marketing and catalogs. In addition, we facecompetition from traditional channels of distribution such as retail outlets,small dealerships and large warehouse stores and from buying groups formed bysmaller distributors, internet-based procurement service companies,auction businesses and trade exchanges. We expect that new competitors maydevelop over time as internet-based enterprises become more establishedand reliable and refine their service capabilities.*

In addition, the MRO product distribution industry isundergoing changes driven by industry consolidation and increased customerdemands. Traditional MRO product distributors are consolidating operations andacquiring or merging with other MRO product distributors to achieve economiesof scale and increase efficiency. This consolidation trend could cause theindustry to become more competitive and make it more difficult for us tomaintain our operating margins.

*Competitionin our industry is primarily based upon product line breadth, productavailability, service capabilities and price. To the extent that existing orfuture competitors seek to gain or retain market share by reducing price or byincreasing support service offerings, we may be required to lower our prices orto make additional expenditures for support services, thereby reducing ourprofitability.*

***Fluctuations in thecost of raw materials, fuel prices or in currency exchange rates couldsignificantly reduce our revenues and profitability.***

As a distributor of manufactured products, ourprofitability is tied to the prices we pay to the manufacturers from which wepurchase our products and to the cost of transporting the products to us andour customers. The price that our suppliers charge us for our products isdependent in part upon the availability and cost of the raw materials used toproduce those products. Such raw materials are often subject to pricefluctuations, frequently due to factors beyond our control, including changesin supply and demand, general U.S. and international economic conditions, laborcosts, competition and government regulations. Increases in the cost of rawmaterials, such as copper, oil, stainless steel, aluminum, zinc, plastic andPVC and other commodities and raw materials, have occurred in the past andadversely impacted our operating results. Transportation prices aresignificantly dependent on fuel prices, which generally change due to factorsbeyond our control, such as changes in worldwide demand, disruptions in supply,changes in the political climate in the Middle East and other regions andchanges in government regulations. Fluctuations in raw materials and fuelprices may increase our costs and significantly reduce our revenues and profitability.

A significant decline in raw materials, fuel andtransportation costs may also adversely affect us. During the last three years,the cost of our products has increased materially because of raw materials,fuel and transportation cost increases and other demand factors. During thisperiod, a significant portion of our sales growth has resulted from our priceincreases related to these increased costs. The nature and extent of such animpact is difficult to predict, quantify and measure. To the extent the costsof products increase or decrease, the prices we charge for our products maycorrespondingly increase or decrease, adversely affecting our revenues andprofitability.

*Inaddition, many of our suppliers price their products in currencies other thanthe U.S. dollar or incur costs of production in non-U.S. currencies.Accordingly, depreciation of the U.S. dollar against foreign currencies couldincrease the price we pay for these products. For example, a substantialportion of our products are sourced from suppliers in China and the value ofthe Chinese Yuan has increased relative to the U.S. Dollar since July 2005,when it was allowed to fluctuate against a basket of foreign currencies. Mostexperts believe that the value of the Yuan will continue to increase relativeto the U.S. Dollar over*

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*thenext few years. Such a move would most likely result in an increase in the costof products that are sourced from suppliers in China.*

***Loss of keysuppliers, lack of product availability or loss of delivery sources coulddecrease our revenues and profitability.***

We believe our ability tooffer a combination of well recognized product lines and high-qualitylow-priced exclusive brand product lines has been a significant factor inattracting and retaining many of our customers and is one of our corecompetitive strengths. Our ability to offer a wide variety of products to ourcustomers is dependent upon our ability to obtain adequate product supply frommanufacturers or other suppliers. While in many instances we have agreements,including supply chain agreements, with our suppliers, these agreements aregenerally terminable by either party on limited notice. The loss of, or asubstantial decrease in the availability of, products from our suppliers, orthe loss of our key supplier agreements, could cause our revenues andprofitability to decrease. In addition, supply interruptions could arise fromshortages of raw materials, labor disputes or weather conditions affectingproducts or shipments, transportation disruptions or other factors beyond ourcontrol. Loss of a key foreign supplier could disrupt our supply chain forapproximately 60 to 90 days, or longer, and loss of key suppliers from anindividual country could result in disruptions of approximately 120 to150 days, or longer. Short and long term disruptions in our supply chainwould result in higher inventory levels as we replace similar productdomestically, a higher cost of product and ultimately a decrease in ourrevenues and profitability. Although no individual supplier represents morethan 6% of our total purchases, a disruption in the timely availability of ourproduct by our key suppliers could result in a decrease in our revenues andprofitability.

***We could facepotential product quality and product liability claims relating to the productswe distribute, which could result in a decline in revenues and profitabilityand negatively impact customer confidence.***

We rely on manufacturersand other suppliers to provide us with the products we sell and distribute. Aswe do not have direct control over the quality of the products manufactured orsupplied by such third party suppliers, we are exposed to risks relating to thequality of the products we distribute. It is possible that inventory from amanufacturer or supplier could be sold to our customers and later be alleged tohave quality problems or to have caused personal injury, subjecting us topotential claims from customers or third parties. The risk of claims may begreater with respect to our exclusive brand products, as these products arecustomarily manufactured by third party suppliers outside the United States,particularly in China. We have been subject to claims in the past, which havebeen resolved without material financial impact. While we currently maintaininsurance coverage to address these types of liabilities, we cannot assure youthat we will be able to obtain such insurance on acceptable terms in thefuture, if at all, or that any such insurance will provide adequate coverageagainst potential claims. Product liability claims can be expensive to defendand can divert the attention of management and other personnel for significanttime periods, regardless of the ultimate outcome. An unsuccessful productliability defense could be highly costly and accordingly result in a decline inrevenues and profitability. In addition, uncertainties with respect to theChinese legal system may adversely affect us in resolving claims arising fromour exclusive brand products manufactured in China. Because many laws andregulations are relatively new and the Chinese legal system is still evolving,the interpretations of many laws, regulations and rules are not alwaysuniform. Finally, even if we are successful in defending any claim relating tothe products we distribute, claims of this nature could negatively impactcustomer confidence in our products and our company.

***If the governmentof China were to reduce or withdraw the tax benefits they provide our Chinesesuppliers, the cost of some of our products could increase and therefore ourprofitability may be significantly reduced.***

China’s turnover taxsystem consists of value-added tax, or VAT, consumption tax and business tax.Export sales are exempted under VAT rules and an exporter who incurs inputVAT on the manufacture of goods can claim a tax rebate from Chinese taxauthorities. Currently, our Chinese suppliers benefit from 

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the taxrebates that China provides them to export their products. If these tax rebatesare reduced or eliminated, some of our Chinese-sourced products could becomemore expensive for us, thereby reducing our profitability.

***In some cases, weare dependent on long supply chains, which may subject us to interruptions inthe supply of many of the products that we distribute.***

*Asignificant portion of the products that we distribute is imported from foreigncountries, including China. We are thus dependent on long supply chains for thesuccessful delivery of many of our products. The length and complexity of thesesupply chains make them vulnerable to numerous risks, many of which are beyondour control, which could cause significant interruptions or delays in deliveryof our products. Factors such as labor disputes, currency fluctuations, changesin tariff or import policies, severe weather or terrorist attacks or armedhostilities may disrupt these supply chains. We expect more of our name brandand exclusive brand products will be imported in the future, which will furtherincrease these risks. A significant interruption in our supply chains caused byany of the above factors could result in increased costs or delivery delays andresult in a decrease in our revenues and profitability.*

***Our ability to bothmaintain our existing customer base and to attract new customers is dependentin many cases upon our ability to deliver products and fulfill orders in atimely and cost-effective manner.***

*Toensure timely delivery of our products to our customers, we frequently rely onthird parties, including couriers such as UPS and other national shippers aswell as various local and regional trucking contractors and logisticsconsulting and management companies. Outsourcing this activity generates anumber of risks, including decreased control over the delivery process andservice timeliness and quality. Any sustained inability of these third partiesto deliver our products to our customers could result in the loss of customersor require us to seek alternative delivery sources, if they are available,which may result in significantly increased costs and delivery delays.Furthermore, the need to identify and qualify substitute service providers orincrease our internal capacity could result in unforeseen operations problemsand additional costs. Moreover, if customer demand for our products increases,we may be unable to secure sufficient additional capacity from our currentservice providers, or others, on commercially reasonable terms, if at all.*

***The loss of any of our significant customers couldsignificantly reduce our revenues and profitability.***

Our 10 largest customersgenerated approximately $62.2 million, or approximately 6%, of our salesin the year ended December 29, 2006, and our largest customer accountedfor approximately 3% of our sales in the year ended December 29, 2006. Theloss of one or more of our significant customers or deterioration in ourrelations with any of them could significantly reduce our revenues andprofitability.

***We may not be ableto protect our trademarks, which could diminish the strength of our trademarksor limit our ability to use our trademarks and, accordingly, undermine ourcompetitive position.***

We believe that ourtrademarks are important to our success and our competitive position. Forinstance, we market and sell products primarily through ten distinct andtargeted brands: Wilmar®, Sexauer®, Maintenance USA®, Barnett®, HardwareExpress®, U.S. Lock®, SunStar®, AmSanTM, CopperfieldTM and AF LightingTM. Webelieve many of our customers have developed strong consumer loyalty to thesetargeted brands. Accordingly, we devote resources to the establishment andprotection of our trademarks, including with respect to our brand names and ourexclusive brand products. However, the actions we have taken may be inadequateto prevent imitation of our brands and concepts by others or to prevent othersfrom claiming violations of their trademarks and proprietary rights by us. Inaddition, others may assert rights in our trademarks. Our exclusive rights toour trademarks are subject to the common law rights of any other person whobegan using the trademark (or a confusingly similar mark) prior to the date offederal registration. Future actions by third parties may diminish the strengthof our trademarks or limit our ability to use our trademarks and, accordingly,undermine our competitive position.

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***We may not be ableto facilitate our growth strategy by identifying or completing transactionswith attractive acquisition candidates, which could impede our revenues andprofitability.***

Our acquisitions ofBarnett in 2000, Florida Lighting in 2003, Copperfield in 2005 and AmSan in2006 have contributed significantly to our growth. An important element of ourgrowth strategy is to continue to seek additional businesses to acquire inorder to add new customers within our existing markets and to acquire brands innew markets. We cannot assure you that we will be able to identify attractiveacquisition candidates or complete the acquisition of any identified candidatesat favorable prices and upon advantageous terms and conditions. Furthermore, webelieve that our industry is currently in a process of consolidation, andcompetition for attractive acquisition candidates is therefore likely toescalate, thereby limiting the number of acquisition candidates or increasingthe overall costs of making acquisitions. Difficulties we may face inidentifying or completing acquisitions could impede our revenue growth andprofitability.

***We cannot assure you that AmSan will be successfullyintegrated by us.***

If we cannotsuccessfully integrate the operations of AmSan with our existing operations, wemay experience material negative consequences to our business, financialcondition or results of operations. The integration of companies that havepreviously been operated separately involves a number of risks, including, butnot limited to:

·       demandson management related to the increase in our size after the AmSan acquisition;

·       thediversion of management’s attention from the management of daily operations tothe integration of operations;

·       difficultiesin the assimilation and retention of employees; and

·       difficultiesin the integration of departments, systems, including accounting systems,technologies, books and records and procedures, as well as in maintaininguniform standards, controls, including internal accounting controls, proceduresand policies and expenses of any undisclosed or potential legal liabilities.

Prior to the acquisition,AmSan and Interline Brands operated as separate entities. We may not be able tomaintain the levels of revenue, earnings or operating efficiency that eachentity had achieved or might achieve separately. Successful integration ofAmSan’s operations will depend on our ability to manage those operations,realize opportunities for revenue growth presented by strengthened productofferings and to eliminate redundant and excess costs.

***We cannot assureyou that we will be able to successfully complete the integration of futureacquisitions or manage other consequences of our acquisitions, which couldimpede our ability to remain competitive and, ultimately, our revenues andprofitability.***

Acquisitions involvesignificant risks and uncertainties, including difficulties integratingacquired personnel and other corporate cultures into our business, difficultiesassociated with information systems conversions, the potential loss of keyemployees, customers or suppliers, the assumption of liabilities and exposureto unforeseen liabilities of acquired companies, the difficulties in achievingtarget synergies and the diversion of management attention and resources fromexisting operations. Although we have been successful in the past inintegrating acquisitions, we may not be able to fully integrate the operationsof future acquired businesses with our own in an efficient and cost-effective manneror without significant disruption to our existing operations. We may also berequired to incur additional debt in order to consummate acquisitions in thefuture. Such debt may be substantial and may limit our flexibility in using ourcash flow from operations. Our failure to integrate future acquired businesseseffectively or to manage 

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otherconsequences of our acquisitions, including increased indebtedness, couldimpede our ability to remain competitive and, ultimately, our revenues andprofitability.

***Disruption in our information technology systems couldsignificantly lower our revenues and profitability.***

*Ouroperations are dependent upon our information technology systems that encompassall of our major business functions. We rely upon our information technologysystems to manage and replenish inventory, to fill and ship customer orders ona timely basis and to coordinate our sales and marketing activities across allof our brands. We believe that our information technology systems plays a keyrole in our ability to achieve operating and financial efficiencies. Anysubstantial disruption of our information technology systems for any prolongedtime period could result in delays in receiving inventory and supplies orfilling customer orders and, accordingly, could significantly lower ourrevenues and profitability.*

***Disruption in our national distribution center couldsignificantly lower our revenues and profitability.***

We currently maintain anational distribution center located in Nashville, Tennessee, which isessential to the efficient operation of our national distribution network. Anyserious disruption to this distribution center due to fire, earthquake, act ofterrorism or any other cause could damage a significant portion of ourinventory and could materially impair our ability to distribute our products toour customers. In addition, we could incur significantly higher costs andlonger lead times associated with distributing our products to our customersduring the time that it takes for us to reopen or replace the center. As aresult, any such disruption could significantly lower our revenues andprofitability.

***We may be unable toretain senior executives and attract and retain other qualified employees whichmight hinder our growth and could impede our ability to run our business andpotentially reduce our revenues and profitability.***

Our success depends inpart on our ability to attract, hire, train and retain qualified managerial,sales and marketing personnel. We face significant competition for these typesof personnel in our industry. We may be unsuccessful in attracting andretaining the personnel we require to conduct and expand our operationssuccessfully and, in such an event, our revenues and profitability coulddecline. In addition, key personnel may leave us and compete against us. Oursuccess also depends, to a significant extent, on the continued service of oursenior management team. The loss of any member of our senior management team orother qualified employees could impair our ability to execute our business planand growth strategy, cause us to lose customers and reduce our net sales, orlead to employee morale problems and/or the loss of key employees.

***If we fail tomaintain an effective system of internal controls, we may not be able toaccurately report our financial results or prevent fraud. As a result, currentand potential stockholders could lose confidence in our financial reporting,which would harm the trading price of our stock.***

Effective internalcontrols are necessary for us to provide reliable financial reports and preventfraud. Any failure to implement required new or improved controls, ordifficulties encountered in their implementation, could harm our operatingresults or cause us to fail to meet our reporting obligations. Inadequateinternal controls could also cause investors to lose confidence in our reportedfinancial information, which could have a negative effect on the trading priceof our stock.

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**Risks Relating toOur Indebtedness**

***Our indebtedness may limitour cash flow available to invest in the ongoing needs of our business, whichcould prevent us from fulfilling our obligations.***

### As of December 29, 2006, our totalindebtedness was $435.0 million, of which $13.9 million was outstanding in theform of letters of credit. We had $232.8 million of senior indebtednessoutstanding and $86.1 million in additional revolving loan availability underour $100.0 million revolving loan facility.

Our indebtednesscould have important consequences, including:

·       ourdebt could limit our ability to obtain additional financing on satisfactoryterms in the future for working capital, capital expenditures, acquisitions andother general corporate purposes;

·       asignificant portion of our cash flow from operations must be dedicated to thepayment of principal and interest on our debt, which will reduce the fundsavailable to us for our operations;

·       someof our debt is, and will continue to be, at variable rates of interest, whichmay result in higher interest expense in the event of increases in interestrates;

·       ourdebt could limit our flexibility in planning for, or reacting to, changes inour business or our industry;

·       ourdebt may potentially place us at a competitive disadvantage to the extent weare more highly leveraged than some of our competitors;

·       ourdebt could make it more difficult for us to satisfy our obligations under ourcredit facility, exposing us to the risk of default on our secured debt, whichcould result in a foreclosure on our assets, and in turn negatively affect ourability to operate as a going concern;

·       ourfailure to comply with the financial and other restrictive covenants in thedocuments governing our indebtedness could result in an event of default that,if not cured or waived, could harm our business or prospects and could resultin our filing for bankruptcy; and

·       ourdebt may make us more vulnerable to a further downturn in the economy, ourindustry or our business.

Our level of indebtednessincreases the possibility that we may be unable to generate sufficient cash topay when due the principal of, interest on or other amounts due in respect ofour indebtedness. In addition, we may incur additional debt from time to timeto finance strategic acquisitions, investments or for other purposes, subjectto the restrictions contained in the documents governing our indebtedness. Ifwe incur additional debt, the risks associated with our leverage, including ourability to service our debt, would increase. We cannot be certain that ourearnings will be sufficient to allow us to pay principal and interest on ourdebt and meet our other obligations. If we do not have sufficient earnings, wemay be required to refinance all or part of our existing debt, sell assets,borrow more money or sell more securities, none of which we can guarantee wewill be able to do. Our ability to incur additional debt will be limited by theterms and conditions of our credit facility. On June 23, 2006 we completeda series of refinancing transactions consisting of (1) an offering of$200.0 million of 81¤8% senior subordinated notes due2014 and (2) entered into a $330.0 million bank credit facility.The new bank credit facility consists of a $100.0 million 7-year termloan, a $130.0 million 7-year delayed draw term loan and a $100.0 million6-year revolving credit facility of which a portion not exceeding $40.0million is available in the form of letters of credit. In July 2006, weutilized, within the terms of our credit agreement, the incremental $130.0million term loan to fund the AmSan acquisition. In addition, the creditfacility provides for an additional incremental term loan and revolverborrowings, limited by certain restrictions, in the aggregate principal 

19

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amountof up to $100.0 million and $50.0 million, respectively. Each incremental termloan must be in a minimum principal amount of $25.0 million.

***Despite our levelof indebtedness, we may be able to incur substantially more debt. This couldfurther exacerbate the risks described above.***

We may be able to incursignificant additional indebtedness in the future. Although the indenturegoverning our 81¤8% senior subordinated notes due2014 and the credit agreement governing our credit facility containrestrictions on the incurrence of additional indebtedness, these restrictionsare subject to a number of qualifications and exceptions, and the indebtednessincurred in compliance with these restrictions could be substantial.Specifically, the indenture permits us to incur all the indebtedness providedfor in our new revolving loan facility. Furthermore, these restrictions do notprevent us from incurring obligations that do not constitute indebtedness, asdefined in the applicable agreement. To the extent new debt is added to ourcurrent debt levels, the substantial leverage risks described above wouldincrease.

***The terms of ourcredit facility and the indenture governing the 8***1¤8%senior subordinated notes may restrict our current and future operations,particularly our ability to respond to changes in our business or to take certainactions.

Our credit facilityand the indenture governing the 81¤8% senior subordinatednotes contain, and any future indebtedness of ours would likely contain, anumber of restrictive covenants that impose significant operating and financialrestrictions on us, including restrictions on our ability to, among otherthings:

·       incuradditional debt,

·       paydividends and make other restricted payments,

·       createliens,

·       makeinvestments, including business acquisitions,

·       engagein sales of assets and subsidiary stock,

·       enterinto sale and leaseback transactions,

·       enterinto transactions with affiliates,

·       transferall or substantially all of our assets or enter into merger or consolidationtransactions and

·       makecapital expenditures.

The credit facility alsorequires us to maintain certain financial ratios, which become more restrictiveover time. A failure by us to comply with the covenants or financial ratioscontained in the credit facility could result in an event of default under thefacility which could materially and adversely affect our operating results andour financial condition. In the event of any default under our credit facility,the lenders under our credit facility are not required to lend any additionalamounts to us and could elect to declare all borrowings outstanding, togetherwith accrued and unpaid interest and fees, to be due and payable, require us toapply all of our available cash to repay these borrowings or prevent us frommaking debt service payments on the 81¤8% senior subordinated notes, anyof which could result in an event of default under the 81¤8% senior subordinatednotes. If the indebtedness under our credit facility or the 81¤8% senior subordinated notes wereto be accelerated, there can be no assurance that our assets would besufficient to repay such indebtedness in full.

20

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***We may not be able to generate sufficient cash flow tomeet our debt service obligations.***

Our ability to generate sufficient cash flow fromoperations to make scheduled payments on our debt obligations will depend onour future financial performance, which will be affected by a range ofeconomic, competitive, regulatory, legislative and business factors, many ofwhich are beyond our control. Our indebtedness under the credit facility bearsinterest at a variable rate.

Historically, we havefunded our debt service obligations and other capital requirements throughinternally generated cash flow and funds borrowed under our credit agreement.We expect our cash flow from operations and the loan availability under ourcredit agreement to be our primary source of funds in the future. If we do notgenerate sufficient cash flow from operations to satisfy our debt obligations,including payments on the 81¤8% senior subordinated notes, wemay have to undertake alternative financing plans, such as refinancing orrestructuring our debt, selling assets, reducing or delaying capitalinvestments or seeking to raise additional capital. We cannot assure you thatany refinancing would be possible, that any assets could be sold, or, ifsold, of the timing of the sales and the amount of proceeds realized from thosesales, or that additional financing could be obtained on acceptable terms, ifat all. Our inability to generate sufficient cash flow to satisfy our debt obligations,or to refinance our obligations on commercially reasonable terms, would have anadverse effect on our business, financial condition and results of operations,as well as on our ability to satisfy our obligations in respect of the 81¤8% senior subordinated notes.

**ITEM1B.  Unresolved Staff Comments**

None.

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**ITEM 2.**                Properties

We operate out of 145 locations throughout the UnitedStates, Canada and Puerto Rico consisting of 77 regional distribution centers,38 professional contractor showrooms, 14 vendor-managed inventory locations, 12administrative and support facilities, three cross-dock facilities and one NDC.

We lease 128 properties. The majority of these leasesare for terms of five to ten years. We own our corporate headquarters locatedin Jacksonville, Florida, and regional distribution centers in Long Island, NewYork and Louisville, Kentucky, both of which have attached administrative andsupport facilities. None of the owned properties are subject to any mortgages.The 14 vendor-managed inventory locations are customer specific locationswhereby we assist those customers with their MRO inventory management process. 

We believe that our properties are in good operatingcondition and adequately serve our current business operations.

Theranges in size of the locations we operate out of are as follows (not includingvendor-managed inventory locations and cross-dock facilities):

| ** **                             | ** ** | **Size  (in square feet)** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| National  distribution center          |       |                                 |       |   |   | 317,000 |   |
| Regional  distribution centers         |       | 8,000                                |       | — |   | 127,000 |   |
| Professional  contractor showrooms     |       | 3,000                                |       | — |   | 46,000 |   |
| Administrative and  support facilities |       | 3,000                                |       | — |   | 37,000 |   |

 

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The following table sets forth the states, territoriesand provinces we operate out of (not including vendor-managed inventorylocations and cross-dock facilities):

| **Location**        | ** ** | **Regional  Distribution  Centers** | ** ** | **Professional  Contractor  Showrooms** | ** ** | **Administrative  and Support  Locations** |
|---------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------|
| *U.S. State*        |       |                                |       |                                    |       |                                            |
| Alabama             |       | 1                                   |       | 1                                       |       |                                            |
| Arizona             |       | 1                                   |       |                                    |       |                                            |
| California          |       | 4                                   |       | 3                                       |       |                                            |
| Colorado            |       | 2                                   |       | 1                                       |       |                                            |
| Florida             |       | 7                                   |       | 6                                       |       | 2                                               |
| Georgia             |       | 2                                   |       | 1                                       |       |                                            |
| Illinois            |       | 4                                   |       | 3                                       |       | 2                                               |
| Indiana             |       | 1                                   |       |                                    |       |                                            |
| Iowa                |       | 3                                   |       | 1                                       |       |                                            |
| Kansas              |       | 2                                   |       |                                    |       |                                            |
| Kentucky            |       | 3                                   |       |                                    |       |                                            |
| Louisiana           |       | 2                                   |       |                                    |       |                                            |
| Maryland            |       | 2                                   |       | 1                                       |       |                                            |
| Massachusetts       |       | 2                                   |       | 1                                       |       |                                            |
| Michigan            |       | 1                                   |       |                                    |       |                                            |
| Minnesota           |       | 2                                   |       | 1                                       |       |                                            |
| Mississippi         |       | 1                                   |       |                                    |       |                                            |
| Missouri            |       | 2                                   |       |                                    |       |                                            |
| Montana             |       | 2                                   |       |                                    |       |                                            |
| Nebraska            |       | 1                                   |       | 1                                       |       |                                            |
| Nevada              |       | 2                                   |       |                                    |       |                                            |
| New Jersey          |       | 3                                   |       | 2                                       |       | 1                                               |
| New York            |       | 2                                   |       | 1                                       |       |                                            |
| North Carolina      |       | 3                                   |       | 1                                       |       |                                            |
| Ohio                |       | 4                                   |       |                                    |       |                                            |
| Oklahoma            |       | 2                                   |       | 1                                       |       | 1                                               |
| Oregon              |       | 1                                   |       | 1                                       |       | 2                                               |
| Pennsylvania        |       | 2                                   |       | 1                                       |       |                                            |
| South Carolina      |       | 1                                   |       |                                    |       |                                            |
| Tennessee           |       | 3                                   |       |                                    |       |                                            |
| Texas               |       | 7                                   |       | 5                                       |       | 1                                               |
| Washington          |       | 5                                   |       | 2                                       |       |                                            |
| Wisconsin           |       |                                |       | 1                                       |       |                                            |
| Subtotal            |       | 74                                  |       | 38                                      |       | 12                                              |
| *U.S. Territory*    |       |                                |       |                                    |       |                                            |
| Puerto Rico         |       | 1                                   |       |                                    |       |                                            |
| Subtotal            |       | 1                                   |       | 0                                       |       | 0                                               |
| *Canadian Province* |       |                                |       |                                    |       |                                            |
| Alberta             |       | 1                                   |       |                                    |       |                                            |
| Ontario             |       | 1                                   |       |                                    |       |                                            |
| Subtotal            |       | 2                                   |       | 0                                       |       | 0                                               |
| Total               |       | 77                                  |       | 38                                      |       | 12                                              |

 

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**ITEM 3.**                LegalProceedings

We are involved in variouslegal proceedings in the normal course of our business. In the opinion ofmanagement, none of the proceedings is material in relation to our consolidatedfinancial statements.

**ITEM 4.**                Submissionof Matters to a Vote of Security Holders

No matter was submitted toa vote of security holders during the fourth quarter of our year ended December 29,2006, through the solicitation of proxies or otherwise.

**PART II**

**ITEM 5.**                Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

*Market Information*

Since December 16, 2004, our common stock hasbeen publicly traded on the New York Stock Exchange, or NYSE, under the symbol “IBI”.

As of March 9, 2007,there were approximately 50 holders of record of our outstanding common stock.

*Stock PricePerformance*

*The following PerformanceGraph and related information shall not be deemed “soliciting material” or tobe “filed” with the Securities and Exchange Commission, nor shall such informationbe incorporated by reference into any future filing under the Securities Act of1933 or Securities Exchange Act of 1934, each as amended, except to the extentthat the Company specifically incorporates it by reference into such filing.*

The following performance graph compares theperformance of our common stock with the performance of the New York StockExchange Composite and the Standard & Poor’s Small Cap 600 Index,during the period from the Company’s initial public offering on December 16,2004 through December 29, 2006. The Company has chosen the Standard andPoor’s Small Cap 600 Index for comparison because the Standard and Poor’s SmallCap 600 Index includes companies of similar capitalization to the Company. Thegraph plots the changes in value of an initial $100 investment over theindicated time period, assuming all dividends are reinvested.

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| ** **                              | ** ** | **December 16,** | ** ** | **December 31,** | ** ** | **December 30,** | ** ** | **December 29,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2004**              | ** ** | **2004**              | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| IBI                                     |       |                  | $          | 100.00                |       |                  |       | $                     | 101.68     |   |   |   | $ | 131.50 |   |   |   | $ | 129.88 |   |   |
| Standard and  Poor’s Small Cap 600 |       |                  | 100.00     |                  |       |                  | 101.58     |                  |       |   | 108.34 |   |   |   | 123.54 |   |   |
| New York Stock Exchange  Composite      |       |                  | 100.00     |                  |       |                  | 101.66     |                  |       |   | 108.72 |   |   |   | 128.14 |   |   |

 

Thefollowing table sets forth the high and low sale price per share of our commonstock during the periods indicated:

| ** **                                   | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------------|------------|----------|------------|---------|------------|
| Fiscal Year 2006                             |       |     |       |    |       |
| First quarter ended March 31, 2006      |       | $        | 26.10      |    | $          | 22.58 |   |
| Second quarter ended June 30, 2006      |       | $        | 27.54      |    | $          | 21.66 |   |
| Third quarter ended September 29, 2006  |       | $        | 25.99      |    | $          | 21.22 |   |
| Fourth quarter ended December 29, 2006  |       | $        | 27.19      |    | $          | 22.36 |   |
| Fiscal Year 2005                             |       |     |       |    |       |
| First quarter ended April 1, 2005       |       | $        | 19.98      |    | $          | 16.60 |   |
| Second quarter ended July 1, 2005       |       | $        | 20.59      |    | $          | 15.17 |   |
| Third quarter ended September 30, 2005  |       | $        | 21.78      |    | $          | 18.75 |   |
| Fourth quarter  ended December 30, 2005 |       | $        | 23.50      |    | $          | 19.10 |   |

 

*Dividends*

We have never declareddividends on our common stock. Our ability to declare and pay dividends on ourcommon stock is subject to the requirements of Delaware law. In addition, weare a parent company with no business operations of our own. Accordingly, oursources of cash are dividends and distributions with respect to our ownershipinterest in Interline New Jersey that are derived from the earnings and cashflow generated by our businesses. The ability of Interline New Jersey to paydividends to us is restricted under certain of its debt and other agreements.

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*SecuritiesAuthorized for Issuance Under Equity Compensation Plans*

The following table setsforth information as of December 29, 2006 regarding compensation plansunder which our equity securities are authorized for issuance.

| ** **                                                  | ** ** | **(a)**    | ** ** | **(b)**                                                                                                              | ** ** | **(c)**                                                                              | ** ** |
|-------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities to  be issued upon exercise  of outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options ($)** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation  plans (excluding securities  reflected in column (a))** | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 2,569,982  |                                                                                                                 |       |                                                                                 | $          | 18.62 |   |   |   | 2,126,286 | (1) |   |
| Equity  compensation plans not approved by security holders |       |       | —     |                                                                                                                 |       |                                                                                 | —     |   |   |   | — |   |   |
| Total                                                       |       |       | 2,569,982  |                                                                                                                 |       |                                                                                 | $          | 18.62 |   |   |   | 2,126,286 | (1) |   |
|                                                             |            |            |            |                                                                                                                      |            |                                                                                      |            |  |  |  |  |  |  |  |  |  |

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(1)          Reducedby the restricted stock, restricted stock unit and deferred stock unit awardsgranted to management and non-employee directors to date pursuant to the 2004Equity Plan and not included in column (a) because they are not options.

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**ITEM 6.**                SelectedFinancial Data

Thetable below presents our selected historical consolidated financial data for2006, 2005, 2004, 2003 and 2002. The information presented below should be readin conjunction with “Management’s Discussion and Analysis of FinancialConditions and Results of Operations” and the consolidated financial statementsincluded elsewhere in this report.

| ** **                                           | ** ** | **Fiscal Year Ended**                                    | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **December 29,**                                              | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **December 26,** | ** ** | **December 27,** | ** ** |
| ** **                                           | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004(1)** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                           | ** ** | **(in thousands, except per share data)** | ** ** |
| **Income Statement Data:**                           | ** ** |                                                               | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net sales                                            |       |                                                               | $          | 1,067,570 |   |   |   | $ | 851,928 |   |   |   | $ | 743,905 |   |   |   | $ | 640,138 |   |   |   | $ | 637,530 |   |   |
| Cost of sales                                        |       |                                                               | 658,698    |   |   |   | 526,334 |   |   |   | 458,516 |   |   |   | 395,894 |   |   |   | 401,212 |   |   |
| Gross profit                                         |       |                                                               | 408,872    |   |   |   | 325,594 |   |   |   | 285,389 |   |   |   | 244,244 |   |   |   | 236,318 |   |   |
| Selling, general  and administrative expenses        |       |                                                               | 292,752    |   |   |   | 229,595 |   |   |   | 202,084 |   |   |   | 171,091 |   |   |   | 164,328 |   |   |
| Depreciation and  amortization                       |       |                                                               | 14,427     |   |   |   | 13,049 |   |   |   | 12,600 |   |   |   | 10,949 |   |   |   | 11,282 |   |   |
| Secondary offering  and IPO related expenses(2)      |       |                                                               | —     |   |   |   | 932 |   |   |   | 9,215 |   |   |   | — |   |   |   | — |   |   |
| Special costs and  expenses(2)                       |       |                                                               | —     |   |   |   | — |   |   |   | — |   |   |   | 607 |   |   |   | 4,893 |   |   |
| Operating income                                     |       |                                                               | 101,693    |   |   |   | 82,018 |   |   |   | 61,490 |   |   |   | 61,597 |   |   |   | 55,815 |   |   |
| Interest expense,  net                               |       |                                                               | (30,776    | ) |   |   | (25,183 | ) |   |   | (39,798 | ) |   |   | (40,317 | ) |   |   | (38,625 | ) |   |
| Change in fair  value of interest rate swaps         |       |                                                               | —     |   |   |   | — |   |   |   | 8,232 |   |   |   | 5,272 |   |   |   | (5,825 | ) |   |
| Loss on  extinguishment of debt                      |       |                                                               | (20,843    | ) |   |   | (10,340 | ) |   |   | (660 | ) |   |   | (14,893 | ) |   |   | — |   |   |
| Other income                                         |       |                                                               | 606        |   |   |   | 639 |   |   |   | 454 |   |   |   | 40 |   |   |   | — |   |   |
| Income before  income taxes                          |       |                                                               | 50,680     |   |   |   | 47,134 |   |   |   | 29,718 |   |   |   | 11,699 |   |   |   | 11,365 |   |   |
| Provision for  income taxes                          |       |                                                               | 19,495     |   |   |   | 18,335 |   |   |   | 11,617 |   |   |   | 4,547 |   |   |   | 4,219 |   |   |
| Net income                                           |       |                                                               | 31,185     |   |   |   | 28,799 |   |   |   | 18,101 |   |   |   | 7,152 |   |   |   | 7,146 |   |   |
| Preferred stock  dividends                           |       |                                                               | —     |   |   |   | — |   |   |   | (54,389 | ) |   |   | (48,623 | ) |   |   | (42,470 | ) |   |
| Net income (loss)  applicable to common stockholders |       |                                                               | $          | 31,185 |   |   |   | $ | 28,799 |   |   |   | $ | (36,288 | ) |   |   | $ | (41,471 | ) |   |   | $ | (35,324 | ) |   |
| Earnings (loss) per  share:                          |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |       |                                                               | $          | 0.97 |   |   |   | $ | 0.90 |   |   |   | $ | (25.21 | ) |   |   | $ | (632.74 | ) |   |   | $ | (538.55 | ) |   |
| Diluted                                              |       |                                                               | $          | 0.95 |   |   |   | $ | 0.89 |   |   |   | $ | (25.21 | ) |   |   | $ | (632.74 | ) |   |   | $ | (538.55 | ) |   |
| Cash dividends  declared per share                   |       |                                                               | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| **Cash Flow and Other Data:**                        | ** ** |                                                               | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net cash provided by  (used in):                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating activities                                 |       |                                                               | $          | 29,946 |   |   |   | $ | 38,838 |   |   |   | $ | (1,403 | ) |   |   | $ | 33,089 |   |   |   | $ | 10,415 |   |   |
| Investing activities                                 |       |                                                               | (139,298   | ) |   |   | (81,133 | ) |   |   | (7,329 | ) |   |   | (26,795 | ) |   |   | (4,944 | ) |   |
| Financing activities                                 |       |                                                               | 113,226    |   |   |   | (24,062 | ) |   |   | 76,006 |   |   |   | (10,962 | ) |   |   | (3,285 | ) |   |
| Adjusted  EBITDA(3)                                  |       |                                                               | 116,726    |   |   |   | 96,638 |   |   |   | 83,759 |   |   |   | 72,586 |   |   |   | 67,097 |   |   |
| Capital  expenditures                                |       |                                                               | 7,813      |   |   |   | 7,920 |   |   |   | 6,763 |   |   |   | 4,556 |   |   |   | 4,944 |   |   |
| **Balance Sheet Data (as of end  of period):**       | ** ** |                                                               | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Cash and cash  equivalents                           |       |                                                               | $          | 6,852 |   |   |   | $ | 2,958 |   |   |   | $ | 69,178 |   |   |   | $ | 1,612 |   |   |   | $ | 5,557 |   |   |
| Total assets                                         |       |                                                               | 890,569    |   |   |   | 705,769 |   |   |   | 673,380 |   |   |   | 565,282 |   |   |   | 551,718 |   |   |
| Total debt(4)                                        |       |                                                               | 421,066    |   |   |   | 285,075 |   |   |   | 303,275 |   |   |   | 341,525 |   |   |   | 326,024 |   |   |
| Stockholders’ equity  (deficit)                 |       |                                                               | 320,679    |   |   |   | 284,542 |   |   |   | 252,899 |   |   |   | (264,536 | ) |   |   | (223,683 | ) |   |

 

27

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(1)          Fiscal year ended December 31,2004 was a 53-week year. All other years presented were 52-weekyears.

(2)          Secondary offering expensesin 2005 consist of expenses related to the secondary stock offering by certainshareholders of which we received no proceeds. IPO related expenses in 2004consist of additional compensation expense for forgiveness of shareholder loansand one-time bonuses that relate to the IPO transaction. Special costs andexpenses in 2003 and 2004 consist of costs associated with acquisition andrecapitalization activities, including integration and assimilation expenses,severance payments and transaction fees and expenses.

(3)          AdjustedEBITDA represents net income plus interest expense (income), net, change infair value of interest rate swaps, cumulative effect of change in accountingprinciple, loss on extinguishment of debt, secondary offering and IPO relatedexpenses, provision for income taxes and depreciation and amortization.Adjusted EBITDA differs from earnings before interest, taxes, depreciation andamortization (“EBITDA”) and may not be comparable to EBITDA or Adjusted EBITDAas reported by other companies. The computation of Adjusted EBITDA is asfollows (in thousands):

| ** **                                   | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **December 29,**           | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **December 26,** | ** ** | **December 27,** | ** ** |
| ** **                                   | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income                                   |       |                            | $          | 31,185 |   |   |   | $ | 28,799 |   |   |   | $ | 18,101 |   |   |   | $ | 7,152 |   |   |   | $ | 7,146 |   |   |
| Interest expense,  net                       |       |                            | 30,776     |   |   |   | 25,183 |   |   |   | 39,798 |   |   |   | 40,317 |   |   |   | 38,625 |   |   |
| Change in fair  value of interest rate swaps |       |                            | —     |   |   |   | — |   |   |   | (8,232 | ) |   |   | (5,272 | ) |   |   | 5,825 |   |   |
| Loss on  extinguishment of debt              |       |                            | 20,843     |   |   |   | 10,340 |   |   |   | 660 |   |   |   | 14,893 |   |   |   | — |   |   |
| Secondary  offering and IPO related expenses |       |                            | —     |   |   |   | 932 |   |   |   | 9,215 |   |   |   | — |   |   |   | — |   |   |
| Provision for  income taxes                  |       |                            | 19,495     |   |   |   | 18,335 |   |   |   | 11,617 |   |   |   | 4,547 |   |   |   | 4,219 |   |   |
| Depreciation and  amortization               |       |                            | 14,427     |   |   |   | 13,049 |   |   |   | 12,600 |   |   |   | 10,949 |   |   |   | 11,282 |   |   |
|                                         |       |                            | $          | 116,726 |   |   |   | $ | 96,638 |   |   |   | $ | 83,759 |   |   |   | $ | 72,586 |   |   |   | $ | 67,097 |   |   |

 

Adjusted EBITDA ispresented herein because we believe it to be relevant and useful information toour investors since it is used by our management to evaluate the operatingperformance of our business and compare our operating performance with that ofour competitors. Management also uses Adjusted EBITDA for planning purposes,including the preparation of annual operating budgets, and to determineappropriate levels of operating and capital investments. Adjusted EBITDAexcludes certain items, including change in fair value of interest rate swaps,cumulative effect of change in accounting principle, loss on extinguishment ofdebt, and IPO related expenses such as additional compensation expense forforgiveness of shareholder loans and one-time bonuses that relate to financingtransactions and which we believe are not indicative of our core operatingresults. We therefore utilize Adjusted EBITDA as a useful alternative to netincome as an indicator of our operating performance. However, Adjusted EBITDAis not a measure of financial performance under GAAP and Adjusted EBITDA shouldbe considered in addition to, but not as a substitute for, other measures offinancial performance reported in accordance with GAAP, such as net income.While we believe that some of the items excluded in the calculation of AdjustedEBITDA are not indicative of our core operating results, these items do impactour income statement, and management therefore utilizes Adjusted EBITDA as anoperating performance measure in conjunction with GAAP measures such as netincome and gross margin.

(4)          Totaldebt represents the amount of our short-term debt and long-term debt.

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**Reconciliation ofAverage Organic Daily Sales to Net Sales**

Averageorganic daily sales are defined as sales for a period of time divided by thenumber of shipping days in that period of time excluding any sales fromacquisitions made subsequent to the beginning of the prior year period. Thecomputation of average organic daily sales is as follows (dollar amounts inthousands):

| ** **                      | ** ** | **Fiscal Year Ended** | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **December 29,**           | ** ** | **December 30,**           | ** ** | ** ** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **2006**                        | ** ** | **2005**                        | ** ** | **% Variance** | ** ** | **2005** | ** ** | **2004** | ** ** | **% Variance** | ** ** |
| Net Sales                       |       |                            | $          | 1,067,570                       |       |   |   | $ | 851,928 |   |   |   | 25.3 | % |   |   | $ | 851,928 |   |   |   | $ | 743,905 |   |   |   | 14.5 | % |   |
| Less  Acquisitions:             |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| AmSan                           |       |                            | (129,752   | )                               |       |   | — |   |   |   | — |   |   |   | — |   |   |   |   |   |   |   |   |   |   |
| Copperfield                     |       |                            | (18,615    | )                               |       |   | — |   |   |   |   |   |   |   | (34,250 | ) |   |   | — |   |   |   |   |   |   |
| Organic Sales                   |       |                            | $          | 919,203                         |       |   |   | $ | 851,928 |   |   |   | 7.9 | % |   |   | $ | 817,678 |   |   |   | $ | 743,905 |   |   |   | 9.9 | % |   |
| Daily Sales:                    |       |                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ship Days                       |       |                            | 252        |                            |       |   | 253 |   |   |   |   |   |   |   | 253 |   |   |   | 256 |   |   |   |   |   |   |
| Average Daily  Sales(1)         |       |                            | $          | 4,236                           |       |   |   | $ | 3,367 |   |   |   | 25.8 | % |   |   | $ | 3,367 |   |   |   | $ | 2,906 |   |   |   | 15.9 | % |   |
| Average Organic Daily  Sales(2) |       |                            | $          | 3,648                           |       |   |   | $ | 3,367 |   |   |   | 8.3 | % |   |   | $ | 3,232 |   |   |   | $ | 2,906 |   |   |   | 11.2 | % |   |

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(1)          Average daily sales aredefined as sales for a period of time divided by the number of shipping days inthat period of time.

(2)          Average organic dailysales are defined as sales for a period of time divided by the number ofshipping days in that period of time excluding any sales from acquisitions madesubsequent to the beginning of the prior year period.

Average organic dailysales is presented herein because we believe it to be relevant and usefulinformation to our investors since it is used by our management to evaluate theoperating performance of our business, as adjusted to exclude the impact of theAmSan and Copperfield acquisitions, and compare our organic operatingperformance with that of our competitors. However, average organic daily salesis not a measure of financial performance under GAAP and it should beconsidered in addition to, but not as a substitute for, other measures offinancial performance reported in accordance with GAAP, such as net sales.Management utilizes average organic daily sales as an operating performancemeasure in conjunction with GAAP measures such as net sales.

**ITEM 7.**                Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*You should read the following discussion inconjunction with “Selected Financial Data” and our consolidated financialstatements included elsewhere in this report. Some of the statements in thefollowing discussion are forward-looking statements. See “Forward-LookingStatements” above.*

**Overview**

We are a leading nationaldistributor and direct marketer of MRO products. We market and sell our products primarily through ten distinct andtargeted brands. Our multi-brand operating model, which we believe isunique in the industry, allows us to use a single platform to deliver tailoredproducts and services to meet the individual needs of each respective customergroup served.

We stock over 80,000 plumbing, electrical, hardware,security hardware, heating, ventilation and air conditioning, janitorial andsanitary and other MRO products and sell to approximately 200,000 active 

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customer accounts. Ourproducts are primarily used for the repair, maintenance, remodeling,refurbishment and construction of properties and non-industrial facilities.

Our highly diverse customer base includes facilitiesmaintenance customers, professional contractors and specialty distributors. Ourcustomers range in size from individual contractors and independent hardwarestores to apartment management companies and national purchasing groups. Nosingle customer accounted for more than 3% of our sales during 2006.

As a result of theAcquisition and Refinancing Transactions described below, our historicalfinancial results or results of operations may not be indicative of ourfinancial results or results of operations in the future.

**Acquisition**

On July 3, 2006, we acquired all of theoutstanding equity interests of AmSan LLC, or AmSan, from American SanitaryIncorporated for $133.0 million in cash, including cash acquired of $2.2million and transaction fees of $3.0 million. AmSan is a leading national distributorand direct marketer of janitorial and sanitary supplies. The acquisition wasfunded with the $130.0 million delayed draw facility under our new bank creditfacility (see Refinancing Transactions below). Given the recent acquisitiondate, we have not completed our integration plan; therefore, the final fairvalue assessment is not yet complete. We expect to complete the allocationprocess during the second quarter of fiscal 2007.

AmSan, one of the largest national distributors in theU.S. janitorial and sanitary maintenance supply industry, offers over 40,000products from 43 locations to approximately 40,000 customers in 39 states.AmSan’s primary end markets are institutional facilities, such as schools anduniversities, health care sites, lodging and government properties and buildingservice contractors. This acquisition represents an expansion of our (1) MROproduct offering and (2) institutional facilities maintenance business.

As a result of thisacquisition, we analyzed our reportable segments. In accordance with FinancialAccounting Standards Board (“FASB”) Statement No. 131, *Disclosure about Segments of an Enterprise and Related Information*(“FAS 131”), we have two operating segments: Interline Brands and AmSan. Weaggregated these segments into one reportable segment, the distribution of MROproducts, because they posses similar economic characteristics and have commonproducts, customers and methods of distribution. During fiscal year 2007, wewill begin to integrate AmSan’s operations onto our information systemsplatform.

**RefinancingTransactions**

On June 23, 2006, Interline New Jersey completeda series of refinancing transactions consisting of (1) an offering of$200.0 million of 81¤8% senior subordinated notes due2014 and (2) entering into a $330.0 million bank credit facility.The new bank credit facility consists of a $100.0 million 7-year termloan, a $130.0 million 7-year delayed draw term loan and a $100.0 million6-year revolving credit facility of which a portion not exceeding $40.0million is available in the form of letters of credit. The delayed draw termloan was drawn on July 3, 2006 to fund the acquisition of AmSan and theacquisition-related fees and expenses (see Acquisition above). We used theproceeds from the 81¤8% senior subordinated notes andthe new bank credit facility to repurchase the outstanding 111¤2% senior subordinated notes ofInterline New Jersey and to repay indebtedness under the prior credit facilityof Interline New Jersey. We repurchased the 111¤2%senior subordinated notes at a price equal to 110.51% of their principalamount.

In connection with therepurchase of the 111¤2%senior subordinated notes and the repayment of the prior credit facility, werecorded a loss on early extinguishment of debt of $20.7 million, which wascomprised of $13.7 million in tender premiums associated with the repurchase ofthe 111¤2% senior 

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subordinatednotes and a non-cash charge of $7.0 million in deferred financing costsassociated with the repurchase of the 111¤2%senior subordinated notes and the repayment of the prior credit facility.

**Accounting andDisclosure Changes**

Effective December 31, 2005, we adopted theprovisions of FASB Statement No. 123 (revised 2004), *Share-BasedPayment*, (“FAS 123R”) using the modified prospective applicationtransition method. Under this method, the share-based compensation costrecognized beginning December 31, 2005 includes compensation cost for (1) allshare-based payments granted prior to, but not vested as of December 31,2005, based on the grant date fair value originally estimated in accordancewith the provisions of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*, (“FAS 123”) and (2) allshare-based payments granted subsequent to December 30, 2005, based on thegrant date fair value estimated in accordance with the provisions of FAS 123R.Compensation cost under FAS 123R is recognized ratably using the straight-lineattribution method over the expected vesting period or to the retirementeligibility date, if less than the vesting period when vesting is notcontingent upon any future performance. In addition, pursuant to FAS 123R, weare required to estimate the amount of expected forfeitures when calculatingthe compensation costs, instead of accounting for forfeitures as incurred,which was the method previously used by us. As of December 31, 2005, thecumulative effect of adopting the estimated forfeiture method was notsignificant. Prior periods are not restated under this transition method.

FAS 123R also requires us to reflect the tax benefitfrom the exercise of stock options in the statement of cash flows as a cashinflow from financing activities and as a cash outflow from operatingactivities. Prior to the adoption of FAS 123R, these tax benefits have been reflectedas a cash inflow from operating activities. The prior year statement of cashflows has not been restated. The tax benefit from the exercise of stock optionswas $0.3 million and $0.2 million during the years ended December 29, 2006and December 30, 2005, respectively. There were no stock options exercisedduring the year ended December 31, 2004.

As of December 29, 2006, there was $7.0 millionof total unrecognized compensation cost related to unvested stock awards. Thecost is expected to be recognized over a weighted-average period of 2.4 years.

Prior to December 31, 2005, we accounted forshare-based compensation plans in accordance with the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*,**(“APB 25”) aspermitted by FAS 123. We elected to use the intrinsic value method ofaccounting for employee and director share-based compensation expense for ournonqualified employee and director stock option awards and did not recognizecompensation expense for the issuance of options with an exercise price equalto or greater than the market price of the underlying common stock at the dateof grant. Had we elected to adopt the fair value approach as prescribed by FAS123, which charges earnings for the estimated fair value of stock options, ournet income for the years ended December 30, 2005 and December 31,2004 would have been $0.1 million and $6.8 million lower, respectively. Had weelected to adopt the fair value approach as prescribed by FAS 123, our basicand diluted earnings per share would have been $0.00 and $0.01 lower for theyear ended December 30, 2005, respectively, and our basic and diluted lossper share would have been $4.72 and $4.72 higher for the year ended December 31,2004, respectively.

As a result of adopting FAS 123R on December 31,2005, our income before income taxes and net income for the year ended December 29,2006, are $0.9 million and $0.6 million lower, respectively, than if we hadcontinued to account for share-based compensation under APB 25. Basic anddiluted earnings per share are $0.02 lower for the year ended December 29,2006 than if we had continued to account for share-based compensation under APB25.

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**Results ofOperations**

Thefollowing table presents information derived from the consolidated statementsof earnings expressed as a percentage of revenues for the periods indicated:

| ** **                                   | ** ** | **% of Net Sales** | ** ** | ** **            | ** ** | **% of Net Sales** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|-----------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | ** **                        | ** ** | ** **            | ** ** | **% Increase**               | ** ** | ** ** | ** ** | ** ** | ** ** | **% Increase** | ** ** |
| ** **                                   | ** ** | **Fiscal Year Ended**   | ** ** | **(Decrease)**        | ** ** | **Fiscal Year Ended**   | ** ** | **(Decrease)** | ** ** |
| ** **                                   | ** ** | **December 29,**             | ** ** | **December 30,** | ** ** | **2006**                          | ** ** | **December 30,** | ** ** | **December 31,** | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **2006**                          | ** ** | **2005**              | ** ** | **vs. 2005(1)**              | ** ** | **2005** | ** ** | **2004(2)** | ** ** | **vs. 2004(1)** | ** ** |
| Net sales                                    |       |                              | 100.0      | %                     |       |                              | 100.0      | % |   |   | 25.3 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |   | 14.5 | % |   |
| Cost of sales                                |       |                              | 61.7       |                  |       |                              | 61.8       |   |   |   | 25.1 |   |   |   | 61.8 |   |   |   | 61.6 |   |   |   | 14.8 |   |   |
| Gross profit                                 |       |                              | 38.3       |                  |       |                              | 38.2       |   |   |   | 25.6 |   |   |   | 38.2 |   |   |   | 38.4 |   |   |   | 14.1 |   |   |
| Operating  Expenses:                         |       |                              |       |                  |       |                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses |       |                              | 27.4       |                  |       |                              | 27.0       |   |   |   | 27.5 |   |   |   | 27.0 |   |   |   | 27.2 |   |   |   | 13.6 |   |   |
| Depreciation and amortization                |       |                              | 1.4        |                  |       |                              | 1.5        |   |   |   | 10.6 |   |   |   | 1.5 |   |   |   | 1.7 |   |   |   | 3.6 |   |   |
| Secondary offering costs                     |       |                              | —     |                  |       |                              | 0.1        |   |   |   | (100.0 | ) |   |   | 0.1 |   |   |   | 1.2 |   |   |   | (89.9 | ) |   |
| Total operating expense                      |       |                              | 28.8       |                  |       |                              | 28.6       |   |   |   | 26.1 |   |   |   | 28.6 |   |   |   | 30.1 |   |   |   | 8.8 |   |   |
| Operating income                             |       |                              | 9.5        |                  |       |                              | 9.6        |   |   |   | 24.0 |   |   |   | 9.6 |   |   |   | 8.3 |   |   |   | 33.4 |   |   |
| Loss on extinguishment of debt               |       |                              | (2.0       | )                     |       |                              | (1.2       | ) |   |   | 101.6 |   |   |   | (1.2 | ) |   |   | (0.1 | ) |   |   | N/M |   |   |
| Change in fair  value of interest rate swaps |       |                              | —     |                  |       |                              | —     |   |   |   | — |   |   |   | — |   |   |   | 1.1 |   |   |   | (100.0 | ) |   |
| Interest expense                             |       |                              | (2.9       | )                     |       |                              | (3.0       | ) |   |   | 23.4 |   |   |   | (3.0 | ) |   |   | (5.4 | ) |   |   | (36.3 | ) |   |
| Interest income                              |       |                              | 0.1        |                  |       |                              | 0.0        |   |   |   | 150.4 |   |   |   | 0.0 |   |   |   | 0.0 |   |   |   | 74.8 |   |   |
| Other income                                 |       |                              | 0.1        |                  |       |                              | 0.1        |   |   |   | (5.2 | ) |   |   | 0.1 |   |   |   | 0.1 |   |   |   | 40.7 |   |   |
| Income before income taxes                   |       |                              | 4.7        |                  |       |                              | 5.5        |   |   |   | 7.5 |   |   |   | 5.5 |   |   |   | 4.0 |   |   |   | 58.6 |   |   |
| Income tax  provision                        |       |                              | (1.8       | )                     |       |                              | (2.2       | ) |   |   | 6.3 |   |   |   | (2.2 | ) |   |   | (1.6 | ) |   |   | 57.8 |   |   |
| Net income                                   |       |                              | 2.9        | %                     |       |                              | 3.4        | % |   |   | 8.3 | % |   |   | 3.4 | % |   |   | 2.4 | % |   |   | 59.1 | % |   |

 

N/M - Not Meaningful.

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(1)          Percent increase(decrease) represents the actual change as a percent of the prior year’sresult.

(2)          Fiscal year ended December 31,2004 was a 53-week year. All other years presented were 52-weekyears.

The following discussionrefers to the term average daily sales and average organic daily sales. Averagedaily sales are defined as sales for a period of time divided by the number ofshipping days in that period of time. Average organic daily sales are definedas sales for a period of time divided by the number of shipping days in thatperiod of time excluding any sales from acquisitions made subsequent to thebeginning of the prior year period. For a reconciliation of average organicdaily sales growth to GAAP-based financial measures, see “Item 6. SelectedFinancial Data—Reconciliation of Average Organic Daily Sales.”

*Fiscal Year Ended December 29,2006 Compared to Fiscal Year Ended December 30, 2005*

*Overview.*   Driven by strong organic andacquisition growth, net sales for 2006 increased $215.6 million, or25.3%, to a record $1,067.6 million from $851.9 million in 2005. On an averagedaily sales basis, net sales for 2006 increased 25.8%. The increase of netsales was as a result of the strong execution of our 

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strategic growthinitiatives and the acquisition of AmSan in July 2006. Average organicdaily sales, which exclude $129.8 million in net sales in the second half ofthe year from AmSan and $18.6 million in net sales in the first half of theyear from Copperfield, grew 8.3% as we continued to invest in proven growthdrivers in each of our facilities maintenance, professional contractor andspecialty distributor end-markets. Our facilities maintenance markets had thelargest average organic daily growth for the year, compared to our othermarkets that we serve, as we continued to execute well on our national accountsand supply chain management initiatives. Our average organic daily growth inour facilities maintenance market, which represents approximately 60% of oursales, grew 10.1%. Average organic daily sales growth in our professionalcontractor market, which represents approximately 25% of our sales, and our specialtydistributor market, which represents approximately 15% of our sales, grew 8.3%and 3.2%, respectively, in what appears to be a slower residential repair andremodeling market.

Selling, general and administrative, or SG&A,expenses in 2006 increased as a percentage of sales to 27.4% from 27.0% in 2005primarily reflecting the effect of our AmSan acquisition and higher share-basedcompensation. Operating income increased $19.7 million, or 24.0%, over theprior year to $101.7 million in 2006 from $82.0 million in 2005. AdjustedEBITDA increased $20.1 million, or 20.8%, to $116.7 million in 2006 from $96.6million in 2005. Adjusted EBITDA is not a measure of financial performanceunder GAAP. For a reconciliation of EBITDA to GAAP-based financial measures,see “Item 6. Selected Financial Data—Reconciliation of Adjusted EBITDA to NetIncome (Loss).”

As a result of our strong sales performance, operatingexpense control and focus on efficiently managing working capital, we generated$29.9 million in cash from operations and continued to provide improvingyear-over-year returns on tangible capital, or ROTC, which we define asearnings before interest, taxes, depreciation and amortization divided by thetrailing five quarter average of accounts receivable, inventory and property,plant and equipment less accounts payable.

*NetSales.**  *Netsales increased by $215.6 million, or 25.3%, to $1,067.6 million in2006 from $851.9 million in 2005. During 2006, we had one less shippingday than the prior year. Average daily sales were $4.2 million in 2006 and$3.4 million in 2005, a 25.8% increase. The $215.6 million salesincrease included $129.8 million from our AmSan acquisition in July 2006and $18.6 million from our Copperfield acquisition in July 2005. Theremaining increase was attributable to improved demand for our products, newsales and growth initiatives and price increases.

*GrossProfit.**  *Grossprofit increased by $83.3 million, or 25.6%, to $408.9 million in2006 from $325.6 million in 2005. Gross profit margins increased to38.3% in 2006 from 38.2% in 2005. This increase in our gross profitmargins is primarily related to slightly higher gross margins at AmSan, salesmix, and our continued efforts to expand our exclusive brand programs.

*Selling,General and Administrative Expenses.**  *SG&A expenses increased by$63.2 million, or 27.5%, to $292.8 million in 2006 from$229.6 million in 2005. Increased SG&A expenses were related inpart to our acquisitions of AmSan and Copperfield, which accounted for$43.1 million, and an additional $2.9 million in share-basedcompensation expense. Certain expenses within SG&A, such as the costs ofrunning our regional distribution centers, pro contractor showrooms, deliveryexpenses and selling expenses fluctuate with sales volume. These items alongwith increased investment in new sales and marketing initiatives accounted forthe remainder of the increase. SG&A expenses increased as a percentage ofsales to 27.4% of sales in 2006 from 27.0% of sales in 2005 as a result of ourAmSan and Copperfield acquisitions and higher share-based compensation.

*Depreciationand Amortization.**  *Depreciationand amortization expense increased by $1.4 million, or 10.6%, to$14.4 million in 2006 from $13.0 million in 2005. This wasprimarily due to the depreciation and amortization associated with our AmSanacquisition. In 2006, we had $8.7 million of depreciation and $5.7 million ofamortization compared to $8.5 million and $4.5 million in 2005, respectively.

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*SecondaryOffering Expenses.**  *Weincurred secondary offering related expenses of $0.9 million during 2005 as aresult of a secondary offering by certain of our stockholders in August 2005.We did not incur any such expenses during 2006.

*OperatingIncome.**  *Asa result of the foregoing, operating income increased by $19.7 million, or24.0%, to $101.7 million in 2006 from $82.0 millionin 2005.

*InterestExpense.**  *Interestexpense increased by $5.9 million in 2006 to $31.4 million from$25.4 million in 2005. This increase was attributed to higher overall debtbalances resulting from the additional $130.0 million term loan incurred in July 2006associated with our AmSan acquisition and higher market interest rates on ourvariable rate term debt compared to the prior year, offset in part by afavorable refinancing transaction which significantly reduced the rate of ourfixed rate notes and our overall weighted average cost of debt.

*Losson Extinguishment of Debt.*   Loss onextinguishment of debt was $20.8 million in 2006 compared to $10.3 million in2005. In connection with the offering of $200.0 million of 81¤8%senior subordinated notes and entering into a $330.0 million bank creditfacility in June 2006, we repurchased the 111¤2% seniorsubordinated notes of Interline New Jersey and repaid the indebtedness underthe prior credit facility of Interline New Jersey. The 111¤2%senior subordinated notes were repurchased at a price equal to 110.51% of theirprincipal amount. In connection with the repurchase of the 111¤2% seniorsubordinated notes and the repayment of the prior credit facility, we recordeda loss on early extinguishment of debt of $20.7 million. The loss was comprisedof $13.7 million in tender premiums associated with the repurchase of the 111¤2%senior subordinated notes and a non-cash charge of $7.0 million in deferredfinancing costs associated with the repurchase of the 111¤2% seniorsubordinated notes and the repayment of the prior credit facility. In addition,in December 2006, we recorded a non-cash charge of $0.1 million indeferred financing costs associated with the repayment of $10.0 million of the$230.0 million of the outstanding term debt. During 2005, we recorded a $10.3million loss on the early extinguishment of debt consisting of $8.1 million inredemption premium and $2.3 million of deferred financing written-off. The $10.3 million loss was recorded due toour redemption of $70.0 million of the 111¤2% seniorsubordinated notes. The redemption was made 30 days after the closing of ourinitial public offering, or IPO, in accordance with the redemption provision ofthe indenture governing the 111¤2%senior subordinated notes.

*Provision for IncomeTaxes.**  *The provision for income taxes was $19.5million in 2006 compared to a provision of $18.3 million in 2005. Theeffective tax rate for 2006 decreased by 0.4% to 38.5% compared to 38.9% for2005. This decrease in the effective tax rate was primarily due to our having aslightly higher effective tax rate in 2005 as a result of the incurrence ofnon-deductible expenses associated with our secondary offering offset in partby the reduction of $0.4 million of our tax reserves during 2005 as well aschanges in our state apportionment mix related in part to our AmSanacquisition.

*Fiscal Year Ended December 30,2005 Compared to Fiscal Year Ended December 31, 2004*

*Overview.**  *Net sales for 2005 increased $108.0million, or 14.5%, to $851.9 million from $743.9 million in 2004. On an averagedaily sales basis, net sales for 2005 increased 15.9%. The increase of netsales was as a result of the strong execution of our strategic growthinitiatives and the acquisition of Copperfield in July 2005. Averageorganic daily sales, which exclude $34.3 million in net sales in the secondhalf of the year from Copperfield, grew 11.2% as we continued to invest inproven growth drivers in each of our facilities maintenance, professionalcontractor and specialty distributor end-markets. Our most significant area ofgrowth was in the professional contractor markets that we serve as weeffectively deployed multiple sales channels including field sales, telesales,national accounts and direct marketing efforts. In 2005, we expanded ouroutbound telesales force by over 20% and established 11 vendor managedinventory locations at large contractors across the country. New productinitiatives, which included the sale of large equipment, such as appliances,HVAC equipment and water heaters, resulted in 

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a sales increase of 55% in2005 on these products. The selling of these products, while generally at lowergross margin percentages, provide an opportunity for us to sell more to ourcustomers and leverage our distribution and delivery systems.

Selling, general and administrative expenses in 2005decreased as a percentage of sales to 27.0% from 27.2% in 2004 as we continuedto obtain leverage on our sales. Operating income increased $20.5 million, or33.4%, over the prior year to $82.0 million in 2005 from $61.5 million in 2004.Adjusted EBITDA increased $12.8 million, or 15.3%, to $96.6 million in 2005from $83.8 million in 2004. Adjusted EBITDA is not a measure of financialperformance under GAAP. For a reconciliation of EBITDA to GAAP-based financialmeasures, see “Item 6. Selected Financial Data—Reconciliation of AdjustedEBITDA to Net Income (Loss).”

As a result of our strong sales performance, operatingexpense control, focus on efficiently managing working capital, and netreduction of debt, we generated $38.8 million in cash from operations andcontinued to provide improving year-over-year ROTC.

*NetSales.**  *Netsales increased by $108.0 million, or 14.5%, to $851.9 million in2005 from $743.9 million in 2004. During 2005, we had 3 less shipping daysthan the prior year period. Average daily sales were $3.4 million in 2005and $2.9 million in 2004, a 15.9% increase. The $108.0 million salesincrease included $34.3 million from our Copperfield acquisitionreferenced above. The remaining increase was attributable to improved demandfor our products, new sales and growth initiatives and price increases.

*GrossProfit.**  *Grossprofit increased by $40.2 million, or 14.1%, to $325.6 million in2005 from $285.4 million in 2004. Gross profit margin decreased to38.2% in 2005 from 38.4% in 2004. This decrease in our gross profitmargins is primarily related to product mix associated with higher sales oflarge equipment, such as appliances, HVAC equipment and water heaters, whichgenerally carry lower gross margins.

*Selling,General and Administrative Expenses.**  *SG&A expenses increased by$27.5 million, or 13.6%, to $229.6 million in 2005 from$202.1 million in 2004. Increased SG&A expenses were related inpart to our Copperfield acquisition, which accounted for $8.0 million ofthe $27.5 million increase and $1.0 million in stock related compensationexpense. Certain expenses within SG&A, such as the costs of running ourregional distribution centers, pro contractor showrooms, delivery expenses andselling expenses fluctuate with sales volume, and these items along withincreased investment in new sales and marketing initiatives accounted for theremainder of the increase. Despite the increase, SG&A expenses decreased asa percentage of sales to 27.0% of sales in 2005 from 27.2% of sales in 2004 aswe continued to obtain leverage on our sales.

*Depreciationand Amortization.**  *Depreciationand amortization expense increased by $0.4 million, or 3.6%, to$13.0 million in 2005 from $12.6 million in 2004. This wasprimarily due to the depreciation and amortization associated with ourCopperfield acquisition.

*SecondaryOffering and IPO Related Expenses.**  *Weincurred secondary offering related expenses of $0.9 million during 2005 as aresult of a secondary offering by certain of our stockholders in August 2005.During 2004, we incurred IPO related expenses of $9.2 million, which consistedof $2.9 million for forgiveness of shareholder loans and $6.2 million forone-time bonuses to senior employees.

*OperatingIncome.**  *Asa result of the foregoing, operating income increased by $20.5 million, or33.4%, to $82.0 million in 2005 from $61.5 million in 2004.Excluding the effect of secondary offering and IPO related expenses, operatingincome increased by $12.2 million, or 17.3%, over the prior year.

*Changein Fair Value of Interest Rate Swaps.**  *Our interest rate swaps wereterminated at the time of our IPO in December 2004. As such, changes infair value of interest rate swaps were zero in 2005 compared to a gain of $8.2million in 2004. Theses gains are related to changes in the market value of our

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interest rate swapinstruments. The non-cash gains were attributable to changes in marketconditions, including but not limited to fluctuations in interest rates,general market volatility, and the remaining tenor of our instruments.

*InterestExpense.**  *Interestexpense decreased by $14.5 million in 2005 to $25.4 million from$39.9 million in 2004. The net decrease was attributed to lower debtbalances associated with the early extinguishment of $70.0 million of the 11.5%senior subordinated notes of Interline New Jersey in January 2005 and thepay down of $31.3 million of our term loan, as well as lower interest expenseassociated with the termination of our interest rate swaps and the write-off ofdeferred financing costs—all associated with our IPO. This was partially offsetby the incurrence of an additional $50.0 million term loan during 2005, as wellas increased borrowings under our revolving credit facility, to fund the $70.0million acquisition of Copperfield.

*Losson Extinguishment of Debt.*   We redeemed $70.0million of the 11.5% senior subordinated notes in January 2005 usingproceeds from our December 2004 IPO. This redemption was made 30 daysafter the closing of our IPO, in accordance with the redemption provision ofthe indenture governing the notes. In connection with the redemption, werecorded a $10.3 million loss on the early extinguishment of debt in the firstquarter of 2005, consisting of an $8.1million redemption premium and $2.3 million write-off of deferred financingcosts. During 2004, in connection with our IPO and amendment of our seniorcredit facility, we recorded an expense of $0.7 million for the earlyextinguishment of debt. This expense resulted from the write-off of theunamortized loan fees on our former credit facility.

*Provision for IncomeTaxes.**  *The provision for income taxes was $18.3million in 2005 compared to a provision of $11.6 million in 2004. Theeffective tax rate for 2005 was 38.9% compared to 39.1% for 2004. This decreasein the effective tax rate was due primarily to the reduction of $0.4 million ofour tax reserves to address expected requirements under the most recentexposure draft on uncertain tax positions partially offset by thenon-deductible secondary offering expenses discussed above.

**Seasonality**

We experience someseasonal fluctuations as sales of our products typically increase in the secondand third fiscal quarters of the year due to increased apartment turnover andrelated maintenance and repairs in the multi-family residential housingsector during these periods. Typically, November, December and January salesare lower across most of our brands because customers may defer purchases atyear-end as their budget limits are met and because of the winter holidayseason between Thanksgiving Day and New Year’s Day. Our Copperfield brand,which we acquired in July 2005, experiences approximately two-thirds ofsales between July and December. As such, our first quarter sales andearnings typically tend to be lower than the remaining three quarters of theyear.

**Liquidity andCapital Resources**

*Overview*

We are a holding company whose only asset is the stockof our subsidiaries. We conduct virtually all of our business operationsthrough Interline New Jersey. Accordingly, our only material sources of cashare dividends and distributions with respect to our ownership interests inInterline New Jersey that are derived from the earnings and cash flow generatedby Interline New Jersey.

In December 2004, we successfully completed ourIPO and amended our senior credit facility. A total of 14,375,000 shares of ourcommon stock were sold, of which 12,667,000 were sold by us and 1,708,000 weresold by our shareholders. We sold 12,500,000 shares of our common stock in December 2004and 167,000 shares in January 2005 following the exercise of theunderwriters’ over-allotment option. We received $171.8 million in net proceedsincluding the exercise of the underwriters’ over-allotment option, 

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representing $176.9million of proceeds from the sale of stock net of underwriting discounts andcommissions, less $4.1 million of IPO costs and $1.1 million of debt issuancecosts.

Immediately prior to the closing of the IPO, areincorporation merger occurred and the parent company of Interline New Jerseybecame the holding company of the Interline group of businesses. In thereincorporation merger, the holders of the preferred stock of Interline NewJersey received an aggregate of $55.0 million in cash and 19,183,321 shares ofour common stock and the holders of the common stock of Interline New Jerseyreceived 0.01218 shares of our common stock per share of Interline New Jerseycommon stock, or 66,667 shares of our common stock in total. In addition,holders of options to purchase shares of the common stock of Interline NewJersey were converted into options to purchase shares of our common stock.

We also used $31.3 million of the proceeds topartially repay the term loan under our credit facility. We amended our seniorcredit facility to allow for the IPO and reduce the interest rate applicable toour term loans. In conjunction with this amendment, we incurred $1.1 million ofdebt issuance costs. In December 2004, we also used $4.6 million of theproceeds to terminate the interest rate swap agreements. In January 2005,we used $70.0 million of the proceeds from the IPO transaction to partiallyredeem our 111⁄2% senior subordinated notes. In connection with the redemption,we paid $8.1 million of premiums for early redemption of the seniorsubordinated notes and recorded a $10.3 million loss on the earlyextinguishment of debt, which included a charge for write-off of unamortizeddebt issuance costs in the amount of $2.3 million in January 2005.

On June 23, 2006, Interline New Jersey completeda series of refinancing transactions consisting of (1) an offering of$200.0 million of 81¤8% senior subordinated notes due2014 and (2) entering into a $330.0 million bank credit facility.The new bank credit facility consists of a $100.0 million 7-year termloan, a $130.0 million 7-year delayed draw term loan and a $100.0 million6-year revolving credit facility of which a portion not exceeding $40.0million is available in the form of letters of credit. We used the proceedsfrom the 81¤8% senior subordinated notes andthe new bank credit facility to redeem the 111¤2% seniorsubordinated notes and to repay our indebtedness under the prior creditfacility of Interline New Jersey. We funded our July 3, 2006 acquisitionof AmSan with the $130.0 million delayed draw facility under our new bankcredit facility. See “—Acquisition” above.

The 81¤8% senior subordinated notes werepriced at 99.3%, or $198.6 million, of their principal amount, representing ayield to maturity of 81¤4%. We will amortize the discountof $1.4 million over the term of the 81¤8% senior subordinated notes. The 81¤8% senior subordinatednotes mature on June 15, 2014 and interest is payable on June 15 and December 15of each year beginning on December 15, 2006. Our debt issuance costs capitalizedin connection with the 81¤8% senior subordinated notes were$5.8 million. As of December 29, 2006, the 81¤8% senior subordinated notes had afair market value of $205.5 million. For a description of certain terms ofthe 81¤8%senior subordinated notes, see Note 9. Debt to our audited consolidatedfinancial statements included in this report.

The debt instruments of Interline New Jersey,primarily the new credit facility entered into on June 23, 2006 and theindenture governing the terms of the 81¤8% senior subordinated notes,contain significant restrictions on the payment of dividends and distributionsto us by Interline New Jersey. Interline New Jersey’s credit facility allows itto pay dividends, make distributions to us or make investments in us in anaggregate amount not to exceed $2.0 million during any fiscal year, so long asInterline New Jersey is not in default or would be in default as a result ofsuch 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 formanagement or employees and (provided Interline New Jersey is not in default)aggregate payments of up to $40.0 million depending on the pro forma netleverage ratio as of the last day of the previous quarter. In addition, theindenture for the 81¤8% senior subordinated notesgenerally restricts the ability of Interline 

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NewJersey 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 NewJersey, plus an amount equal to the net proceeds from certain equity issuances,subject to compliance with a leverage ratio and no default having occurred andcontinuing. The indenture also contains certain permitted exceptions including (1) allowingus to pay our franchise taxes and other fees required to maintain our corporateexistence, to pay for general corporate and overhead expenses and to pay expensesincurred in connection with certain financing, acquisition or dispositiontransactions, in an aggregate amount not to exceed $10.0 million per year; (2) allowingcertain tax payments; and (3) allowing certain permitted distributions upto $75 million. The new bank credit facility also allows for certainincremental term loans and incremental commitments under the revolving creditfacility which are available to Interline New Jersey to repay indebtedness andmake acquisitions if certain conditions, including various financial ratios aremet.

As of December 29,2006, we had $86.1 million of availability under Interline New Jersey’s new$100.0 million revolving credit facility. Historically, our capitalrequirements have been for debt service obligations, working capitalrequirements, acquisitions, the expansion and maintenance of our distributionnetwork and upgrades of our proprietary information systems. We expect this tocontinue in the foreseeable future. Historically, we have funded theserequirements through internally generated cash flow and funds borrowed underour credit facility. We expect our cash flow from operations and the loanavailability under our credit facility to be our primary source of funds in thefuture. Letters of credit, which are issued under the revolving loan facilityunder our credit facility, are used to support payment obligations incurred forour general corporate purposes. As of December 29, 2006, we had $13.9million of letters of credit issued under the new credit facility. For afurther description of the new credit facility, see “—Credit Facility” below.

*Cash Flow*

*OperatingActivities.*   Net cash provided by operatingactivities was $29.9 million during the year ended December 29, 2006compared to net cash provided by operating activities of $38.8 millionduring the year ended December 30, 2005 and net cash used in operatingactivities of $1.4 million during the year ended December 31, 2004.

Net cash provided by operatingactivities during the year ended December 29, 2006 was $8.9 millionlower than net cash provided by operating activities during the year ended December 30,2005 primarily as a result of a higher net use of working capital to supportthe growth of our business. In addition to higher net income, the key driversof cash from operating activities are our working capital position, morespecifically changes in our trade receivables, inventory holding levels and thetiming of trade accounts payable payments. In 2006, trade accounts receivablebalances decreased compared to the prior year by $8.8 million on improved dayssales outstanding, inventory balances increased $8.4 million and our tradepayables outstanding as of the end of the year were $30.0 million lower thanthe prior year, primarily on lower product purchase volumes.

Net cash provided by operating activities for the yearended December 30, 2005 was $40.2 million higher than net cash used inoperating activities during the year ended December 31, 2004 primarily asa result of our increase in operating income of $20.5 million and changes inour core working capital partially offset by changes in other current assetsand current liabilities. In addition, during the year ended December 30,2005 compared to the year ended December 31, 2004, we had lower cashinterest expense of $17.4 million, resulting from our lower average debtbalances, which were reduced using proceeds from our IPO, and higher cash taxesof $24.1 million, due to higher pretax earnings and the timing of income taxpayments.

*InvestingActivities.*   Net cash used in investingactivities was $139.3 million during the year ended December 29, 2006compared to net cash used in investing activities of $81.1 million during theyear ended 

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December 30, 2005 andnet cash used in investing activities of $7.3 million during the year ended December 31,2004.

Net cash used in investing activities during the yearended December 29, 2006 was attributable to capital expenditures made inthe ordinary course of business of $7.8 million and costs related to purchasesof businesses, net of cash acquired, of $131.5 million, including $130.8 forAmSan.

Net cash used in investing activities during the yearended December 30, 2005 was attributable to capital expenditures made inthe ordinary course of business of $7.9 million and costs related to purchasesof businesses, net of cash acquired, of $73.2 million, including $69.5 millionfor Copperfield in July 2005 and $3.6 million related to our November 2003acquisition of Florida Lighting.

Net cash used in investing activities during the yearended December 31, 2004 was attributable to capital expenditures made inthe ordinary course of business of $6.8 million and costs related to purchasesof businesses, net of cash acquired, of $0.6 million related to our November 2003acquisition of Florida Lighting.

*FinancingActivities.*   Net cash provided by financingactivities totaled $113.2 million during the year ended December 29,2006 compared to net cash used in financing activities of $24.1 millionduring the year ended December 30, 2005 and net cash provided by financingactivities of $76.0 million during the year ended December 31, 2004.

Net cash used in financingactivities during the year ended December 29, 2006 was primarilyattributable to our June refinancing transaction, which included therepayment of $160.0 million of term debt, our repurchase of $130.0 million ofour 111⁄2% senior subordinated notes and $13.7 million in redemption premiumsoffset by the issuance of $198.6 million of 81¤8% senior subordinated notes, netof $1.4 million discount, and $230.0 million of term debt, less $9.7million in debt issuance costs associated with the issuance of the 81¤8% senior subordinated notes andthe term debt. In addition, we repaid $3.4 million of borrowings on ourrevolving credit facility and capital lease obligations partially offset by$1.5 million from stock options exercised and excess tax benefits fromshare-based compensation.

Net cash used in financingactivities during the year ended December 30, 2005 was primarily due to theearly redemption of $70.0 million of Interline New Jersey’s 111¤2%senior subordinated notes and $8.1 million in related redemption premiums,partially offset by $50.0 million of term debt, less $0.9 million in debtissuance costs, $3.0 million increase on our revolving line of credit, $2.3million received in January 2005 for the over-allotment of shares sold tounderwriters, net of expenses, in conjunction with our IPO, $1.7 million ofproceeds received from stock options exercised.

**Net cash provided by financing activities during the yearended December 31, 2004 was primarily attributable to net proceeds fromour initial public offering of $170.6 million offset by the redemption ofpreferred stock of $55.0 million, the repayment of term debt of $38.3 millionand the payment of debt issuance costs of $1.3 million.**

*CapitalExpenditures*

Capital expenditures were$7.8 million in 2006, $7.9 million in 2005 and $6.8 million in 2004. Capitalexpenditures as a percentage of sales were 0.7%, 0.9% and 0.9% in 2006, 2005and 2004, respectively.

Acquisition expenditureswere $131.5 million in 2006, which consisted primarily of 130.8 million relatedto our AmSan acquisition in July 2006, $73.2 million in 2005, whichconsisted of $69.5 million related to our Copperfield acquisition inJuly 2005 and $3.6 million related to our Florida Lighting acquisition inNovember 2003 and $0.6 million in 2004, which related to our FloridaLighting acquisition.

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*Liquidity*

Our principal workingcapital need is for inventory and trade accounts receivable, which havegenerally increased with the growth in our business, both organically andthrough acquisitions. Our principal sources of cash to fund our working capitalneeds are cash generated from operating activities and borrowings under ourrevolving credit facility.

*Credit Facility*

On June 23,2006, Interline New Jersey entered into a $330.0 million bank creditfacility. The new bank credit facility consists of a $100.0 million 7-yearterm loan, a $130.0 million 7-year delayed draw term loan and a $100.0million 6-year revolving credit facility of which a portion not exceeding$40.0 million is available in the form of letters of credit. The delayed drawterm loan was drawn upon to fund the acquisition of substantially all of theassets of American Sanitary Incorporated and the acquisition-related fees andexpenses (see “—Acquisition” above).

Borrowings under the newterm loan, the delayed draw facility and the new revolving credit facility bearinterest, at Interline New Jersey’s option, at either LIBOR plus 1.75% or atthe alternate base rate, which is the greater of the Prime Rate or the FederalFunds Effective Rate plus 0.50%, plus 0.75%. As of December 29, 2006, theinterest rate in effect with respect to the new term loan and the delayed drawfacility was 7.11% for the LIBOR option and 9.00% for the alternate base rateoption. Outstanding letters of credit under the revolving credit facility aresubject to a per annum fee equal to the applicable margin under the revolvingcredit facility. The interest rate margin is subject to pricing adjustments atthe end of each fiscal quarter based on net total indebtedness to consolidatedEBITDA. The new term loan and the delayed draw facility mature on June 23,2013 and the revolving loan facility matures on June 23, 2012. Amountsunder the new term loan and the delayed draw facility are due and payable inquarterly installments equal to 1.0% of the original principal amount on anannual basis through June 23, 2013, with the balance payable in one finalinstallment at the maturity date. Our debt issuance costs capitalized inconnection with the new term loan, the delayed draw facility and the newrevolving credit facility were $3.9 million.

The new bank creditfacility, which is secured by substantially all of the assets of Interline NewJersey and is guaranteed by us and by the domestic subsidiaries of InterlineNew Jersey, contains affirmative, negative and financial covenants that limitInterline New Jersey’s ability to incur additional indebtedness, pay dividendson its common stock or redeem, repurchase or retire its common stock orsubordinated indebtedness, make certain investments, sell assets, andconsolidate, merge or transfer assets, and that require Interline New Jersey tomaintain certain financial ratios as of the last day of each fiscal quarter,including a minimum ratio based on an adjusted and consolidated earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) to consolidated cashinterest expense and a maximum ratio of net total indebtedness to an adjustedconsolidated EBITDA. Interline New Jersey and the Company were in compliancewith all covenants at December 29, 2006.

In connection with the newbank credit facility, Interline New Jersey is required to pay administrativefees, commitment fees, letter of credit issuance and administration fees andcertain expenses and to provide certain indemnities, all of which are customaryfor financings of this type. The new bank credit facility also allows forcertain incremental term loans and incremental commitments under the revolvingcredit facility which are available to Interline New Jersey to repayindebtedness and make acquisitions if certain conditions, including variousfinancial ratios are met.

During the year ended December 29,2006, we borrowed periodically on the revolving credit facility to accommodateour daily working capital needs. The weighted average daily outstanding balanceduring the year was $0.2 million, with ordinary course borrowings rangingfrom $0.0 million to $3.5 million.

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As of December 29,2006, Interline New Jersey had $13.9 million of letters of credit issuedunder the new revolving loan facility and $218.9 million aggregate principaloutstanding under the new term loan facility.

We believe that cash flowfrom operations and available borrowing capacity under our new credit facilitywill be adequate to finance our ongoing operational cash flow needs and debtservice obligations for the next twelve months.

**ContractualObligations and Off-Balance Sheet Arrangements**

The following table setsforth our contractual obligations as of December 29, 2006 (in thousands):
|                                        | ** ** | ** ** | ** ** | **Less than** | ** ** | **2 - 3** | ** ** | **4 - 5** | ** ** | **After 5** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|------------------|------------|
| ** **                             | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **years**           | ** ** | **years**           | ** ** | **years**        | ** ** |
| Term debt                              |       | $          | 222,437    |               |       | $                   | 2,416      |                |       | $                | 4,766      |   | $ | 7,905 |   | $ | 207,350 |   |
| 81¤8% senior subordinated notes   |       | 200,000    |       |               | —     |                |       | —              |       | —           |       | 200,000 |   |
| Revolving credit  facility(1)          |       | —     |       |               | —     |                |       | —              |       | —           |       | — |   |
| Interest                               |       | 237,867    |       |               | 32,507     |                |       | 64,524              |       | 63,641           |       | 77,195 |   |
| Operating leases                       |       | 52,662     |       |               | 17,492     |                |       | 22,419              |       | 8,441            |       | 4,310 |   |
| Capital leases                         |       | 1,201      |       |               | 399        |                |       | 564                 |       | 238              |       | — |   |
| Non-compete agreement                  |       | 400        |       |               | 200        |                |       | 200                 |       | —           |       | — |   |
| Employment agreements                  |       | 5,295      |       |               | 4,179      |                |       | 1,116               |       | —           |       | — |   |
| Total contractual cash  obligations(2) |       | $          | 719,862    |               |       | $                   | 57,193     |                |       | $                | 93,589     |   | $ | 80,225 |   | $ | 488,855 |   |

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(1)          Oursenior secured revolving credit facility includes a $100.0 million revolvingloan facility. As of December 29, 2006, we had $13.9 million in letters ofcredit issued under the revolving credit facility.

(2)          Tradeaccounts payable of $67.5 million are excluded from the table but generallypayable within 30 to 60 days. Accrued interest payable which is currentlyrecorded as a liability is also excluded from the table. See Item 8. FinancialStatements and Supplementary Data and the accompanying audited consolidatedfinancial statements.

As of December 29,2006, except for operating leases and letters of credit, we had no materialoff-balance sheet arrangements.

**Critical Accounting Policies**

In preparing theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America, we are required to makecertain estimates, judgments and assumptions. These estimates, judgments andassumptions affect the reported amounts of assets and liabilities, includingthe disclosure of contingent assets and liabilities, at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe periods presented. On an ongoing basis, we evaluate these estimates andassumptions. We base our estimates and assumptions on historical experience andon various other factors that we believe are reasonable at the time we make theestimates and assumptions. Actual results may differ from these estimates andassumptions under different circumstances or conditions. The significantaccounting policies that we believe are the most critical in order to fullyunderstand and evaluate our financial position and results of operationsinclude the following policies.

*Revenue Recognition*

While our recognition ofrevenue is predominantly derived from routine transactions and does not involvesignificant judgment, revenue recognition represents an important accountingpolicy for us. We recognize a sale when the product has been shipped and riskof loss has passed to the customer, collection of the resulting receivable isprobable, persuasive evidence of an arrangement exists, and the price is fixed 

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ordeterminable. Sales are recorded net of estimated discounts, rebates andreturns. A portion of our sales is delivered directly from the supplier to ourcustomers. These direct-shipment sales are recorded on a gross basis, with thecorresponding cost of goods sold, in accordance with the guidance in EmergingIssues Task Force (“EITF”) Issue No. 99-19, *ReportingRevenues Gross as a Principal versus Net as an Agent*, (“EITF 99-19”).We provide limited product return and protection rights to certain customers.We accrue product return reserves. A provision is made for estimated productreturns based on sales volumes and our experience. Actual returns have notvaried materially from amounts provided historically.

*Allowances for Doubtful Accounts*

We maintain allowances fordoubtful accounts for estimated losses resulting from the inability to collectoutstanding amounts from customers. The allowances include specific amounts forthose accounts that are likely to be uncollectible, such as accounts ofcustomers in bankruptcy and general allowances for those accounts thatmanagement currently believes to be collectible but may later becomeuncollectible. Estimates are used to determine the allowances for bad debts andare based on historical collection experience, current economic trends, creditworthiness of customers and changes in customer payment terms. Adjustments tocredit limits are made based upon payment history and our customers’ currentcredit worthiness. If the financial condition of our customers were todeteriorate, allowances may be needed that will increase selling, general andadministrative expenses and decrease accounts receivable.

*Write-Offs for Excess and Obsolete Inventory*

Inventories are valued atthe lower of cost or market. We determine inventory cost using the average costmethod. We adjust inventory for excess and obsolete inventory and for thedifference by which the cost of the inventory exceeds the estimated marketvalue. In order to determine the adjustments, management reviews inventoryquantities on hand, slow movement reports and sales history reports. Managementestimates the required adjustment based on estimated demand for products andmarket conditions. To the extent historical results are not indicative offuture results and if events occur that affect our relationships with suppliersor the salability of our products, additional write-offs may be needed thatwill increase our cost of sales and decrease inventory.

*Vendor Rebates*

We account for vendorrebates in accordance with EITF Issue 02-16, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received from aVendor*, (“EITF 02-16”). Many of our arrangements with ourvendors provide for us to receive a rebate of a specified amount, payable to uswhen we achieve any of a number of measures generally related to the volume ofpurchases from our vendors. We account for these rebates as a reduction of theprices of the related vendors’ products, which reduces the inventory cost untilthe period in which we sell the product, at which time these rebates reducecost of sales in our income statement. Throughout the year, we estimate theamount of rebates receivable based upon the expected level of purchases. Wecontinually revise these estimates to reflect actual rebates earned based onactual purchase levels. Historically, our actual rebates have been within ourexpectations used for our estimates. If we fail to achieve a measure which isrequired to obtain a vendor rebate, we will have to record a charge in theperiod that we determine the criteria or measure for the vendor rebate will notbe met to the extent the vendor rebate was estimated and included as areduction to cost of sales. If market conditions were to change, vendors maychange the terms of some or all of these programs. Although these changes wouldnot affect the amounts which we have recorded related to products alreadypurchased, it may impact our gross margin on products we sell or revenuesearned in future periods.

*Goodwill, Intangibles and Other Long-Lived Assets*

Management assesses therecoverability of our goodwill, identifiable intangibles and other long-livedassets whenever events or changes in circumstances indicate that the carryingvalue may not be 

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recoverable.The following factors, if present, may trigger an impairment review: (1) significantunderperformance relative to expected historical or projected future operatingresults; (2) significant negative industry or economic trends; (3) asignificant increase in competition; and (4) a significant increase ininterest rates on debt. If the recoverability of these assets is unlikelybecause of the existence of one or more of the above-mentioned factors,an impairment analysis is performed using a projected discounted cash flowmethod. Management must make assumptions regarding estimated future cash flowsand other factors to determine the fair value of these respective assets. Ifthese estimates or related assumptions change in the future, we may be requiredto record an impairment charge. Impairment charges would be included in ourstatements of operations, and would result in reduced carrying amounts of therelated assets in our balance sheets.

*Legal Contingencies*

From time to time, in thecourse of our business, we become involved in legal proceedings. In accordancewith FASB Statement No. 5, *Accounting forContingencies*,**(“FAS 5”) ifit is probable that, as a result of a pending legal claim, an asset had beenimpaired or a liability had been incurred at the date of the financialstatements and the amount of the loss is estimable, an accrual for the costs toresolve the claim is recorded in accrued expenses in our balance sheets.Professional fees related to legal claims are included in selling, general andadministrative expenses in our statements of operations. Management, with theassistance of outside counsel, determines whether it is probable that aliability from a legal claim has been incurred and estimates the amount ofloss. The analysis is based upon potential results, assuming a combination oflitigation and settlement strategies. As discussed in Note 14. Commitmentsand Contingencies to our audited consolidated financial statements included inthis report, management does not believe that currently pending proceedingswill have a material adverse effect on our consolidated financial position. Itis possible, however, that future results of operations for any particularperiod could be materially affected by changes in our assumptions related tothese proceedings.

**Recent Accounting Standards**

In June 2006, theFASB issued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109*,(“FIN 48”) which clarifies the accounting for uncertainty in income taxesrecognized in accordance with FASB Statement No. 109, *Accountingfor Income Taxes* (“FAS 109”). FIN 48 clarifies the application ofFAS 109 by defining criteria that an individual tax position must meet for anypart of the benefit of that position to be recognized in the financialstatements. Additionally, FIN 48 provides guidance on the measurement,derecognition, classification and disclosure of tax positions, along withaccounting for the related interest and penalties. The provisions of FIN 48 areeffective for fiscal years beginning after December 15, 2006, with thecumulative effect of the change in accounting principle recorded as anadjustment to opening retained earnings. We do not expect adoption of FIN 48 tohave a material effect on our financial position, results of operations andcash flows.

In June 2006, theFASB ratified the consensus reached by the EITF with respect to EITF Issue No. 06-3,*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*, (“EITF 06-3) which addresseshow taxes imposed on a revenue producing transaction between a buyer and acustomer, such as sales, use, value-added and excise and other taxes imposed atthe point of sale, should be recorded in the income statement. Theconsensus reached requires that a policy decision be made as to thepresentation of taxes in the income statement. This policy should be disclosedwithin the notes to the financial statements and the amount of taxes includedin revenue, if any, should also be disclosed. EITF 06-3 is effectivefor financial reports for interim and annual periods beginning after December 15,2006 with earlier application permitted. Adoption of EITF 06-3 resultedin additional disclosure and did not change the way we account 

43

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fortaxes collected and remitted. See Note 2.Summary of Significant Accounting Policies to our audited consolidatedfinancial statements included in this report.

In September 2006,the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*, (“SAB 108”)which provides interpretive guidance on the consideration of the effects ofprior year misstatements in quantifying current year misstatements for thepurpose of a materiality assessment. We adopted SAB 108 in the fourth quarterof 2006. Adoption of SAB 108 did not have an impact on our financial position,results of operations and cash flows.

In September 2006,the FASB issued FASB Statement No. 157, *Fair ValueMeasurements*, (“FAS 157”). FAS 157 defines fair value, establishes aframework for measuring fair value with accounting principles generallyaccepted in the United States of America and expands disclosures about fair valuemeasurements. FAS 157 applies under other accounting pronouncements thatrequire or permit fair value measurements. Accordingly, FAS 157 does notrequire any new fair value measurements. FAS 157 is effective for fiscal yearsbeginning after November 15, 2007 with early adoption permitted. We arecurrently evaluating the impact that adoption of FAS 157 will have on ourfinancial position, results of operations and cash flows.

In September 2006,the FASB issued FASB Statement No. 158, *Employer’sAccounting for Defined Benefit Pension and Other Postretirement Plans—anamendment of FASB Statements No. 87, 88, 106 and 132(R)*, (“FAS158”). FAS 158 requires employers to fully recognize the obligations associatedwith single-employer defined benefit pension, retiree healthcare and otherpostretirement plans in the financial statements. Specifically, FAS 158requires as employer to (a) recognize in its statement of financialposition an asset for a plan’s overfunded status or a liability for a plan’sunderfunded status and recognize changes in the funded status of a definedbenefit postretirement plan in comprehensive income in the year in which thechanges occur. In addition, FAS 158 requires an employer to measure a plan’sassets and its obligations that determine its funded status as of the end ofthe employer’s fiscal year (with limited exceptions). We adopted all provisionsof FAS 158 as of December 29, 2006. Adoption of FAS 158 did not have amaterial impact on our financial position, results of operations and cashflows. See Note 13. Employee Benefit Plansto our audited consolidated financial statements included in this report.

In February 2007, theFASB issued FASB Statement No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, (“FAS 159”). FAS 159permits an entity to irrevocably elect fair value on a contract-by-contractbasis as the initial and subsequent measurement attribute for many financialassets and liabilities and certain other items including property and casualtyinsurance contracts. Entities electing the fair value option would be requiredto recognize changes in fair value in earnings and to expense upfront cost andfees associated with the item for which the fair value option is elected.Entities electing the fair value option are required to distinguish on the faceof the statement of financial position, the fair value of assets andliabilities for which the fair value option has been elected and similar assetsand liabilities measured using another measurement attribute. An entity canaccomplish this by either reporting the fair value and non-fair-value carryingamounts as separate line items or aggregate those amounts and discloseparenthetically the amount of fair value included in the aggregate amount. FAS159 is effective for fiscal years beginning after November 15, 2007 withearly adoption permitted as of the beginning of the previous fiscal yearprovided that the entity makes that choice in the first 120 days of that fiscalyear and also elects to apply the provisions of FAS 157. Upon adoption, anentity is permitted to elect the fair value option irrevocably for any existingasset or liability within the scope of the standard. The adjustment to reflectthe difference between the fair value and the carrying amount would beaccounted for as a cumulative-effect adjustment to retained earnings as of thedate of initial adoption. Retrospective application would not be permitted. Weare currently evaluating the impact that adoption of FAS 159 will have on ourfinancial position, results of operations and cash flows.

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**Certifications**

Our Chief Executive Officer has certified to the NewYork Stock Exchange that he is not aware of any violations by the company ofNYSE corporate governance listing standards. We have included as exhibits tothis Annual Report on Form 10-K certificates of our Chief ExecutiveOfficer and Chief Financial Officer certifying the quality of our publicdisclosure.

**ITEM 7A.**        Quantitativeand Qualitative Disclosures About Market Risk

*Commodity PriceRisk*

We are aware of the potentially unfavorable effectsinflationary pressures may create through higher product and material costs,higher asset replacement costs and related depreciation and higher interestrates. In addition, our operating performance is affected by price fluctuationsin copper, oil, stainless steel, aluminum, zinc, plastic and PVC and othercommodities and raw materials. We seek to minimize the effects of inflation andchanging prices through economies of purchasing and inventory managementresulting in cost reductions and productivity improvements as well as priceincreases to maintain reasonable profit margins.

Our results of operations in 2006, 2005 and 2004 werefavorably impacted by increases in the pricing of certain commodity-basedproducts. Such commodity price fluctuations have from time to time createdcyclicality in our financial performance, and could continue to do so in thefuture. In addition, our use of priced catalogs may not allow us to offset suchcost increases quickly, resulting in a decrease in gross margins and profit.

*Interest Rate Risk*

Our variable rate term debt is sensitive to changes inthe general level of interest rates. As of December 29, 2006, the interest ratein effect with respect to our $218.9 million variable rate term debt was 7.11%for the LIBOR option and 9.00% for the alternate base rate option. While ourvariable rate term debt obligations exposes us to the risk of rising interestrates, we do not believe that the potential exposure is material to our overallfinancial performance or results of operations. Based on the outstandingvariable rate term debt as of December 29, 2006, a 1.0% annual increase ordecrease in current market interest rates would have the effect of causing a$2.2 million pre-tax change to our statement of operations.

The fair market value of fixed rate debt debt issubject to interest rate risk. As of December 29, 2006, the fair marketvalue of our $200.0 million 81¤8% seniorsubordinated notes was $205.5 million.

*Foreign CurrencyExchange Risk*

The majority of our purchases from foreign-basedsuppliers are from China and other countries in Asia and are transacted in U.S.dollars. Accordingly, our risk to foreign currency exchange rates was notmaterial as of December 29, 2006.

*DerivativeFinancial Instruments*

As of December 29, 2006, we did not have anyinterest rate swap exchange agreements, or swaps. Historically, we have enteredinto derivative financial instruments from time to time, including interestrate exchange agreements, to manage our exposure to fluctuations in interestrates on our debt. Under our former swap agreements, which were eliminated in December 2004,we paid a fixed rate on the notional amount to our banks and the banks paid usa variable rate on the notional amount equal to a base LIBOR rate. Ourderivative activities, all of which are for purposes other than trading, areinitiated within the guidelines of corporate risk-management policies.

We periodically evaluate the costs and benefits of anychanges in our interest rate risk. Based on such evaluation, we may enter intonew interest rate swaps to manage our interest rate exposure.

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**ITEM 8.**                FinancialStatements and Supplementary Data

Our consolidated financial statements are provided inpart IV, Item 15 of this filing.

**ITEM 9.**                Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**ITEM 9A.**        Controlsand Procedures

*Evaluation ofDisclosure Controls and Procedures*

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer (our principal executive officerand principal financial officer), evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of December 29, 2006. Based on this evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, as of December 29,2006, our disclosure controls and procedures were (1) designed to ensurethat material information relating to us, including our consolidatedsubsidiaries, is made known to our Chief Executive Officer and Chief FinancialOfficer by others within those entities, particularly during the period inwhich this report was being prepared and (2) effective, in that theyprovide reasonable assurance that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

*Internal Controlover Financial Reporting*

Management’s report on internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) is included on page F-1 of this Annual Report on Form 10-K.The report of our independent registered public accounting firm related tomanagement’s assessment of the effectiveness of internal control over financialreporting is included on page F-2 of this Annual Report on Form 10-K.

*Changes in InternalControl over Financial Reporting*

No change in our internal control over financialreporting occurred during the quarter ended December 29, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

*Limitations on theEffectiveness of Controls*

Our management, including our Chief Executive Officerand Chief Financial Officer, does not expect that our disclosure controls andprocedures or our internal control over financial reporting will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable assurance that the objectives of acontrol system are met. Further, any control system reflects limitations onresources, and the benefits of a control system must be considered relative toits costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, have been detected. The design of a controlsystem is also based upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions. Over time, controls maybecome inadequate because of changes in conditions or deterioration in thedegree of compliance with policies or procedures. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and may not be detected. Our disclosure controls are designedto provide reasonable assurance of achieving their objectives.

**ITEM 9B.**       OtherInformation

None.

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**PART III**

**ITEM 10.**         Directors,Executive Officers and Corporate Governance

The information requiredby this item is incorporated by reference from our definitive proxy statementto be filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

**ITEM 11.**         ExecutiveCompensation

The information requiredby this item is incorporated by reference from our definitive proxy statementto be filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

**ITEM 12.**         Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters

The information requiredby this item is incorporated by reference from our definitive proxy statementto be filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

**ITEM 13.**         Certain Relationships andRelated Transactions, and Director Independence

The information requiredby this item is incorporated by reference from our definitive proxy statementto be filed not later than 120 days after the end of the fiscal year covered bythis Annual Report on Form 10-K pursuant to Regulation 14A.

**ITEM 14.**         Principal Accounting Feesand Services

The information required by this item is incorporatedby reference from our definitive proxy statement to be filed not later than 120days after the end of the fiscal year covered by this Annual Report on Form 10-Kpursuant to Regulation 14A.

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**PART IV**

**ITEM 15.   Exhibits,Financial Statement Schedules**

(a)          Documents filed as partof the report.

(1)          ConsolidatedFinancial Statements

| Management’s Report on  Internal Control over Financial Reporting |   | F-1          |   |
|------------------------------------------------------------------------|--------|--------------|--------|
| Reports of  Independent Registered Public Accounting Firm              |   | F-2          |   |
| Consolidated Balance  Sheets                                           |   | F-5          |   |
| Consolidated  Statements of Operations                                 |   | F-6          |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit)        |   | F-7          |   |
| Consolidated  Statements of Cash Flows                                 |   | F-8          |   |
| Notes to  Consolidated Financial Statements                            |   | F-10 to F-44 |   |

 

(2)          Exhibits

See Exhibit Index beginning on page 50

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**ITEM 16.**         Signatures

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. 

|        | **INTERLINE BRANDS, INC.**                |
|--------|-------------------------------------------|
|   | /s/ Michael J. Grebe                      |
|   | Michael J. Grebe  Chief Executive Officer |
|   | Date: March 13,  2007                |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the Registrant and in thecapacities indicated and on the dates indicated.

|                           | **Signature** | ** **                                             | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|---------------------------|---------------|--------------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ Michael J. Grebe      |          | Chairman of the  Board and Chief                       |       | March 13,  2007 |
| Michael  J. Grebe         |          | Executive Officer (Principal Executive Officer)        |       |                 |
| /s/ Thomas J. Tossavainen |          | Chief Financial  Officer (Principal Accounting Officer |       | March 13,  2007 |
| Thomas  J. Tossavainen    |          | and Principal Financial Officer)                       |       |                 |
| /s/ Gideon Argov          |          | Director                                               |       | March 13,  2007 |
| Gideon  Argov             |          |                                                   |       |                 |
| /s/ Michael E. DeDomenico |          | Director                                               |       | March 13,  2007 |
| Michael  E. DeDomenico    |          |                                                   |       |                 |
| /s/ John J. Gavin         |          | Director                                               |       | March 13,  2007 |
| John  J. Gavin            |          |                                                   |       |                 |
| /s/ Barry J. Goldstein    |          | Director                                               |       | March 13,  2007 |
| Barry  J. Goldstein       |          |                                                   |       |                 |
| /s/ Ernest K. Jacquet     |          | Director                                               |       | March 13,  2007 |
| Ernest  K. Jacquet        |          |                                                   |       |                 |
| /s/ Charles W. Santoro    |          | Director                                               |       | March 13,  2007 |
| Charles  W. Santoro       |          |                                                   |       |                 |
| /s/ Drew T. Sawyer        |          | Director                                               |       | March 13,  2007 |
| Drew T. Sawyer            |          |                                                   |       |                 |

 

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**EXHIBITINDEX**

| 1.1 |   | Underwriting Agreement dated as of August 3,  2005 among Interline Brands, Inc., the several selling stockholders  named on Schedule A thereto and the several underwriters named on Schedule B  thereto, for whom Credit Suisse First Boston LLC and Lehman  Brothers, Inc. acted as representatives (incorporated by reference to  exhibit 1.1 to Interline Brand, Inc.’s Amendment No. 1 to  Registration Statement on Form S-1 filed on July 22, 2005  (No. 333-126515)). |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.2 |   | Underwriting Agreement,  dated as of June 9, 2006, among Interline Delaware, Interline New Jersey  and certain subsidiary guarantors listed in Schedule 2 thereto, Lehman  Brothers Inc. and J.P. Morgan Securities Inc, as representatives of the  several underwriters listed in Schedule 1 thereto (incorporated by reference  to the Company’s interim report on Form 8-K filed June 13,  2006).                                                                                                   |
| 2.1 |   | Agreement and Plan of  Merger dated December 21, 2004 (incorporated by reference to  Exhibit 2.1 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                                       |
| 2.2 |   | Stock Purchase and Sale  Agreement, dated as of July 7, 2005, by and among Copperfield, the  shareholders listed therein and Interline Opco (incorporated by reference to  Exhibit 10.1 to Interline Brands, Inc.’s Current Report on  Form 8-K filed on July 13, 2005).                                                                                                                                                                                                                     |
| 2.3 |   | Securities Purchase  Agreement, dated as of May 23, 2006, by and among American Sanitary  Incorporated, AmSan, LLC, Golder, Thoma, Cressey, Rauner Fund V, L.P., GTCR  Associates V, GTCR Capital Partners, L.P. and Interline New Jersey  (incorporated by reference to the Company’s interim report on Form 8-K  filed July 10, 2006).                                                                                                                                                               |
| 3.1 |   | Amended and Restated  Certificate of Incorporation of Interline Brands, Inc. (incorporated by  reference to Exhibit 3.1 to Interline Brands, Inc.’s Form S-3  Registration Statement filed on May 25, 2006 (No. 333-134415)).                                                                                                                                                                                                                                                                     |
| 3.2 |   | Amended and Restated  By-Laws of Interline Brands, Inc. (incorporated by reference to  Exhibit 3.2 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                                                                                                     |
| 4.1 |   | Indenture, dated as of  May 23, 2003, among Interline Opco, the Subsidiary Guarantors thereto  and The Bank of New York, as Trustee (incorporated by reference to  Exhibit 4.1 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                                                                                                      |
| 4.2 |   | Credit Agreement, dated  as of May 29, 2003, among Interline Opco, the Lender Parties thereto,  Credit Suisse First Boston, as Administrative Agent, and JPMorgan Chase Bank,  as Syndication Agent (incorporated by reference to Exhibit 10.1 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                      |
| 4.3 |   | Amendment No. 1,  dated as of December 19, 2003, to the Credit Agreement dated as of  May 29, 2003, among Interline Opco, and the lenders party thereto  (incorporated by reference to Exhibit 10.1 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                                                       |

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| 4.4  |   | Amendment No. 2,  dated as of December 21, 2004, to the Credit Agreement dated as of  May 29, 2003, among Interline Opco and the lenders party thereto, and  the related Amendment and Restatement Agreement dated as of December 21,  2004, among Interline Opco and the lenders party thereto (incorporated by  reference to Exhibit 10.6 to Interline Brands, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2004).                                                                                                                                                                                                  |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.5  |   | Form of Specimen  Certificate (incorporated by reference to Exhibit 4.2 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.6  |   | Supplemental Indenture,  dated as of July 8, 2005, among Interline Opco, CCS Enterprises, Inc.,  Copperfield Chimney Supply, Inc., Riverton Machine &  Foundry, Inc., the other subsidiary guarantors thereto and the Bank of  New York, as trustee (incorporated by reference to Exhibit 10.52 of  Interline Brands, Inc.’s Amendment No. 1 to Form S-1  filed on July 22, 2005 (No. 333-126515)).                                                                                                                                                                                                                             |
| 4.7  |   | Incremental Facility  Amendment, dated as of July 7, 2005, among Interline Brands, Inc.,  Interline Opco, the lenders named therein and Credit Suisse as administrative  agent (incorporated by reference to Exhibit 10.53 of Interline  Brands, Inc.’s Amendment No. 1 to Form S-1 filed on  July 22, 2005 (No. 333-126515)).                                                                                                                                                                                                                                                                                                                     |
| 4.8  |   | Second Supplemental  Indenture, dated as of June 7, 2006, among Interline New Jersey, Wilmar  Holdings, Inc., Wilmar Financial, Inc., Glenwood Acquisition LLC  and The Bank of New York, as trustee (incorporated by reference to the  Company’s interim report on Form 8-K filed June 13, 2006).                                                                                                                                                                                                                                                                                                                                                                |
| 4.9  |   | Credit Agreement, dated  June 23, 2006 among Interline Delaware, Interline Brands, Inc., a  wholly-owned subsidiary of Interline Delaware (“Interline New Jersey”), as  borrower, the lenders party therein, JPMorgan Chase Bank, N.A., as  administrative agent, Lehman Commercial Paper Inc., as syndication agent,  Credit Suisse, Bank of America, N.A., Wachovia Bank, National Association and  SunTrust Bank, each as a co-documentation agent and J.P. Morgan Securities  Inc. and Lehman Brothers Inc. as joint bookrunners and joint-lean arrangers  (incorporated by reference to the Company’s interim report on Form 8-K  filed June 26, 2006). |
| 4.10 |   | Guarantee and Collateral  Agreement, dated as of June 23, 2006, among Interline Delaware,  Interline New Jersey, certain subsidiaries of Interline New Jersey and  JPMorgan Chase Bank, N.A., as collateral agent (incorporated by reference to  the Company’s interim report on Form 8-K filed June 26,  2006).                                                                                                                                                                                                                                                                                                                                                            |
| 4.11 |   | Base Indenture, dated as  of June 23, 2006, among Interline New Jersey, Interline Delaware, as  guarantor, certain subsidiaries of Interline Delaware and the Bank of New  York Trust Company, N.A., as trustee (incorporated by reference to the  Company’s interim report on Form 8-K filed June 26, 2006).                                                                                                                                                                                                                                                                                                                                                               |
| 4.12 |   | First Supplemental  Indenture, dated as of June 23, 2006, among Interline New Jersey,  Interline Delaware, as guarantor, certain subsidiaries of Interline Delaware  and the Bank of New York Trust Company, N.A., as trustee (incorporated by  reference to the Company’s interim report on Form 8-K filed  June 26, 2006).                                                                                                                                                                                                                                                                                                                                                |
| 4.13 |   | Second Supplemental  Indenture, dated as of July 3, 2006, by and among Interline New Jersey,  Interline Delaware, AmSan as a subsidiary guarantor, certain other  subsidiaries of Interline New Jersey and the Bank of New York Trust Company,  N.A., as trustee (incorporated by reference to the Company’s interim report  on Form 8-K filed July 10, 2006).                                                                                                                                                                                                                                                                                                              |

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| 4.14  |   | Supplement No.1, dated  as of July 3, 2006, to the Guarantee and Collateral Agreement, dated  June 23, 2006, between AmSan, LLC and JPMorgan Chase Bank, N.A., as  collateral agent (incorporated by reference to the Company’s interim report  on Form 8-K filed July 10, 2006).                                                                                                |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  |   | Amended and Restated  Shareholders’ Agreement dated as of September 29, 2000 among Interline  Opco and certain of its shareholders (incorporated by reference to  Exhibit 9.1 to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                  |
| 10.2  |   | Amendment No. 1 to  Amended and Restated Shareholders’ Agreement dated as of March 15, 2004  among Interline Opco and certain of its shareholders (incorporated by  reference to Exhibit 9.2 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                             |
| 10.3  |   | Amendment No. 2 to  Amended and Restated Shareholders’ Agreement dated as of December 21,  2004 among Interline Opco and certain of its shareholders (incorporated by  reference to Exhibit 10.3 to Interline Brands, Inc.’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2004).                                                            |
| 10.4  |   | Guarantee and Collateral  Agreement, dated as of May 29, 2003, among Interline Opco, the  Subsidiaries of Interline Brands, Inc. named therein and Credit Suisse  First Boston LLC (incorporated by reference to Exhibit 10.3 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)). |
| 10.5  |   | Incentive Stock Option  Agreement, dated as of May 16, 2000, by and between Wilmar  Industries, Inc. and William E. Sanford (incorporated by reference to  Exhibit 10.5 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                       |
| 10.6  |   | Incentive Stock Option  Agreement of Michael J. Grebe, dated as of May 16, 2000 (incorporated by  reference to Exhibit 10.11 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                                                                                                       |
| 10.7  |   | Restricted Stock Award  Agreement under the 2000 Stock Award Plan, dated as of September 29,  2000, between William R. Pray and Wilmar Industries, Inc. (incorporated  by reference to Exhibit10.23 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)).                                |
| 10.8  |   | 2000 Stock Award Plan,  as amended and restated July, 2000 (incorporated by reference to  Exhibit 10.24 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                                                                 |
| 10.9  |   | Employment Agreement,  dated as of January 7, 2004, by and between Interline Opco and Fred  Bravo (incorporated by reference to Exhibit 10.25 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                                      |
| 10.10 |   | Employment Agreement,  dated as of January 7, 2004, by and between Interline Opco and Pamela L.  Maxwell (incorporated by reference to Exhibit 10.26 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                               |
| 10.11 |   | 2004 Equity Incentive  Plan (incorporated by reference to Exhibit 10.27 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                                                                                 |

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| 10.12       |   | Employment Agreement,  dated as of May 17, 2004, by and between Interline Opco and Laurence  Howard (incorporated by reference to Exhibit 10.28 to Interline  Brands, Inc.’s Amendment No. 5 to Form S-1 Registration  Statement filed on December 14, 2004 (No. 333-116482)).                                    |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13       |   | Employment Agreement,  dated as of June 18, 2004, by and between Interline Brands, Inc.  and Charles Blackmon (incorporated by reference to Exhibit 10.30 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                     |
|  10.14 |   | Separation Agreement and  Release of All Claims, dated March 17, 2005, by and between Interline  Brands, Inc. and Charles Blackmon (incorporated by reference to  Exhibit 10.20 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                                  |
| 10.15       |   | Employment Agreement,  dated as of August 13, 2004, by and between Interline Brands, Inc.  and William E. Sanford (incorporated by reference to Exhibit 10.31  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).            |
| 10.16       |   | Employment Agreement,  dated as of August 13, 2004, by and between Interline Brands, Inc.  and Michael J. Grebe (incorporated by reference to Exhibit 10.32 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).              |
| 10.17       |   | Employment Agreement,  dated as of September 23, 2004 by and between Interline  Brands, Inc. and William R. Pray (incorporated by reference to  Exhibit 10.33 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).            |
| 10.18       |   | Amendment and Restated  Employment Agreement, dated as of December 15, 2004, by and between  Interline Brands, Inc. and William R. Pray (incorporated by reference to  Exhibit 10.24 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                             |
| 10.19       |   | Amendment to Employment  Agreement, dated September 27, 2004, by and between Interline  Brands, Inc. and Fred Bravo (incorporated by reference to  Exhibit 10.34 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).              |
| 10.20       |   | Amendment to Employment  Agreement, dated September 27, 2004, by and between Interline  Brands, Inc. and Laurence W. Howard (incorporated by reference to  Exhibit 10.35 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).      |
| 10.21       |   | Amendment to Employment  Agreement, dated as of September 27, 2004, by and between Interline  Brands, Inc. and Pamela L. Maxwell (incorporated by reference to  Exhibit 10.36 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)). |
| 10.22       |   | Amendment to Employment  Agreement, dated as of December 2, 2004, by and between Interline  Brands, Inc. and Michael J. Grebe (incorporated by reference to  Exhibit 10.37 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).    |

53

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| 10.23 |   | Amendment to Employment  Agreement, dated as of December 2, 2004, by and between Interline  Brands, Inc. and William E. Sanford (incorporated by reference to  Exhibit 10.38 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).        |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24 |   | Amendment to Employment  Agreement, dated as of December 2, 2004, by and between Interline  Brands, Inc. and Pamela L. Maxwell (incorporated by reference to  Exhibit 10.37 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).         |
| 10.25 |   | Amendment to Employment  Agreement, dated as of December 2, 2004, by and between Interline  Brands, Inc. and Fred Bravo (incorporated by reference to  Exhibit 10.40 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                |
| 10.26 |   | Management Agreement,  dated May 16, 2000, by and between Wilmar Industries, Inc. and  Parthenon Capital, Inc. (incorporated by reference to Exhibit 10.41  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                     |
| 10.27 |   | Amendment to Management  Agreement, dated September 29, 2000, by and between Wilmar  Industries, Inc. and Parthenon Capital, Inc. (incorporated by  reference to Exhibit 10.42 to Interline Brands, Inc.’s Amendment  No. 5 to Form S-1 Registration Statement filed on  December 14, 2004 (No. 333-116482)). |
| 10.28 |   | Employment Agreement,  dated May 12, 2004 between Interline Opco and Thomas J. Tossavainen  (incorporated by reference to Exhibit 10.34 to Interline  Brands, Inc.’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2004).                                                                               |
| 10.29 |   | Amendment to Employment  Agreement, dated November 10, 2004, between Interline Brands, Inc.  and Thomas J. Tossavainen (incorporated by reference to  Exhibit 10.35 to Interline Brands, Inc.’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004).                                               |
| 10.30 |   | Employment Agreement,  dated July 25, 2005, between Interline Opco and Thomas J. Tossavainen  (incorporated by reference to Exhibit 10.55 of Interline  Brands, Inc.’s Amendment No. 2 to Form S-1 filed on  August 1, 2005 (No. 333-126515)).                                                                          |
| 10.31 |   | Form of Executive  Stock Option Agreement (incorporated by reference to Exhibit 10.43 to  Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                                                                    |
| 10.32 |   | Form of Management  Restricted Stock Agreement (incorporated by reference to Exhibit 10.44  to Interline Brands, Inc.’s Amendment No. 5 to Form S-1  Registration Statement filed on December 14, 2004 (No. 333-116482)).                                                                                               |
| 10.33 |   | Form of  Non-Employee Directors Option Agreement (incorporated by reference to  Exhibit 10.45 to Interline Brands, Inc.’s Amendment No. 5 to  Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                            |
| 10.34 |   | Form of  Non-Employee Directors Restricted Stock Agreement (incorporated by reference  to Exhibit 10.46 to Interline Brands, Inc.’s Amendment No. 5  to Form S-1 Registration Statement filed on December 14, 2004  (No. 333-116482)).                                                                                  |

54

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| 10.35 |   | Amendment, dated  September 9, 2005, to Employment Agreement, dated as of  December 15, 2004, between Interline Opco and William R. Pray  (incorporated by reference to Exhibit 10.56 to Interline  Brands, Inc.’s Quarterly Report on Form 10-Q for the quarter  ended September 30, 2005). |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.36 |   | Form of Deferred  Stock Unit Agreement and Notice of Election for Non-employee Directors  (incorporated by reference to Exhibit 10.36 to Interline  Brands, Inc.’s Annual Report on Form 10-K for the fiscal year  ended December 30, 2005).                                                      |
| 10.37 |   | 2004 Equity Incentive  Plan (incorporated by reference to Appendix A to the Company’s definitive  proxy statement for its annual meeting of stockholders held on May 11,  2006, Commission File No. 1-32380).                                                                                                    |
| 10.38 |   | Executive Cash Incentive  Plan (incorporated by reference to Appendix B to the Company’s definitive  proxy statement for its annual meeting of stockholders held on May 11,  2006, Commission File No. 1-32380).                                                                                                 |
| 10.39 |   | Form of stock  option agreement (executive) (incorporated by reference to the Company’s  interim report filed on Form 8-K March 17, 2006).                                                                                                                                                                  |
| 10.40 |   | Form of stock  option agreement (non-executive) (incorporated by reference to the Company’s  interim report filed on Form 8-K March 17, 2006).                                                                                                                                                              |
| 10.41 |   | Form of restricted  share unit agreement (incorporated by reference to the Company’s interim  report filed on Form 8-K March 17, 2006).                                                                                                                                                                     |
| 10.42 |   | Form of Change in  Control Severance Agreement (filed herewith).                                                                                                                                                                                                                                                           |
| 10.43 |   | Amendment to the 2004  Incentive Plan (filed herewith).                                                                                                                                                                                                                                                                         |
| 11.1  |   | Computation of earnings  per share information included in Note 2 to the Consolidated Financial  Statements (furnished herewith).                                                                                                                                                                                               |
| 21.1  |   | List of Subsidiaries of  Interline Brands, Inc. (furnished herewith).                                                                                                                                                                                                                                                      |
| 23.1  |   | Consent of Deloitte &  Touche LLP (furnished herewith).                                                                                                                                                                                                                                                                |
| 31.1  |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14 of the Exchange  Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (furnished herewith).                                                                                                                               |
| 31.2  |   | Certification of the Chief  Financial Officer pursuant to Rule 13a-14 of the Exchange Act, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (furnished herewith).                                                                                                                               |
| 32.1  |   | Certification of the  Chief Executive Officer pursuant to Rule 13a-14(b) of the  Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                       |
| 32.2  |   | Certification of the  Chief Financial Officer pursuant to Rule 13a-14(b) of the  Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                       |

 

55

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**MANAGEMENT’S REPORTON INTERNAL CONTROL OVER FINANCIAL REPORTING**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f) and 15d-15(f).Under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.As permitted, we have excluded from our evaluation the acquisition of AmSanLLC, which was acquired on July 3, 2006 and is included in the consolidatedfinancial statements and which represents 17.6% of consolidated total assets asof December 29, 2006 and 12.2% of consolidated net sales for the yearended December 29, 2006. Based on our evaluation, under the InternalControl—Integrated Framework, our management concluded that our internalcontrol over financial reporting was effective as of December 29, 2006.Our management’s assessment of the effectiveness of our internal control overfinancial reporting as of December 29, 2006 has been audited by Deloitte &Touche LLP, an independent registered public accounting firm, as stated intheir attestation report which is included herein.

F-1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofInterline Brands, Inc.Jacksonville, Florida

We have audited the accompanying consolidated balancesheets of Interline Brands, Inc. and subsidiaries (the “Company”) as of December 29,2006 and December 30, 2005, and the related consolidated statements ofoperations, stockholders’ equity (deficit), and cash flows for each of thethree years in the period ended December 29, 2006. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of InterlineBrands, Inc. and subsidiaries as of December 29, 2006 and December 30,2005, and the results of their operations and their cash flows for each of thethree years in the period ended December 29, 2006, in conformity withaccounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theeffectiveness of the Company’s internal control over financial reporting as of December 29,2006, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated March 13, 2007 expressed an unqualifiedopinion on management’s assessment of the effectiveness of the Company’sinternal control over financial reporting and an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.

Asdiscussed in Note 2 to the consolidated financial statements, the Companyadopted FASB Statement No. 123 (revised 2004), *Share-BasedPayment*, on December 31, 2005.
| /s/ DELOITTE &  TOUCHE LLP |   |
|-------------------------------------|--------|
| Certified Public Accountants        |
| Jacksonville, Florida               |
| March 13, 2007                 |

 

F-2

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofInterline Brands, Inc.Jacksonville, Florida

We have audited management’s assessment, included inthe accompanying Managements Report on Internal Control over FinancialReporting, that Interline Brands, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of December 29,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.As described in Managements Report on Internal Control over FinancialReporting, management excluded from their assessment the internal control overfinancial reporting at AmSan LLC, which was acquired on July 3, 2006 andwhose financial statements reflect total assets and revenues constituting 17.6%and 12.2%, respectively, of the related consolidated financial statementamounts as of and for the year ended December 29, 2006. Accordingly, ouraudit did not include the internal control over financial reporting at AmSanLLC. The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the Company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the Company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of December 29,2006, is fairly stated, in all material respects, based on the criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring 

F-3

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Organizations of theTreadway Commission. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 29,2006, based on the criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financial statementsas of and for the year ended December 29, 2006 of the Company and ourreport dated March 13, 2007 expressed an unqualified opinion and includesan explanatory paragraph relating to the adoption of FASB Statement No. 123(revised 2004), *Share-Based Payment*, on thosefinancial statements.
| /s/ DELOITTE & TOUCHE LLP |   |
|------------------------------------|--------|
| Certified Public  Accountants      |
| Jacksonville,  Florida             |
| March 13,  2007               |

 

F-4

----

**INTERLINE BRANDS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSAS OF DECEMBER 29, 2006 AND DECEMBER 30, 2005(in thousands, except share and per share data)**

| ** **                                                                                                                                                                                             | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                                             |       |                  |       |                  |       |   |   |   |   |
| Current Assets:                                                                                                                                                                                        |       |                  |       |                  |       |   |   |   |   |
| Cash  and cash equivalents                                                                                                                                                                             |       |                  | $          | 6,852                 |       |   |   | $ | 2,958 |   |   |
| Accounts receivable - trade  (net of allowance for doubtful accounts of $10,224 and $8,150)                                                                                                            |       |                  | 142,901    |                  |       |   | 113,271 |   |   |
| Accounts  receivable - other                                                                                                                                                                           |       |                  | 15,663     |                  |       |   | 12,163 |   |   |
| Inventory                                                                                                                                                                                              |       |                  | 201,662    |                  |       |   | 165,282 |   |   |
| Prepaid  expenses and other current assets                                                                                                                                                             |       |                  | 7,252      |                  |       |   | 5,498 |   |   |
| Deferred  income taxes                                                                                                                                                                                 |       |                  | 17,821     |                  |       |   | 13,945 |   |   |
| Total  current assets                                                                                                                                                                                  |       |                  | 392,151    |                  |       |   | 313,117 |   |   |
| Property  and equipment, net                                                                                                                                                                           |       |                  | 31,754     |                  |       |   | 29,865 |   |   |
| Goodwill                                                                                                                                                                                               |       |                  | 313,077    |                  |       |   | 249,574 |   |   |
| Other  intangible assets, net                                                                                                                                                                          |       |                  | 143,440    |                  |       |   | 104,244 |   |   |
| Other  assets                                                                                                                                                                                          |       |                  | 10,147     |                  |       |   | 8,969 |   |   |
| Total  assets                                                                                                                                                                                          |       |                  | $          | 890,569               |       |   |   | $ | 705,769 |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                         | ** ** |                  |       |                  |       |   |   |   |   |
| Current Liabilities:                                                                                                                                                                                   |       |                  |       |                  |       |   |   |   |   |
| Accounts  payable                                                                                                                                                                                      |       |                  | $          | 67,493                |       |   |   | $ | 69,182 |   |   |
| Accrued  expenses and other current liabilities                                                                                                                                                        |       |                  | 33,240     |                  |       |   | 21,574 |   |   |
| Accrued  merger expenses                                                                                                                                                                               |       |                  | 5,482      |                  |       |   | 5,408 |   |   |
| Accrued  interest                                                                                                                                                                                      |       |                  | 3,516      |                  |       |   | 2,152 |   |   |
| Income  taxes payable                                                                                                                                                                                  |       |                  | 2,486      |                  |       |   | 1,780 |   |   |
| Revolver                                                                                                                                                                                               |       |                  | —     |                  |       |   | 3,000 |   |   |
| Current  portion of long-term debt                                                                                                                                                                     |       |                  | 2,416      |                  |       |   | 1,400 |   |   |
| Capital  lease - current                                                                                                                                                                               |       |                  | 307        |                  |       |   | 452 |   |   |
| Total  current liabilities                                                                                                                                                                             |       |                  | 114,940    |                  |       |   | 104,948 |   |   |
| Long-Term Liabilities:                                                                                                                                                                                 |       |                  |       |                  |       |   |   |   |   |
| Deferred  income taxes                                                                                                                                                                                 |       |                  | 34,799     |                  |       |   | 34,646 |   |   |
| Long-term  debt, net of current portion                                                                                                                                                                |       |                  | 418,650    |                  |       |   | 280,675 |   |   |
| Capital  lease - long term                                                                                                                                                                             |       |                  | 683        |                  |       |   | 958 |   |   |
| Other  liabilities                                                                                                                                                                                     |       |                  | 818        |                  |       |   | — |   |   |
| Total  liabilities                                                                                                                                                                                     |       |                  | 569,890    |                  |       |   | 421,227 |   |   |
| Commitments and  contingencies                                                                                                                                                                         |       |                  |       |                  |       |   |   |   |   |
| Senior preferred stock, $0.01 par value, 20,000,000 shares  authorized, no shares outstanding as of December 29, 2006 and  December 30, 2005                                                 |       |                  | —     |                  |       |   | — |   |   |
| Stockholders’ Equity:                                                                                                                                                                             |       |                  |       |                  |       |   |   |   |   |
| Common  stock; $0.01 par value, 100,000,000 authorized; 32,308,221 issued and  32,284,069 outstanding as of December 29, 2006 and 32,220,669 issued and  outstanding as of December 30, 2005 |       |                  | 323        |                  |       |   | 322 |   |   |
| Additional  paid-in capital                                                                                                                                                                            |       |                  | 561,634    |                  |       |   | 558,183 |   |   |
| Accumulated  deficit                                                                                                                                                                                   |       |                  | (241,852   | )                     |       |   | (273,037 | ) |   |
| Accumulated  other comprehensive income                                                                                                                                                                |       |                  | 1,072      |                  |       |   | 992 |   |   |
| Deferred  compensation                                                                                                                                                                                 |       |                  | —     |                  |       |   | (1,918 | ) |   |
| Treasury  stock, at cost, 24,152 shares as of December 29, 2006                                                                                                                                   |       |                  | (498       | )                     |       |   | — |   |   |
| Total stockholders’ equity                                                                                                                                                                        |       |                  | 320,679    |                  |       |   | 284,542 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                        |       |                  | $          | 890,569               |       |   |   | $ | 705,769 |   |   |

 

See accompanying notes to consolidated financial statements.

F-5

----

**INTERLINE BRANDS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSYEARS ENDED DECEMBER 29, 2006, DECEMBER 30, 2005 AND DECEMBER 31, 2004(in thousands, except share and per share data)**

| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                             | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Net sales                                              |       | $          | 1,067,570  |       | $          | 851,928    |       | $ | 743,905 |   |
| Cost of sales                                          |       | 658,698    |       | 526,334    |       | 458,516    |       |
| Gross profit                                           |       | 408,872    |       | 325,594    |       | 285,389    |       |
| Operating  Expenses:                                   |       |       |       |       |       |       |       |
| Selling, general  and administrative expenses          |       | 292,752    |       | 229,595    |       | 202,084    |       |
| Depreciation and  amortization                         |       | 14,427     |       | 13,049     |       | 12,600     |       |
| Secondary  offering costs                              |       | —     |       | 932        |       | 9,215      |       |
| Total operating  expense                               |       | 307,179    |       | 243,576    |       | 223,899    |       |
| Operating income                                       |       | 101,693    |       | 82,018     |       | 61,490     |       |
| Loss on  extinguishment of debt                        |       | (20,843    | )          | (10,340    | )          | (660       | )          |
| Interest expense                                       |       | (31,367    | )          | (25,419    | )          | (39,933    | )          |
| Interest income                                        |       | 591        |       | 236        |       | 135        |       |
| Change in fair value of  interest rate swaps           |       | —     |       | —     |       | 8,232      |       |
| Other income                                           |       | 606        |       | 639        |       | 454        |       |
| Income before  income taxes                            |       | 50,680     |       | 47,134     |       | 29,718     |       |
| Income tax provision                                   |       | 19,495     |       | 18,335     |       | 11,617     |       |
| Net income                                             |       | 31,185     |       | 28,799     |       | 18,101     |       |
| Preferred stock  dividends                             |       | —     |       | —     |       | (54,389    | )          |
| Net income (loss)  attributable to common stockholders |       | $          | 31,185     |       | $          | 28,799     |       | $ | (36,288 | ) |
| Earnings (Loss)  Per Share:                            |       |       |       |       |       |       |       |
| Basic                                                  |       | $          | 0.97       |       | $          | 0.90       |       | $ | (25.21 | ) |
| Diluted                                                |       | $          | 0.95       |       | $          | 0.89       |       | $ | (25.21 | ) |
| Weighted-Average Shares  Outstanding:                  |       |       |       |       |       |       |       |
| Basic                                                  |       | 32,141,958 |       | 32,004,007 |       | 1,439,322  |       |
| Diluted                                                |       | 32,748,400 |       | 32,443,772 |       | 1,439,322  |       |

 

See accompanying notes to consolidated financial statements.

F-6

----

**INTERLINE BRANDS,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)YEARS ENDED DECEMBER 29, 2006, DECEMBER 30, 2005 AND DECEMBER 31, 2004(in thousands, except share data)**

| ** **                                               | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** **           | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** **         | **Stockholder**        | ** ** | **Deferred** | ** **      | **Treasury**     | ** ** | **Total  Stockholders’  Equity** | ** **   |
|----------------------------------------------------------|------------|-----------------------|------------|-------------------------|----------------------|-----------------|------------|---------------------------------------|--------------------|------------------------|------------|--------------|-----------------|------------------|------------|---------------------------------------|--------------|
| ** **                                               | ** ** | **Shares**            | ** ** | **Amount**              | ** **           | **Capital**     | ** ** | **Deficit**                           | ** **         | **Income (Loss)** | ** ** | **Loans**    | ** **      | **Compensation** | ** ** | **Stock**                             | ** **   | **(Deficit)** | ** ** |
| Balance at December 26, 2003                        |       | 64,975                |       |                    | $   1 |            |       |                                  | $  1,993 |                   |       |         | $ (265,548 | )                |       |                                  | $ 563   |   |   |   | $ (1,545 | ) |   |   | $     — |   |   |   | $  — |   |   |   | $ (264,536 | ) |   |
| Preferred stock dividends                                |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         | (54,389         | )                |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (54,389 | ) |   |
| Issuance of restricted  stock                            |       | 186,614               |       |                    | 2                    |            |       |                                  | 2,785              |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   | (2,787 | ) |   |   |   |   |   |   | — |   |   |
| Interest accrual on  stockholder loans                   |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   | (30 | ) |   |   |   |   |   |   |   |   |   |   | (30 | ) |   |
| Forgiveness of  stockholder loans                        |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   | 1,575 |   |   |   |   |   |   |   |   |   |   |   | 1,575 |   |   |
| Conversion of preferred  stock to common stock           |       | 19,183,321            |       |                    | 191                  |            |       |                                  | 378,810            |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 379,001 |   |   |
| Issuance of common stock  from exercise of warrants      |       | 910                   |       |                    | —               |            |       |                                  | —             |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |
| Issuance of common stock  in public offering, net        |       | 12,667,000            |       |                    | 127                  |            |       |                                  | 172,758            |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 172,885 |   |   |
| Comprehensive income:                                    |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                               |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         | 18,101          |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation                            |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  | 292          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive  income                              |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 18,393 |   |   |
| Balance at December 31, 2004                        |       | 32,102,820            |       |                    | 321                  |            |       |                                  | 556,346            |                   |       |         | (301,836        | )                |       |                                  | 855          |   |   |   | — |   |   |   | (2,787 | ) |   |   | — |   |   |   | 252,899 |   |   |
| Offering costs                                           |       |                  |       |                    |                 |            |       |                                  | (165               | )                      |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (165 | ) |   |
| Share-based compensation                                 |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   | 965 |   |   |   |   |   |   |   | 965 |   |   |
| Issuance of restricted  stock                            |       | 5,000                 |       |                    | —               |            |       |                                  | 96                 |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   | (96 | ) |   |   |   |   |   |   | — |   |   |
| Issuance of common stock from  exercise of stock options |       | 112,849               |       |                    | 1                    |            |       |                                  | 1,691              |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,692 |   |   |
| Tax benefits on stock  options exercised                 |       |                  |       |                    |                 |            |       |                                  | 215                |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 215 |   |   |
| Comprehensive income:                                    |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                               |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         | 28,799          |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation                            |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  | 137          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive  income                              |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 28,936 |   |   |
| Balance at December 30, 2005                        |       | 32,220,669            |       |                    | 322                  |            |       |                                  | 558,183            |                   |       |         | (273,037        | )                |       |                                  | 992          |   |   |   | — |   |   |   | (1,918 | ) |   |   | — |   |   |   | 284,542 |   |   |
| Offering costs                                           |       |                  |       |                    |                 |            |       |                                  | (30                | )                      |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (30 | ) |   |
| Reclassification to adopt                                |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FAS 123R                                                 |       |                  |       |                    |                 |            |       |                                  | (1,918             | )                      |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   | 1,918 |   |   |   |   |   |   |   | — |   |   |
| Share-based compensation                                 |       |                  |       |                    |                 |            |       |                                  | 3,847              |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,847 |   |   |
| Issuance of restricted  stock                            |       | 17,800                |       |                    | —               |            |       |                                  | —             |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   |
| Issuance of common stock  from exercise of stock options |       | 69,752                |       |                    | 1                    |            |       |                                  | 1,074              |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,075 |   |   |
| Tax benefits on stock  options exercised                 |       |                  |       |                    |                 |            |       |                                  | 284                |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 284 |   |   |
| Tax benefits on other  vested share-based payments       |       |                  |       |                    |                 |            |       |                                  | 194                |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 194 |   |   |
| Repurchase of common  stock                              |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   | (498 | ) |   |   | (498 | ) |   |
| Adjustment to initially  apply FAS 158                   |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  | 90           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 90 |   |   |
| Comprehensive income:                                    |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                               |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         | 31,185          |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency  translation                            |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  | (10          | ) |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive  income                              |       |                  |       |                    |                 |            |       |                                  |               |                   |       |         |            |             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 31,175 |   |   |
| Balance at  December 29, 2006                       |       | 32,308,221            |       |                    | $ 323           |            |       |                                  | $ 561,634     |                   |       |         | $ (241,852 | )                |       |                                  | $ 1,072 |   |   |   | $     — |   |   |   | $     — |   |   |   | $ (498 | ) |   |   | $ 320,679 |   |   |

 

See accompanyingnotes to consolidated financial statements.

F-7

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**INTERLINE BRANDS, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED DECEMBER 29, 2006, DECEMBER 30, 2005 AND DECEMBER 31, 2004(in thousands)**

| ** **                                                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows from  Operating Activities:                                                       |       |     |       |     |       |     |       |
| Net income                                                                                   |       | $        | 31,185     |     | $          | 28,799   |       | $ | 18,101 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                                |       | 14,427   |       | 13,049   |       | 12,600   |       |
| Amortization of debt issuance costs                                                          |       | 1,352    |       | 1,610    |       | 1,898    |       |
| Amortization of discount on 81¤8%  senior subordinated notes                            |       | 63       |       | —   |       | —   |       |
| Write-off of debt issuance costs                                                             |       | 7,180    |       | 2,290    |       | 660      |       |
| Tender and redemption premiums on 111¤2%  senior subordinated notes                     |       | 13,663   |       | 8,050    |       | —   |       |
| Share-based compensation                                                                     |       | 3,847    |       | 965      |       | —   |       |
| Deferred income taxes                                                                        |       | (2,199   | )          | (2,364   | )          | 1,709    |       |
| Provision for doubtful accounts                                                              |       | 3,443    |       | 2,828    |       | 2,040    |       |
| Loss on disposal of property and equipment                                                   |       | 83       |       | 53       |       | 10       |       |
| Excess tax benefits from share-based compensation                                            |       | (478     | )          | 215      |       | —   |       |
| Change in fair value of interest rate swaps                                                  |       | —   |       | —   |       | (12,793  | )          |
| Forgiveness of shareholder notes                                                             |       | —   |       | —   |       | 1,875    |       |
| Interest on shareholder notes                                                                |       | —   |       | —   |       | (30      | )          |
| Changes in assets  and liabilities which provided (used) cash, net of business acquired:     |       |     |       |     |       |     |       |
| Accounts receivable—trade                                                               |       | (5,027   | )          | (13,874  | )          | (16,866  | )          |
| Accounts receivable—other                                                               |       | (2,041   | )          | 3,521    |       | (2,863   | )          |
| Inventory                                                                                    |       | (18,555  | )          | (10,175  | )          | (26,231  | )          |
| Prepaid expenses and other current assets                                                    |       | 70       |       | (1,869   | )          | 1,056    |       |
| Other assets                                                                                 |       | (546     | )          | 99       |       | 484      |       |
| Accounts payable                                                                             |       | (18,571  | )          | 11,282   |       | 10,080   |       |
| Accrued expenses and other current liabilities                                               |       | (107     | )          | 1,137    |       | 2,846    |       |
| Accrued merger expenses                                                                      |       | (217     | )          | (428     | )          | (591     | )          |
| Accrued interest                                                                             |       | 1,271    |       | (890     | )          | (2,760   | )          |
| Income taxes payable                                                                         |       | 1,060    |       | (5,460   | )          | 7,372    |       |
| Other liabilities                                                                            |       | 43       |       | —   |       | —   |       |
| Net cash provided by (used in) operating activities                                          |       | 29,946   |       | 38,838   |       | (1,403   | )          |
| Cash Flows from  Investing Activities:                                                       |       |     |       |     |       |     |       |
| Purchase of property and equipment, net                                                      |       | (7,813   | )          | (7,920   | )          | (6,763   | )          |
| Purchase of businesses, net of cash acquired                                                 |       | (131,485 | )          | (73,213  | )          | (566     | )          |
| Net cash used in investing activities                                                        |       | (139,298 | )          | (81,133  | )          | (7,329   | )          |
|                                                                                              |            |          |            |          |            |          |            |  |  |  |

 

(CONTINUED)

F-8

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**INTERLINE BRANDS,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)YEARS ENDED DECEMBER 29, 2006, DECEMBER 30, 2005 AND DECEMBER 31, 2004(in thousands)**

| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash Flows from  Financing Activities:                                              |       |     |       |     |       |     |       |
| (Decrease) Increase in revolver, net                                                |       | (3,000   | )          | 3,000    |       | —   |       |
| Repayment of term debt                                                              |       | (160,008 | )          | (1,200   | )          | (38,250  | )          |
| Repayment of 111¤2%  senior subordinated notes                                 |       | (130,000 | )          | (70,000  | )          | —   |       |
| Payment of tender and redemption premiums on 111¤2%  senior subordinated notes |       | (13,663  | )          | (8,050   | )          | —   |       |
| Proceeds from issuance of 81¤8%  senior subordinated notes, net of discount    |       | 198,566  |       | —   |       | —   |       |
| Proceeds from issuance of term debt                                                 |       | 230,000  |       | 50,000   |       | —   |       |
| Payment of debt issuance costs                                                      |       | (9,724   | )          | (838     | )          | (1,296   | )          |
| Proceeds from stock options exercised                                               |       | 1,046    |       | 1,693    |       | —   |       |
| Excess tax benefits from share-based compensation                                   |       | 478      |       | —   |       | —   |       |
| Payments on capital lease obligations                                               |       | (439     | )          | (335     | )          | —   |       |
| Initial public offering costs                                                       |       | (30      | )          | (665     | )          | (4,057   | )          |
| Proceeds from exercise of underwriters over-allotment  options                      |       | —   |       | 2,333    |       | —   |       |
| Proceeds from sale of common stock                                                  |       | —   |       | —   |       | 174,609  |       |
| Redemption of preferred stock                                                       |       | —   |       | —   |       | (55,000  | )          |
| Net cash provided by (used in) financing activities                                 |       | 113,226  |       | (24,062  | )          | 76,006   |       |
| Effect of  exchange rate changes on cash and cash equivalents                       |       | 20       |       | 137      |       | 292      |       |
| Net increase  (decrease) in cash and cash equivalents                               |       | 3,894    |       | (66,220  | )          | 67,566   |       |
| Cash and cash  equivalents at beginning of period                                   |       | 2,958    |       | 69,178   |       | 1,612    |       |
| Cash and cash  equivalents at end of period                                         |       | $        | 6,852      |     | $          | 2,958    |       | $ | 69,178 |   |
| Supplemental Disclosure  of Cash Flow Information:                                  |       |     |       |     |       |     |       |
| Cash paid during  the period for:                                                   |       |     |       |     |       |     |       |
| Interest                                                                            |       | $        | 29,232     |     | $          | 23,363   |       | $ | 40,726 |   |
| Income taxes, net of refunds                                                        |       | $        | 21,101     |     | $          | 26,003   |       | $ | 1,937 |   |
| Schedule of Non-Cash  Investing and Financing Activities:                           |       |     |       |     |       |     |       |
| Adjustments to liabilities assumed and goodwill on  businesses acquired             |       | $        | 1,535      |     | $          | 8,443    |       | $ | 2,193 |   |
| Treasury stock acquired with accrued expenses and  other current liabilities        |       | $        | 498        |     | $          | —   |       | $ | — |   |
| Conversion of preferred stock                                                       |       | $        | —     |     | $          | —   |       | $ | 379,001 |   |
| Dividends on preferred stock                                                        |       | $        | —     |     | $          | —   |       | $ | 54,389 |   |
| Exercise of  underwriters over-allotment options                                    |       | $        | —     |     | $          | —   |       | $ | 2,333 |   |

 

See accompanyingnotes to consolidated financial statements.

F-9

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**INTERLINE BRANDS, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 29, 2006, DECEMBER 30, 2005 AND DECEMBER 31, 2004**

**1.   DESCRIPTION OFTHE BUSINESS AND BACKGROUND**

Interline Brands, Inc., a Delaware corporation,and its subsidiaries (“Interline” or the “Company”) is a direct marketer andspecialty distributor of maintenance, repair and operations, (“MRO”) products.The Company sells plumbing, electrical, hardware, security, heating,ventilation and air conditioning, janitorial and sanitary and other MROproducts. Interline’s highly diverse customer base consists of multi-familyhousing, educational, lodging, government and health care facilities,professional contractors and specialty distributors.

The Company markets and sells its products primarilythrough ten distinct and targeted brands. The Company utilizes a variety ofsales channels, including a direct sales force, telesales representatives, adirect marketing program, brand-specific websites and a national accounts salesprogram. The Company delivers its products through its network of regionaldistribution centers and professional contractor showrooms located throughoutthe United States and Canada, a national distribution center in Nashville,Tennessee, vendor managed inventory locations at large professional contractorcustomer locations and its dedicated fleet of trucks. Through its broaddistribution network, the Company provides same day/next day delivery serviceto 98% of the U.S. population.

During December 2004,the Company completed its initial public offering (the “IPO”). Immediatelyprior to the closing of the IPO, a reincorporation merger occurred and theCompany became the parent company of its principal operating subsidiary,Interline Brands, Inc., a New Jersey corporation (“Interline New Jersey”).In the reincorporation merger, the holders of the preferred stock of InterlineNew Jersey received an aggregate of $55.0 million in cash and 19,183,321 sharesof the Company’s common stock and the holders of the common stock of InterlineNew Jersey received 0.01218 shares of the Company’s common stock per share ofInterline New Jersey common stock, or 66,667 shares of the Company’s commonstock in total. The Company restated earnings per share and shares outstandingfor all years presented in the accompanying financial statements to reflect theconversion of the shares.

**2.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Principles of Consolidation***

The consolidated financialstatements include the accounts of Interline Brands, Inc. and all of itswholly-owned subsidiaries. These statements have been prepared in accordancewith accounting principles generally accepted in the United States of America.All significant intercompany balances and transactions have been eliminated inconsolidation.

***Fiscal Year***

The Company operates on a52-53 week fiscal year, which ends on the last Friday in December. Thefiscal years ended December 29, 2006 and December 30, 2005 werefifty-two week years. The fiscal year ended December 31, 2004 was afifty-three week year. References herein to 2006, 2005 and 2004 are for thefiscal years ended December 29, 2006, December 30, 2005 and December 31,2004, respectively.

F-10

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***Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.Actual results may differ from those estimates and assumptions.

***Fair Value of Financial Instruments***

The carrying value of cashand cash equivalents, accounts receivable, and accounts payable approximatefair value because of the short maturities of these items. The carrying valuesof variable rate notes payable and long-term debt are reasonable estimates oftheir fair values. Estimated fair values of fixed rate notes payable andlong-term debt are determined by noted market prices as the debt is publiclytraded. Interest rate swaps are carried at fair value, which is determined byquoted market prices.

***Foreign Currency Translation***

Assets and liabilities ofthe Company’s foreign subsidiary, where the functional currency is the localcurrency, are translated into United States dollars at the year end exchangerate. The related translation adjustments are recorded as a component of othercomprehensive income. Revenues and expenses are translated using averageexchange rates prevailing during the year.

***Cash and Cash Equivalents***

Cash and cash equivalentsconsist of cash and highly liquid investments with an original maturity ofthree months or less.

***Concentrations of Credit Risk***

**Financialinstruments, which potentially subject the Company to concentration of creditrisk, consist principally of accounts receivable. The Company’s accountsreceivable are principally from facilities maintenance, professional contractorand specialty distributor customers in the United States and Canada.Concentration of credit risk with respect to accounts receivable, however, islimited due to the large number of customers comprising the Company’s customerbase. The Company performs credit evaluations of its customers; however, theCompany’s policy is not to require collateral. As of December 29, 2006 andDecember 30, 2005, the Company had no significant concentrations of creditrisk.**

***Inventories***

Inventories, consistingsubstantially of finished goods, are valued at the lower of cost or market.Inventory cost is determined using the weighted-average cost method. TheCompany adjusts inventory for excess and obsolete inventory and for thedifference by which the cost of the inventory exceeds the estimated marketvalue. In order to determine the adjustments, management reviews inventoryquantities on hand, slow movement reports and sales history reports. Managementestimates the required adjustment based on estimated demand for products andmarket conditions. To the extent historical results are not indicative offuture results and if events occur that affect the Company’s relationships withsuppliers or the salability of their products, additional write-offs may beneeded that will increase cost of sales and decrease inventory.

F-11

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***VendorRebates***

The Company accounts for vendor rebates in accordance withthe Emerging Issues Task Force (“EITF”) Issue No. 02-16, A*ccounting bya Customer (Including a Reseller) for Certain Consideration Received from aVendor*, (“EITF 02-16”). Many of the Company’s arrangementswith its vendors provide for the Company to receive a rebate of a specifiedamount of consideration, payable to the Company when the Company achieves anyof a number of measures, generally related to the volume level of purchasesfrom its vendors. The Company accounts for such rebates as a reduction of theprices of the vendor’s products and therefore as a reduction of inventory untilit sells the product, at which time such rebates reduce cost of sales in theCompany’s statement of operations. Throughout the year, the Company estimatesthe amount of the rebate earned based on estimated purchases to date relativeto the purchase levels that mark the Company’s progress toward earning therebates. The Company continually revises these estimates to reflect actualrebates earned based on actual purchase levels.

***Property and Equipment***

Property and equipment purchased in the normal courseof business is stated at cost, net of accumulated depreciation andamortization. Expenditures for additions, renewals and betterments arecapitalized. Expenditures for maintenance and repairs are charged to expense asincurred. Property and equipment acquired in connection with acquisitions arerecorded at amounts which approximate fair market value as of the date of theacquisition. Upon the retirement or disposal of assets, the cost andaccumulated depreciation or amortization is eliminated from the accounts andthe resulting gain or loss is credited or charged to operations. Leasehold improvementsand assets under capital leases are amortized, using the straight-line method,over the lesser of the estimated useful lives or the term of the lease.

Depreciationand amortization, including assets under capital leases, is computed using thestraight-line method based upon estimated useful lives of the assets asfollows:

| Buildings                       |   | 39-40 years |   |
|---------------------------------|--------|-------------|--------|
| Machinery and  equipment        |   | 5-7 years   |   |
| Office furniture  and equipment |   | 5-7 years   |   |
| Vehicles                        |   | 5 years     |   |
| Leasehold improvements          |   | 1-10 years  |   |

 

***Costs of Computer Software Developed or Obtained forInternal Use***

The Company capitalizescosts related to internally developed software in accordance with Statement ofPosition (“SOP”) No. 98-1, *Accounting for the Costsof Computer Software Developed or Obtained for Internal Use*, (“SOP 98-1”).Only costs incurred during the development stage, including design, coding,installation and testing are capitalized. These capitalized costs primarilyrepresent internal labor costs for employees directly associated with thesoftware development. Upgrades or modifications that result in additionalfunctionality are capitalized. Capitalized costs were $0.8 million, $1.0million and $0.8 million for 2006, 2005 and 2004, respectively.

***Goodwill***

Goodwill represents theexcess of the costs of acquired companies over the fair value of their nettangible assets. In accordance withFinancial Accounting Standards Board (“FASB”) Statement No. 142, *Goodwill and Other Intangible Assets*, (“FAS 142”) the Company does not amortize goodwill butis required to annually evaluate goodwill for impairment. Goodwill is testedfor impairment at least annually, or whenever events of changes incircumstances indicate that the carrying amount may not be recoverable. 

F-12

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The Company has elected to perform its annualgoodwill impairment test as of the last day of each year. No impairment wasidentified as a result of its impairment test for any year presented.

***Other Intangible Assets***

Other intangible assets include amountsassigned to trademarks, customer lists, non-compete agreements and deferreddebt issuance costs. Other intangibles are amortized on a straight-line basisover their useful lives, 13 to 20 years for customer lists and 5 to 10 yearsfor non-compete agreements. Deferred debt issuance costs are amortized as acomponent of interest expense over the term of the related debt using theeffective interest method or a method that approximates the effective interestmethod. Effective September 30, 2006, the Company determined that itstrademarks had indefinite lives and discontinued the amortization of itstrademarks. TheCompany has elected to perform its annual impairment test on long-lived assetsas of the last day of each year. No impairment was identified as a result ofits impairment test. See Note 7. Goodwill and Other Intangible Assetsfor more information.

***Impairment of Long-Lived Assets***

The Company evaluates itsintangible assets for impairment on an annual basis or when an event occurs orcircumstances change that would indicate that the fair value of the intangibleasset has reduced below its carrying amount. Such evaluations include anassessment of customer retention, cash flow projections and other factors theCompany believes are relevant. The discounted future expected net cash flows ofeach identifiable asset are used to measure impairment losses. The Company hasnot identified any impairment losses with respect to long-lived assets for anyyear presented.

***Risk Insurance***

The Company has a $0.3million self-insured retention per occurrence in connection with its workers’compensation policy (“Risk Insurance”). The Company accrues its estimated costin connection with its portion of its Risk Insurance losses using an actuarialmethodology based on claims filed, historical development factors and anestimate of claims incurred but not yet reported. As of December 29, 2006,the Company did not discount its workers’ compensation reserve. As of December 30,2005, the Company discounted its workers compensation reserve at the rate of6%. The effect of not discounting the workers’ compensation reserve as of December 29,2006 was a higher workers’ compensation reserve of $0.5 million. Claims paidare charged against the reserve.

***Taxes Collected and Remitted***

The Company recordsnon-income taxes collected from customers and remitted to governmental agencieson a net basis.

***Revenue Recognition***

The Companyrecognizes revenue in accordance with Securities and Exchange Commission (“SEC”)Staff Accounting Bulletin (“SAB”) No. 101, *RevenueRecognition in Financial Statements*, (“SAB 101”)**asamended by SAB No. 104, *Revenue Recognition,corrected copy*, (“SAB 104”). The SEC requires that the followingfour basic criteria must be met before the Company recognizes revenue:

·       persuasiveevidence of an arrangement exists;

·       deliveryhas occurred or services have been rendered;

·       theseller’s price to the buyer is fixed or determinable; and

·       collectibilityis reasonably assured.

F-13

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The Company recognizes asale when the product has been shipped and risk of loss has passed to thecustomer. For goods shipped by third party carriers, the Company recognizesrevenue upon shipment since the terms are generally FOB shipping point. Salesare recorded net of estimated discounts, rebates and returns. A portion of theCompany’s sales are delivered direct from the suppliers. These direct-shipmentsales are recorded on a gross basis, with the corresponding cost of goods sold,in accordance with the guidance in EITF Issue No. 99-19, *Reporting Revenues Gross as a Principal verses Net as an Agent*,(“EITF 99-19”). The Company provides product return and protection rightsto certain customers. The Company accrues product return reserves. A provisionis made for estimated product returns based on sales volumes and ourexperience. Actual returns have not varied materially from amounts providedhistorically.

***Cost of Sales***

Cost of sales includes netmerchandise costs, freight-in, and operating costs related to the Company’sNational Distribution Center.

***Shipping and Handling Costs***

Shipping and handlingcosts have been included in selling, general and administrative expenses on theconsolidated statements of operations. Shipping and handling costs were $52.0million, $40.6 million, and $39.0 million in 2006, 2005 and 2004, respectively.

***Advertising Costs***

Costs of producing anddistributing sales catalogs and promotional flyers are capitalized and chargedto expense over the life of the related catalog and promotional flyers.Advertising expenses, net of co-op advertising, were $3.8 million, $2.7million, and $2.1 million in 2006, 2005 and 2004, respectively. Co-opadvertising was $2.3 million in 2006, 2005 and 2004.

***Share-Based Compensation***

Effective December 31, 2005, the Company adoptedthe provisions of FASB Statement No. 123 (revised 2004), *Share-Based Payment*, (“FAS 123R”) using the modifiedprospective application transition method. Under this method, the share-basedcompensation cost recognized beginning December 31, 2005 includescompensation cost for (1) all share-based payments granted prior to, butnot vested as of December 31, 2005, based on the grant date fair valueoriginally estimated in accordance with the provisions of FASB Statement No. 123,*Accounting for Stock-Based Compensation*,(“FAS 123”) and (2) all share-based payments granted subsequent to December 30,2005, based on the grant date fair value estimated in accordance with theprovisions of FAS 123R. Compensation cost under FAS 123R is recognized ratably usingthe straight-line attribution method over the expected vesting period or to theretirement eligibility date, if less than the vesting period when vesting isnot contingent upon any future performance. In addition, pursuant to FAS 123R,the Company is required to estimate the amount of expected forfeitures whencalculating the compensation costs, instead of accounting for forfeitures asincurred, which was the method previously used by the Company. As of December 31,2005, the cumulative effect of adopting the estimated forfeiture method was notsignificant. Prior periods are not restated under this transition method.

FAS 123R also requires the Company to reflect the taxbenefit from the exercise of stock options in the statement of cash flows as acash inflow from financing activities and as a cash outflow from operatingactivities. Prior to the adoption of FAS 123R, these tax benefits have beenreflected as a cash inflow from operating activities. The prior years’statements of cash flows have not been restated. The tax benefit from theexercise of stock options was $0.3 million and $0.2 million during the yearsended December 29, 2006 

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and December 30,2005, respectively. There were no stock options exercised during the year endedDecember 31, 2004.

Priorto December 31, 2005, the Company accounted for share-based compensationplans in accordance with the provisions of Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for StockIssued to Employees*, (“APB 25”) as permitted by FAS 123. The Companyelected to use the intrinsic value method of accounting for employee anddirector share-based compensation expense for its nonqualified employee anddirector stock option awards and did not recognize compensation expense for theissuance of options with an exercise price equal to or greater than the marketprice of the underlying common stock at the date of grant. Had the Companyelected to adopt the fair value approach as prescribed by FAS 123, whichcharges earnings for the estimated fair value of stock options, the pro formanet income and pro forma earnings per share for the years ended December 30,2005 and December 31, 2004 would have been as follows (in thousands,except per share amounts):

| ** **                                                                                                                               | ** ** | **Year Ended**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                               | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Net income as  reported                                                                                                                  |       |                  | $          | 28,799 |   |   |   | $ | 18,101 |   |   |
| Add: Share-based compensation expense included in  reported net income, net of related tax effects                                       |       |                  | 589        |   |   |   | — |   |   |
| Deduct: Total share-based compensation expense  determined under the fair value-based method for all awards, net of related  tax effects |       |                  | (734       | ) |   |   | (6,796 | ) |   |
| Pro forma net  income                                                                                                                    |       |                  | 28,654     |   |   |   | 11,305 |   |   |
| Preferred stock dividends                                                                                                                |       |                  | —     |   |   |   | (54,389 | ) |   |
| Pro forma net  income (loss) applicable to common stockholders                                                                           |       |                  | $          | 28,654 |   |   |   | $ | (43,084 | ) |   |
| Earnings (loss) per share:                                                                                                               |       |                  |       |   |   |   |   |   |   |
| Basic-as reported                                                                                                                        |       |                  | $          | 0.90 |   |   |   | $ | (25.21 | ) |   |
| Basic-pro forma                                                                                                                          |       |                  | $          | 0.90 |   |   |   | $ | (29.93 | ) |   |
| Diluted-as reported                                                                                                                      |       |                  | $          | 0.89 |   |   |   | $ | (25.21 | ) |   |
| Diluted-pro forma                                                                                                                        |       |                  | $          | 0.88 |   |   |   | $ | (29.93 | ) |   |

 

As a result of adopting FAS 123R on December 31,2005, the Company’s income before income taxes and net income for the yearended December 29, 2006, are $0.9 million and $0.6 million lower,respectively, than if the Company had continued to account for share-basedcompensation under APB 25. Basic and diluted earnings per share are $0.02 lowerfor the year ended December 29, 2006 than if the Company had continued toaccount for share-based compensation under APB 25.

The total share-basedcompensation expense, which is included in the consolidated statement ofearnings, was $3.8 million and $1.0 million for the years ended December 29,2006 and December 30, 2005, respectively. See Note 12. Share-BasedCompensation for more information.

***Income Taxes***

Taxes on income areprovided using an asset and liability approach to financial accounting andreporting for income taxes. Deferred income tax assets and liabilities arecomputed for differences between the financial statement carrying values andthe tax bases of assets and liabilities that will result in taxable ordeductible amounts in the future. Such deferred income tax asset and liabilitycomputations are based on enacted tax laws and rates applicable to periods inwhich the differences are expected to affect 

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taxableincome. Valuation allowances are established when necessary to reduce deferredtax assets to the amounts expected to be realized.

***Earnings (Loss) per Common Share***

Earning (loss) per sharefor all years has been computed in accordance with FASB Statement No. 128,*Earnings per Share*, (“FAS 128”). Basicearnings (loss) per share is computed by dividing net income (loss) applicableto common stockholders by the weighted-average number of common sharesoutstanding during the year. Diluted earnings per share is computed by dividingnet income (loss) applicable to stockholders by the weighted-average number ofshares outstanding during the year as adjusted for the potential dilutiveeffect of stock options and non-vested shares of restricted stock, restrictedstock units and deferred stock units using the treasury stock method.

Thefollowing summarizes the shares of common stock used to calculate earnings pershare including the potentially dilutive impact of stock options, restrictedstock, restricted stock units and deferred stock units, calculated using thetreasury stock method, as included in the calculation of dilutedweighted-average shares:

| ** **                                      | ** ** | **Year Ended**   | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **December 29,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                      | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  shares outstanding—basic |       |                  | 32,141,958 |   |   |   | 32,004,007 |   |   |   | 1,439,322 |   |   |
| Dilutive shares  resulting from:                |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Stock options                                   |       |                  | 497,042    |   |   |   | 363,937 |   |   |   | — |   |   |
| Restricted stock                                |       |                  | 48,959     |   |   |   | 75,828 |   |   |   | — |   |   |
| Restricted stock units                          |       |                  | 59,199     |   |   |   | — |   |   |   | — |   |   |
| Deferred stock units                            |       |                  | 1,242      |   |   |   | — |   |   |   | — |   |   |
| Weighted average shares  outstanding - diluted  |       |                  | 32,748,400 |   |   |   | 32,443,772 |   |   |   | 1,439,322 |   |   |

 

During the years ended December 29, 2006, December 30,2005 and December 31, 2004, options to purchase 266,788 shares, 452,942shares and 2,468,009 shares of common stock, respectively, were excluded fromthe computations of diluted weighted-average shares outstanding because theexercise prices of those options are greater than the average market value ofcommon stock and the effect would be anti-dilutive.

During the year ended December 31,2004, potential common shares, consisting of stock options and restricted stock,totaling 17,451 were excluded from the computation of loss per share becausetheir effect would be anti-dilutive.

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***Segment Information***

Inaccordance with FASB Statement No.131, *Disclosure about segmentsof an Enterprise and Related Information*, (“FAS 131”), the Companyhas two operating segments: Interline Brands and AmSan. These segments areaggregated into one reportable segment, the distribution of MRO products,because they possess similar economic characteristics and have common products,customers and methods of distribution. During fiscal year 2007, the Companywill begin to integrate AmSan’s operations onto the Company’s informationsystems platform. The Company’s net sales by product category were as follows(in thousands):

| ** **                                 | ** ** | **Year Ended**   | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **December 29,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| **Product Category**                  | ** ** | ** **            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Plumbing                                   |       |                  | $          | 378,512 |   |   |   | $ | 358,670 |   |   |   | $ | 331,200 |   |   |
| Janitorial and  Sanitary                   |       |                  | 149,632    |   |   |   | 21,072 |   |   |   | 20,856 |   |   |
| Electrical                                 |       |                  | 127,511    |   |   |   | 120,198 |   |   |   | 115,359 |   |   |
| Heating,  Ventilation and Air Conditioning |       |                  | 123,568    |   |   |   | 101,519 |   |   |   | 46,333 |   |   |
| Appliances                                 |       |                  | 59,548     |   |   |   | 51,093 |   |   |   | 46,493 |   |   |
| Security                                   |       |                  | 56,262     |   |   |   | 54,076 |   |   |   | 52,073 |   |   |
| Hardware                                   |       |                  | 51,075     |   |   |   | 49,875 |   |   |   | 48,300 |   |   |
| Other                                      |       |                  | 121,462    |   |   |   | 95,425 |   |   |   | 83,291 |   |   |
| Total                                      |       |                  | $          | 1,067,570 |   |   |   | $ | 851,928 |   |   |   | $ | 743,905 |   |   |
|                                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company’s revenues andassets outside the United States are not significant.

***Derivative Financial Instruments***

Historically, the Company entered into derivativefinancial instruments from time to time, including interest rate exchangeagreements (“swaps”) to manage its exposure to fluctuations in interest rateson its debt. Under swaps the Company held during 2004, the Company paid a fixedrate on the notional amount to its banks and the banks paid the Company avariable rate on the notional amount equal to a base LIBOR rate. The Company’sderivative activities, all of which are for purposes other than trading, areinitiated within the guidelines of corporate risk-management policies. TheCompany recorded a gain of $8.2 million in 2004, as a result of the change inmarket value of the swaps. The Company did not hold any derivative financialinstruments during 2006 and 2005.

***Recent Accounting Pronouncements***

In June 2006, the FASB issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement No. 109* (“FIN 48”), whichclarifies the accounting for uncertainty in income taxes recognized inaccordance with FASB Statement No. 109, *Accountingfor Income Taxes*, (“FAS 109”). FIN 48 clarifies the application ofFAS 109 by defining criteria that an individual tax position must meet for anypart of the benefit of that position to be recognized in the financialstatements. Additionally, FIN 48 provides guidance on the measurement,derecognition, classification and disclosure of tax positions, along withaccounting for the related interest and penalties. The provisions of FIN 48 areeffective for fiscal years beginning after December 15, 2006, with thecumulative effect of the change in accounting principle recorded as anadjustment to opening retained earnings. The Company does not expect adoptionof FIN 48 to have a material effect on its financial position, results ofoperations and cash flows.

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In June 2006, the FASB ratified the consensusreached by the EITF with respect to EITF Issue No. 06-3, How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation), (“EITF06-3) which addresses how taxes imposed on a revenue producingtransaction between a buyer and a customer, such as sales, use, value-added andexcise and other taxes imposed at the point of sale, should be recorded in theincome statement. The consensus reached requires that a policy decision bemade as to the presentation of taxes in the income statement. This policyshould be disclosed within the notes to the financial statements and the amountof taxes included in revenue, if any, should also be disclosed. EITF 06-3is effective for financial reports for interim and annual periods beginningafter December 15, 2006 with earlier application permitted. Adoption ofEITF 06-3 resulted in additional disclosure and did not change the waythe Company accounts for taxes collected and remitted (see Taxes Collected andRemitted above).

In September 2006, the SEC issued StaffAccounting Bulletin (“SAB”) No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*, (“SAB 108”) which provides interpretiveguidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materialityassessment. The Company adopted SAB 108 in the fourth quarter of 2006. Adoptionof SAB 108 did not have an impact on the Company’s financial position, resultsof operations and cash flows.

In September 2006, the FASB issued FASB StatementNo. 157, *Fair Value Measurements*, (“FAS157”). FAS 157 defines fair value, establishes a framework for measuring fairvalue with accounting principles generally accepted in the United States ofAmerica and expands disclosures about fair value measurements. FAS 157 appliesunder other accounting pronouncements that require or permit fair valuemeasurements. Accordingly, FAS 157 does not require any new fair valuemeasurements. FAS 157 is effective for fiscal years beginning after November 15,2007 with early adoption permitted. The Company is currently evaluating theimpact that adoption of FAS 157 will have on its financial position, results ofoperations and cash flows.

In September 2006, the FASB issued FASB StatementNo. 158, Employer’s Accounting for Defined Benefit Pension and OtherPostretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and132(R), (“FAS 158”). FAS 158 requires employers to fully recognize theobligations associated with single-employer defined benefit pension, retireehealthcare and other postretirement plans in the financial statements.Specifically, FAS 158 requires as employer to (a) recognize in itsstatement of financial position an asset for a plan’s overfunded status or aliability for a plan’s underfunded status and recognize changes in the fundedstatus of a defined benefit postretirement plan in comprehensive income in theyear in which the changes occur. In addition, FAS 158 requires an employer tomeasure a plan’s assets and its obligations that determine its funded status asof the end of the employer’s fiscal year (with limited exceptions). The Companyadopted all provisions of FAS 158 as of December 29, 2006. Adoption of FAS158 did not have a material impact on the Company’s financial position, resultsof operations and cash flows. See Note 13.Employee Benefit Plans for more information.

In February 2007, theFASB issued FASB Statement No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, (“FAS 159”). FAS 159permits an entity to irrevocably elect fair value on a contract-by-contractbasis as the initial and subsequent measurement attribute for many financialassets and liabilities and certain other items including property and casualtyinsurance contracts. Entities electing the fair value option would be requiredto recognize changes in fair value in earnings and to expense upfront cost andfees associated with the item for which the fair value option is elected.Entities electing the fair value option are required to distinguish on the faceof the statement of financial position, the fair value of assets andliabilities for which the fair value option has been elected and similar assetsand liabilities measured using another measurement attribute. An entity canaccomplish this by either reporting the fair value and non-fair-value carryingamounts as separate line items or aggregate those amounts and discloseparenthetically the amount of fair value included in the aggregate amount. FAS159 is effective for 

F-18

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fiscalyears beginning after November 15, 2007 with early adoption permitted asof the beginning of the previous fiscal year provided that the entity makesthat choice in the first 120 days of that fiscal year and also elects to applythe provisions of FAS 157. Upon adoption, an entity is permitted to elect thefair value option irrevocably for any existing asset or liability within thescope of the standard. The adjustment to reflect the difference between thefair value and the carrying amount would be accounted for as acumulative-effect adjustment to retained earnings as of the date of initialadoption. Retrospective application would not be permitted. The Company iscurrently evaluating the impact that adoption of FAS 159 will have on itsfinancial position, results of operations and cash flows.

**3.   SIGNIFICANTTRANSACTIONS**

***Initial Public Offering Transaction***

In December 2004, the Company successfullycompleted its IPO and amended its senior credit facility. A total of 14,375,000shares of the Company’s common stock were sold, of which 12,667,000 were soldby the Company and 1,708,000 were sold by the Company’s shareholders. TheCompany sold 12,500,000 shares of its common stock in December 2004 and167,000 shares in January 2005 following the exercise of the underwriters’over-allotment option. The Company received $171.8 million in net proceedsincluding the exercise of the underwriters’ over-allotment option, representing$176.9 million of proceeds from the sale of stock net of underwriting discountsand commissions, less $4.1 million of IPO costs and $1.1 million of debtissuance costs.

Immediately prior to the closing of the IPO, areincorporation merger occurred and the parent company of Interline New Jerseybecame the holding company of the Interline group of businesses. In thereincorporation merger, the holders of the preferred stock of Interline NewJersey received an aggregate of $55.0 million in cash and 19,183,321 shares ofthe Company’s common stock and the holders of the common stock of Interline NewJersey received 0.01218 shares of the Company’s common stock per share ofInterline New Jersey common stock, or 66,667 shares of the Company’s commonstock in total. In addition, holders of options to purchase shares of thecommon stock of Interline New Jersey were converted into options to purchaseshares of the Company’s common stock.

The Company also used $31.3 million of the proceeds topartially repay the term loan under its credit facility. The Company amendedits senior credit facility to allow for the IPO and reduce its applicable ratein respect to any term loans from LIBOR plus 3.50% to LIBOR plus 2.25%. Inconjunction with this amendment, the Company incurred $1.1 million of debtissuance costs. In December 2004, the Company also used $4.6 million ofthe proceeds to terminate the interest rate swap agreements. In January 2005,the Company used $70.0 million of the proceeds from the IPO transaction topartially redeem its 11.5% senior subordinated notes. In connection with theredemption, the Company paid $8.1 million of premiums for early redemption ofthe senior subordinated notes and recorded a $10.3 million loss on the earlyextinguishment of debt, which included a charge for write-off of unamortizeddebt issuance costs in the amount of $2.3 million in January of 2005.

In connection with the IPOtransaction, the Company paid bonuses totaling $6.2 million and incurredadditional compensation expense for the forgiveness of shareholder loans of $1.9million and the reimbursement of taxes of $1.1 million on such loanforgiveness. These costs are reported as IPO related expenses in the consolidatedstatements of operations.

***Secondary Stock Offering Transaction***

On August 9, 2005,certain of the Company’s stockholders sold 7,750,000 shares of the Company’s commonstock in an underwritten offering pursuant to a registration statement onForm S-1 filed with the SEC (Commission File No. 333-126515).The underwriters of this offering elected to exercise their over-allotmentoption with respect to additional shares held by the selling stockholders. As aresult, on 

F-19

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August 22,2005, certain of the selling stockholders sold an additional 1,162,500 sharesof our common stock in a second closing pursuant to the same underwrittenoffering. In connection with this offering, the Company did not receive anyproceeds and incurred $0.9 million of expenses during 2005, which was recordedby the Company as an expense.

**4.   ACQUISITIONS**

***CCS Enterprises, Inc.***

On July 7, 2005, Interline New Jersey acquiredall of the common stock of CCS Enterprises, Inc. (“Copperfield”) under astock purchase agreement. Copperfield is a national distributor and directmarketer of specialty ventilation and chimney maintenance products and isheadquartered in Fairfield, Iowa. This acquisition represents an expansion ofthe Company’s professional contractor and specialty distributor business.

The aggregate purchase price was $70.0 million,including costs of acquisition of $0.7 million, and was funded by borrowingsunder Interline New Jersey’s credit facility. Included in the purchase pricewas $4.0 million deposited in an escrow account to cover the representations,warranties and contingencies of the parties to the purchase agreement. TheCompany has included the results of operations for Copperfield from the date ofacquisition and applied purchase accounting in accordance with FASB Statement No. 141,*Business Combinations*(“FAS 141”) as ofthe date of acquisition, which resulted in recorded estimated goodwill of $35.7million.

Thefollowing table summarizes the final allocation of the purchase price to theCopperfield assets acquired and liabilities assumed at fair values (in thousands):

| Current assets            |   | $      | 14,237 |   |
|---------------------------|--------|--------|--------|--------|
| Property and  equipment   |   | 1,727  |   |
| Goodwill                  |   | 35,648 |   |
| Intangible assets         |   | 26,500 |   |
| Total assets acquired     |   | 78,112 |   |
| Current  liabilities      |   | 6,849  |   |
| Other liabilities         |   | 1,293  |   |
| Total liabilities assumed |   | 8,142  |   |
| Net assets acquired       |   | $      | 69,970 |   |

 

Goodwill recorded inconnection with the acquisition of Copperfield is not expected to be deductiblefor tax purposes. The intangible assets subject to amortization will beamortized on a straight-line basis over a weighted-average useful life ofapproximately 20 years. The Company recorded additional goodwill of $9.5million in connection with the acquisition of Copperfield to recognize the bookto tax basis difference on non-goodwill intangibles. Supplemental pro formainformation has not been provided below because it is immaterial.

***AmSan LLC***

On July 3, 2006, Interline New Jersey acquiredall of the outstanding equity interests of AmSan LLC (“AmSan”) from AmericanSanitary Incorporated for $133.0 million in cash, including cash acquired of$2.2 million and transaction fees of $3.0 million. AmSan is a leading nationaldistributor of janitorial and sanitary supplies. The acquisition was fundedwith the $130.0 million delayed draw facility under Interline New Jersey’s newbank credit facility (see Note 9. Debt).

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AmSan, one of the largest national distributors in theU.S. janitorial and sanitary maintenance supply industry, offers over 40,000products from 43 locations to approximately 40,000 customers in 39 states.AmSan’s primary end markets are institutional facilities, such as schools anduniversities, health care sites, lodging and government properties and buildingservice contractors. This acquisition represents an expansion of the Company’sMRO product offering and institutional facilities maintenance business.

Thefollowing table summarizes the preliminary allocation of the purchase price tothe AmSan assets acquired and liabilities assumed at estimated fair values (inthousands):

| Current assets            |   | $       | 53,205  |   |
|---------------------------|--------|---------|---------|--------|
| Property and  equipment   |   | 2,983   |    |
| Goodwill                  |   | 65,003  |    |
| Intangible assets         |   | 43,600  |    |
| Other assets              |   | 631     |    |
| Total assets acquired     |   | 165,422 |    |
| Current  liabilities      |   | 31,150  |    |
| Other liabilities         |   | 1,255   |    |
| Total liabilities assumed |   | 32,405  |    |
| Net assets acquired       |   | $       | 133,017 |   |

 

Given the recent acquisition date, the Company has notcompleted its integration plan; therefore, the final fair value assessment isnot yet complete. As of December 29, 2006, the Company had accrued, aspart of the purchase price, $1.8 million in employee severance and relocationcosts and $2.7 million in facility closing and other costs associated with theAmSan acquisition. The Company expects to complete the allocation processduring the second quarter of fiscal 2007.

This acquisition was treated as a purchase and sale ofassets for federal income tax purposes. Accordingly, of the $65.0 million ofgoodwill, $62.3 million is expected to be deductible for tax purposes.

Of the $43.6 million of acquired intangible assets,$19.4 million was assigned to registered trademarks that are not subject toamortization as the Company believes these intangible assets have indefinitelives. The remaining $24.2 million of acquired intangible assets consists ofcustomer relationships and have a weighted-average useful life of approximately16 years.

Theresults of AmSan have been included in the condensed consolidated financialstatements since July 3, 2006. The following unaudited pro forma financialinformation reflects the AmSan acquisition as if it had occurred on December 31,2005 and January 1, 2005, respectively, after giving effect to certainadjustments including amortization of other intangible assets and interestexpense (in thousands, except per share data):

| ** **           | ** ** | **Year Ended**   | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
| ** **           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Revenues             |       |                  | $          | 1,201,262 |   |   |   | $ | 1,111,961 |   |   |
| Net income           |       |                  | $          | 33,634 |   |   |   | $ | 31,940 |   |   |
| Earnings Per  Share: |       |                  |       |   |   |   |   |   |   |
| Basic                |       |                  | $          | 1.05 |   |   |   | $ | 1.00 |   |   |
| Diluted              |       |                  | $          | 1.03 |   |   |   | $ | 0.98 |   |   |

 

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The pro forma financialinformation does not purport to represent what the Company’s actual results ofoperations would have been had the acquisition occurred as of December 31,2005 and January 1, 2005, respectively, and may not be indicative ofoperating results for any future periods.

***Acquisition Reserves***

Thefollowing table summarizes the changes to reserves assumed in connection withthe Company’s business combinations (in thousands):

| ** **                         | ** ** | **Employee  Severance and  Relocation** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at  December 31, 2004 |       |                                         | $          | 215                                              |       |      |       | $ | 5,890 |   |   | $ | 6,105 |   |
| Payments                           |       |                                         | (10        | )                                                |       |      | (454       | ) |   | (464 | ) |
| Write-offs                         |       |                                         | —     |                                             |       |      | (1,563     | ) |   | (1,563 | ) |
| Additions to reserve               |       |                                         | 425        |                                             |       |      | 905        |   |   | 1,330 |   |
| Balance at  December 30, 2005 |       |                                         | 630        |                                             |       |      | 4,778      |   |   | 5,408 |   |
| Payments                           |       |                                         | (1,221     | )                                                |       |      | (337       | ) |   | (1,558 | ) |
| Write-offs                         |       |                                         | (76        | )                                                |       |      | (1,811     | ) |   | (1,887 | ) |
| Additions to reserve               |       |                                         | 1,760      |                                             |       |      | 2,691      |   |   | 4,451 |   |
| Balance at  December 29, 2006 |       |                                         | $          | 1,093                                            |       |      |       | $ | 5,321 |   |   | $ | 6,414 |   |

 

**5.   ACCOUNTSRECEIVABLE**

TheCompany’s trade receivables are exposed to credit risk. The majority of themarket served by the Company is comprised of numerous individual accounts, noneof which is individually significant. The Company monitors the creditworthinessof its customers on an ongoing basis and provides a reserve for estimated baddebt losses. The activity in the allowance for doubtful accounts consisted ofthe following (in thousands):

| **Year Ended**     | ** ** | ** ** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged to  Expense** | ** ** | **Deductions  (1)** | ** ** | **Balance at  End of  Year** | ** ** |
|-------------------------|------------|------------|------------|----------------------------------------------|------------|------------------------------|------------|---------------------|------------|----------------------------------------|------------|
| December 31,  2004 |       |       | $          | 6,316                                        |       |                         |       | $                   | 2,041      |                                   |       |   | $ | (1,428 | ) |   |   | $ | 6,929 |   |   |
| December 30,  2005 |       |       | $          | 6,929                                        |       |                         |       | $                   | 2,828      |                                   |       |   | $ | (1,607 | ) |   |   | $ | 8,150 |   |   |
| December 29, 2006  |       |       | $          | 8,150                                        |       |                         |       | $                   | 3,443      |                                   |       |   | $ | (1,369 | ) |   |   | $ | 10,224 |   |   |

----

(1)          Accountsreceivable written-off as uncollectible, net of recoveries.

F-22

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**6.   PROPERTY ANDEQUIPMENT**

Majorclassifications of property and equipment are as follows (in thousands):

| ** **                                       | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Land                                             |       |                  | $          | 400                   |       |   |   | $ | 400 |   |   |
| Building                                         |       |                  | 9,258      |                  |       |   | 9,536 |   |   |
| Machinery and  equipment                         |       |                  | 59,762     |                  |       |   | 55,913 |   |   |
| Office furniture  and equipment                  |       |                  | 6,772      |                  |       |   | 6,142 |   |   |
| Vehicles                                         |       |                  | 1,150      |                  |       |   | 600 |   |   |
| Leasehold  improvements                          |       |                  | 8,096      |                  |       |   | 8,846 |   |   |
| Construction in  progress                        |       |                  | 56         |                  |       |   | — |   |   |
|                                             |       |                  | 85,494     |                  |       |   | 81,437 |   |   |
| Less: Accumulated  depreciation and amortization |       |                  | (53,740    | )                     |       |   | (51,572 | ) |   |
|                                             |       |                  | $          | 31,754                |       |   |   | $ | 29,865 |   |   |

 

Depreciation andamortization expense, including for assets under capital leases, was $8.7million, $8.5 million, and $8.6 million for 2006, 2005 and 2004, respectively.

**7.   GOODWILL ANDOTHER INTANGIBLE ASSETS**

A summary of changes to goodwill for the year ended December 29,2006 and December 30, 2005 follows (in thousands):

| Balance at  December 31, 2004 |   | $      | 203,848 |   |
|------------------------------------|--------|--------|---------|--------|
| Acquired goodwill                  |   | 35,648 |    |
| Purchase price adjustments         |   | 10,078 |    |
| Balance at  December 30, 2005 |   | $      | 249,574 |   |
| Acquired goodwill                  |   | 65,003 |    |
| Purchase price adjustments         |   | (1,500 | )       |
| Balance at  December 29, 2006 |   | $      | 313,077 |   |

 

The acquired goodwill during the years ended December 30,2005 and December 29, 2006 relate to the Company’s July 2005 and July 2006acquisitions of Copperfield and AmSan, respectively. This is discussed infurther detail in Note 4. Acquisitions.

Purchase price adjustments during the year ended December 30,2005 relate primarily to the establishment of acquisition accruals for theCopperfield acquisition, of which $9.5 million relates to the recording ofdeferred taxes on the assets and liabilities acquired. This increase waspartially offset by adjustments to acquisition accruals established for theBarnett and Florida Lighting acquisitions that were settled for less than theestimated amounts accrued.

Purchase price adjustments during the year ended December 29,2006 relate primarily to the write-off of unused acquisition accruals created forthe estimated loss on property and equipment associated with the Barnett, Inc.Florida Lighting, Inc. and Copperfield acquisitions as well as theadjustment to deferred taxes associated with the final valuation ofCopperfield.

F-23

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Thegross carrying amount and accumulated amortization of the Company’s intangibleassets other than goodwill as of December 29, 2006 and December 30,2005 are as follows (in thousands):

| **December 29, 2006** | ** ** | ** ** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|---------------------------------|------------|------------|------------|-----------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Customer lists                  |       | $          | 49,362     |                        |       | $                             | 13,898     |                     |       | $ | 35,464 |   |
| Customer  relationships         |       | 45,200     |       |                        | 2,298      |                          |       | 42,912                   |       |
| Trademarks                      |       | 61,121     |       |                        | 5,569      |                          |       | 55,552                   |       |
| Non-compete  agreements         |       | 2,616      |       |                        | 2,134      |                          |       | 482                      |       |
| Deferred debt  issuance costs   |       | 9,581      |       |                        | 551        |                          |       | 9,030                    |       |
| Total                           |       | $          | 167,880    |                        |       | $                             | 24,440     |                     |       | $ | 143,440 |   |

 

| **December 30,  2005**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Customer lists                |       | $          | 49,362     |       |       | $          | 11,064     |       |       | $          | 38,298     |   |
| Customer  relationships       |       | 21,000     |       |       | 481        |       |       | 20,519     |       |
| Trademarks                    |       | 41,721     |       |       | 4,786      |       |       | 36,935     |       |
| Non-compete  agreements       |       | 2,616      |       |       | 1,868      |       |       | 748        |       |
| Deferred debt  issuance costs |       | 15,297     |       |       | 7,553      |       |       | 7,744      |       |
| Total                         |       | $          | 129,996    |       |       | $          | 25,752     |       |       | $          | 104,244    |   |

 

The amortization of deferred debt issuance costs,recorded as a component of interest expense, was $1.4 million, $1.6 million,and $1.9 million in 2006, 2005 and 2004, respectively and write-off of suchcosts were $7.2 million, $2.3 million and $0.7 million in 2006, 2005 and 2004,respectively.

Amortizationexpense on other intangible assets was $5.7 million, $4.5 million, and $4.0million for 2006, 2005 and 2004, respectively. Expected amortization expense onother intangible assets (excluding deferred debt issuance costs which will varydepending upon debt payments) for each of the five succeeding fiscal years isexpected to be as follows (in thousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | **Future  Estimated  Amortization** | ** ** |
|----------------------|------------|------------|------------|-------------------------------------|------------|
| 2007                 |       |       | $          | 5,646                               |       |   |
| 2008                 |       |       | $          | 5,630                               |       |   |
| 2009                 |       |       | $          | 5,397                               |       |   |
| 2010                 |       |       | $          | 5,397                               |       |   |
| 2011                 |       |       | $          | 5,397                               |       |   |

 

***Change in Estimate***

During the quarter ended December 29, 2006, inaccordance with FAS 142, the Company evaluated the remaining useful lives ofits intangible assets that are being amortized to determine whether a revisionto the remaining period of amortization was appropriate. As a result of itsevaluation, effective September 30, 2006, the Company changed theestimated useful life of the trademarks acquired in the acquisitions of Sexauer, Inc.,Barnett. Inc., Florida Lighting, Inc. and Copperfield from 40 years toindefinite. Accordingly, the Company will no longer amortize its trademarks.Instead, in accordance with FAS 142, the Company will test its trademarks forimpairment annually, or more frequently if events or changes in circumstancesindicate that the trademarks might be impaired. The effect of this change inthe estimated remaining useful life was a decrease in amortization expense of$0.3 million during the year ended December 29, 2006 with no materialimpact on net income or earnings per share.

F-24

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**8.   ACCRUEDLIABILITIES**

Accrued expensesand other current liabilities consisted of the following as of December 29,2006 and December 30, 2005 (in thousands):

| ** **                         | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Accrued  compensation and benefits |       |                  | $          | 15,879                |       |   |   | $ | 10,054 |   |   |
| Accrued sales tax                  |       |                  | 3,488      |                  |       |   | 2,663 |   |   |
| Other                              |       |                  | 13,873     |                  |       |   | 8,857 |   |   |
|                               |       |                  | $          | 33,240                |       |   |   | $ | 21,574 |   |   |

 

**9.   DEBT**

Long-term debtconsists of the following (in thousands):

| ** **                                                                   | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Term loans                                                                   |       |                  | $          | 218,850               |       |   |   | $ | 148,800 |   |   |
| Notes payable                                                                |       |                  | 3,587      |                  |       |   | 3,275 |   |   |
| 81¤8% senior subordinated notes,  net of unamortized discount of $1,371 |       |                  | 198,629    |                  |       |   | — |   |   |
| 111¤2%  senior subordinated notes                                       |       |                  | —     |                  |       |   | 130,000 |   |   |
|                                                                         |       |                  | 421,066    |                  |       |   | 282,075 |   |   |
| Less: Current  portion                                                       |       |                  | (2,416     | )                     |       |   | (1,400 | ) |   |
|                                                                         |       |                  | $          | 418,650               |       |   |   | $ | 280,675 |   |   |

 

In April 2003, Interline New Jersey issued anon-recourse note payable in the principal amount of $3.3 million for thepurchase of an investment. This note, which is secured only by the investment,bears interest at a rate of 4.0% per annum, with principal due in full in April 2010.

In May 2003, Interline New Jersey completed anoffering of $200.0 million of 111¤2% seniorsubordinated notes due 2011 and entered into a $205.0 million senior securedcredit facility.

On December 20, 2004, Interline New Jerseyelected to redeem $70.0 million of the 111¤2% seniorsubordinated notes using proceeds from the Company’s IPO and gave the 30-daynotice required by the indenture. In January 2005, the Company recorded aloss on extinguishment of debt of $10.3 million, consisting of the write-off ofdeferred financing costs of $2.3 million and the redemption premium of $8.1 millionon the $70.0 million redemption of 111¤2%senior subordinated notes. On June 23, 2006, Interline New Jerseyrepurchased the remaining $130.0 million of 111¤2% seniorsubordinated notes as part of the refinancing transactions described below.

In December 2004, Interline New Jersey amendedits term loan facility and revolving loan facility. The term loan was reducedto $100.0 million from $140.0 million and the revolving loan facility wasincreased to $100.0 million from $65.0 million. As part of the amendment in December 2004,Interline New Jersey paid down $31.3 million of the term loan using proceedsfrom the Company’s IPO. Interline New Jersey also amended its credit facilityon July 7, 2005, in connection with the acquisition of Copperfield, topermit the incurrence of an additional $50.0 million term loan, havingsubstantially the same terms as the existing term loan. On August 8, 2005,Interline New Jersey again amended its credit facility to lower the interestrate spreads applicable to the additional $50.0 million term loan. The amendedcredit facility provided for aggregate commitments of $250.0 million,consisting of (1) a revolving loan facility of $100.0 million, of which aportion not exceeding $20.0 million was available in the form of letters ofcredit, and (2) a term loan facility of $150.0 million.

F-25

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Borrowings under the amended term loan facility andrevolving loan facility bore interest, at Interline New Jersey’s option, ateither LIBOR or at the alternate base rate plus a spread. The indebtednessunder the amended credit facility was guaranteed by the Company and by thedomestic subsidiaries of Interline New Jersey. Interest rates in effect onborrowings under the term loan facilities at June 23, 2006, the date suchborrowings were paid off, ranged from 7.72% for LIBOR based borrowings and9.25% for prime based borrowings under the $100.0 million tranche B-1term loan and 7.22% for LIBOR based borrowings and 9.00% for prime basedborrowings under the $50.0 million tranche B-2 term loan. Outstandingletters of credit under the revolving loan facility were subject to a per annumfee equal to the applicable spread over the adjusted LIBOR for revolving loans.The term loan facility was due to mature on December 31, 2010 and therevolving loan facility was due to mature on May 31, 2008. Debt issuancecosts capitalized in connection with the amended credit facility were $1.1million. On June 23, 2006, Interline New Jersey paid off the term loanfacility as part of the refinancing transactions described below.

In June 2006, Interline New Jersey completed aseries of refinancing transactions consisting of (1) an offering of $200.0million of 81¤8% senior subordinated notes due2014 and (2) entering into a $330.0 million bank credit facility.The new bank credit facility consists of a $100.0 million 7-year termloan, a $130.0 million 7-year delayed draw term loan and a $100.0 million6-year revolving credit facility of which a portion not exceeding $40.0million is available in the form of letters of credit. The delayed draw termloan was available solely to fund the acquisition of substantially all of theassets of American Sanitary Incorporated and the acquisition-related fees andexpenses (see Note 4. Acquisitions). The proceeds from the 81¤8% senior subordinated notes andthe new bank credit facility were used to repurchase the 111¤2% senior subordinated notes andto repay the indebtedness under the prior credit facility. The 111¤2% senior subordinated notes wererepurchased at a price equal to 110.51% of their principal amount.

In connection with the repurchase of the 111¤2%senior subordinated notes and the repayment of the prior credit facility,Interline New Jersey recorded a loss on early extinguishment of debt of $20.7million. The loss was comprised of $13.7 million in tender premiums associatedwith the repurchase of the 111¤2%senior subordinated notes and a non-cash charge of $7.0 million in deferredfinancing costs associated with the repurchase of the 111⁄2% senior subordinatednotes and the repayment of the prior credit facility.

The 81¤8% senior subordinated notes werepriced at 99.3%, or $198.6 million, of their principal amount, representing ayield to maturity of 81¤4 %. The discount of $1.4 millionwill be amortized over the term of the 81¤8% senior subordinated notes. The81¤8% senior subordinated notesmature on June 15, 2014 and interest is payable on June 15 andDecember 15 of each year beginning on December 15, 2006. Debtissuance costs capitalized in connection with the 81¤8% senior subordinatednotes were $5.8 million. As of December 29, 2006, the 81¤8% senior subordinated notes had afair market value of $205.5 million.

Borrowings under the new term loan, the delayed drawfacility and the new revolving credit facility bear interest, at Interline NewJersey’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 plus0.50%, plus 0.75%. As of December 29, 2006, the interest rate in effectwith respect to the new term loan and the delayed draw facility was 7.11% forthe LIBOR option and 9.00% for the alternate base rate option. Outstandingletters of credit under the new revolving credit facility are subject to a perannum fee equal to the applicable margin under the new revolving creditfacility. The interest rate margin is subject to pricing adjustments at the endof each fiscal quarter based on net total indebtedness to consolidated EBITDA.The new term loan and the delayed draw facility mature on June 23, 2013and the revolving loan facility matures on June 23, 2012. Amounts underthe new term loan and the delayed draw facility are due and payable inquarterly installments equal to 1.0% of the original principal amount on anannual basis through June 23, 2013, with the balance payable in one finalinstallment at the maturity date. Debt issuance costs capitalized in connectionwith the new term loan, the delayed draw facility and the new revolving creditfacility were $3.9 million.

F-26

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The new bank credit facility, which is secured bysubstantially all of the assets of Interline New Jersey and is guaranteed bythe Company and by the domestic subsidiaries of Interline New Jersey, containsaffirmative, negative and financial covenants that limit Interline New Jersey’sability to incur additional indebtedness, pay dividends on its common stock orredeem, repurchase or retire its common stock or subordinated indebtedness,make certain investments, sell assets, and consolidate, merge or transferassets, and that require Interline New Jersey to maintain certain financialratios as of the last day of each fiscal quarter, including a minimum ratio ofconsolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”)to consolidated cash interest expense and a maximum ratio of net totalindebtedness to consolidated EBITDA. Interline New Jersey and the Company werein compliance with all covenants at December 29, 2006.

In connection with the new bank credit facility,Interline New Jersey is required to pay administrative fees, commitment fees,letter of credit issuance and administration fees and certain expenses and toprovide certain indemnities, all of which are customary for financings of thistype. The new bank credit facility also allows for certain incremental termloans and incremental commitments under the revolving credit facility which areavailable to Interline New Jersey to repay indebtedness and make acquisitionsif certain conditions, including various financial ratios, are met.

The debt instruments of Interline New Jersey,primarily the credit facility and the indenture governing the terms of the 81¤8% senior subordinated notes,contain significant restrictions on the payment of dividends and distributionsto the Company by Interline New Jersey. Interline New Jersey’s creditfacility allows it to pay dividends, make distributions to the Company or makeinvestments in the Company in an aggregate amount not to exceed $2.0 millionduring any fiscal year, so long as Interline New Jersey is not in default orwould be in default as a result of such payments. In addition, ordinary coursedistributions for overhead (up to $3.0 million annually) and taxes arepermitted, as are annual payments of up to $7.5 million in respect of theCompany’s 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 dayof the previous quarter. In addition, the indenture for the 81¤8% senior subordinated notesgenerally restricts the ability of Interline New Jersey to pay distributionsto the Company and to make advances to, or investments in, the Company to anamount generally equal to 50% of the net income of Interline New Jersey, plusan amount equal to the net proceeds from certain equity issuances, subject tocompliance with a leverage ratio and no default having occurred and continuing.The indenture also contains certain permitted exceptions including (1) allowingthe Company to pay its franchise taxes and other fees required to maintain itscorporate existence, to pay for general corporate and overhead expenses and topay expenses incurred in connection with certain financing, acquisition ordisposition transactions, in an aggregate amount not to exceed $10.0 millionper year; (2) allowing certain tax payments; and (3) allowing certainpermitted distributions up to $75 million. The new bank credit facility alsoallows for certain incremental term loans and incremental commitments under therevolving credit facility which are available to Interline New Jersey to repayindebtedness and make acquisitions if certain conditions, including variousfinancial ratios are met.

As of December 29, 2006, Interline New Jersey had$86.1 million available under its revolving credit facility. Total letters ofcredit issued under this facility as of December 29, 2006 were $13.9million. There were no borrowings under the revolving credit facility as of December 29,2006.

F-27

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The maturities oflong-term debt subsequent to December 29, 2006 are as follows (inthousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | $          | 2,416      |       |
| 2008                 |       | 2,406      |       |
| 2009                 |       | 2,360      |       |
| 2010                 |       | 5,599      |       |
| 2011                 |       | 2,306      |       |
| Thereafter           |       | 407,350    |       |
|                 |       | $          | 422,437    |       |

 

**10.   PREFERRED STOCK**

The Company has theauthority to issue 20,000,000 shares of preferred stock, par value $.01 pershare. At December 29, 2006, and December 30, 2005 there were nopreferred shares issued or outstanding. In connection with the reincorporationmerger and IPO transaction, as described above, the preferred stock ofInterline New Jersey was converted to company common stock.

**11.   STOCKHOLDERS’EQUITY**

***Common Stock***

During 2004 the Companycompleted its IPO described in Note 3. Significant Transactions above. Inaddition to the shares issued to the public at the IPO in December 2004,the Company issued 19,250,000 shares of its common stock to existingstockholders and senior management of Interline New Jersey in connection withthe reincorporation merger and the IPO. Existing holders of Interline NewJersey common stock received .01218 shares of the Company’s common stock pershare held or an aggregate of 66,667 shares of common stock. As a result of theconversion, the accompanying consolidated financial statements retroactivelyreflect a decrease in the numbers of outstanding shares of common stock. Theforegoing amount of outstanding shares of common stock excludes 167,000 sharesissued by the Company in January 2005 in connection with the IPO underwriters’exercise of their over-allotment option.

***Stockholder Loans***

In conjunction with theIPO transaction described above, the Company forgave $1.6 million ofstockholder loans included in stockholders’ equity and accordingly took acharge to operating income for this amount. As of December 16, 2004, thedate the loans were forgiven, and December 31, 2004, $375 and $345,respectively, of interest was accrued on the notes and was included as aportion of the stockholder loans in stockholders’ equity. As of December 29,2006 and December 30, 2005, there were no stockholder loans outstanding.

**12.   SHARE-BASEDCOMPENSATION**

***Stock Incentive Plans***

During 2000, Interline New Jersey established a StockAward Plan (the “2000 Plan”), under which Interline New Jersey may award atotal of 6,395 shares of common stock in the form of incentive stock options (whichmay be awarded to key employees only), nonqualified stock options, stockappreciation rights (“SARs”) and restricted stock awards, all of which may beawarded to directors, officers, key employees and consultants. The Company’scompensation committee will determine in its sole discretion whether a SAR issettled in cash, shares or a combination of cash and shares. In connection withthe Company’s IPO in December 2004, options to purchase shares of thecommon stock of Interline New Jersey were converted into options to purchaseshares of the Company’s common stock.

F-28

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During 2004, the Company adopted the 2004 EquityIncentive Plan, (the “2004 Plan”), under which the Company may award 3,175,000shares in the form of incentive stock options, nonqualified stock options,stock appreciation rights, or SARs, restricted stock, restricted stock units (“RSUs”),deferred stock units (“DSUs”) and stock bonus awards, all of which may beawarded to any employee, director, officer or consultant of the Company. In May 2006,the stockholders of the Company approved an amendment to the 2004 Plan wherebythe number of shares of the Company’s common stock reserved for issuance underthe 2004 Plan was increased by 2,000,000 shares and to further restrict therepricing of awards granted under the 2004 Plan without first obtainingapproval by the Company’s stockholders.

These plans allow theCompany to fulfill its incentive stock option, nonqualified stock option, SAR,restricted stock, RSU, DSU and stock bonus award obligations using unissued ortreasury shares.

***Stock Options***

Under the terms of the 2000 Plan, the exercise priceper share for an incentive stock option may not be less than 100% of the fairmarket value of a share of common stock on the grant date. The exercise price pershare for an incentive stock option granted to a person owning stock possessingmore than 10% of the total combined voting power of all classes of stock maynot be less than 110% of the fair market value of a share of common stock onthe grant date. These incentive stock options vest in 25% increments over fouryears and may not be exercisable after the expiration of ten years from thedate of grant.

Under the terms of the 2004 Plan, the exercise priceof the options will not be less than the fair market value of the common stockat the date of grant, generally vest in 25% increments over four years and maynot be exercisable after the expiration of seven or ten years from the date ofgrant.

As permitted by FAS123R, the fair values of stock options were estimated using the Black-Scholesoption-pricing model. Expected volatility is based on historical performance ofthe Company’s stock. The Company also uses historical data to estimate thetiming and amount of stock option exercises and forfeitures. The expected liferepresents the period of time that stock options are expected to remainoutstanding and is based on the contractual term of the stock options andexpected exercise behavior. The risk-free interest rate is based on U.S.Treasury zero-coupon issues with a remaining term equal to the expected optionlife assumed at the date of grant. The Black-Scholes weighted-averageassumptions were as follows:

| ** **               | ** ** | **Year Ended**   | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **December 29,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **               | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected  volatility     |       |                  | 27.7       | % |   |   | 28.7 | % |   |   | 31.0 | % |   |
| Expected  dividends      |       |                  | 0.0        | % |   |   | 0.0 | % |   |   | 0.0 | % |   |
| Risk-free  interest rate |       |                  | 4.9        | % |   |   | 4.0 | % |   |   | 3.7 | % |   |
| Expected life (in years) |       |                  | 5.0        |   |   |   | 5.0 |   |   |   | 5.0 |   |   |

 

The weighted average fair value of stock optionsgranted during the years ended December 29, 2006, December 30, 2005and December 31, 2004 were $7.96 per option, $6.39 per option and $4.53per option, respectively.

F-29

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A summary of stockoption activity as of December 29, 2006 and changes during the year thenended is presented below:

| ** **                                            | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**       | ** ** | ** **              | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**         | ** ** | ** **              | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**       | ** ** | **Aggregate**           | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual**     | ** ** | **Intrinsic**           | ** ** |
| **Options**                                           | ** ** | ** ** | ** ** | **Shares**    | ** ** | **Price**           | ** ** | **Term**                | ** ** | **Value (1)** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | ** **    | ** ** | **(in years)** | ** ** | **(in thousands)** | ** ** |
| Outstanding at  December 26, 2003                |       | 2,399      |       |          | $          | 486.32              |       |                    |       |   |   |   |   |   |   |   |
| Granted                                               |       | 2,465,682  |       |          | 17.16      |                |       |                    |       |   |   |   |   |   |   |
| Forfeited or expired                                  |       | (73        | )          |          | 41.05      |                |       |                    |       |   |   |   |   |   |   |
| Outstanding at  December 31, 2004                |       | 2,468,008  |       |          | 17.61      |                |       |                    |       |   |   |   |   |   |   |
| Granted                                               |       | 72,000     |       |          | 19.76      |                |       |                    |       |   |   |   |   |   |   |
| Exercised                                             |       | (112,849   | )          |          | 15.00      |                |       |                    |       |   |   |   |   |   |   |
| Forfeited or expired                                  |       | (153,132   | )          |          | 23.36      |                |       |                    |       |   |   |   |   |   |   |
| Outstanding at  December 30, 2005                |       | 2,274,027  |       |          | 17.42      |                |       |                    |       |   |   |   |   |   |   |
| Granted                                               |       | 442,502    |       |          | 23.66      |                |       |                    |       |   |   |   |   |   |   |
| Exercised                                             |       | (69,752    | )          |          | 15.00      |                |       |                    |       |   |   |   |   |   |   |
| Forfeited or expired                                  |       | (76,795    | )          |          | 15.44      |                |       |                    |       |   |   |   |   |   |   |
| Outstanding at  December 29, 2006                |       | 2,569,982  |       |          | $          | 18.62               |       |                    |       | 7.8 |   |   |   | $ | 12,373 |   |   |
| Vested or  expected to vest at December 29, 2006 |       | 2,560,488  |       |          | $          | 18.59               |       |                    |       | 7.8 |   |   |   | $ | 12,371 |   |   |
| Exercisable at  December 29, 2006                |       | 2,105,037  |       |          | $          | 17.42               |       |                    |       | 8.0 |   |   |   | $ | 12,312 |   |   |
|                                                       |            |            |            |               |            |                     |            |                         |            |  |  |  |  |  |  |  |  |  |  |

----

(1)          The aggregate intrinsicvalue represents the amount by which the fair value of the underlying stock atperiod end exceeds the stock option exercise price.

The total intrinsic value,the difference between the exercise price and the market price on the date ofexercise, of all stock options exercised during the years ended December 29,2006 and December 30, 2005 was $0.7 million and $0.6 million,respectively. Proceeds from stock options exercised during the years endedDecember 29, 2006 and December 30, 2005 was $1.0 million and$1.7 million, respectively. No stock options were exercised during theyear ended December 31, 2004. As of December 29, 2006, there was $2.7 millionof total unrecognized compensation cost related to unvested stock options. Thecost is expected to be recognized over a weighted-average period of 3.2 years.

***Restricted Stock, Restricted Stock Units and DeferredStock Units***

Shares of restricted stock granted under the 2004 Planto executives, employees and non-employee directors do not have an exercise price.The share-based compensation expense associated with the restricted stock isbased on the quoted market price of the Company’s shares of common stock on thedate of grant. The restricted stock awards for executives vest either on anaccelerated basis in one-third installments over three years provided thatcertain pre-established annual percentage increases in the Company’s earningsper share are attained or on the seventh anniversary of the date of grant. Onehalf of the restricted stock awards granted to employees vest evenly over threeyears and one half vest evenly over five years. The restricted stock awards fornon-employee directors vest evenly over two years or at the end of three years,depending on the grant.

RSUs granted under the 2004 Plan to management do nothave an exercise price. The share-based compensation expense associated withthe RSUs is based on the quoted market price of the Company’s shares of commonstock on the date of grant. Depending on the grant, (1) one half of theRSUs vest on an accelerated basis in two installments over two years providedthat certain pre-established annual percentage increases in the Company’searnings per share are attained and one half vest evenly over three years; or (2) onehalf of the RSUs vest on the second grant date anniversary if certain earningsbefore 

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interest, taxes,depreciation and amortization (“EBITDA”) targets are met and one half vest onthe third grant date anniversary if certain EBITDA targets are met.

DSUs granted under the 2004 Plan to non-employeedirectors do not have an exercise price. The share-based compensation expenseassociated with the DSUs is based on the quoted market price of the Company’sshares of common stock on the date of grant. DSUs vest on the grant date orevenly over the non-employee directors’ current service term; depending on thegrant. All DSUs are to be settled in shares of the Company’s common stock upontermination of the non-employee directors’ service or one year aftertermination of the non-employee directors’ service; depending on the grant.

In prior periods, unearned stock compensation wasrecorded as deferred compensation within stockholders’ equity at the date ofthe award based on the quoted market price of the Company’s common stock on thedate of grant and amortized to expense using the straight-line method from thegrant date through the vesting date. Upon adoption of FAS 123R, the $1.9million of deferred compensation as of December 30, 2005 was required to becharged against additional paid-in capital.

A summary status ofrestricted stock, RSUs and DSUs as of December 29, 2006, and changesduring the year then ended is presented below:

| ** **                             | ** ** | **Restricted Stock** | ** ** | **Restricted Stock Units** | ** ** | **Deferred Stock Units** | ** ** |
|----------------------------------------|------------|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                             | ** ** | ** **                | ** ** | **Weighted-**                        | ** ** | ** **                         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                             | ** ** | ** **                | ** ** | **Average**                          | ** ** | ** **                         | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                             | ** ** | ** **                | ** ** | **Grant Date**                  | ** ** | ** **                         | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                             | ** ** | **Shares**                | ** ** | **Fair Value**                  | ** ** | **Shares**                         | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Outstanding at  December 30, 2005 |       | 190,818                   |       |                                 | $          | 15.11                              |       |   | — |   |   | $ | — |   |   | — |   |   | $ | — |   |   |
| Granted                                |       | 17,800                    |       |                                 | 24.14      |                               |       | 198,145 |   |   | 23.35 |   |   | 12,924 |   |   | 25.17 |   |   |
| Vested                                 |       | (63,608                   | )          |                                 | 15.00      |                               |       | — |   |   | — |   |   | — |   |   | — |   |   |
| Forfeited                              |       | (7,675                    | )          |                                 | 15.00      |                               |       | (1,550 | ) |   | 23.36 |   |   | — |   |   | — |   |   |
| Outstanding at  December 29, 2006 |       | 137,335                   |       |                                 | $          | 16.34                              |       |   | 196,595 |   |   | $ | 23.35 |   |   | 12,924 |   |   | $ | 25.17 |   |   |

 

The total fair value of restricted stock vested duringthe year ended December 29, 2006 was $1.6 million. No restricted stockvested during the years ended December 30, 2005 and December 31,2004. As of December 29, 2006, there was $4.2 million of totalunrecognized compensation cost related to unvested restricted stock, RSUs andDSUs. The cost is expected to be recognized over a weighted-average period of1.8 years.

**13.   EMPLOYEE BENEFITPLANS**

***401(k) Plan***

The Company has qualifiedprofit sharing plans under Section 401(k) of the Internal RevenueCode. Pursuant to the 401(k) plan, the Company matches employeecontributions at a rate of 50% of the first 5% up to the statutory maximum of$5,500 per employee. Company contributions to the 401(k) plan were $1.6million, $1.2 million and $1.1 million for 2006, 2005 and 2004,respectively.

***Supplemental Executive Retirement Plan***

As a result of the AmSan acquisition, the Company hasa supplemental executive retirement plan (“AmSan SERP”). The AmSan SERP is a nonqualifiedplan that covers three AmSan employees. As a result of FAS 158, the Companydecreased the liability associated with the AmSan SERP as of December 29,2006 by $0.1 million and recorded the unrecognized gain in accumulated othercomprehensive income. The projected benefit obligation for the AmSan SERP as ofDecember 29, 2006 was $0.4 million and is included in other liabilities onthe Company’s consolidated balance sheet. The Company does not fund thisliability and no assets are held by the AmSan SERP. The accumulated benefitobligation for the AmSan SERP as of December 29, 2006 was$0.4 million.

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Thereconciliation of the projected benefit obligation for the AmSan SERP is asfollows (in thousands):

| Benefit  obligation at July 3, 2006      |   | $  | 402    |   |
|-----------------------------------------------|--------|----|--------|--------|
| Service cost                                  |   | 22 |   |
| Interest cost                                 |   | 11 |   |
| Benefit obligation at  December 29, 2006 |   | $  | 435    |   |

 

Thecomponents of net periodic benefit cost since the acquisition on July 3,2006 are as follows (in thousands):

| Service cost               |   | $   | 22     |   |
|----------------------------|--------|-----|--------|--------|
| Interest cost              |   | 11  |   |
| Gain recognized            |   | (15 | )      |
| Prior service  cost        |   | 4   |   |
| Total liabilities  assumed |   | $   | 22     |   |

 

Theweighted-average assumptions used to determine the projected benefit obligationas of December 29, 2006 and the net periodic benefit cost for the periodfrom July 3, 2006 to December 29, 2006 are as follows:

| Discount rate                  |   | 5.5 | % |
|--------------------------------|--------|-----|---|
| Rate of compensation  increase |   | 0.0 | % |

 

The following benefit payments are expected to be paidunder the AmSan SERP (in thousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | $          | 26         |       |
| 2008                 |       | 59         |       |
| 2009                 |       | 59         |       |
| 2010                 |       | 59         |       |
| 2011                 |       | 84         |       |
| Thereafter           |       | 550        |       |
|                 |       | $          | 837        |       |

 

The Company has onewhole-life insurance policy for each AmSan employee covered by the AmSan SERP.As of December 29, 2006, the cash surrender value of these policies was$0.5 million and is included in other assets on the Company’s consolidatedbalance sheet.

***Deferred Compensation Plan***

As a result of the AmSan acquisition, the Company hasa deferred compensation plan (“AmSan DCP”). The AmSan DCP is a nonqualifiedplan that covers three AmSan employees. Contributions and interest expense forthe AmSan DCP since the acquisition on July 3, 2006 were immaterial. Theliability for the AmSan DCP as of December 29, 2006 was $0.4 million andis included in other liabilities on the Company’s consolidated balance sheet.The Company does not fund this liability and no assets are held by the AmSanDCP.

F-32

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The followingbenefit payments, including interest and estimated future contributions, areexpected to be paid under the AmSan DCP (in thousands):

| **Fiscal Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       | $          | 90         |       |
| 2008                 |       | 21         |       |
| 2009                 |       | 22         |       |
| 2010                 |       | 23         |       |
| 2011                 |       | 42         |       |
| Thereafter           |       | 407        |       |
|                 |       | $          | 605        |       |

 

**14.   COMMITMENTSAND CONTINGENCIES**

***Lease Commitments***

The Company leasesits facilities under operating and capital leases expiring at various datesthrough 2016. Minimum future rental payments under these operating and capitalleases as of December 29, 2006 are as follows (in thousands):

| **Fiscal Year**                     | ** ** | ** ** | ** ** | **Operating** | ** ** | **Capital** | ** ** |
|------------------------------------------|------------|------------|------------|---------------|------------|-------------|------------|
| 2007                                     |       |       | $          | 17,492        |       |        | $          | 399 |   |
| 2008                                     |       |       | 13,108     |          |       | 285         |       |
| 2009                                     |       |       | 9,311      |          |       | 279         |       |
| 2010                                     |       |       | 5,864      |          |       | 234         |       |
| 2011                                     |       |       | 2,577      |          |       | 4           |       |
| Thereafter                               |       |       | 4,310      |          |       | —      |       |
| Total payments                           |       |       | $          | 52,662        |       |        | 1,201      |   |
| Less: Amount representing interest       |       |       |       |          |       | (211        | )          |
| Present value of  minimum lease payments |       |       |       |          |       | 990         |       |
| Less: Current portion                    |       |       |       |          |       | (307        | )          |
|                                     |       |       |       |          |       | $           | 683        |   |

 

In connection with the Copperfield acquisition, theCompany leases an office building from an entity in which an employee and hisfamily hold an ownership interest in the property. This lease was amended in November 2005and will expire on November 30, 2010, with an option to extend for oneadditional five year term. Minimum annual rent payable under this lease is $0.2million, plus all real estate taxes and assessments, and all operating costsrelated to the building. The total rent expense for this lease was $0.2 millionfor the year ended December 29, 2006 and $0.1 million from the period fromJuly 7, 2005 to December 30, 2005. The Company believes that theterms of the lease are no less favorable to it than could be obtained from anunaffiliated party.

In connection with the AmSan acquisition, the Companyleases six properties from entities in which employees and their families holdan ownership interest. One of these leases expires on December 31, 2007,two of these leases expire on December 31, 2008 and the remaining threeleases expire on January 31, 2009, March 25, 2009 andDecember 31, 2009, respectively. Minimum annual rent payable under theseleases is $1.3 million, including all real estate taxes and assessments, plusall operating costs related to the properties. The total rent expense for theseleases was $0.6 million for the period from July 3, 2006 to December 29,2006. The Company believes that the terms of these leases are no less favorableto it than could be obtained from unaffiliated parties.

Rent expense under alloperating leases was $25.1 million, $19.1 million, and $17.7 million for 2006,2005 and 2004, respectively. Certain of the leases provide that the Companypays taxes, insurance and other operating expenses applicable to the leasedpremises.

F-33

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***EmploymentAgreement***

The Company has employmentagreements with certain officers of various dates through 2006, unlessterminated earlier by the Company, at combined salaries of $5.3 million, plusbonuses and subject to adjustments.

***ContingentLiabilities***

At December 29, 2006and December 30, 2005, the Company was contingently liable for unusedletters of credit aggregating $13.9 million and $10.6 million, respectively.

***Legal Proceedings***

The Company is involved invarious legal proceedings in the ordinary course of its business that are notanticipated to have a material adverse effect on the Company’s results ofoperations or financial position.

**15.   PROVISIONFOR INCOME TAXES**

Theprovision (benefit) for income taxes for the years 2006, 2005 and 2004, is asfollows (in thousands):

| ** ** | ** ** | **Year Ended**   | ** ** |
|------------|------------|-----------------------|------------|
| ** ** | ** ** | **December 29,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** ** | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:   | ** ** |                  | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Federal    |       |                  | $          | 18,726 |   |   |   | $ | 17,686 |   |   |   | $ | 8,530 |   |   |
| State      |       |                  | 2,778      |   |   |   | 2,662 |   |   |   | 882 |   |   |
| Foreign    |       |                  | 190        |   |   |   | 351 |   |   |   | 496 |   |   |
|       |       |                  | 21,694     |   |   |   | 20,699 |   |   |   | 9,908 |   |   |
| Deferred:  |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Federal    |       |                  | (2,028     | ) |   |   | (2,371 | ) |   |   | 908 |   |   |
| State      |       |                  | (234       | ) |   |   | 4 |   |   |   | 871 |   |   |
| Foreign    |       |                  | 63         |   |   |   | 3 |   |   |   | (70 | ) |   |
|       |       |                  | (2,199     | ) |   |   | (2,364 | ) |   |   | 1,709 |   |   |
|       |       |                  | $          | 19,495 |   |   |   | $ | 18,335 |   |   |   | $ | 11,617 |   |   |

 

Thecomponents of income before income taxes were as follows (in thousands):

| ** **    | ** ** | **Year Ended**   | ** ** |
|---------------|------------|-----------------------|------------|
| ** **    | ** ** | **December 29,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **    | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       |                  | $          | 49,908 |   |   |   | $ | 45,984 |   |   |   | $ | 28,488 |   |   |
| Foreign       |       |                  | 772        |   |   |   | 1,150 |   |   |   | 1,230 |   |   |
| Total         |       |                  | $          | 50,680 |   |   |   | $ | 47,134 |   |   |   | $ | 29,718 |   |   |

 

The reconciliationof the provision for income taxes at the federal statutory tax rate to theprovision for income taxes is as follows:

| ** **                                  | ** ** | **Year Ended**   | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **December 29,** | ** ** | **December 30,** | ** ** | **December 31,** | ** ** |
| ** **                                  | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal statutory  tax rate                 |       |                  | 35.00      | % |   |   | 35.00 | % |   |   | 35.00 | % |   |
| State income  taxes, net of federal benefit |       |                  | 3.10       |   |   |   | 3.68 |   |   |   | 3.83 |   |   |
| Non-deductible  expenses                    |       |                  | 0.56       |   |   |   | 1.02 |   |   |   | 0.29 |   |   |
| Foreign income  taxes                       |       |                  | (0.03      | ) |   |   | — |   |   |   | (0.01 | ) |   |
| Other                                       |       |                  | (0.16      | ) |   |   | (0.81 | ) |   |   | (0.02 | ) |   |
|                                        |       |                  | 38.47      | % |   |   | 38.89 | % |   |   | 39.09 | % |   |

 

F-34

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Deferredincome taxes result primarily from temporary differences in the recognition ofcertain expenses for financial and income tax reporting purposes. Thecomponents of the Company’s deferred tax assets and liabilities at December 29,2006 and December 30, 2005 consist of the following (in thousands):

| ** **                     | ** ** | **December 29,** | ** ** | **December 30,** | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Deferred tax  assets:          | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Inventory                      |       |                  | $          | 4,789                 |       |   |   | $ | 4,250 |   |   |
| Bad debt reserves              |       |                  | 3,570      |                  |       |   | 2,842 |   |   |
| State taxes                    |       |                  | 1,810      |                  |       |   | 1,340 |   |   |
| Operating lease                |       |                  | —     |                  |       |   | 79 |   |   |
| Closing cost accrual           |       |                  | 1,919      |                  |       |   | 1,893 |   |   |
| Vacation accrual               |       |                  | 484        |                  |       |   | 352 |   |   |
| Vendor discounts               |       |                  | 1,462      |                  |       |   | 1,225 |   |   |
| Other                          |       |                  | 5,918      |                  |       |   | 4,094 |   |   |
| Total deferred tax assets      |       |                  | 19,952     |                  |       |   | 16,075 |   |   |
| Deferred tax  liabilities:     |       |                  |       |                  |       |   |   |   |   |
| Identifiable intangibles       |       |                  | (30,846    | )                     |       |   | (31,023 | ) |   |
| Depreciation                   |       |                  | (1,605     | )                     |       |   | (2,079 | ) |   |
| State taxes                    |       |                  | (3,686     | )                     |       |   | (3,584 | ) |   |
| Other                          |       |                  | (793       | )                     |       |   | (90 | ) |   |
| Total deferred tax liabilities |       |                  | (36,930    | )                     |       |   | (36,776 | ) |   |
| Net deferred tax  liabilities  |       |                  | $          | (16,978               | )          |   |   | $ | (20,701 | ) |   |

 

**16.   GUARANTORSUBSIDIARIES**

In June 2006, Interline New Jersey (the“Subsidiary Issuer”) issued $200.0 million of 81¤8% senior subordinated notes due2014 and entered into a $330.0 million bank credit facility (see Note 9. Debt).The 81¤8% senior subordinated notes andthe bank credit facility are fully and unconditionally guaranteed, jointly andseverally, on a subordinated basis by the Company (the “Parent Company”) andall of Interline New Jersey’s 100% owned domestic subsidiaries: WilmarHoldings, Inc., Wilmar Financial, Inc., Glenwood Acquisition LLC andAmSan LLC (the “Guarantor Subsidiaries”). The guarantees by the subsidiaryguarantors are senior to any of their existing and future subordinatedobligations, equal in right of payment with any of their existing and futuresenior subordinated indebtedness and subordinated to any of their existing andfuture senior indebtedness.

The Company is a holding company whose only asset isthe stock of its subsidiaries. The Company conducts virtually all of itsbusiness operations through Interline New Jersey. Accordingly, the Company’s onlymaterial sources of cash are dividends and distributions with respect to itsownership interests in Interline New Jersey that are derived from the earningsand cash flow generated by Interline New Jersey.

The following tables set forth, on a condensedconsolidating basis, the balance sheets, statements of operations andstatements of cash flows for the Parent Company, Subsidiary Issuer andGuarantor Subsidiaries for all financial statement periods presented in theCompany’s consolidated financial statements. The Subsidiary Issuer does notallocate integration expenses, corporate overhead or other expenses for sharedservices to the Guarantor Subsidiaries; therefore, the following tables do notreflect any such allocation.

F-35

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**CONDENSEDCONSOLIDATING BALANCE SHEETAs of December 29, 2006**

| ** **                                       | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|
| **ASSETS**                                       | ** ** | ** **          | ** ** | ** **             | ** ** |                        | ** ** | ** **                     |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Assets:                                  |       |                |       |                   |       |                        |       | ** **                     |       |             |       |   |   |   |   | ** ** |   |
| Cash and cash equivalents                        |       | $                   | —     |                   | $          | 8,783                       |       |                           | $          | 15               | ** ** |   |   | $ | (1,946 | ) |   |   | $ | 6,852 | ** ** |   |
| Accounts receivable—trade                   |       | —              |       | 119,118                |       |                        | 23,783     | ** **                     |       |             | —     |   |   |   | 142,901 | ** ** |   |
| Inventory                                        |       | —              |       | 183,023                |       |                        | 18,639     | ** **                     |       |             | —     |   |   |   | 201,662 | ** ** |   |
| Intercompany receivable                          |       | —              |       | —                 |       |                        | 103,564    | ** **                     |       |             | (103,564   | ) |   |   | — | ** ** |   |
| Other current assets                             |       | —              |       | 35,385                 |       |                        | 5,351      | ** **                     |       |             | —     |   |   |   | 40,736 | ** ** |   |
| Total current assets                             |       | —              |       | 346,309                |       |                        | 151,352    | ** **                     |       |             | (105,510   | ) |   |   | 392,151 | ** ** |   |
| Property and equipment, net                      |       | —              |       | 29,164                 |       |                        | 2,590      | ** **                     |       |             | —     |   |   |   | 31,754 | ** ** |   |
| Goodwill                                         |       | —              |       | 248,074                |       |                        | 65,003     | ** **                     |       |             | —     |   |   |   | 313,077 | ** ** |   |
| Other intangible  assets, net                    |       | —              |       | 100,596                |       |                        | 42,844     | ** **                     |       |             | —     |   |   |   | 143,440 | ** ** |   |
| Investment in  subsidiaries                      |       | 320,679             |       | 176,523                |       |                        | —     | ** **                     |       |             | (497,202   | ) |   |   | — | ** ** |   |
| Other assets                                     |       | —              |       | 6,186                  |       |                        | 8,570      | ** **                     |       |             | (4,609     | ) |   |   | 10,147 | ** ** |   |
| Total assets                                     |       | $                   | 320,679    |                   | $          | 906,852                     |       |                           | $          | 270,359          | ** ** |   |   | $ | (607,321 | ) |   |   | $ | 890,569 | ** ** |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   | ** ** | ** **          | ** ** | ** **             | ** ** |                        | ** ** | ** **                     |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Liabilities:                             |       |                |       |                   |       |                        |       | ** **                     |       |             |       |   |   |   |   | ** ** |   |
| Accounts payable                                 |       | $                   | —     |                   | $          | 53,976                      |       |                           | $          | 15,463           | ** ** |   |   | $ | (1,946 | ) |   |   | $ | 67,493 | ** ** |   |
| Accrued expenses and other current liabilities   |       | —              |       | 31,181                 |       |                        | 13,543     | ** **                     |       |             | —     |   |   |   | 44,724 | ** ** |   |
| Intercompany payable                             |       | —              |       | 52,060                 |       |                        | —     | ** **                     |       |             | (52,060    | ) |   |   | — | ** ** |   |
| Debt and capital lease—short-term           |       | —              |       | 2,594                  |       |                        | 129        | ** **                     |       |             | —     |   |   |   | 2,723 | ** ** |   |
| Total current liabilities                        |       | —              |       | 139,811                |       |                        | 29,135     | ** **                     |       |             | (54,006    | ) |   |   | 114,940 | ** ** |   |
| Long-Term  Liabilities:                          |       |                |       |                   |       |                        |       | ** **                     |       |             |       |   |   |   |   | ** ** |   |
| Term debt and capital lease—long-term       |       | —              |       | 415,838                |       |                        | 3,495      | ** **                     |       |             | —     |   |   |   | 419,333 | ** ** |   |
| Other liabilities                                |       | —              |       | 34,799                 |       |                        | 818        | ** **                     |       |             | —     |   |   |   | 35,617 | ** ** |   |
| Total liabilities                                |       | —              |       | 590,448                |       |                        | 33,448     | ** **                     |       |             | (54,006    | ) |   |   | 569,890 | ** ** |   |
| Senior preferred stock                           |       | —              |       | 501,763                |       |                        | —     | ** **                     |       |             | (501,763   | ) |   |   | — | ** ** |   |
| Stockholders’ equity (deficit)              |       | 320,679             |       | (185,359               | )          |                        | 236,911    | ** **                     |       |             | (51,552    | ) |   |   | 320,679 | ** ** |   |
| Total liabilities  and stockholders’ equity |       | $                   | 320,679    |                   | $          | 906,852                     |       |                           | $          | 270,359          | ** ** |   |   | $ | (607,321 | ) |   |   | $ | 890,569 | ** ** |   |

 

F-36

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**CONDENSEDCONSOLIDATING BALANCE SHEETAs of December 30, 2005**

| ** **                                       | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|
| **ASSETS**                                       | ** ** | ** **          | ** ** | ** **             | ** ** |                        | ** ** | ** **                     |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Assets:                                  |       |                |       |                   |       |                        |       | ** **                     |       |             |       |   |   |   |   | ** ** |   |
| Cash and cash equivalents                        |       | $                   | —     |                   | $          | 2,610                       |       |                           | $          | 348              | ** ** |   |   | $ | — |   |   |   | $ | 2,958 | ** ** |   |
| Accounts receivable—trade                   |       | —              |       | 108,926                |       |                        | 4,345      | ** **                     |       |             | —     |   |   |   | 113,271 | ** ** |   |
| Inventory                                        |       | —              |       | 156,696                |       |                        | 8,586      | ** **                     |       |             | —     |   |   |   | 165,282 | ** ** |   |
| Intercompany receivable                          |       | —              |       | —                 |       |                        | 17,518     | ** **                     |       |             | (17,518    | ) |   |   | — | ** ** |   |
| Other current assets                             |       | —              |       | 30,061                 |       |                        | 1,545      | ** **                     |       |             | —     |   |   |   | 31,606 | ** ** |   |
| Total current assets                             |       | —              |       | 298,293                |       |                        | 32,342     | ** **                     |       |             | (17,518    | ) |   |   | 313,117 | ** ** |   |
| Property and equipment, net                      |       | —              |       | 28,255                 |       |                        | 1,610      | ** **                     |       |             | —     |   |   |   | 29,865 | ** ** |   |
| Goodwill                                         |       | —              |       | 212,682                |       |                        | 36,892     | ** **                     |       |             | —     |   |   |   | 249,574 | ** ** |   |
| Other intangible  assets, net                    |       | —              |       | 78,288                 |       |                        | 25,956     | ** **                     |       |             | —     |   |   |   | 104,244 | ** ** |   |
| Investment in  subsidiaries                      |       | 284,542             |       | 117,159                |       |                        | —     | ** **                     |       |             | (401,701   | ) |   |   | — | ** ** |   |
| Other assets                                     |       | —              |       | 5,694                  |       |                        | 7,550      | ** **                     |       |             | (4,275     | ) |   |   | 8,969 | ** ** |   |
| Total assets                                     |       | $                   | 284,542    |                   | $          | 740,371                     |       |                           | $          | 104,350          | ** ** |   |   | $ | (423,494 | ) |   |   | $ | 705,769 | ** ** |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   | ** ** | ** **          | ** ** | ** **             | ** ** |                        | ** ** | ** **                     |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Liabilities:                             |       |                |       |                   |       |                        |       | ** **                     |       |             |       |   |   |   |   | ** ** |   |
| Accounts payable                                 |       | $                   | —     |                   | $          | 63,765                      |       |                           | $          | 5,417            | ** ** |   |   | $ | — |   |   |   | $ | 69,182 | ** ** |   |
| Accrued expenses and other current liabilities   |       | —              |       | 27,800                 |       |                        | 3,114      | ** **                     |       |             | —     |   |   |   | 30,914 | ** ** |   |
| Intercompany payable                             |       | —              |       | 47,818                 |       |                        | —     | ** **                     |       |             | (47,818    | ) |   |   | — | ** ** |   |
| Debt and capital lease—short-term           |       | —              |       | 4,400                  |       |                        | 452        | ** **                     |       |             | —     |   |   |   | 4,852 | ** ** |   |
| Total current liabilities                        |       | —              |       | 143,783                |       |                        | 8,983      | ** **                     |       |             | (47,818    | ) |   |   | 104,948 | ** ** |   |
| Long-Term  Liabilities:                          |       |                |       |                   |       |                        |       | ** **                     |       |             |       |   |   |   |   | ** ** |   |
| Term debt and capital lease—long-term       |       | —              |       | 277,400                |       |                        | 4,233      | ** **                     |       |             | —     |   |   |   | 281,633 | ** ** |   |
| Other liabilities                                |       | —              |       | 34,646                 |       |                        | —     | ** **                     |       |             | —     |   |   |   | 34,646 | ** ** |   |
| Total liabilities                                |       | —              |       | 455,829                |       |                        | 13,216     | ** **                     |       |             | (47,818    | ) |   |   | 421,227 | ** ** |   |
| Senior preferred stock                           |       | —              |       | 437,420                |       |                        | —     | ** **                     |       |             | (437,420   | ) |   |   | — | ** ** |   |
| Stockholders’ equity (deficit)              |       | 284,542             |       | (152,878               | )          |                        | 91,134     | ** **                     |       |             | 61,744     |   |   |   | 284,542 | ** ** |   |
| Total liabilities  and stockholders’ equity |       | $                   | 284,542    |                   | $          | 740,371                     |       |                           | $          | 104,350          | ** ** |   |   | $ | (423,494 | ) |   |   | $ | 705,769 | ** ** |   |

 

F-37

----

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONSFor the fiscal year ended December 29, 2006**

| ** **                                             | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries(1)** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                              |       | $                   | —     |                   | $          | 937,818                        |       |                           | $          | 129,752          |       |   |   | $ | — |   |   |   | $ | 1,067,570 |   |   |
| Cost of sales                                          |       | —              |       | 579,020                |       |                           | 79,678     |                           |       |             | —     |   |   |   | 658,698 |   |   |
| Gross profit                                           |       | —              |       | 358,798                |       |                           | 50,074     |                           |       |             | —     |   |   |   | 408,872 |   |   |
| Operating  Expenses:                                   |       |                |       |                   |       |                           |       |                           |       |             |       |   |   |   |   |   |   |
| Selling, general and administrative expenses           |       | —              |       | 255,448                |       |                           | 37,304     |                           |       |             | —     |   |   |   | 292,752 |   |   |
| Depreciation and amortization                          |       | —              |       | 13,075                 |       |                           | 1,352      |                           |       |             | —     |   |   |   | 14,427 |   |   |
| Equity earnings of subsidiaries                        |       | (50,680             | )          | (16,790                | )          |                           | —     |                           |       |             | 67,470     |   |   |   | — |   |   |
| Total operating expense                                |       | (50,680             | )          | 251,733                |       |                           | 38,656     |                           |       |             | 67,470     |   |   |   | 307,179 |   |   |
| Operating income                                       |       | 50,680              |       | 107,065                |       |                           | 11,418     |                           |       |             | (67,470    | ) |   |   | 101,693 |   |   |
| Loss on extinguishment of debt                         |       | —              |       | (20,843                | )          |                           | —     |                           |       |             | —     |   |   |   | (20,843 | ) |   |
| Interest  (expense) income, net                        |       | —              |       | (45,551                | )          |                           | 14,775     |                           |       |             | —     |   |   |   | (30,776 | ) |   |
| Other income                                           |       | —              |       | 606                    |       |                           | 606        |                           |       |             | (606       | ) |   |   | 606 |   |   |
| Income before income taxes                             |       | 50,680              |       | 41,277                 |       |                           | 26,799     |                           |       |             | (68,076    | ) |   |   | 50,680 |   |   |
| Income tax  provision                                  |       | 19,495              |       | 10,092                 |       |                           | 9,403      |                           |       |             | (19,495    | ) |   |   | 19,495 |   |   |
| Net income                                             |       | 31,185              |       | 31,185                 |       |                           | 17,396     |                           |       |             | (48,581    | ) |   |   | 31,185 |   |   |
| Preferred stock  dividends                             |       | —              |       | (64,343                | )          |                           | —     |                           |       |             | 64,343     |   |   |   | — |   |   |
| Net income (loss)  attributable to common stockholders |       | $                   | 31,185     |                   | $          | (33,158                        | )          |                           | $          | 17,396           |       |   |   | $ | 15,762 |   |   |   | $ | 31,185 |   |   |

----

(1)          The Subsidiary Issuerdoes not allocate integration expenses, corporate overhead or other expensesfor shared services to the Guarantor Subsidiaries; therefore, the results forthe Guarantor Subsidiaries do not reflect any such allocation.

F-38

----

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONSFor the fiscal year ended December 30, 2005**

| ** **                                             | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries(1)** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                              |       |                | $          | —                 |       |                           | $          | 817,678                        |       |             | $          | 34,250 |   |   |   | $ | — |   |   |   | $ | 851,928 |   |   |
| Cost of sales                                          |       |                | —     |                   |       | 507,785                        |       |                           | 18,549     |             |       |   | — |   |   |   | 526,334 |   |   |
| Gross profit                                           |       |                | —     |                   |       | 309,893                        |       |                           | 15,701     |             |       |   | — |   |   |   | 325,594 |   |   |
| Operating  Expenses:                                   |       |                |       |                   |       |                           |       |                           |       |             |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses           |       |                | 932        |                   |       | 221,620                        |       |                           | 7,975      |             |       |   | — |   |   |   | 230,527 |   |   |
| Depreciation and amortization                          |       |                | —     |                   |       | 12,830                         |       |                           | 219        |             |       |   | — |   |   |   | 13,049 |   |   |
| Equity earnings of subsidiaries                        |       |                | (48,066    | )                      |       | (14,492                        | )          |                           | —     |             |       |   | 62,558 |   |   |   | — |   |   |
| Total operating expense                                |       |                | (47,134    | )                      |       | 219,958                        |       |                           | 8,194      |             |       |   | 62,558 |   |   |   | 243,576 |   |   |
| Operating income                                       |       |                | 47,134     |                   |       | 89,935                         |       |                           | 7,507      |             |       |   | (62,558 | ) |   |   | 82,018 |   |   |
| Loss on extinguishment of debt                         |       |                | —     |                   |       | (10,340                        | )          |                           | —     |             |       |   | — |   |   |   | (10,340 | ) |   |
| Interest  (expense) income, net                        |       |                | —     |                   |       | (40,573                        | )          |                           | 15,390     |             |       |   | — |   |   |   | (25,183 | ) |   |
| Other income                                           |       |                | —     |                   |       | 639                            |       |                           | 639        |             |       |   | (639 | ) |   |   | 639 |   |   |
| Income before income taxes                             |       |                | 47,134     |                   |       | 39,661                         |       |                           | 23,536     |             |       |   | (63,197 | ) |   |   | 47,134 |   |   |
| Income tax  provision                                  |       |                | 18,335     |                   |       | 9,930                          |       |                           | 8,405      |             |       |   | (18,335 | ) |   |   | 18,335 |   |   |
| Net income                                             |       |                | 28,799     |                   |       | 29,731                         |       |                           | 15,131     |             |       |   | (44,862 | ) |   |   | 28,799 |   |   |
| Preferred stock  dividends                             |       |                | —     |                   |       | (56,092                        | )          |                           | —     |             |       |   | 56,092 |   |   |   | — |   |   |
| Net income (loss)  attributable to common stockholders |       |                | $          | 28,799                 |       |                           | $          | (26,361                        | )          |             | $          | 15,131 |   |   |   | $ | 11,230 |   |   |   | $ | 28,799 |   |   |

 

(1)          The Subsidiary Issuerdoes not allocate integration expenses, corporate overhead or other expensesfor shared services to the Guarantor Subsidiaries; therefore, the results forthe Guarantor Subsidiaries do not reflect any such allocation.

F-39

----

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONSFor the fiscal year ended December 31, 2004**

| ** **                                             | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries(1)** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------|------------|
| Net sales                                              |       | $                   | —     |                   | $          | 743,905                        |       |                           | $          | —           |       |   |   | $ | — |   |   |   | $ | 743,905 |   |   |
| Cost of sales                                          |       | —              |       | 458,516                |       |                           | —     |                           |       |             | —     |   |   |   | 458,516 |   |   |
| Gross profit                                           |       | —              |       | 285,389                |       |                           | —     |                           |       |             | —     |   |   |   | 285,389 |   |   |
| Operating  Expenses:                                   |       |                |       |                   |       |                           |       |                           |       |             |       |   |   |   |   |   |   |
| Selling, general and administrative expenses           |       | —              |       | 211,281                |       |                           | 18         |                           |       |             | —     |   |   |   | 211,299 |   |   |
| Depreciation and amortization                          |       | —              |       | 12,600                 |       |                           | —     |                           |       |             | —     |   |   |   | 12,600 |   |   |
| Equity earnings of subsidiaries                        |       | (29,718             | )          | (8,102                 | )          |                           | —     |                           |       |             | 37,820     |   |   |   | — |   |   |
| Total operating expense                                |       | (29,718             | )          | 215,779                |       |                           | 18         |                           |       |             | 37,820     |   |   |   | 223,899 |   |   |
| Operating income                                       |       | 29,718              |       | 69,610                 |       |                           | (18        | )                              |       |             | (37,820    | ) |   |   | 61,490 |   |   |
| Interest (expense) income, net                         |       | —              |       | (52,218                | )          |                           | 12,420     |                           |       |             | —     |   |   |   | (39,798 | ) |   |
| Other income                                           |       | —              |       | 8,026                  |       |                           | 454        |                           |       |             | (454       | ) |   |   | 8,026 |   |   |
| Income before income taxes                             |       | 29,718              |       | 25,418                 |       |                           | 12,856     |                           |       |             | (38,274    | ) |   |   | 29,718 |   |   |
| Income tax  provision                                  |       | 11,617              |       | 7,317                  |       |                           | 4,300      |                           |       |             | (11,617    | ) |   |   | 11,617 |   |   |
| Net income                                             |       | 18,101              |       | 18,101                 |       |                           | 8,556      |                           |       |             | (26,657    | ) |   |   | 18,101 |   |   |
| Preferred stock  dividends                             |       | (54,389             | )          | (56,715                | )          |                           | —     |                           |       |             | 56,715     |   |   |   | (54,389 | ) |   |
| Net (loss) income attributable  to common stockholders |       | $                   | (36,288    | )                      | $          | (38,614                        | )          |                           | $          | 8,556            |       |   |   | $ | 30,058 |   |   |   | $ | (36,288 | ) |   |

 

(1)          The Subsidiary Issuerdoes not allocate integration expenses, corporate overhead or other expensesfor shared services to the Guarantor Subsidiaries; therefore, the results forthe Guarantor Subsidiaries do not reflect any such allocation.

F-40

----

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWFor the year ended December 29, 2006**

| ** **                                                                       | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|
| Net cash provided  by operating activities                                       |       |                | $          | —                 |       |                        | $          | 25,512                         |       |             | $          | 4,434 |   |   |   | $ | — |   |   |   | $ | 29,946 |   |   |
| Cash Flows from  Investing Activities:                                           |       |                |       |                   |       |                        |       |                           |       |             |       |   |   |   |   |   |   |   |   |
| Purchase of property and equipment, net                                          |       |                | —     |                   |       | (7,610                      | )          |                           | (203       | )                |       |   | — |   |   |   | (7,813 | ) |   |
| Purchase of businesses, net of cash acquired                                     |       |                | —     |                   |       | (133,727                    | )          |                           | 2,242      |             |       |   | — |   |   |   | (131,485 | ) |   |
| Net cash (used in) provided by investing activities                              |       |                | —     |                   |       | (141,337                    | )          |                           | 2,039      |             |       |   | — |   |   |   | (139,298 | ) |   |
| Cash Flows from  Financing Activities:                                           |       |                |       |                   |       |                        |       |                           |       |             |       |   |   |   |   |   |   |   |   |
| Repayment of debt and capital lease obligations                                  |       |                | —     |                   |       | (163,407                    | )          |                           | (40        | )                |       |   | — |   |   |   | (163,447 | ) |   |
| Repayment of 111¤2%  senior subordinated notes                              |       |                | —     |                   |       | (130,000                    | )          |                           | —     |             |       |   | — |   |   |   | (130,000 | ) |   |
| Payment of tender and redemption premiums                                        |       |                | —     |                   |       | (13,663                     | )          |                           | —     |             |       |   | — |   |   |   | (13,663 | ) |   |
| Proceeds from issuance of 81¤8% senior subordinated  notes, net of discount |       |                | —     |                   |       | 198,566                     |       |                           | —     |             |       |   | — |   |   |   | 198,566 |   |   |
| Proceeds from issuance of term debt                                              |       |                | —     |                   |       | 230,000                     |       |                           | —     |             |       |   | — |   |   |   | 230,000 |   |   |
| Payment of debt issuance costs                                                   |       |                | —     |                   |       | (9,724                      | )          |                           | —     |             |       |   | — |   |   |   | (9,724 | ) |   |
| Other                                                                            |       |                | —     |                   |       | 8,260                       |       |                           | (6,766     | )                |       |   | — |   |   |   | 1,494 |   |   |
| Net cash provided by (used in) financing activities                              |       |                | —     |                   |       | 120,032                     |       |                           | (6,806     | )                |       |   | — |   |   |   | 113,226 |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                    |       |                | —     |                   |       | 20                          |       |                           | —     |             |       |   | — |   |   |   | 20 |   |   |
| Net increase  (decrease) in cash and cash equivalents                            |       |                | —     |                   |       | 4,227                       |       |                           | (333       | )                |       |   | — |   |   |   | 3,894 |   |   |
| Cash and cash  equivalents at beginning of period                                |       |                | —     |                   |       | 2,610                       |       |                           | 348        |             |       |   | — |   |   |   | 2,958 |   |   |
| Cash and cash  equivalents at end of period                                      |       |                | $          | —                 |       |                        | $          | 6,837                          |       |             | $          | 15 |   |   |   | $ | — |   |   |   | $ | 6,852 |   |   |

 

F-41

----

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWFor the year ended December 30, 2005**

| ** **                                                    | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|
| Net cash (used  in) provided by operating activities          |       |                | $          | (932                   | )          |                        |       | $                              | 39,053     |             |       |   | $ | 717 |   |   |   | $ | — |   |   |   | $ | 38,838 |   |   |
| Cash Flows from  Investing Activities:                        |       |                |       |                   |       |                        |       |                           |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Purchase of property and equipment, net                       |       |                | —     |                   |       |                        | (7,818     | )                              |       |             | (102       | ) |   |   | — |   |   |   | (7,920 | ) |   |
| Purchase of businesses, net of cash acquired                  |       |                | —     |                   |       |                        | (73,213    | )                              |       |             | —     |   |   |   | — |   |   |   | (73,213 | ) |   |
| Net cash used in investing activities                         |       |                | —     |                   |       |                        | (81,031    | )                              |       |             | (102       | ) |   |   | — |   |   |   | (81,133 | ) |   |
| Cash Flows from  Financing Activities:                        |       |                |       |                   |       |                        |       |                           |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of debt and capital lease obligations               |       |                | —     |                   |       |                        | (68,200    | )                              |       |             | (335       | ) |   |   | — |   |   |   | (68,535 | ) |   |
| Payment of tender and redemption premiums                     |       |                | —     |                   |       |                        | (8,050     | )                              |       |             | —     |   |   |   | — |   |   |   | (8,050 | ) |   |
| Proceeds from issuance of term debt                           |       |                | —     |                   |       |                        | 50,000     |                           |       |             | —     |   |   |   | — |   |   |   | 50,000 |   |   |
| Payment of debt issuance costs                                |       |                | —     |                   |       |                        | (838       | )                              |       |             | —     |   |   |   | — |   |   |   | (838 | ) |   |
| Other                                                         |       |                | 932        |                   |       |                        | 2,429      |                           |       |             | —     |   |   |   | — |   |   |   | 3,361 |   |   |
| Net cash provided by (used in) financing activities           |       |                | 932        |                   |       |                        | (24,659    | )                              |       |             | (335       | ) |   |   | — |   |   |   | (24,062 | ) |   |
| Effect of exchange rate changes on cash and cash  equivalents |       |                | —     |                   |       |                        | 137        |                           |       |             | —     |   |   |   | — |   |   |   | 137 |   |   |
| Net (decrease)  increase in cash and cash equivalents         |       |                | —     |                   |       |                        | (66,500    | )                              |       |             | 280        |   |   |   | — |   |   |   | (66,220 | ) |   |
| Cash and cash  equivalents at beginning of period             |       |                | —     |                   |       |                        | 69,110     |                           |       |             | 68         |   |   |   | — |   |   |   | 69,178 |   |   |
| Cash and cash  equivalents at end of period                   |       |                | $          | —                 |       |                        |       | $                              | 2,610      |             |       |   | $ | 348 |   |   |   | $ | — |   |   |   | $ | 2,958 |   |   |

 

F-42

----

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWFor the year ended December 31, 2004**

| ** **                                                    | ** ** | **Parent  Company** | ** ** | **Subsidiary  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Consolidating  Adjustments** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|
| Net cash (used  in) provided by operating activities          |       | $                   | —     |                   | $          | (1,386                      | )          |                           | $          | (17              | )          |   |   | $ | — |   |   |   | $ | (1,403 | ) |   |
| Cash Flows from  Investing Activities:                        |       |                |       |                   |       |                        |       |                           |       |             |       |   |   |   |   |   |   |
| Purchase of property and equipment, net                       |       | —              |       | (6,763                 | )          |                        | —     |                           |       |             | —     |   |   |   | (6,763 | ) |   |
| Purchase of businesses, net of cash acquired                  |       | (170,552            | )          | (566                   | )          |                        | —     |                           |       |             | 170,552    |   |   |   | (566 | ) |   |
| Net cash used in investing activities                         |       | (170,552            | )          | (7,329                 | )          |                        | —     |                           |       |             | 170,552    |   |   |   | (7,329 | ) |   |
| Cash Flows from  Financing Activities:                        |       |                |       |                   |       |                        |       |                           |       |             |       |   |   |   |   |   |   |
| Repayment of debt and capital lease obligations               |       | —              |       | (38,250                | )          |                        | —     |                           |       |             | —     |   |   |   | (38,250 | ) |   |
| Payment of debt issuance costs                                |       | —              |       | (1,296                 | )          |                        | —     |                           |       |             | —     |   |   |   | (1,296 | ) |   |
| Proceeds from sale of common stock                            |       | 174,609             |       | 174,609                |       |                        | —     |                           |       |             | (174,609   | ) |   |   | 174,609 |   |   |
| Redemption of preferred stock                                 |       | —              |       | (55,000                | )          |                        | —     |                           |       |             | —     |   |   |   | (55,000 | ) |   |
| Initial public offering costs                                 |       | (4,057              | )          | (4,057                 | )          |                        | —     |                           |       |             | (4,057     | ) |   |   | (4,057 | ) |   |
| Net cash provided by (used in) financing activities           |       | 170,552             |       | 76,006                 |       |                        | —     |                           |       |             | (170,557   | ) |   |   | 76,006 |   |   |
| Effect of exchange rate changes on cash and cash  equivalents |       | —              |       | 292                    |       |                        | —     |                           |       |             | —     |   |   |   | 292 |   |   |
| Net increase (decrease) in cash and cash equivalents          |       | —              |       | 67,583                 |       |                        | (17        | )                              |       |             | —     |   |   |   | 67,566 |   |   |
| Cash and cash  equivalents at beginning of period             |       | —              |       | 1,527                  |       |                        | 85         |                           |       |             | —     |   |   |   | 1,612 |   |   |
| Cash and cash  equivalents at end of period                   |       | $                   | —     |                   | $          | 69,110                      |       |                           | $          | 68               |       |   |   | $ | — |   |   |   | $ | 69,178 |   |   |

 

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**17.**   QUARTERLYRESULTS OF OPERATIONS (UNAUDITED)

Thefollowing is a summary of our quarterly results of operations for the yearsended December 29, 2006 and December 30, 2005 (in thousands, exceptper share amounts):

| ** **                  | ** ** | **Quarter** | ** ** |
|-----------------------------|------------|-------------|------------|
| ** **                  | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| **2006**                    | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                   |       | $           | 224,674    |   | $ | 235,409 |   | $ | 314,182 |   | $ | 293,305 |   |
| Gross profit                |       | 85,708      |       | 89,496 |   | 120,083 |   | 113,585 |   |
| Net income  (loss)(1)       |       | 8,441       |       | (2,865 | ) | 14,219 |   | 11,390 |   |
| Earnings (Loss) Per  Share: |       |        |       |   |   |   |   |   |   |
| Basic(2)                    |       | $           | 0.26       |   | $ | (0.09 | ) | $ | 0.44 |   | $ | 0.35 |   |
| Diluted                     |       | $           | 0.26       |   | $ | (0.09 | ) | $ | 0.43 |   | $ | 0.35 |   |
| **2005**                    |       |        |       |   |   |   |   |   |   |
| Net sales                   |       | $           | 196,491    |   | $ | 203,666 |   | $ | 225,811 |   | $ | 225,960 |   |
| Gross profit                |       | 75,486      |       | 77,255 |   | 86,163 |   | 86,690 |   |
| Net income(3)               |       | 1,393       |       | 8,565 |   | 9,718 |   | 9,123 |   |
| Earnings Per Share:         |       |        |       |   |   |   |   |   |   |
| Basic(2)                    |       | $           | 0.04       |   | $ | 0.27 |   | $ | 0.30 |   | $ | 0.28 |   |
| Diluted(2)                  |       | $           | 0.04       |   | $ | 0.26 |   | $ | 0.30 |   | $ | 0.28 |   |

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(1)          During the secondquarter of 2006, the Company recorded a $20.7 million loss on extinguishment ofdebt, consisting of the write-off of deferred financing costs of $7.0 millionand the premium of $13.7 million on the $130.0 million redemption of the 111⁄2%senior subordinated notes, using proceeds from the issuance of $198.6 millionof 81¤8% senior subordinated notes, netof discount.

(2)          Earnings per commonshare for each quarter is computed using the weighted-average number of sharesoutstanding during that quarter while earnings per common share for the fullyear is computed using the weighted-average number of shares outstanding duringthe year. Thus, the sum of the four quarters’ earnings per common share may notequal the full-year earnings per common share.

(3)          During the first quarterof 2005, the Company recorded a $10.3 million loss on extinguishment of debt,consisting of the write-off of deferred financing costs of $2.3 million and thepremium of $8.1 million on the $70.0 million partial redemption of the 111⁄2%senior subordinated notes, using proceeds from the December 2004 IPOtransaction. During the third quarter of 2005, certain of the Company’sstockholders sold 8,912,500 shares of the Company’s common stock. In connectionwith this offering the Company did not receive any proceeds and incurred $0.9million in expense, which amounts were recorded by the Company as an expense.

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