##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
 Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file
    number: 0-10546
 LAWSON PRODUCTS, INC.
 (Exact Name of Registrant as
    Specified in Charter)
  Delaware

36-2229304(State or other jurisdiction
    of

(I.R.S. Employerincorporation or
    organization)

Identification
    No.)   1666 East
    Touhy Avenue, Des Plaines, Illinois 60018 (Address
    of principal executive offices)
  Registrants telephone number, including area code:
 (847) 827-9666
 Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $1.00 par value

The NASDAQ Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
 None
 (Title of class)
  o þ
  o þ
  o þ
  Regulation S-K Form 10-K Form 10-K. þ
    Large accelerated filer
    o

Accelerated
    filer
    þ

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    Company o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




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##### 





TABLE OF
    CONTENTS
   
 PART IITEM 1.


BUSINESS


4ITEM 1A.


RISK FACTORS


8ITEM 1B.


UNRESOLVED STAFF COMMENTS


10ITEM 2.


PROPERTIES


10ITEM 3.


LEGAL PROCEEDINGS


10ITEM 4.


SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS


11PART IIITEM 5.


MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES


11ITEM 6.


SELECTED FINANCIAL DATA


13ITEM 7.


MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS


15ITEM 7A.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


22ITEM 8.


FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


23ITEM 9.


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE


50ITEM 9A.


CONTROLS AND PROCEDURES


50ITEM 9B.


OTHER INFORMATION


51PART IIIITEM 10.


DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
    GOVERNANCE


51ITEM 11.


EXECUTIVE COMPENSATION


52ITEM 12.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


52ITEM 13.


CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
    AND DIRECTOR INDEPENDENCE


52ITEM 14.


PRINCIPAL ACCOUNTING FEES AND SERVICES


52PART IVITEM 15.


EXHIBITS, FINANCIAL STATEMENT SCHEDULES


53EXHIBIT INDEX


54SIGNATURES


56Subsidiaries of the CompanyConsent of Ernst & Young LLPCertification of the Chief Executive Officer Pursuant to Section 302Certification of the Chief Financial Officer Pursuant to Section 302Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906    Safe Harbor Statement under the Securities
    Litigation Reform Act of 1995: Form 10-K Form 10-K.
   3




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##### Table of Contents



PART I  ITEM 1.
    BUSINESS.  Form 10-K,
  Overview
        Products
  Fasteners,
    Fittings and Related Parts Industrial Supplies Automotive and Equipment Maintenance
    Parts
    Percentage ofConsolidated Net Sales2007


2006


2005Fasteners, Fittings and Related Parts


44
%


44
%


48
%Industrial Supplies


47



48



43Automotive and Equipment Maintenance Parts


9



8



9100
%


100
%


100
%    4




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##### Table of Contents



Markets
    In-Plant and Building Maintenance.
  Heavy Duty Equipment
    Maintenance.
  Original Equipment Manufacturers.
  Vehicle Maintenance and
    Transportation.
      Inventories
    Distribution
    and Manufacturing Facilities
     5




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##### Table of Contents



International
    Operations
          Competition
   6




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##### Table of Contents



Executive
    Officers of the Registrant
    Year FirstElected toPresent


Other Offices HeldName and Present Position with Company

Age


Office


During the Past Five YearsThomas J. Neri
    Chief Executive Officer and Director


56



2007


Mr. Neri was elected Chief Executive Officer in April 2007.
    Mr. Neri was elected to the Board of Directors in December
    2007. Mr. Neri was elected President and
    Chief Operating Officer on January 5, 2007.
    Mr. Neri was elected Executive Vice President,
    Finance, Planning and Corporate Development; Chief Financial
    Officer and Treasurer in 2004. He also served as Chief Financial
    Officer and Treasurer from 2004 to January 2006. Prior thereto,
    Mr. Neri was a business consultant from 2000 to 2003. From
    1993 to 2000, Mr. Neri was President and Publisher of
    Pioneer Newspapers, Inc., a subsidiary of Hollinger
    International, a publicly held international publishing company.Neil E. Jenkins
    Executive Vice President; Secretary and General Counsel


58



2004


Mr. Jenkins was elected Executive Vice President in
    2004. From 2000 to 2003 Mr. Jenkins served as Secretary and
    Corporate Counsel of the Company.Scott F. Stephens
    Chief Financial Officer


38



2006


Mr. Stephens was elected Chief Financial Officer in 2006.
    From 2004 to 2005 he was Senior Vice President Finance and
    Accounting of the Company. From 2001 to 2003 he was Chief
    Financial Officer of Wormser Company. Prior thereto he was a
    Senior Manager with Ernst & Young LLPs Merger
    and Acquisition Advisory Services.Michael W. Ruprich
    Group President, MRO and New Channels


51



2005


Mr. Ruprich was elected Group President MRO in 2004. From
    1999 through 2003 he was Chief Executive Officer of Newark
    Electronics.Stewart Howley
    Chief Marketing Officer


46



2005


Mr. Howley was elected Chief Marketing Officer in 2005.
    From 2002 through 2004 he was Director of Strategic Business
    Development with Home Depot Supply.Kenneth E. Malik
    Group President, OEM


58



2005


Mr. Malik was elected Group President, OEM in 2004. From
    2002 to 2004 he was the Chief Operating Officer of Conduit
    Healthcare Solutions. Prior thereto he was a Senior Executive
    with Haworth, Inc. from 1999 to 2002.William Holmes
    Vice President and Treasurer


48



2006


Mr. Holmes was elected Vice President and Treasurer
    effective January 3, 2006. From 2001 through 2005
    Mr. Holmes was Vice President and Assistant Treasurer
    of the Company.  7




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Available
    Information
  www.lawsonproducts.com. Form 10-K, Form 10-Q, Form 8-K
  ITEM 1A.
    RISK
    FACTORS.  Form 10-K
  If the
    Company is unable to successfully conclude the pending
    governmental investigation of the Company, the Companys
    business, financial condition, results of operations and stock
    price could be adversely affected.
      A
    significant portion of Lawsons inventory may become
    obsolete.
   8




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##### Table of Contents



Work
    stoppages and other disruptions at transportation centers or
    shipping ports may adversely affect Lawsons ability to
    obtain inventory and make deliveries to Lawsons
    customers.
    Changes
    in the Companys customers and product mix could cause the
    Companys gross margin percentage to fluctuate or decline
    in the future.
    Increases
    in energy costs and the cost of raw materials used in
    Lawsons products could impact Lawsons cost of goods
    and distribution and occupancy expenses, which may result in
    lower operating margins.
    Disruptions
    of Lawsons information systems could adversely affect the
    Company.
    A
    limited number of the Companys stockholders can exert
    significant influence over the Company.
    The
    Company operates in highly competitive markets.
   9




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##### Table of Contents



Future
    acquisitions are subject to integration and other
    risks.
    A
    slowdown in the economy could negatively impact Lawsons
    sales and earnings.
    An
    economic or other situation that affects government and
    tax-supported entities could negatively impact Lawsons
    sales and earnings.
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS.    ITEM 2.
    PROPERTIES.      ITEM 3.
    LEGAL
    PROCEEDINGS.   10




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##### Table of Contents



ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS.   PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES.    2007


2006Cash Dividends








Cash DividendsHigh


Low


Paid per Share


High


Low


Paid per ShareFirst Quarter

$
47.00


$
34.54


$
.20


$
43.79


$
33.82


$
.20Second Quarter


39.70



34.99



.20



44.02



32.21



.20Third Quarter


39.05



34.81



.20



42.77



33.43



.20Fourth Quarter


38.73



29.96



.20



51.37



41.72



.20   Company
    Stock Repurchases
   11




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##### Table of Contents



Stock
    Price Performance Chart
    COMPARISON
    OF 5 YEAR CUMULATIVE TOTAL RETURN* Among
    Lawson Products, The S&P Smallcap 600 Index,
    A New Peer Group And An Old Peer Group
  
    ©
   Indexed Returns Years Ending December 31,Base PeriodCompany Name/Index

12/02

12/03

12/04

12/05

12/06

12/07Lawson Products


100.00



109.22



168.77



129.51



159.82



134.81S&P Smallcap 600


100.00



138.79



170.22



183.30



211.01



210.38New Peer Group


100.00



140.47



169.67



213.00



208.84



245.52Old Peer Group


100.00



164.48



139.07



177.88



240.48



376.28  12




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##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA.    Percent2007


Change


2006


2005


2004


2003(Dollars in thousands, except per share data)Net sales(1)

$
509,695



(0.3
)%

$
511,377


$
443,629


$
402,142


$
374,177Income from continuing operations before income taxes and
    cumulative effect of accounting change


20,072



(20.1
)%


25,120



37,039



33,173



27,990Income from continuing operations before cumulative effect of
    accounting change(2)(3)


11,332



(17.3
)%


13,702



21,944



21,570



19,686Income (loss) from discontinued operations(4)


(703
)


(3.6
)%


(729
)


4,794



(145
)


(3,490
)Income before cumulative effect of accounting change


10,629



(18.1
)%


12,973



26,738



21,425



16,196Cumulative effect of accounting change, net of tax






(100.0
)%


(361
)










Net income(2)(3)(5)


10,629



(15.7
)%


12,612



26,738



21,425



16,196Basic income (loss) per share of common stock:Continuing operations before cumulative effect of accounting
    change

$
1.33



(13.6
)%

$
1.54



2.42


$
2.29


$
2.07Discontinued operations


(0.08
)


0.0
%


(0.08
)


0.53



(0.02
)


(0.37
)Cumulative effect of accounting change






(100.0
)%


(0.04
)










Net income

$
1.25



(12.0
)%

$
1.42


$
2.94


$
2.28


$
1.71Diluted income (loss) per share of common stockContinuing operations before cumulative effect of accounting
    change

$
1.33



(13.6
)%

$
1.54


$
2.41


$
2.29


$
2.07Discontinued operations


(0.08
)


0.0
%


(0.08
)


0.53



(0.02
)


(0.37
)Cumulative effect of accounting change






(100.0
)%


(0.04
)










Net income

$
1.25



(12.0
)%

$
1.42


$
2.94


$
2.27


$
1.70Total assets

$
299,863



6.6
%

$
281,292


$
279,224


$
260,550


$
246,943Noncurrent liabilities


52,660



9.0
%


48,320



41,256



37,271



36,714Stockholders equity


174,361



2.4
%


170,317



185,425



180,332



173,350Return on average equity (percent)


6.2



(8.8
)%


6.8



14.9



12.1



9.6Return on assets (percent)


3.5



(22.2
)%


4.5



9.6



8.2



6.6Stockholders equity per share(6)

$
20.46



6.7
%

$
19.18


$
20.42


$
19.16


$
18.26Cash dividends declared per share(6)


0.80



0.0
%


0.80



0.80



0.72



0.66Basic weighted average shares outstanding


8,522



(4.0
)%


8,878



9,082



9,410



9,492Diluted weighted average shares outstanding


8,524



(4.0
)%


8,880



9,099



9,430



9,511     (1)
    
    Net sales include the sales of Rutland Tool & Supply
    Co. (Rutland) since the date of acquisition in
    December 2005 and exclude amounts from the Companys
    discontinued operations for all periods presented as discussed
    in Note C to the Consolidated Financial Statements. Rutland
    accounted for $52.0 million, $54.8 million and
    $4.1 million of net sales in 2007, 2006 and 2005,
    respectively. 13




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##### Table of Contents



(2)
    
    In 2007, includes $12.3 million of severance and other
    charges as discussed in Note D to the Consolidated
    Financial Statements, $5.8 million of legal fees and other
    costs incurred in conjunction with the ongoing government
    investigation previously discussed, $2.4 million of
    compensation expense related to the Companys annual and
    long-term incentive plans and income of $0.4 million
    related to stock performance rights (SPRs).(3)
    
    In 2006, includes $8.9 million of compensation expense
    related to the Companys annual and long-term incentive
    plans, $3.2 million of legal fees related to the previously
    disclosed investigation, $1.9 million of compensation
    expense related to stock performance rights and
    $1.9 million of increased income tax expense related to the
    elimination of tax deductions associated with the Companys
    customer loyalty and promotions programs in its MRO business for
    tax years 2005, 2004 and 2003, (many of the customer loyalty and
    promotion programs in place for these years were terminated or
    replaced early in 2006), $1.3 million of severance expense
    and $0.8 million for a loss on the sale of equipment.(4)
    
    In 2005, the Company recorded a $7.5 million after tax loss
    related to the operations and closing of its remaining UK
    business. Also in 2005, the Company realized an after-tax gain
    of $12.2 million related to operating income and the gain
    on the sale of the Companys investment in real estate. The
    loss from discontinued operations for 2003 primarily relates to
    a $2.8 million pretax loss related to the sale of Lawson
    Products Limited, the Companys former UK MRO business. The
    2002 losses from discontinued operations primarily relate to
    inventory write-offs in the Companys UK business.(5)
    
    In 2003, income tax expense includes a $2.2 million benefit
    to reflect the partial utilization of a capital loss generated
    by the sale of the Companys former UK MRO business. In
    2003 and 2002, the Company recorded $1.5 million and
    $0.4 million respectively, of after tax charges for
    compensation arrangements related to management personnel
    reductions.(6)
    
    These per share amounts were computed using basic weighted
    average shares outstanding for all periods presented. 14




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##### Table of Contents



ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS.  SUMMARY
    OF FINANCIAL PERFORMANCE
  % of





% of





% ofNet





Net





Net2007


Sales


2006


Sales


2005


Sales(Dollars in thousands, except per share data)Net sales

$
509,695



100.0


$
511,377



100.0


$
443,629



100.0Cost of goods sold


208,714



40.9



207,547



40.6



165,576



37.3Gross profit


300,981



59.1



303,830



59.4



278,053



62.7Operating expenses(1)(2)


280,540



55.0



280,867



54.9



242,213



54.6Operating income


20,441



4.0



22,963



4.5



35,840



8.1Other income and expense, net


(369
)


(0.1
)


2,157



0.4



1,199



0.3Income from continuing operations before taxes and cumulative
    effect of accounting change


20,072



3.9



25,120



4.9



37,039



8.3Income tax expense(3)


8,740



1.7



11,418



2.2



15,095



3.4Income from continuing operations before cumulative effect of
    accounting change


11,332



2.2



13,702



2.7



21,944



4.9Income (loss) from discontinued operations, net of income taxes


(703
)


(0.1
)


(729
)


(0.1
)


4,794



1.1Income before cumulative effect of accounting change


10,629



2.1



12,973



2.5



26,738



6.0Cumulative effect of accounting change, net of tax






0.0



(361
)


(0.1
)






0.0Net income

$
10,629



2.1


$
12,612



2.5


$
26,738



6.0Diluted income (loss) per share:Continuing operations before cumulative effect of accounting
    change

$
1.33






$
1.54






$
2.41Discontinued operations


(0.08
)






(0.08
)






0.53Cumulative effect of accounting change










(0.04
)






Net income

$
1.25






$
1.42






$
2.94Total assets


299,863







281,292







279,224Return on assets (%)


3.5
%






4.5
%






9.6
%Stockholders equity


174,361







170,317







185,425Return on average equity (%)


6.2
%






6.8
%






14.9
%     (1)
    
    In 2007, operating expenses include $12.3 million of
    severance and related expense as discussed in Note D to the
    Consolidated Financial Statements, $5.8 million of legal
    fees related to the previously disclosed investigation,
    $2.4 million of compensation expense related to the
    Companys annual and long-term incentive plans and income
    of $0.4 million related to stock performance rights.(2)
    
    In 2006, operating expenses include $8.9 million of
    compensation expense related to the Companys annual and
    long-term incentive plans, $3.2 million of legal fees
    related to the previously disclosed investigation,
    $1.9 million of compensation expense related to stock
    performance rights (SPRs), $1.3 million of
    severance expense and $0.8 million ($0.5 million, net
    of tax) for a loss on the sale of equipment.(3)
    
    In 2006, income tax expense includes $1.9 million related
    to the elimination of tax deductions associated with the
    Companys customer loyalty and promotions programs in its
    MRO business for tax years 2005, 2004 and 2003. Many of the
    customer loyalty and promotion programs in place for these years
    were terminated or replaced early in 2006. 15




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##### Table of Contents



Overview
    Form 10-K.
  Form 10-K.
  YEAR
    ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31,
    2006
  Net
    Sales and Gross Profit
      2007


2006(Dollars in millions)MRO

$
426.7


$
427.9OEM


83.0



83.5$
509.7


$
511.4             Operating
    Expenses and Operating Income
   16




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##### Table of Contents



Other
    Income (Expense), Net
    Income Tax Expense
      Income
    from Continuing Operations before Cumulative Effect of
    Accounting Change
    Loss
    from Discontinued Operations
      Cumulative
    Effect of Accounting Change, Net of Tax
    Net
    Income
   17




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##### Table of Contents



YEAR
    ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31,
    2005
  Net
    Sales and Gross Profit
      2006


2005(Dollars in millions)MRO

$
427.9


$
368.6OEM


83.5



75.0$
511.4


$
443.6             Operating
    Expenses and Operating Income
     18




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##### Table of Contents



Other
    Income (Expense), Net
    Income Tax Expense
    Income
    from Continuing Operations before Cumulative Effect of
    Accounting Change
    Income
    (Loss) from Discontinued Operations, Net of
    Tax
    Cumulative
    Effect of Accounting Change, Net of Tax
    Net
    Income
    LIQUIDITY
    AND CAPITAL RESOURCES
     19




---



##### Table of Contents



YearShares





AuthorizedYear Purchased

Purchased


Cost


by Board(In millions)2007





$
2006


486,514



20.9



20062005


334,362



14.5



2000/2004                 2013 and2008


2009


2010


2011


2012


Thereafter


Total(In thousands)Operating leases

$
2,762


$
2,172


$
1,902


$
1,665


$
835


$



$
9,336Capital leases


1,464



1,301



744



512



43







4,064Deferred compensation


4,164



1,798



1,569



1,394



1,391



8,803



19,119Security bonus plan(1)






















25,491



25,491Total contractual cash obligations

$
8,390


$
5,271


$
4,215


$
3,571


$
2,269


$
34,294


$
58,010  20




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##### Table of Contents



(1)
    
    Payments to beneficiaries of the security bonus plan are made on
    a lump sum basis at time of retirement. As no such retirements
    are in place or known for the future, the entire balance is
    reflected in the thereafter column. The liabilities of
    $0.9 million related to FASB Interpretation No. 48,
    Accounting for Uncertainty in Income Taxes
    (FIN 48), are excluded from this contractual
    obligations table because the Company cannot make a reasonably
    reliable estimate of the period of cash settlement with the
    respective taxing authorities.  BUSINESS
    ACQUISITIONS
  Purchase
    of Rutland Tool & Supply Co.
    BUSINESS
    DISPOSALS
  Discontinued
    Operations of Mexico Business
    Discontinued
    Operations of UK Business
    Sale
    of Real Estate
    CRITICAL
    ACCOUNTING POLICIES
    Allowance for Doubtful Accounts Methodology
  Inventories  Slow Moving and
    Obsolescence
 21




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##### Table of Contents



Income Taxes
  FIN 48
  ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.     22




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##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA.    Managements Report on Internal Control Over
    Financial Reporting


24Report of Independent Registered Public
    Accounting Firm on Internal Control Over Financial Reporting


25Report of Independent Registered Public
    Accounting Firm on Consolidated Financial Statements


26Consolidated Balance Sheets as of
    December 31, 2007 and 2006


27Consolidated Statements of Income for the Years
    ended December 31, 2007, 2006 and 2005


28Consolidated Statements of Changes in
    Stockholders Equity for the Years ended December 31,
    2007, 2006 and 2005


29Consolidated Statements of Cash Flows for the
    Years ended December 31, 2007, 2006 and 2005


30Notes to Consolidated Financial Statements


31Schedule II


50  23




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##### Table of Contents



Managements
    Report on Internal Control Over Financial Reporting  Rules 13a-15(f) and/or
      Form 10-K
 24




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
    on Internal Control Over Financial Reporting               
  
 25




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
    on Consolidated Financial Statements                   26




---



##### Table of Contents



Lawson
    Products, Inc.



Consolidated
    Balance Sheets  December 31,2007


2006(Dollars in thousands)ASSETSCurrent assets:Cash and cash equivalents

$
1,671


$
3,391Accounts receivable, less allowance for doubtful


58,882



60,401accounts (2007  $1,376; 2006  $1,332)Inventories


96,785



90,272Miscellaneous receivables


4,422



3,106Prepaid expenses


5,881



4,748Deferred income taxes


3,226



3,538Discontinued current assets


1,064



2,150Total current assets


171,931



167,606Property, plant and equipment, net


53,031



42,664Other assets:Cash value of life insurance


23,702



20,996Deferred income taxes


21,344



20,341Goodwill


27,999



27,999Other intangible assets, net


1,263



1,513Other


593



170Discontinued noncurrent assets






374,901



71,022Total assets

$
299,863


$
281,292LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Revolving line of credit

$
11,000


$
Accounts payable


16,266



14,055Accrued expenses and other


45,254



46,736Discontinued current liabilities


322



1,864Total current liabilities


72,842



62,655Noncurrent liabilities and deferred credits:Accrued liability under security bonus plans


25,491



25,522Deferred compensation and other liabilities


27,169



22,79852,660



48,320Commitments and contingenciesStockholders equity:Preferred Stock, $1 par value: Authorized 
    500,000 shares; Issued and outstanding  None






Common Stock, $1 par value: Authorized 
    35,000,000 shares; Issued  2007 
    8,522,001 shares; 2006  8,521,001 shares


8,522



8,521Capital in excess of par value


4,774



4,749Retained earnings


160,606



158,008173,902



171,278Accumulated other comprehensive income (loss)


459



(961
)Total stockholders equity


174,361



170,317Total liabilities and stockholders equity

$
299,863


$
281,292    27




---



##### Table of Contents



Lawson
    Products, Inc.



Consolidated
    Statements of Income  Year Ended December 31,2007


2006


2005(Dollars in thousands, exceptper share data)Net sales

$
509,695


$
511,377


$
443,629Cost of goods sold


208,714



207,547



165,576Gross profit


300,981



303,830



278,053Operating expenses:Selling, general and administrative expenses


268,212



278,780



242,213Severance and other charges


12,328



1,281



Loss on sale of equipment






806



Operating income


20,441



22,963



35,840Interest and dividend income


255



513



374Interest expense


(910
)


(150
)


(7
)Other income, net


286



1,794



832(369
)


2,157



1,199Income from continuing operations before income taxes and
    cumulative effect of accounting change


20,072



25,120



37,039Income tax expense


8,740



11,418



15,095Income from continuing operations before cumulative effect of
    accounting change


11,332



13,702



21,944Discontinued operations (net of income taxes):Gain on sale of real estate










12,189Income from operations of real estate partnership










584Loss on closure of Mexico business


(68
)Loss from operations of Mexico business


(635
)


(717
)


(485
)Loss on closure of UK business










(6,656
)Loss from operations of UK business






(12
)


(838
)Income (loss) from discontinued operations


(703
)


(729
)


4,794Income before cumulative effect of accounting change


10,629



12,973



26,738Cumulative effect of accounting change, net of tax






(361
)


Net income

$
10,629


$
12,612



26,738Basic income (loss) per share of common stock:Continuing operations before cumulative effect of accounting
    change

$
1.33


$
1.54


$
2.42Discontinued operations


(0.08
)


(0.08
)


0.53Cumulative effect of accounting change






(0.04
)


Net income

$
1.25


$
1.42


$
2.94Diluted income (loss) per share of common stock:Continuing operations before cumulative effect of accounting
    change

$
1.33


$
1.54


$
2.41Discontinued operations


(0.08
)


(0.08
)


0.53Cumulative effect of accounting change






(0.04
)


Net income

$
1.25


$
1.42


$
2.94    28




---



##### Table of Contents



Lawson
    Products, Inc.



Consolidated
    Statements of

Changes
    in Stockholders Equity  AccumulatedOtherCommon


Capital in





ComprehensiveStock,


Excess of


Retained


Income


Comprehensive$1 par Value


par Value


Earnings


(Loss)


Income(Dollars in thousands)Balance at January 1, 2005

$
9,281


$
3,467


$
167,187


$
397Net income










26,738






$
26,738Other comprehensive income, net of tax:Cumulative translation adjustment related to closure of UK
    operations














435



435Adjustment for foreign currency translation














(1,184
)


(1,184
)Comprehensive income for the year

















$
25,989Cash dividends declared










(7,235
)Stock issued under employee stock plans


25



801Purchase and retirement of common stock


(334
)


(131
)


(14,022
)Balance at December 31, 2005


8,972



4,137



172,668



(352
)Net income










12,612






$
12,612Other comprehensive income, net of tax:Adjustment for foreign currency translation














(609
)


(609
)Comprehensive income for the year

















$
12,003Cash dividends declared










(7,098
)Stock issued under employee stock plans


35



870Purchase and retirement of common stock


(486
)


(258
)


(20,174
)Balance at December 31, 2006


8,521



4,749



158,008



(961
)Net income










10,629






$
10,629Other comprehensive income, net of tax:Cumulative translation adjustment related to closure of Mexico
    operations














403



403Adjustment for foreign currency translation














1,017



1,017Comprehensive income for the year

















$
12,049Adjustment for FIN 48 adoption










(1,213
)Cash dividends declared










(6,818
)Stock issued under employee stock plans


1



25Balance at December 31, 2007

$
8,522


$
4,774


$
160,606


$
459    29




---



##### Table of Contents



Lawson
    Products, Inc.



Consolidated
    Statements of Cash Flows  Year Ended December 31,2007


2006


2005(Dollars in thousands)Operating activitiesNet income

$
10,629


$
12,612


$
26,738Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation


4,308



4,568



5,041Amortization


3,127



2,976



1,577Provision for allowance for doubtful accounts


954



594



809Deferred income taxes


(1,456
)


(4,309
)


(2,397
)Deferred compensation and security bonus plans


5,000



6,593



5,668Payments under deferred compensation and security bonus plans


(4,922
)


(3,285
)


(1,543
)Stock based compensation


(427
)


2,482



(431
)Gain on sale of real estate










(12,189
)Loss on sale of equipment






806



Changes in operating assets and liabilities:Accounts receivable


1,120



(991
)


(9,345
)Inventories


(5,955
)


(11,723
)


(151
)Prepaid expenses and other assets


(5,732
)


(357
)


(5,860
)Accounts payable and accrued expenses


(387
)


7,664



10,618Income taxes payable


(1,213
)






Other


6,502



2,255



(739
)Net Cash Provided by Operating Activities


11,548



19,885



17,796Investing activitiesPurchases of property, plant and equipment


(17,694
)


(5,291
)


(9,271
)Proceeds from sale of equipment






175



Proceeds from sale of real estate










15,707Acquisition of Rutland Tool & Supply Co., net of cash
    acquired






181



(14,562
)Other


90



275



100Net Cash Used for Investing Activities


(17,604
)


(4,660
)


(8,026
)Financing activitiesProceeds from revolving line of credit, net of payments


11,000







Payments on mortgage payable










(1,573
)Purchases of common stock






(20,919
)


(14,487
)Proceeds from exercise of stock options and other common stock
    transactions


26



906



826Dividends paid


(6,817
)


(7,189
)


(7,111
)Net Cash Provided by (Used for) Financing Activities


4,209



(27,202
)


(22,345
)Decrease in cash and cash equivalents


(1,847
)


(11,977
)


(12,575
)Cash and cash equivalents at beginning of year


4,320



16,297



28,872Cash and cash equivalents at end of year


2,473



4,320



16,297Cash held by discontinued operations


(802
)


(929
)


(1,791
)Cash and cash equivalents held by continuing operations at end
    of year

$
1,671


$
3,391


$
14,506    30




---



##### Table of Contents



Lawson
    Products, Inc.



Notes to
    Consolidated Financial Statements

(Dollars
    in Thousands)  Note A 
    Description
    of Business    Note B 
    Summary
    of Significant Accounting Policies  Principles of Consolidation
  Revenue Recognition Revenue Recognition
    When Right of Return Exists
  Shipping and Handling Fees and Costs
  Allowance for Doubtful Accounts Methodology
  Investment in Real Estate Partnership
  Cash Equivalents
  Inventories (first-in,
  Property, Plant and Equipment
  Stock-Based Compensation Share-Based Payment
 31




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Goodwill and Other Intangibles
  Income Taxes
      Earnings Per Share
  Use of Estimates
  Reclassifications
  Recent Accounting Pronouncements Fair
    Value Measurements ,
 32




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    The Fair
    Value Option for Financial Assets and Financial Liabilities
    Including an amendment of FASB Statement No. 115
  Business
    Combinations
  Noncontrolling Interests in Consolidated Financial Statements
    (an amendment of ARB No. 51)
  
    ownership interests in subsidiaries held by parties, other than
    the parent, to be clearly identified, labeled and presented in
    the consolidated balance sheet within equity, but separate from
    the parents equity,
    net income attributable to the parent and the noncontrolling
    interest to be clearly identified and presented on the face of
    the consolidated statement of income,
    changes in the parents ownership interest to be accounted
    for as equity transactions, if a subsidiary is deconsolidated
    and any retained noncontrolling equity investment to be measured
    at fair value,
    and that entities provide sufficient disclosures that clearly
    identify and distinguish between the interests of the parent and
    noncontrolling owners.      Note C 
    Business
    Combination and Discontinued Operations  Accounting for the
    Impairment or Disposal of Long Lived Assets
  Discontinued
    Operations of Mexico Business
   33




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Year Ended December 31,2007


2006


2005(In millions)Net sales

$
2.6


$
6.8


$
6.6Loss before income taxes


(0.7
)


(0.7
)


(0.5
)Income tax


(0.0
)


(0.0
)


(0.0
)Loss from discontinued operations

$
(0.7
)

$
(0.7
)

$
(0.5
)     December 31,


December 31,2007


2006(In millions)Current assets

$
0.6


$
1.4Total assets

$
0.6


$
1.4Current liabilities

$
0.1


$
0.9Total liabilities

$
0.1


$
0.9     Discontinued
    Operations of UK Business
      Sale
    of Real Estate
    Purchase
    of Rutland Tool & Supply Co.
   34




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
      Note D 
    Reserve
    for Severance    Balance January 1, 2005

$
1,042Cash paid in 2005


(826
)Balance December 31, 2005


216Charged to earnings 2006


1,281Cash paid in 2006


(382
)Adjustment to reserves 2006


(153
)Balance December 31, 2006


962Charged to earnings 2007


10,886Cash paid in 2007


(4,670
)Adjustment to reserves 2007


(120
)Balance December 31, 2007

$
7,058         Note E 
    Inventories    2007


2006Inventories

$
106,809


$
99,505Reserve for excess and obsolete inventories


(10,024
)


(9,233
)$
96,785


$
90,272  35




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Note F 
    Property,
    Plant and Equipment  2007


2006Land

$
9,444


$
9,245Buildings and improvements


54,333



44,120Machinery and equipment


32,142



28,731Furniture and fixtures


6,384



5,695Vehicles


414



420Capitalized software(1)


14,563



13,495Capital leases(2)


3,342



552Construction in progress


924



2,322121,546



104,581Accumulated depreciation and amortization


(68,515
)


(61,917
)$
53,031


$
42,664     (1)
    
    Expense for amortization of capitalized software was $2,877,
    $2,726 and $1,269 for 2007, 2006 and 2005, respectively.(2)
    
    Expense for capital lease amortization is included in
    depreciation expense.  Note G 
    Loss on
    Sale of Equipment    Note H 
    Goodwill
    and Other Intangibles  Goodwill and
    Other Intangibles
  Gross


Accumulated


Net CarryingDecember 31, 2007

Balance


Amortization


AmountTrademarks and tradenames

$
1,400


$
737


$
663Non-compete covenant


1,000



400



600$
2,400


$
1,137


$
1,263     Gross


Accumulated


Net CarryingDecember 31, 2006

Balance


Amortization


AmountTrademarks and tradenames

$
1,400


$
687


$
713Non-compete covenant


1,000



200



800$
2,400


$
887


$
1,513    36




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Note I 
    Accrued
    Expenses and Other Liabilities    2007


2006Salaries, commissions and other compensation

$
18,386


$
21,519Accrued severance


4,344



962Accrued and withheld taxes, other than income taxes


3,101



2,848Accrued profit sharing contributions


3,952



4,152Accrued stock performance rights


2,098



2,602Accrued self-insured health benefits


2,548



2,006Cash dividends payable


1,704



1,704Other


9,121



10,943$
45,254


$
46,736   Note J 
    Revolving
    Line of Credit    Note K 
    Stock
    Performance Plan    Stock
    Performance Rights
       37




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    WeightedAverage SPRExercise Price


# of SPRsOutstanding January 1, 2005

$
27.41



189,000Granted


41.46



31,000Exercised


26.69



(13,750
)Outstanding December 31, 2005(1)


29.57



206,250Granted


44.02



35,000Exercised


26.69



(13,750
)Outstanding December 31, 2006(2)


33.31



179,500Granted


36.71



40,000Exercised


28.80



(6,550
)Cancelled


29.54



(3,700
)Outstanding December 31, 2007(3)

$
34.17



209,250     (1)
    
    Includes 128,180 SPRs vested at December 31, 2005 at a
    weighted average exercise price of $27.31 per SPR.(2)
    
    Includes 113,500 SPRs vested at December 31, 2006 at a
    weighted average exercise price of $28.88 per SPR.(3)
    
    Includes 132,117 SPRs vested at December 31, 2007 at a
    weighted average exercise price of $31.26 per SPR.      Valuation
    Information
    December 31, 2007Expected volatility

37.63% to 44.08%Risk-free interest rate

3.05% to 3.49%Expected term (in years)

1.5 to 5.4Expected dividend yield

2.11%  38




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Stock
    Options
  WeightedAveragePrice


OptionsOutstanding January 1, 2005

$
22.75



49,550Exercised


22.50



(10,750
)Canceled or expired


22.50



(1,600
)Outstanding December 31, 2005


22.83



37,200Exercised


22.66



(30,700
)Canceled or expired


22.50



(500
)Outstanding December 31, 2006


23.72



6,000Exercised


26.75



(1,000
)Outstanding December 31, 2007

$
23.11



5,000   WeightedAverageExercisable Options at:

Price


OptionsDecember 31, 2005

$
22.83



37,200December 31, 2006

$
23.72



6,000December 31, 2007

$
23.11



5,000     Exercise Price

$
23.56


$
22.44Options Outstanding


3,000



2,000Weighted Average Exercise Price

$
23.56


$
22.44Weighted Average Remaining Life


2.4



1.6Options Exercisable


3,000



2,000Weighted Average Exercise price

$
23.56


$
22.44       Note L 
    Retirement
    and Security Bonus Plans       39




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Note M 
    Income
    Taxes    Deferred Tax Assets:

2007


2006Compensation and benefits

$
25,075


$
22,871Inventories


4,122



3,361Net operating loss carryforward of subsidiary






744Capital loss


3,337



574Accounts receivable


503



511Property, plant & equipment


230



Other






518Total deferred tax assets


33,267



28,579Valuation allowance for deferred tax assets


(3,337
)


(1,318
)Net deferred tax assets


29,930



27,261Deferred tax liabilities:Property, plant & equipment






179Goodwill


3,259



2,678Other


2,101



525Total deferred tax liabilities


5,360



3,382Total net deferred tax assets

$
24,570


$
23,879Net deferred tax assets:Total current deferred income taxes

$
3,226


$
3,538Total noncurrent deferred income taxes


21,344



20,341Total net deferred tax assets

$
24,570


$
23,879       2007


2006


2005United States

$
15,741


$
20,446


$
34,077Foreign


4,331



4,674



2,962$
20,072


$
25,120


$
37,039  40




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    2007


2006


2005Current:Federal

$
8,029


$
12,702


$
14,599State


1,960



3,025



2,8939,989



15,727



17,492Deferred benefit


(1,249
)


(4,309
)


(2,397
)$
8,740


$
11,418


$
15,095     2007


2006


2005Statutory federal rate


35.0
%


35.0
%


35.0
%Increase (decrease) resulting from:State income taxes, net of federal income tax benefit(1)


7.4



7.8



5.1Foreign subsidiaries


0.2



0.4



0.0Executive life insurance


(3.4
)


(3.0
)


(1.0
)Non-deductible promotion expense(2)


0.0



7.7



1.5Other items, net


4.3



(2.4
)


0.2Provision for income taxes


43.5
%


45.5
%


40.8
%     (1)
    
    The effective rate for state income taxes increased in 2006 due
    to California unitary tax obligations triggered by
    Rutlands operations in 2006, as well as additional state
    tax due related to the 2005 sale of the Companys
    investment in Superior and Sedgwick Associates, a real estate
    partnership. The Companys effective state tax rate
    fluctuates based on the income tax rates in the various
    jurisdictions in which the Company operates, and based on the
    level of profits in those jurisdictions.(2)
    
    In 2006, the Company eliminated tax deductions associated with
    the Companys customer loyalty and promotions programs in
    its MRO business for tax years 2005, 2004 and 2003. Many of the
    customer loyalty and promotion programs in place for these years
    were terminated or replaced early in 2006.         41




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
      non-U.S. income
    Balance January 1, 2007

$
4,059Additions based on tax positions related to the current year


Additions for tax positions of prior years


1,029Reductions for tax positions of prior years


(2,010
)Settlements


(2,155
)Balance at December 31, 2007

$
923   Note N 
    Commitments
    and Contingencies  Operating
    Leases
    2013 and2008

2009

2010

2011

2012

Thereafter$2,762

$
2,172


$
1,902


$
1,665


$
835


$
     Capital
    Leases
    2013 and2008

2009

2010

2011

2012

Thereafter$1,464

$
1,301


$
744


$
512


$
43



   Contingency
   42




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
        Note O 
    Earnings
    (Loss) Per Share    Year Ended December 31,Income:

2007


2006


2005Income from continuing operations before cumulative effect of
    accounting change

$
11,332


$
13,702


$
21,944Income (loss) from discontinued operations


(703
)


(729
)


4,794Cumulative effect of accounting change, net of tax






(361
)


Net income

$
10,629


$
12,612


$
26,738   Year Ended December 31,2007


2006


2005Basic


Diluted


Basic


Diluted


Basic


DilutedWeighted average shares:Weighted average shares


8,522



8,522



8,878



8,878



9,082



9,082Dilutive stock options






2







2







17Total weighted average shares


8,522



8,524



8,878



8,880



9,082



9,099Earnings (loss) per share of common stock:Income from continuing operations before cumulative effect of
    accounting change

$
1.33


$
1.33


$
1.54


$
1.54


$
2.42


$
2.41Income (loss) from discontinued operations


(0.08
)


(0.08
)


(0.08
)


(0.08
)


0.53



0.53Cumulative effect of accounting change, net of tax










(0.04
)


(0.04
)






Net income

$
1.25


$
1.25


$
1.42


$
1.42


$
2.94


$
2.94  43




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Note P 
    Segment
    Reporting     44




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Year Ended December 31,2007


2006


2005Net salesMRO

$
426,660


$
427,919


$
368,615OEM


83,035



83,458



75,014Consolidated total

$
509,695


$
511,377


$
443,629Operating incomeMRO

$
16,585


$
18,712


$
31,159OEM


3,856



4,251



4,681Consolidated total

$
20,441


$
22,963


$
35,840Capital expendituresMRO

$
16,943


$
4,711


$
8,246OEM


751



581



1,006Consolidated total

$
17,694


$
5,292


$
9,252Depreciation and amortizationMRO

$
6,692


$
6,765


$
5,235OEM


743



762



789Consolidated total

$
7,435


$
7,527


$
6,024Total assetsMRO

$
221,274


$
204,852


$
208,333OEM


52,955



50,408



48,336Segment total


274,229



255,260



256,669Corporate


24,570



23,879



19,124Consolidated total

$
298,799


$
279,139


$
275,793GoodwillMRO

$
25,748


$
25,748


$
25,748OEM


2,251



2,251



2,251Consolidated total

$
27,999


$
27,999


$
27,999  45




---



##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
    Year Ended December 31,2007


2006


2005Operating income

$
20,441


$
22,963


$
35,840Interest and dividend income


255



513



374Interest expense


(910
)


(150
)


(7
)Other  net


286



1,794



832Income from continuing operations before income taxes and
    cumulative effect of accounting change

$
20,072


$
25,120


$
37,039     Year Ended December 31,2007


2006


2005Net salesUnited States

$
479,643


$
482,695


$
416,876Canada


30,052



28,682



26,753Consolidated total

$
509,695


$
511,377


$
443,629   Year Ended December 31,2007


2006


2005Long-lived assetsUnited States

$
72,708


$
62,720


$
65,472Canada


8,322



7,943



8,158Consolidated total

$
81,030


$
70,663


$
73,630    46




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##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Note Q 
    Summary
    of Unaudited Quarterly Results of Operations    Quarter Ended2007

Mar. 31


Jun. 30


Sept. 30


Dec. 31(Dollars in thousands, except per share data)Net sales

$
129,669


$
129,178


$
127,913


$
122,935Cost of goods sold


53,842



52,481



51,456



50,935Income (loss) from continuing operations before income
    taxes(1)(2)(3)


8,166



(215
)


5,228



6,893Income tax expense


3,440



(195
)


2,818



2,677Income (loss) from continuing operations


4,726



(20
)


2,410



4,216Loss from discontinued operations


(156
)


(329
)


(11
)


(207
)Net income (loss)


4,570



(349
)


2,399



4,009Basic income (loss) per share of common stock continuing
    operations

$
0.55


$
(0.00
)

$
0.28


$
0.49Discontinued operations


(0.02
)


(0.04
)


(0.00
)


(0.02
)Net income (loss)

$
0.54


$
(0.04
)

$
0.28


$
0.47Basic weighted average shares outstanding


8,521



8,522



8,522



8,522Diluted income (loss) per share of common stock continuing
    operations

$
0.55


$
(0.00
)

$
0.28


$
0.49Discontinued operations


(0.02
)


(0.04
)


(0.00
)


(0.02
)Net income (loss)

$
0.54


$
(0.04
)

$
0.28


$
0.47Diluted weighted average shares outstanding


8,524



8,523



8,524



8,524       Quarter EndedMar. 31


Jun. 30


Sept. 30


Dec. 31(Dollars in thousands)Severance and other charges(1)


1,721



5,642



3,671



1,293Legal and other fees(2)


1,086



2,689



1,172



846SPRs compensation expense(3)


(664
)


489



(860
)


608     (1)
    
    Reflects expenses for severance and other charges (see
    Note D to the Consolidated Financial Statements).(2)
    
    Reflects expenses for legal fees related to the previously
    disclosed investigation.(3)
    
    Reflects the expenses associated with the Stock Performance Plan
    (see Note K to the Consolidated Financial Statements).  47




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##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
  Quarter Ended2006

Mar. 31


Jun. 30


Sept. 30


Dec. 31(Dollars in thousands, except per share data)Net sales(1)

$
130,166


$
129,226


$
127,335


$
124,650Cost of goods sold


53,787



52,401



50,786



50,573Income from continuing operations before income taxes and
    cumulative effect of accounting change(2)(3)(4)(5)


8,965



5,494



6,069



4,592Income tax expense(6)


3,546



2,273



2,768



2,831Income from continuing operations before cumulative effect of
    accounting change


5,419



3,221



3,301



1,761Loss from discontinued operations


(70
)


(16
)


(226
)


(417
)Income before cumulative effect of accounting change


5,349



3,205



3,075



1,344Cumulative effect of accounting change, net of tax


(361
)










Net income(7)


4,988



3,205



3,075



1,344Basic income (loss) per share of common stock continuing
    operations before cumulative effect of accounting change

$
0.60


$
0.36


$
0.37


$
0.20Discontinued operations


(0.01
)


(0.00
)


(0.03
)


(0.05
)Cumulative effect of accounting change


(0.04
)










Net income

$
0.56


$
0.36


$
0.34


$
0.16Basic weighted average shares outstanding


8,974



8,989



8,998



8,635Diluted income (loss) per share of common stock continuing
    operations before cumulative effect of accounting change

$
0.60


$
0.36


$
0.37


$
0.20Discontinued operations


(0.01
)


(0.00
)


(0.03
)


(0.05
)Cumulative effect of accounting change


(0.04
)










Net income

$
0.55


$
0.36


$
0.34


$
0.16Diluted weighted average shares outstanding


8,988



8,995



9,004



8,638       Quarter EndedMar. 31


Jun. 30


Sept. 30


Dec. 31(Dollars in thousands)Rutland Tool & Supply Co. net sales(1)

$
14,670


$
13,647


$
13,395


$
13,068Legal fees(2)


1,056



969



528



672SPRs compensation expense(3)


556



342



506



523Severance expense(4)










675



606Loss on sale of equipment(5)






806







Income tax expense(6)














1,939Rutland Tool & Supply Co. net income(7)


612



410



248



168     (1)
    
    Reflects the acquisition of Rutland Tool & Supply Co.
    in December 2005.(2)
    
    Reflects expenses for legal fees related to the previously
    disclosed investigation. 48




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##### Table of Contents



Lawson
    Products, Inc.
  Notes to
    Consolidated Financial Statements 
    (Continued)
   (3)
    
    Reflects the expenses associated with the adoption of
    SFAS 123(R) as of January 1, 2006 (see Notes B
    and K to the Consolidated Financial Statements for additional
    information), excluding the cumulative effect of adoption.(4)
    
    Reflects the expenses associated with severance charges. See
    Note D to the Consolidated Financial Statements for
    additional information.(5)
    
    In the second quarter of 2006, the Company incurred a loss of
    $806 ($500, net of tax) on the sale of equipment related to the
    Companys decision to outsource the manufacturing of a
    product line in the Companys OEM business. Net book value
    for the disposed equipment totaled $1,000.(6)
    
    The fourth quarter of 2006 includes income tax expense of $1,939
    related to the elimination of tax deductions associated with the
    Companys customer loyalty and promotions programs in its
    MRO business for tax years 2005, 2004 and 2003. Many of the
    customer loyalty and promotion programs in place for these years
    were terminated or replaced early in 2006.(7)
    
    Reflects the impact of Rutland Tool & Supply Co. on
    net income. 49




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##### Table of Contents



Lawson
    Products, Inc. and Subsidiaries
    Schedule II  Valuation and Qualifying
    Accounts  Balance at


Charged to





Balance atBeginning


Costs and





End ofDescription

of Period


Expenses


Deductions(A)


Period(In thousands)Allowance for doubtful accounts:Year ended December 31, 2007

$
1,332


$
928


$
884


$
1,376Year ended December 31, 2006


1,483



605



756



1,332Year ended December 31, 2005


1,576



810



903



1,483     Balance at


Charged to





Balance atBeginning


Costs and





End ofDescription

of Period


Expenses


Deductions(B)


Period(In thousands)Reserve for excess and obsolete inventory:Year ended December 31, 2007

$
9,233


$
2,455


$
1,664


$
10,024Year ended December 31, 2006


9,348



521



636



9,233Year ended December 31, 2005


7,757



2,599



1,008



9,348     Balance at


Charged to





Balance atBeginning


Costs and





End ofDescription

of Period


Expenses


Deductions(C)


Period(In thousands)Valuation allowance for deferred tax assets:Year ended December 31, 2007

$
1,318


$
2,763


$
744


$
3,337Year ended December 31, 2006


1,318











1,318Year ended December 31, 2005


8,199







6,881



1,318     ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE.    ITEM 9A.
    CONTROLS
    AND PROCEDURES.  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e))
 50




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##### Table of Contents



Managements
    Report on Internal Control over Financial Reporting
  Form 10-K
  Changes
    in Internal Controls
    Report of Independent Registered Public Accounting Firm on
    Internal Control Over Financial Reporting
  Form 10-K
  ITEM 9B.
    OTHER
    INFORMATION.   PART III ITEM 10.  DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.  a.
    Directors    b.
    Executive
    Officers    c.
    Audit
    Committee    Regulation S-K,
  d.
    Code
    of Ethics  www.lawsonproducts.com
 51




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##### Table of Contents



ITEM 11.
    EXECUTIVE
    COMPENSATION.    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS.    Equity
    Compensation Plan Information
    Number of SecuritiesRemaining Available forFuture Issuance underEquity CompensationNumber of Securities to


Weighted-Average


Plans (Excludingbe Issued upon Exercise


Exercise Price of


Securities Reflected inPlan Category

of Outstanding Options


Outstanding Options


the First Column)Equity compensation plans approved by security holders


5,000


$
23.11



Equity compensation plans not approved by security holders










Total


5,000


$
23.11



   ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE.    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES.   52




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##### Table of Contents



PART IV  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES.  Financial Statements
              Financial Statement Schedule
      Regulation S-X
  Form 10-K.
  Exhibits. Regulation S-K.
 53




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##### Table of Contents



EXHIBIT INDEX  ExhibitNumber

Description of Exhibit3(1)


Certificate of Incorporation of the Company, as amended,
    incorporated herein by reference to Exhibit 3(a) to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 1988.3(2)


Amended and Restated By-laws of the Company, incorporated herein
    by reference to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 2003.10(1)*


Lawson Products, Inc. Incentive Stock Plan, incorporated herein
    by reference to Appendix A to the Companys Proxy
    Statement for the Annual Meeting of Stockholders held on
    May 11, 1999.10(2)*


Salary Continuation Agreement between the Company and
    Mr. Sidney L. Port, dated January 7, 1980,
    incorporated herein by reference from Exhibit 10(c)(2) to
    the Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 1991.10(3)*


Employment Agreement between the Company and Mr. Jerome
    Shaffer, incorporated herein by reference from
    Exhibit 10(c)(9) to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 1985.10(3.1)*


First Amendment to Employment Agreement between the Company and
    Mr. Jerome Shaffer, dated as of August 1,
    1996,incorporated herein by reference from
    Exhibit 10(c)(6.1) to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 1996.10(4)*


Employment Agreement between the Company and Jeffrey B. Belford
    dated March 1, 2005, incorporated herein by reference to
    Exhibit 10(c)(4) to the Companys Current Report on
    Form 8-K
    dated March 4, 2005.10(5)*


Amended and Restated Executive Deferral Plan, incorporated
    herein by reference from Exhibit 10(c)(7) to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 1995.10(6)*


Employment Agreement dated March 1, 2005 between the
    Company and Roger F. Cannon, incorporated herein by reference to
    Exhibit 10(c)(6) to the Companys Current Report on
    Form 8-K
    dated March 4, 2005.10(7)*


Agreement between the Company and Bernard Kalish dated
    July 31, 1999, incorporated herein by reference from
    Exhibit 10(c)(8) to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 1999.10(8)*


Lawson Products, Inc. Stock Performance Plan, incorporated
    herein by reference from Exhibit 10(c)(8) to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 2000.10(9)*


Lawson Products, Inc. 2002 Stock Equivalents Plan for Non
    Employee Directors, incorporated herein by reference from
    Exhibit 10(c)(9) to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 2002.10(10)*


Lawson Products, Inc. Long-Term Capital Accumulation Plan,
    incorporated herein by reference from Exhibit 10(c)(10) to
    the Companys Current Report on
    Form 8-K
    dated October 21, 2004.10(11)*


Employment Agreement dated January 1, 2004 between the
    Company and Robert Washlow, incorporated herein by reference to
    Exhibit 10(c)(10) to the Companys Current Report on
    Form 8-K
    dated December 28, 2004.10(12)*


Employment Agreement dated March 9, 2005 between the
    Company and Thomas J. Neri, incorporated herein by reference to
    Exhibit 10(c)(12) to the Companys Current Report on
    Form 8-K
    dated March 14, 2005.10(13)*


Employment Agreement dated March 9, 2005 between the
    Company and Neil E. Jenkins, incorporated herein by reference to
    Exhibit 10(c)(13) to the Companys Current Report on
    Form 8-K
    dated March 14, 2005.10(14)*


Form of Shareholder Value Appreciation Rights Award Agreement,
    incorporated by reference to Exhibit 10(c)(14) to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 2004.10(15)*


Form of Restricted Stock Award and Acknowledgment, incorporated
    by reference to Exhibit 10(c)(15) to the Companys
    Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 2004. 54




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##### Table of Contents



ExhibitNumber

Description of Exhibit10(16)*


Form Letter regarding Stock Performance Rights,
    incorporated by reference to Exhibit 10(c)(16) to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended December 31, 2004.10(17)


Credit Agreement dated March 27, 2001 between Lawson
    Products, Inc. and LaSalle Bank National Association, as amended
    by the First Amendment to Credit Agreement dated August 12,
    2002 as amended by Second Modification to Loan Documents dated
    July 11, 2003, and as further amended by Third Modification
    to Credit Agreement dated as of June 15, 2005, incorporated
    by reference to Exhibit 10(c)(17) to the Companys
    Form 10-Q
    for the quarter ended June 30, 2005.10(18)*


Employment Agreement dated July 27, 2005 between the
    Company and Mr. Michael W. Ruprich, incorporated herein by
    reference to Exhibit 10(c)(18) to the Companys
    Current Report on
    Form 8-K
    dated July 26, 2005.10(19)*


Employment Agreement dated September 14, 2005 between the
    Company and Mr. Kenneth E. Malik, incorporated herein by
    reference to Exhibit 10(c)(19) to the Companys
    Current Report on
    Form 8-K
    dated September 14, 2005.10(20)


Real Estate Sales Agreement, dated October 24, 2005, by and
    between the City of Chicago and Superior and Sedgwick
    Associates, incorporated by reference to Exhibit 10(c)(20)
    to the Companys Current Report on
    Form 8-K
    dated October 24, 2005.10(21)


Agreement of Limited Partnership of Superior and Sedgwick
    Associates, an Illinois Limited Partnership, dated
    November 1, 1984, incorporated by reference to
    Exhibit 10(c)(21) to the Companys Current Report on
    Form 8-K
    dated October 24, 2005.10(22)*


Separation Agreement dated April 13, 2007 between the
    Company and Mr. Robert J. Washlow, incorporated herein by
    reference to Exhibit 10.1 to the Companys Current
    Report on
    Form 8-K
    dated April 19, 2007.10(23)*


Employment Agreement dated April 16, 2007 between the
    Company and Mr. Thomas Neri, incorporated herein by
    reference to Exhibit 10.1 to the Companys Current
    Report on
    Form 8-K
    dated October 9, 2007.10(24)*


Employment Agreement dated October 1, 2007 between the
    Company and Mr. Scott Stephens, incorporated herein by
    reference to Exhibit 10.2 to the Companys Current
    Report on
    Form 8-K
    dated October 9, 2007.10(25)*


Employment Agreement dated October 1, 2007 between the
    Company and Mr. Neil Jenkins, incorporated herein by
    reference to Exhibit 10.3 to the Companys Current
    Report on
    Form 8-K
    dated October 9, 2007.10(26)


Credit Agreement dated March 27, 2001 between Lawson
    Products, Inc. and LaSalle Bank National Association, as amended
    by the Seventh Amendment to Credit Agreement dated
    December 26, 2007, incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K
    dated December 26, 2007.21


Subsidiaries of the Company.23


Consent of Ernst & Young LLP.31(1)


Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.31(2)


Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350 as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.32


Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350 as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     *
    
    Indicates management employment contracts or compensatory *
    plans or arrangements. 55




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##### Table of Contents



SIGNATURES      By:
    /s/  Thomas
    J. Neri   
      Signature

Title/s/  Thomas
    J. NeriThomas
    J. Neri

Chief Executive Officer and Director
    (principal executive officer)/s/  Scott
    F. StephensScott
    F. Stephens

Chief Financial Officer
    (principal financial and accounting officer)/s/  Ronald
    B. Port, M.DRonald
    B. Port, M.D

Chairman of the Board/s/  James
    T. BrophyJames
    T. Brophy

Director/s/  James
    S. ErrantJames
    S. Errant

Director/s/  Robert
    G. RettigRobert
    G. Rettig

Director/s/  Mitchell
    H. SaranowMitchell
    H. Saranow

Director/s/  Lee
    S. HillmanLee
    S. Hillman

Director/s/  Wilma
    J. SmelcerWilma
    J. Smelcer

Director/s/  Thomas
    S. PostekThomas
    S. Postek

Director  56