**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

| ****(Mark One)****                                                                                                                                                                                                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **** ****                                                                                                                                                                                                                                                                                                                                        |
| ****x****                                                                                                                                                                                                                                                                                                                                             | ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE********SECURITIES  EXCHANGE ACT OF 1934**** |
|                                                                                                                                                                                                                                                                                                                                                  |
| ****FOR THE QUARTERLY PERIOD  ENDED JUNE 29, 2007****                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                  |
| ****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)

**NOT APPLICABLE**

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

| Yes x |   | No o |
|------------|--------|-----------|

 

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. (Check one):

| Large Accelerated  Filer o |   | Accelerated  Filer x |   | Non-accelerated  Filero |
|---------------------------------|--------|---------------------------|--------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

| Yes o |   | No x |
|------------|--------|-----------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: As of August 1, 2007, there were 32,299,963 shares ofthe registrant’s common stock outstanding (excluding 39,400 shares held intreasury), par value $0.01.

 

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**TABLE OF CONTENTS**
| ****ITEM****       | ** **                                                                                                                  | ****PAGE****   |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------|----------------|
| ** **         | ****PART  I. FINANCIAL INFORMATION****                                                                                      |           |
| **** ****     | **** ****                                                                                                              | **** **** |
| ****1****          | ****Financial Statements (Unaudited)****                                                                                    |           |
| ** **         | ****Condensed Consolidated Balance Sheets as of June 29, 2007 and December  29, 2006****                                    | 1              |
| ** **         | ****Condensed Consolidated Statements of Operations for  the Three and Six Months Ended June 29, 2007 and June 30, 2006**** | ****2****      |
| ** **         | ****Condensed Consolidated Statement of Stockholders’  Equity for the Six Months Ended June 29, 2007****               | ****3****      |
| ** **         | ****Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 29, 2007 and June 30, 2006****           | ****4****      |
| **** ****     | ****Notes to Condensed Consolidated Financial Statements****                                                                | ****6****      |
| ****2.****         | ****Management’s Discussion and Analysis of Financial  Condition and Results of Operations****                         | ****19****     |
| ****3.****         | ****Quantitative and Qualitative Disclosures about Market  Risk****                                                         | ****26****     |
| ****4.****         | ****Controls and Procedures****                                                                                             | ****27****     |
| ** **         | **** ****                                                                                                              |           |
| ** **         | ****PART  II. OTHER INFORMATION****                                                                                         |           |
| **** ****     | **** ****                                                                                                              | **** **** |
| ****1.****         | ****Legal Proceedings****                                                                                                   | ****28****     |
| ****1A.****        | ****Risk Factors****                                                                                                        | ****28****     |
| ****2.****         | ****Unregistered Sales of Equity Securities and Use of  Proceeds****                                                        | 28             |
| ****3.****         | ****Defaults Upon  Senior Securities****                                                                                    | 28             |
| ****4.****         | Submission of Matters to a Vote of Security Holders                                                                         | 28             |
| 5.                 | Other  Information                                                                                                          | 29             |
| ****6.****         | ****Exhibits****                                                                                                            | ****29****     |
| **** ****     | **** ****                                                                                                              | **** **** |
| ****SIGNATURES**** | ****30****                                                                                                                  |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1. Financial Statements**

**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**AS OFJUNE 29, 2007 AND DECEMBER 29, 2006**

**(inthousands, except share and per share data)**
| ** **                                                                                                                                                                                         | ** ** | **                      ** | ** ** | ** **            | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **June 29,**                                                                                                                        | ** ** | **December 29,** | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **2007**                                                                                                                                 | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                                         |       |                                                                                                                                     |       |                  |       |
| Current assets:                                                                                                                                                                                    |       |                                                                                                                                     |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                          |       | $                                                                                                                                        | 33,437     |                  | $          | 6,852 |   |
| Accounts receivable - trade (net of allowance for  doubtful accounts of $9,005 and $10,224)                                                                                                   |       | 166,690                                                                                                                                  |       | 142,901               |       |
| Accounts receivable - other                                                                                                                                                                        |       | 13,766                                                                                                                                   |       | 15,663                |       |
| Inventory                                                                                                                                                                                          |       | 205,214                                                                                                                                  |       | 201,662               |       |
| Prepaid expenses and other current assets                                                                                                                                                          |       | 6,408                                                                                                                                    |       | 7,252                 |       |
| Deferred income taxes                                                                                                                                                                              |       | 18,981                                                                                                                                   |       | 17,821                |       |
| Total current assets                                                                                                                                                                               |       | 444,496                                                                                                                                  |       | 392,151               |       |
|                                                                                                                                                                                               |       |                                                                                                                                     |       |                  |       |
| Property and  equipment, net                                                                                                                                                                       |       | 34,969                                                                                                                                   |       | 31,754                |       |
| Goodwill                                                                                                                                                                                           |       | 314,262                                                                                                                                  |       | 313,077               |       |
| Other intangible  assets, net                                                                                                                                                                      |       | 140,110                                                                                                                                  |       | 143,440               |       |
| Other assets                                                                                                                                                                                       |       | 10,515                                                                                                                                   |       | 10,147                |       |
| Total assets                                                                                                                                                                                       |       | $                                                                                                                                        | 944,352    |                  | $          | 890,569 |   |
|                                                                                                                                                                                               |       |                                                                                                                                     |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                     |       |                                                                                                                                     |       |                  |       |
| Current  liabilities:                                                                                                                                                                              |       |                                                                                                                                     |       |                  |       |
| Accounts payable                                                                                                                                                                                   |       | $                                                                                                                                        | 99,730     |                  | $          | 67,493 |   |
| Accrued expenses and other current liabilities                                                                                                                                                     |       | 39,343                                                                                                                                   |       | 38,722                |       |
| Accrued interest                                                                                                                                                                                   |       | 726                                                                                                                                      |       | 3,516                 |       |
| Income taxes payable                                                                                                                                                                               |       | 1,653                                                                                                                                    |       | 2,486                 |       |
| Current portion of long-term debt                                                                                                                                                                  |       | 2,414                                                                                                                                    |       | 2,416                 |       |
| Capital lease - current                                                                                                                                                                            |       | 210                                                                                                                                      |       | 307                   |       |
| Total current liabilities                                                                                                                                                                          |       | 144,076                                                                                                                                  |       | 114,940               |       |
|                                                                                                                                                                                               |       |                                                                                                                                     |       |                  |       |
| Long-term  liabilities:                                                                                                                                                                            |       |                                                                                                                                     |       |                  |       |
| Deferred income taxes                                                                                                                                                                              |       | 34,780                                                                                                                                   |       | 34,799                |       |
| Long-term debt, net of current portion                                                                                                                                                             |       | 417,511                                                                                                                                  |       | 418,650               |       |
| Capital lease - long term                                                                                                                                                                          |       | 575                                                                                                                                      |       | 683                   |       |
| Other liabilities                                                                                                                                                                                  |       | 2,359                                                                                                                                    |       | 818                   |       |
| Total liabilities                                                                                                                                                                                  |       | 599,301                                                                                                                                  |       | 569,890               |       |
| Commitments and  contingencies                                                                                                                                                                     |       |                                                                                                                                     |       |                  |       |
| Senior preferred  stock, $0.01 par value, 20,000,000 shares authorized, no shares outstanding  as of June 29, 2007 and December 29, 2006                                                           |       | —                                                                                                                                   |       | —                |       |
|                                                                                                                                                                                               |       |                                                                                                                                     |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                        |       |                                                                                                                                     |       |                  |       |
| Common stock; $0.01 par value, 100,000,000  authorized; 32,336,184 issued and 32,296,784 outstanding as of June 29, 2007  and 32,308,221 issued and 32,284,069 outstanding as of December 29, 2006 |       | 323                                                                                                                                      |       | 323                   |       |
| Additional paid-in capital                                                                                                                                                                         |       | 565,364                                                                                                                                  |       | 561,634               |       |
| Accumulated deficit                                                                                                                                                                                |       | (221,213                                                                                                                                 | )          | (241,852              | )          |
| Accumulated other comprehensive income                                                                                                                                                             |       | 1,392                                                                                                                                    |       | 1,072                 |       |
| Treasury stock, at cost, 39,400 shares as of June  29, 2007 and 24,152 shares as of December 29, 2006                                                                                              |       | (815                                                                                                                                     | )          | (498                  | )          |
| Total stockholders’ equity                                                                                                                                                                    |       | 345,051                                                                                                                                  |       | 320,679               |       |
| Total liabilities  and stockholders’ equity                                                                                                                                                   |       | $                                                                                                                                        | 944,352    |                  | $          | 890,569 |   |

 

*See accompanying notes to unaudited condensed consolidatedfinancial statements.*

1

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**

**THREEAND SIX MONTHS ENDED JUNE 29, 2007 AND JUNE 30, 2006**

**(inthousands, except share and per share data)**
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 29,**                | ** ** | **June 30,**              | ** ** | **June 29,** | ** ** | **June 30,** | ** ** |
| ** **                                   | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                    |       | $                                | 313,247    |                           | $          | 235,409 |   | $ | 608,650 |   | $ | 460,083 |   |
| Cost of sales                                |       | 195,280                          |       | 145,913                        |       | 378,389 |   | 284,879 |   |
| Gross profit                                 |       | 117,967                          |       | 89,496                         |       | 230,261 |   | 175,204 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                         |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative expenses |       | 86,935                           |       | 63,303                         |       | 172,240 |   | 124,981 |   |
| Depreciation and amortization                |       | 3,667                            |       | 3,509                          |       | 7,218 |   | 6,954 |   |
| Total operating expense                      |       | 90,602                           |       | 66,812                         |       | 179,458 |   | 131,935 |   |
| Operating income                             |       | 27,365                           |       | 22,684                         |       | 50,803 |   | 43,269 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Loss on extinguishment  of debt              |       | —                           |       | (20,700                        | )          | — |   | (20,700 | ) |
| Interest expense                             |       | (8,487                           | )          | (6,982                         | )          | (17,047 | ) | (13,934 | ) |
| Interest income                              |       | 589                              |       | 174                            |       | 989 |   | 234 |   |
| Other income                                 |       | 154                              |       | 129                            |       | 359 |   | 255 |   |
| Income (Loss) before income taxes            |       | 19,621                           |       | (4,695                         | )          | 35,104 |   | 9,124 |   |
| Income tax  provision (benefit)              |       | 7,646                            |       | (1,830                         | )          | 13,689 |   | 3,548 |   |
|  Net income  (loss)                     |       | $                                | 11,975     |                           | $          | (2,865 | ) | $ | 21,415 |   | $ | 5,576 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Earnings (Loss)  per share:                  |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | $                                | 0.37       |                           | $          | (0.09 | ) | $ | 0.66 |   | $ | 0.17 |   |
| Diluted                                      |       | $                                | 0.37       |                           | $          | (0.09 | ) | $ | 0.66 |   | $ | 0.17 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares outstanding:        |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | 32,226,176                       |       | 32,121,936                     |       | 32,219,593 |   | 32,106,534 |   |
| Diluted                                      |       | 32,704,448                       |       | 32,121,936                     |       | 32,651,384 |   | 32,667,695 |   |

 

*See accompanying notes to unauditedcondensed consolidated financial statements.*

2

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**INTERLINE BRANDS, INC.AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)**

**SIX MONTHS ENDED JUNE 29, 2007**

**(inthousands, except share data)**

 
| ** **                                                                 | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | **Accumulated Other  Comprehensive** | ** ** | **Treasury** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------------------------------------|------------|--------------|------------|-------------------------------|------------|
| ** **                                                                 | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit**                               | ** ** | **Income**   | ** ** | **Stock**                     | ** ** | **Equity** | ** ** |
|                                                                       |       |                  |       |                    |       |            |       |                                      |       |         |       |                          |       |   |   |
| Balance at  December 29, 2006                                              |       | 32,308,221            |       | $                       | 323        |            | $          | 561,634                                   |       | $            | (241,852   | )                             | $          | 1,072 |   | $ | (498 | ) | $ | 320,679 |   |
| Share-based compensation                                                   |       |                  |       |                    |       | 3,193           |       |                                      |       |         |       |                          |       | 3,193 |   |
| Issuance of restricted stock                                               |       | 4,600                 |       | —                  |       | —          |       |                                      |       |         |       |                          |       | — |   |
| Issuance of common stock from stock options  exercised                     |       | 23,363                |       | —                  |       | 341             |       |                                      |       |         |       |                          |       | 341 |   |
| Tax benefits on stock options exercised                                    |       |                  |       |                    |       | 72              |       |                                      |       |         |       |                          |       | 72 |   |
| Tax benefits on other vested share-based payments                          |       |                  |       |                    |       | 124             |       |                                      |       |         |       |                          |       | 124 |   |
| Repurchase of common stock                                                 |       |                  |       |                    |       |            |       |                                      |       |         |       | (317                          | )          | (317 | ) |
| Cumulative impact of change in accounting for  uncertainty in income taxes |       |                  |       |                    |       |            |       | (776                                      | )          |         |       |                          |       | (776 | ) |
| Comprehensive income:                                                      |       |                  |       |                    |       |            |       |                                      |       |         |       |                          |       |   |   |
| Net income                                                                 |       |                  |       |                    |       |            |       | 21,415                                    |       |         |       |                          |       |   |   |
| Amortization of unrecognized gain on employee  benefits                    |       |                  |       |                    |       |            |       |                                      |       | (78          | )          |                          |       |   |   |
| Foreign currency translation                                               |       |                  |       |                    |       |            |       |                                      |       | 398          |       |                          |       |   |   |
| Total comprehensive income                                                 |       |                  |       |                    |       |            |       |                                      |       |         |       |                          |       | 21,735 |   |
| Balance at June 29,  2007                                                  |       | 32,336,184            |       | $                       | 323        |            | $          | 565,364                                   |       | $            | (221,213   | )                             | $          | 1,392 |   | $ | (815 | ) | $ | 345,051 |   |

* *

*Seeaccompanying notes to unaudited condensed consolidated financial statements.*

3

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**SIXMONTHS ENDED JUNE 29, 2007 AND JUNE 30, 2006**

**(inthousands)**

**** ****
| ** **                                                                               | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **June 29,**              | ** ** | **June 30,** | ** ** |
| ** **                                                                               | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                   |       |                           |       |   |   |
| Net income                                                                               |       | $                              | 21,415     |   | $ | 5,576 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:       |       |                           |       |   |   |
| Depreciation and  amortization                                                           |       | 7,644                          |       | 6,954 |   |
| Amortization of  debt issuance costs                                                     |       | 541                            |       | 821 |   |
| Amortization of  discount on 81¤8  % senior subordinated notes                      |       | 66                             |       | — |   |
| Write-off of  debt issuance costs                                                        |       | —                         |       | 7,037 |   |
| Tender and  redemption premiums on 111¤2 % senior  subordinated notes               |       | —                         |       | 13,663 |   |
| Share-based  compensation                                                                |       | 3,193                          |       | 1,622 |   |
| Deferred income  taxes                                                                   |       | (965                           | )          | (2,390 | ) |
| Provision for  doubtful accounts                                                         |       | 1,753                          |       | 1,684 |   |
| (Gain) Loss on  disposal of property and equipment                                       |       | (12                            | )          | 30 |   |
| Excess tax  benefits from share-based compensation                                       |       | (196                           | )          | (388 | ) |
|                                                                                     |       |                           |       |   |   |
| Changes in  assets and liabilities which provided (used) cash, net of business acquired: |       |                           |       |   |   |
| Accounts  receivable - trade                                                             |       | (25,383                        | )          | (16,097 | ) |
| Accounts  receivable - other                                                             |       | 1,909                          |       | 2,995 |   |
| Inventory                                                                                |       | (3,327                         | )          | (5,813 | ) |
| Prepaid expenses  and other current assets                                               |       | 855                            |       | (1,215 | ) |
| Other assets                                                                             |       | (326                           | )          | (1,183 | ) |
| Accounts payable                                                                         |       | 32,195                         |       | 6,094 |   |
| Accrued expenses  and other current liabilities                                          |       | (1,237                         | )          | 1,437 |   |
| Accrued interest                                                                         |       | (2,790                         | )          | (1,753 | ) |
| Income taxes  payable                                                                    |       | 11                             |       | (7,159 | ) |
| Other  liabilities                                                                       |       | 55                             |       | — |   |
| Net cash  provided by operating activities                                               |       | 35,401                         |       | 11,915 |   |
| Cash flows from investing  activities:                                                   |       |                           |       |   |   |
| Purchase of  property and equipment, net                                                 |       | (7,978                         | )          | (3,711 | ) |
| Purchase of  businesses, net of cash acquired                                            |       | (3                             | )          | (355 | ) |
| Net cash used in  investing activities                                                   |       | (7,981                         | )          | (4,066 | ) |
|                                                                                          |            |                                |            |  |  |  |  |

 

*****(Continued)*****

4

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**INTERLINE BRANDS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)-Continued**

**SIX MONTHS ENDED JUNE 29, 2007AND JUNE 30, 2006**

**(inthousands)**
| ** **                                                                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **June 29,**              | ** ** | **June 30,** | ** ** |
| ** **                                                                          | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Cash Flows from  Financing Activities:                                              |       |                           |       |   |   |
| Decrease in revolver, net                                                           |       | —                         |       | (3,000 | ) |
| Repayment of term debt                                                              |       | (1,208                         | )          | (148,800 | ) |
| Repayment of 111¤2%  senior subordinated notes                                 |       | —                         |       | (130,000 | ) |
| Payment of tender and redemption premiums on 111¤2%  senior subordinated notes |       | —                         |       | (13,663 | ) |
| Proceeds from issuance of 81¤8%  senior subordinated notes, net of discount    |       | —                         |       | 198,566 |   |
| Proceeds from issuance of term debt                                                 |       | —                         |       | 100,000 |   |
| Payment of debt issuance costs                                                      |       | (34                            | )          | (7,326 | ) |
| Proceeds from stock options exercised                                               |       | 349                            |       | 685 |   |
| Excess tax benefits from share-based compensation                                   |       | 196                            |       | 388 |   |
| Payments on capital lease obligations                                               |       | (205                           | )          | (204 | ) |
| Net cash used in financing activities                                               |       | (902                           | )          | (3,354 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                       |       | 67                             |       | 172 |   |
| Net increase in  cash and cash equivalents                                          |       | 26,585                         |       | 4,667 |   |
| Cash and cash  equivalents at beginning of period                                   |       | 6,852                          |       | 2,958 |   |
| Cash and cash  equivalents at end of period                                         |       | $                              | 33,437     |   | $ | 7,625 |   |
|                                                                                |       |                           |       |   |   |
| Supplemental disclosure  of cash flow information:                                  |       |                           |       |   |   |
| Cash paid during the period for :                                                   |       |                           |       |   |   |
| Interest                                                                            |       | $                              | 19,562     |   | $ | 14,854 |   |
| Income taxes, net of refunds                                                        |       | $                              | 14,942     |   | $ | 13,526 |   |
|                                                                                |       |                           |       |   |   |
| Schedule of non-cash  investing and financing activities:                           |       |                           |       |   |   |
| Adjustments to liabilities assumed and goodwill on  businesses acquired             |       | $                              | 1,298      |   | $ | 866 |   |
| Treasury stock  acquired with accrued expenses and other current liabilities        |       | $                              | 317        |   | $ | 498 |   |

* *

*See accompanying notes tounaudited condensed consolidated financial statements.*

5

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**INTERLINEBRANDS, INC. AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

** **

** **

**1.             DESCRIPTIONOF BUSINESS AND BASIS OF PRESENTATION**

*Business*

Interline Brands, Inc., a Delaware corporation, andits 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 (“HVAC”), janitorial and sanitary supplies andother MRO products. Interline’s highly diverse customer base consists ofmulti-family housing, educational, lodging, government and health carefacilities, professional contractors and specialty distributors.

The Companymarkets and sells its products primarily through ten distinct and targetedbrands. The Company utilizes a variety of sales channels, including a directsales force, telesales representatives, a direct marketing program,brand-specific websites and a national accounts sales program. The Companydelivers its products through its network of regional distribution centers andprofessional contractor showrooms located throughout the United States andCanada, a national distribution center in Nashville, Tennessee, vendor managedinventory locations at large professional contractor customer locations and itsdedicated fleet of trucks. Through its broad distribution network, the Companyprovides same day/next day delivery service to 98% of the U.S. population.

During December 2004, the Company completed itsinitial public offering (“IPO”). Immediately prior to the closing of the IPO, areincorporation merger occurred and the Company became the parent company ofits principal operating subsidiary, Interline Brands, Inc., a New Jerseycorporation (“Interline New Jersey”).

*Basis of Presentation*

The accompanyingunaudited interim condensed consolidated financial statements of Interline havebeen prepared in accordance with accounting principles generally accepted inthe United States of America and instructions to the Quarterly Report on Form10-Q and Article 10 of Regulation S-X promulgated by the Securities andExchange Commission (“SEC”). Accordingly, certain information and footnotedisclosures normally included in financial statements included in the Company’sAnnual Report on Form 10-K have been condensed or omitted. The accompanyingunaudited interim condensed consolidated financial statements should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations contained in this report and the audited consolidatedfinancial statements and related notes included in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 29, 2006 filed with theSEC.

All adjustments,consisting of normal recurring adjustments, which are, in the opinion ofmanagement, necessary for a fair statement of the results for the interimperiods presented have been recorded. The results of operations for the interimperiods presented are not necessarily indicative of the results to be expectedfor the full year.

The preparation ofcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the condensed consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period. Significantestimates include valuation reserves for accounts receivable, inventory andincome taxes, reserves for self-insurance programs, valuation of goodwill andvaluation of assets and liabilities assumed in the acquisition of AmSan LLC (“AmSan”).Actual results could differ from those estimates.

*SegmentInformation*

In accordance withFinancial Accounting Standards Board (“FASB”) Statement No. 131, *Disclosure about Segments of an Enterprise and Related Information*,(“FAS 131”) the Company has two operating segments: Interline Brands and AmSan.These segments are aggregated into one reportable segment, the distribution ofMRO products, because they possess similar economic characteristics and havecommon products, customers and methods of distribution. During 2007, theCompany will undertake significant integration activities to consolidate AmSan’soperations onto the Company’s information systems platform.

6

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Our net sales forthe three and six months ended June 29, 2007 and June 30, 2006 by productcategory were as follows (in thousands):
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **June 29,**                | ** ** | **June 30,**              | ** ** | **June 29,** | ** ** | **June 30,** | ** ** |
| **Product Category**                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Plumbing                                   |       | $                                | 95,854     |                           | $          | 92,987 |   | $ | 191,860 |   | $ | 188,473 |   |
| Janitorial and  sanitary                   |       | 72,674                           |       | 5,650                          |       | 140,321 |   | 11,042 |   |
| Electrical                                 |       | 25,373                           |       | 31,545                         |       | 57,572 |   | 61,651 |   |
| Heating,  ventilation and air conditioning |       | 29,759                           |       | 33,687                         |       | 54,300 |   | 60,050 |   |
| Appliances                                 |       | 18,168                           |       | 13,889                         |       | 33,529 |   | 26,471 |   |
| Security                                   |       | 15,662                           |       | 13,418                         |       | 30,728 |   | 27,123 |   |
| Hardware                                   |       | 14,722                           |       | 13,183                         |       | 27,720 |   | 25,540 |   |
| Other                                      |       | 41,035                           |       | 31,050                         |       | 72,620 |   | 59,733 |   |
| Total                                      |       | $                                | 313,247    |                           | $          | 235,409 |   | $ | 608,650 |   | $ | 460,083 |   |

 

**2.             ACQUISITIONS**

***AmSanLLC***

On July 3, 2006,Interline New Jersey acquired all of the outstanding equity interests of AmSanfrom American Sanitary Incorporated for $133.0 million in cash, including cashacquired of $2.2 million and transaction fees of $3.0 million. AmSan is aleading national distributor and direct marketer of janitorial and sanitarysupplies. The acquisition was funded with the $130.0 million delayed drawfacility under Interline New Jersey’s bank credit facility.

The followingtable summarizes the allocation of the purchase price to the AmSan assetsacquired and liabilities assumed at estimated fair values (in thousands):
| Current assets            |   | $       | 53,650  |   |
|---------------------------|--------|---------|---------|--------|
| Property and  equipment   |   | 2,983   |    |
| Goodwill                  |   | 66,092  |    |
| Intangible  assets        |   | 43,600  |    |
| Other assets              |   | 631     |    |
| Total assets acquired     |   | 166,956 |    |
| Current  liabilities      |   | 32,662  |    |
| Other  liabilities        |   | 1,255   |    |
| Total liabilities assumed |   | 33,917  |    |
| Net assets acquired       |   | $       | 133,039 |   |

***Acquisition Reserves***

The following table summarizes the changes to reserves assumed in connection with the Company’s business combinations (in thousands):
| ** **                    | ** ** | **Employee  Severance and  Relocation** | ** ** | **Facility  Closing and  Other Costs** | ** ** | **Total** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|-----------|------------|
| Balance at  December 29, 2006 |       | $                                            | 1,093      |                                             | $          | 5,321     |       | $ | 6,414 |   |
| Additions                     |       | $                                            | 248        |                                             | $          | 698       |       | 946 |   |
| Payments                      |       | (813                                         | )          | (153                                             | )          | (966      | )          |
| Balance at June  29, 2007     |       | $                                            | 528        |                                             | $          | 5,866     |       | $ | 6,394 |   |

 

7

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**3**.             EARNINGSPER SHARE

Earnings per sharefor all periods has been computed in accordance with FASB Statement No. 128, *Earnings per Share*, (“FAS 128”). Basic earnings per share iscomputed by dividing net income by the weighted-average number of shares ofcommon stock outstanding during the period. Diluted earnings per share iscomputed by dividing net income by the weighted-average number of shares ofcommon stock outstanding during the period as adjusted for the potentialdilutive effect of stock options and non-vested shares of restricted stock,restricted share units and deferred stock units using the treasury stockmethod.

The followingsummarizes the shares of common stock used to calculate earnings per shareincluding the potentially dilutive impact of stock options, restricted stock,restricted share units and deferred stock units, calculated using the treasurystock method, as included in the calculation of diluted weighted-averageshares:
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June 29,**                | ** ** | **June 30,**              | ** ** | **June 29,** | ** ** | **June 30,** | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006(1)**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  shares outstanding - basic   |       | 32,226,176                       |       | 32,121,936                     |       | 32,219,593 |   | 32,106,534 |   |
| Dilutive shares resulting from:                |       |                             |       |                           |       |   |   |   |   |
| Stock options                                  |       | 370,042                          |       | —                         |       | 341,106 |   | 469,797 |   |
| Restricted stock                               |       | 21,794                           |       | —                         |       | 24,786 |   | 58,468 |   |
| Restricted share units                         |       | 84,143                           |       | —                         |       | 64,330 |   | 32,146 |   |
| Deferred stock units                           |       | 2,293                            |       | —                         |       | 1,569 |   | 750 |   |
| Weighted average shares  outstanding - diluted |       | 32,704,448                       |       | 32,121,936                     |       | 32,651,384 |   | 32,667,695 |   |

----

(1)           Duringthe three months ended June 30, 2006, potential common shares totaling 628,946were excluded from the computation of loss per share because their effect wouldbe anti-dilutive. Potential common shares include stock options, restrictedstock, restricted share units and deferred stock units.

During the threemonths ended June 29, 2007 and June 30, 2006, options to purchase 1,150,516shares and 279,007 shares of common stock, respectively, were excluded from thecomputations 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 six months endedJune 29, 2007 and June 30, 2006, options to purchase 909,591 shares and 252,783shares of common stock, respectively, were excluded from the computations of dilutedweighted-average shares outstanding because the exercise prices of thoseoptions are greater than the average market value of common stock and theeffect would be anti-dilutive.

**4.             COMPREHENSIVE INCOME**

Comprehensive income refers to revenues, expenses,gains and losses that under accounting principles generally accepted in theUnited States are included in comprehensive income but are excluded from netincome as these amounts are recorded directly as an adjustment to stockholders’equity, net of tax. The components of comprehensive income for the three andsix months ended June 29, 2007 and June 30, 2006 are as follows (in thousands):
| ** **                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **June 29,**                | ** ** | **June 30,**              | ** ** | **June 29,** | ** ** | **June 30,** | ** ** |
| ** **                                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                              |       | $                                | 11,975     |                           | $          | (2,865 | ) | $ | 21,415 |   | $ | 5,576 |   |
| Other  comprehensive income (loss):                     |       |                             |       |                           |       |   |   |   |   |
| Amortization of unrecognized gain on employee  benefits |       | (1                               | )          | —                         |       | (78 | ) | — |   |
| Foreign currency translation                            |       | 359                              |       | 189                            |       | 398 |   | 172 |   |
| Total comprehensive  income                             |       | $                                | 12,333     |                           | $          | (2,676 | ) | $ | 21,735 |   | $ | 5,748 |   |

 

8

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**5.             SHARE-BASED COMPENSATION**

During the three months ended June 29, 2007 and June30, 2006, share-based compensation expense was $1.7 million and $0.9 million,respectively. During the six months ended June 29, 2007 and June 30, 2006,share-based compensation expense was $3.2 million and $1.6 million,respectively. As of June 29, 2007, there was $11.3 million of totalunrecognized share-based compensation expense related to unvested share-basedequity awards. The expense is expected to be recognized over a weighted-averageperiod of 2.4 years.

During the three months ended June 29, 2007 and June30, 2006, the Company granted 82,500 and 52,500 stock options, respectively,with a weighted-average grant date fair value of $7.38 and $9.48, respectively.During the six months ended June 29, 2007 and June 30, 2006, the Companygranted 485,346 and 397,702 stock options, respectively, with aweighted-average grant date fair value of $6.88 and $7.81, respectively. Aspermitted by FASB Statement No. 123 (revised 2004), *Share-BasedCompensation*, (“FAS 123R”) the fair values of stock options wereestimated using the Black-Scholes option-pricing model. Expected volatility isbased on historical performance of the Company’s stock. The Company also useshistorical data to estimate the timing and amount of stock option exercises andforfeitures. The expected life represents the period of time that stock optionsare expected to remain outstanding and is based on the contractual term of thestock options and expected exercise behavior. The risk-free interest rate isbased on U.S. Treasury zero-coupon issues with a remaining term equal to theexpected option life assumed at the date of grant. The Black-Scholesweighted-average assumptions were as follows:
| ** **                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **June 29,**                | ** ** | **June 30,**              | ** ** | **June 29,** | ** ** | **June 30,** | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected  volatility      |       | 26.8                             | %          | 30.9                           | %          | 27.0 | % | 26.8 | % |
| Expected  dividends       |       | 0.0                              | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |
| Risk-free  interest rate  |       | 4.5                              | %          | 5.0                            | %          | 4.5 | % | 4.8 | % |
| Expected life (in  years) |       | 5.0                              |       | 5.0                            |       | 5.0 |   | 5.0 |   |

 

During the three and six months ended June 29, 2007,10,902 and 23,363 stock options were exercised with an intrinsic value of $0.1million and $0.2 million, respectively. During the three and six months endedJune 30, 2006, 45,680 stock options were exercised with an intrinsic value of$0.5 million.

A summary status of restricted stock, restricted shareunits and deferred stock units as of June 29, 2007, and changes during the yearthen ended is presented below:
| ** **                        | ** ** | **Restricted Stock** | ** ** | **Restricted Share 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 29, 2006 |       | 137,335                   |       | $                                    | 16.34      |                               | 196,595    |   | $ | 23.35 |   | 12,924 |   | $ | 25.17 |   |
| Granted                           |       | 4,600                     |       | 22.27                                |       | 183,979                            |       | 21.00 |   | 11,477 |   | 23.29 |   |
| Vested                            |       | (54,770                   | )          | 15.00                                |       | —                             |       | — |   | — |   | — |   |
| Outstanding at June 29,  2007     |       | 87,165                    |       | $                                    | 17.49      |                               | 380,574    |   | $ | 22.21 |   | 24,401 |   | $ | 24.28 |   |

During the six months ended June 29, 2007 and June 30, 2006, 54,770 and58,607 shares of restricted stock vested, respectively. The total fair value ofrestricted stock vested during the six months ended June 29, 2007 and June 30,2006 was $1.1 million and $1.5 million, respectively.

**6.             INCOME TAXES**

Effective December30, 2006, the Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes—an Interpretation of FASBStatement No. 109*, (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in accordance with FASB Statement No.109, *Accounting for Income Taxes*, (“FAS 109”).FIN 48 clarifies the application of FAS 109 by defining criteria that anindividual tax position must meet for any part of the benefit of that positionto be recognized in the financial statements. Additionally, FIN 48 providesguidance on the measurement, derecognition, classification and disclosure oftax positions, along with accounting for the related interest and penalties.

9

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As a result of theimplementation of FIN 48, the Company recognized an increase of $0.8 million inthe liability for unrecognized tax benefits, which was accounted for as anincrease to the December 30, 2006 balance of accumulated deficit. As of thedate of adoption and after the impact of recognizing the increase in liabilitynoted above, the Company’s unrecognized tax benefits totaled $1.4 million. Ofthis $1.4 million, $1.0 million represents the amount of unrecognized taxbenefits that, if recognized, would favorably affect the effective income taxrate. In addition, during the three and six months ended June 29, 2007, theCompany recognized less than $0.1 million and $0.1 million, respectively, inadditional income tax benefits associated with uncertain tax positions andincreased the related liability to $1.5 million.

The Company recognizespotential accrued penalties and accrued interest related to unrecognized taxbenefits within its statements of earnings as selling, general andadministrative expenses and interest expense, respectively. In conjunction withthe adoption of FIN 48, the Company accrued $0.4 million of interest andpenalties at December 30, 2006 which is included as a component of the $1.4million unrecognized tax benefits noted above. During the three and six monthsended June 29, 2007, the Company recognized less than $0.1 million and lessthan $0.1 million, respectively, in potential interest and penalties associatedwith uncertain tax positions. To the extent interest and penalties are notassessed with respect to uncertain tax positions, amounts accrued will bereduced and reflected as a reduction of selling, general and administrativeexpenses and interest expense, respectively.

The Company filesnumerous consolidated and separate income tax returns in the United StatesFederal jurisdiction and in many state and foreign jurisdictions. With fewexceptions, the Company is no longer subject to U.S. Federal income taxexaminations for years before 2004 and is no longer subject to state and local,or foreign income tax examinations by tax authorities for years before 2003.

The Company does notanticipate that total unrecognized tax benefits will significantly change priorto June 28, 2008.

**7.**                                      GUARANTOR SUBSIDIARIES

InJune 2006, Interline New Jersey (the “Subsidiary Issuer”) issued $200.0 millionof 81⁄8% senior subordinated notes due 2014 and entered into a $330.0million bank credit facility. The 81⁄8% senior subordinated notes and thebank credit facility are fully and unconditionally guaranteed, jointly andseverally, on a senior subordinated basis by the Company (the “Parent Company”)and all of Interline New Jersey’s 100% owned domestic subsidiaries: WilmarHoldings, Inc., Wilmar Financial, Inc., Glenwood Acquisition LLC and AmSan LLC(collectively the “Guarantor Subsidiaries”). The guarantees by the ParentCompany and the Guarantor Subsidiaries are senior to any of their existing andfuture subordinated obligations, equal in right of payment with any of theirexisting and future senior subordinated indebtedness and subordinated to any oftheir existing and future senior indebtedness.

TheCompany is a holding company whose only asset is the stock of its subsidiaries.The Company conducts virtually all of its business operations through InterlineNew Jersey. Accordingly, the Company’s only material sources of cash aredividends and distributions with respect to its ownership interests inInterline New Jersey that are derived from the earnings and cash flow generatedby Interline New Jersey.

Thefollowing tables set forth, on a condensed consolidating basis, the balancesheets, statements of operations and statements of cash flows for the ParentCompany, Subsidiary Issuer and Guarantor Subsidiaries for all financialstatement periods presented in the Company’s consolidated financial statements.The non-guarantor subsidiaries are minor and are included in the condensedfinancial data of the Subsidiary Issuer. Subsequent to the issuance of theconsolidated financial statements for the three and six months ended June 30,2006, it was determined that the condensed consolidating financial data for thethree and six months ended June 30, 2006 was not presented. The currentpresentation has been supplemented to reflect the condensed consolidatingfinancial data for the three and six months ended June 30, 2006. Thepresentation did not affect the Company’s consolidated financial position orconsolidated results of operations, nor did it adversely impact the Company’scompliance with debt covenants. The Subsidiary Issuer does not allocateintegration expenses, corporate overhead or other expenses for shared servicesto the Guarantor Subsidiaries; therefore, the following tables do not reflectany such allocation.

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**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OFJUNE 29, 2007**

**(inthousands)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |           |       |             |       |              |       |             |       |
| Current assets:                                  |       |        |       |           |       |             |       |              |       |             |       |
| Cash and cash equivalents                        |       | $           | —     |           | $          | 34,470           |       | $                 | 11         |             | $          | (1,044 | ) | $ | 33,437 |   |
| Accounts receivable - trade                      |       | —      |       | 138,752        |       | 27,938           |       | —            |       | 166,690          |       |
| Inventory                                        |       | —      |       | 187,123        |       | 18,091           |       | —            |       | 205,214          |       |
| Intercompany receivable                          |       | —      |       | —         |       | 108,694          |       | (108,694          | )          | —           |       |
| Other current assets                             |       | —      |       | 36,116         |       | 3,039            |       | —            |       | 39,155           |       |
| Total current assets                             |       | —      |       | 396,461        |       | 157,773          |       | (109,738          | )          | 444,496          |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Property and  equipment, net                     |       | —      |       | 32,264         |       | 2,705            |       | —            |       | 34,969           |       |
| Goodwill                                         |       | —      |       | 248,170        |       | 66,092           |       | —            |       | 314,262          |       |
| Other intangible  assets, net                    |       | —      |       | 98,023         |       | 42,087           |       | —            |       | 140,110          |       |
| Investment in  subsidiaries                      |       | 345,051     |       | 175,546        |       | —           |       | (520,597          | )          | —           |       |
| Other assets                                     |       | —      |       | 6,537          |       | 8,824            |       | (4,846            | )          | 10,515           |       |
| Total assets                                     |       | $           | 345,051    |           | $          | 957,001          |       | $                 | 277,481    |             | $          | (635,181 | ) | $ | 944,352 |   |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   |       |        |       |           |       |             |       |              |       |             |       |
| Current  liabilities:                            |       |        |       |           |       |             |       |              |       |             |       |
| Accounts payable                                 |       | $           | —     |           | $          | 83,588           |       | $                 | 17,186     |             | $          | (1,044 | ) | $ | 99,730 |   |
| Accrued expenses and other current liabilities   |       | —      |       | 32,346         |       | 9,376            |       | —            |       | 41,722           |       |
| Intercompany payable                             |       | —      |       | 50,428         |       | —           |       | (50,428           | )          | —           |       |
| Debt and capital lease - short-term              |       | —      |       | 2,497          |       | 127              |       | —            |       | 2,624            |       |
| Total current liabilities                        |       | —      |       | 168,859        |       | 26,689           |       | (51,472           | )          | 144,076          |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Long-term  liabilities:                          |       |        |       |           |       |             |       |              |       |             |       |
| Term debt and capital lease - long-term          |       | —      |       | 414,653        |       | 3,433            |       | —            |       | 418,086          |       |
| Other liabilities                                |       | —      |       | 36,321         |       | 818              |       | —            |       | 37,139           |       |
| Total liabilities                                |       | —      |       | 619,833        |       | 30,940           |       | (51,472           | )          | 599,301          |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Senior preferred  stock                          |       | —      |       | 537,401        |       | —           |       | (537,401          | )          | —           |       |
|                                             |       |        |       |           |       |             |       |              |       |             |       |
| Stockholders’  equity (deficit)             |       | 345,051     |       | (200,233       | )          | 246,541          |       | (46,308           | )          | 345,051          |       |
| Total  liabilities and stockholders’ equity |       | $           | 345,051    |           | $          | 957,001          |       | $                 | 277,481    |             | $          | (635,181 | ) | $ | 944,352 |   |

 

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**CONDENSEDCONSOLIDATING BALANCE SHEET (UNAUDITED)**

**AS OFDECEMBER 29, 2006**

**(inthousands)**

 
| ** **                                       | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **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 |   |

 

12

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**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THETHREE MONTHS ENDED JUNE 29, 2007**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                              |       | $           | —     |           | $          | 245,189             |       | $                 | 68,058     |             | $          | — |   | $ | 313,247 |   |
| Cost of sales                                          |       | —      |       | 152,694        |       | 42,586              |       | —            |       | 195,280          |       |
| Gross profit                                           |       | —      |       | 92,495         |       | 25,472              |       | —            |       | 117,967          |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Operating  expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —      |       | 72,359         |       | 14,576              |       | —            |       | 86,935           |       |
| Depreciation and amortization                          |       | —      |       | 2,998          |       | 669                 |       | —            |       | 3,667            |       |
| Equity earnings of subsidiaries                        |       | (19,621     | )          | (4,442         | )          | —              |       | 24,063            |       | —           |       |
| Total operating expense                                |       | (19,621     | )          | 70,915         |       | 15,245              |       | 24,063            |       | 90,602           |       |
| Operating income                                       |       | 19,621      |       | 21,580         |       | 10,227              |       | (24,063           | )          | 27,365           |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Interest  (expense) income, net                        |       | —      |       | (11,009        | )          | 3,111               |       | —            |       | (7,898           | )          |
| Other income                                           |       | —      |       | 154            |       | 149                 |       | (149              | )          | 154              |       |
| Income before income taxes                             |       | 19,621      |       | 10,725         |       | 13,487              |       | (24,212           | )          | 19,621           |       |
| Income tax  provision                                  |       | 7,646       |       | 3,443          |       | 4,203               |       | (7,646            | )          | 7,646            |       |
| Net income                                             |       | 11,975      |       | 7,282          |       | 9,284               |       | (16,566           | )          | 11,975           |       |
| Preferred stock  dividends                             |       | —      |       | (18,125        | )          | —              |       | 18,125            |       | —           |       |
| Net income (loss)  attributable to common stockholders |       | $      | 11,975     |           | $     | (10,843             | )          | $            | 9,284      |             | $     | 1,559 |   | $  | 11,975 |   |

----

(1)             TheSubsidiary Issuer does not allocate integration expenses, corporate overhead orother expenses for shared services to the Guarantor Subsidiaries; therefore,the results for the Guarantor Subsidiaries do not reflect any such allocation.

13

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THETHREE MONTHS ENDED JUNE 30, 2006**

**(inthousands)**

 
| ** **                                            | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                            | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                             |       | $           | —     |           | $          | 235,409             |       | $                 | —     |             | $          | — |   | $ | 235,409 |   |
| Cost of sales                                         |       | —      |       | 145,913        |       | —              |       | —            |       | 145,913          |       |
| Gross profit                                          |       | —      |       | 89,496         |       | —              |       | —            |       | 89,496           |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Operating expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general  and administrative expenses         |       | —      |       | 63,296         |       | 7                   |       | —            |       | 63,303           |       |
| Depreciation and  amortization                        |       | —      |       | 3,509          |       | —              |       | —            |       | 3,509            |       |
| Equity earnings  of subsidiaries                      |       | 4,695       |       | (2,882         | )          | —              |       | (1,813            | )          | —           |       |
| Total operating  expense                              |       | 4,695       |       | 63,923         |       | 7                   |       | (1,813            | )          | 66,812           |       |
| Operating income                                      |       | (4,695      | )          | 25,573         |       | (7                  | )          | 1,813             |       | 22,684           |       |
|                                                  |       |        |       |           |       |                |       |              |       |             |       |
| Loss on extinguishment of  debt                       |       | —      |       | (20,700        | )          | —              |       | —            |       | (20,700          | )          |
| Interest (expense)  income, net                       |       | —      |       | (11,197        | )          | 4,389               |       | —            |       | (6,808           | )          |
| Other income                                          |       | —      |       | 129            |       | 129                 |       | (129              | )          | 129              |       |
| Income before  income taxes                           |       | (4,695      | )          | (6,195         | )          | 4,511               |       | 1,684             |       | (4,695           | )          |
| Income tax provision                                  |       | (1,830      | )          | (3,330         | )          | 1,500               |       | 1,830             |       | (1,830           | )          |
| Net income                                            |       | (2,865      | )          | (2,865         | )          | 3,011               |       | (146              | )          | (2,865           | )          |
| Preferred stock  dividends                            |       | —      |       | (15,800        | )          | —              |       | 15,800            |       | —           |       |
| Net income (loss) attributable to common stockholders |       | $      | (2,865     | )              | $     | (18,665             | )          | $            | 3,011      |             | $     | 15,654 |   | $  | (2,865 | ) |

----

(1)             TheSubsidiary Issuer does not allocate integration expenses, corporate overhead orother expenses for shared services to the Guarantor Subsidiaries; therefore,the results for the Guarantor Subsidiaries do not reflect any such allocation.

14

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THESIX MONTHS ENDED JUNE 29, 2007**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                              |       | $           | —     |           | $          | 477,045             |       | $                 | 131,605    |             | $          | — |   | $ | 608,650 |   |
| Cost of sales                                          |       | —      |       | 297,068        |       | 81,321              |       | —            |       | 378,389          |       |
| Gross profit                                           |       | —      |       | 179,977        |       | 50,284              |       | —            |       | 230,261          |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Operating  expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —      |       | 143,138        |       | 29,102              |       | —            |       | 172,240          |       |
| Depreciation and amortization                          |       | —      |       | 5,882          |       | 1,336               |       | —            |       | 7,218            |       |
| Equity earnings of subsidiaries                        |       | (35,104     | )          | (9,430         | )          | —              |       | 44,534            |       | —           |       |
| Total operating expense                                |       | (35,104     | )          | 139,590        |       | 30,438              |       | 44,534            |       | 179,458          |       |
| Operating income                                       |       | 35,104      |       | 40,387         |       | 19,846              |       | (44,534           | )          | 50,803           |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Interest  (expense) income, net                        |       | —      |       | (21,986        | )          | 5,928               |       | —            |       | (16,058          | )          |
| Other income                                           |       | —      |       | 359            |       | 368                 |       | (368              | )          | 359              |       |
| Income before income taxes                             |       | 35,104      |       | 18,760         |       | 26,142              |       | (44,902           | )          | 35,104           |       |
| Income tax  provision                                  |       | 13,689      |       | 6,471          |       | 7,218               |       | (13,689           | )          | 13,689           |       |
| Net income                                             |       | 21,415      |       | 12,289         |       | 18,924              |       | (31,213           | )          | 21,415           |       |
| Preferred stock  dividends                             |       | —      |       | (35,638        | )          | —              |       | 35,638            |       | —           |       |
| Net income (loss)  attributable to common stockholders |       | $      | 21,415     |           | $     | (23,349             | )          | $            | 18,924     |             | $     | 4,425 |   | $  | 21,415 |   |

----

(1)             TheSubsidiary Issuer does not allocate integration expenses, corporate overhead orother expenses for shared services to the Guarantor Subsidiaries; therefore,the results for the Guarantor Subsidiaries do not reflect any such allocation.

15

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)**

**FOR THESIX MONTHS ENDED JUNE 30, 2006**

**(inthousands)**

 
| ** **                                             | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**       | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|----------------|------------|---------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries(1)** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Net sales                                              |       | $           | —     |           | $          | 460,083             |       | $                 | —     |             | $          | — |   | $ | 460,083 |   |
| Cost of sales                                          |       | —      |       | 284,879        |       | —              |       | —            |       | 284,879          |       |
| Gross profit                                           |       | —      |       | 175,204        |       | —              |       | —            |       | 175,204          |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Operating  expenses:                                   |       |        |       |           |       |                |       |              |       |             |       |
| Selling, general and administrative expenses           |       | —      |       | 124,968        |       | 13                  |       | —            |       | 124,981          |       |
| Depreciation and amortization                          |       | —      |       | 6,954          |       | —              |       | —            |       | 6,954            |       |
| Equity earnings of subsidiaries                        |       | (9,124      | )          | (5,545         | )          | —              |       | 14,669            |       | —           |       |
| Total operating expense                                |       | (9,124      | )          | 126,377        |       | 13                  |       | 14,669            |       | 131,935          |       |
| Operating income                                       |       | 9,124       |       | 48,827         |       | (13                 | )          | (14,669           | )          | 43,269           |       |
|                                                   |       |        |       |           |       |                |       |              |       |             |       |
| Loss on extinguishment  of debt                        |       | —      |       | (20,700        | )          | —              |       | —            |       | (20,700          | )          |
| Interest  (expense) income, net                        |       | —      |       | (22,258        | )          | 8,558               |       | —            |       | (13,700          | )          |
| Other income                                           |       | —      |       | 255            |       | 255                 |       | (255              | )          | 255              |       |
| Income before income taxes                             |       | 9,124       |       | 6,124          |       | 8,800               |       | (14,924           | )          | 9,124            |       |
| Income tax  provision                                  |       | 3,548       |       | 548            |       | 3,000               |       | (3,548            | )          | 3,548            |       |
| Net income                                             |       | 5,576       |       | 5,576          |       | 5,800               |       | (11,376           | )          | 5,576            |       |
| Preferred stock  dividends                             |       | —      |       | (31,068        | )          | —              |       | 31,068            |       | —           |       |
| Net income (loss)  attributable to common stockholders |       | $      | 5,576      |           | $     | (25,492             | )          | $            | 5,800      |             | $     | 19,692 |   | $  | 5,576 |   |

----

(1)             TheSubsidiary Issuer does not allocate integration expenses, corporate overhead orother expenses for shared services to the Guarantor Subsidiaries; therefore,the results for the Guarantor Subsidiaries do not reflect any such allocation.

16

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)**

**FOR THESIX MONTHS ENDED JUNE 29, 2007**

**(inthousands)**

 
| ** **                                                    | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                          |       |        |       |           |       |             |       |              |       |             |       |
| Net cash  provided by operating activities                    |       | $           | —     |           | $          | 32,492           |       | $                 | 2,007      |             | $          | 902 |   | $ | 35,401 |   |
| Cash flows from  investing activities:                        |       |        |       |           |       |             |       |              |       |             |       |
| Purchase of property and equipment, net                       |       | —      |       | (7,295         | )          | (683             | )          | —            |       | (7,978           | )          |
| Purchase of businesses, net of cash acquired                  |       | —      |       | 1,261          |       | 209              |       | (1,473            | )          | (3               | )          |
| Net cash (used in) provided by investing activities           |       | —      |       | (6,034         | )          | (474             | )          | (1,473            | )          | (7,981           | )          |
| Cash flows from  financing activities:                        |       |        |       |           |       |             |       |              |       |             |       |
| Repayment of debt and capital lease obligations               |       | —      |       | (1,349         | )          | (64              | )          | —            |       | (1,413           | )          |
| Other                                                         |       | —      |       | 511            |       | (1,473           | )          | 1,473             |       | 511              |       |
| Net cash provided by (used in) financing activities           |       | —      |       | (838           | )          | (1,537           | )          | 1,473             |       | (902             | )          |
| Effect of  exchange rate changes on cash and cash equivalents |       | —      |       | 67             |       | —           |       | —            |       | 67               |       |
| Net increase  (decrease) in cash and cash equivalents         |       | —      |       | 25,687         |       | (4               | )          | 902               |       | 26,585           |       |
| Cash and cash  equivalents at beginning of period             |       | —      |       | 8,783          |       | 15               |       | (1,946            | )          | 6,852            |       |
| Cash and cash  equivalents at end of period                   |       | $           | —     |           | $          | 34,470           |       | $                 | 11         |             | $          | (1,044 | ) | $ | 33,437 |   |

 

17

----

 

**CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOW (UNAUDITED)**

**FOR THESIX MONTHS ENDED JUNE 30, 2006**

**(inthousands)**

 
| ** **                                                                        | ** ** | **Parent**  | ** ** | **Subsidiary** | ** ** | **Guarantor**    | ** ** | **Consolidating** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|------------|----------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | **Company** | ** ** | **Issuer**     | ** ** | **Subsidiaries** | ** ** | **Adjustments**   | ** ** | **Consolidated** | ** ** |
|                                                                              |       |        |       |           |       |             |       |              |       |             |       |
| Net cash (used in)  provided by operating activities                              |       | $           | —     |           | $          | 11,915           |       | $                 | —     |             | $          | — |   | $ | 11,915 |   |
| Cash flows from  investing activities:                                            |       |        |       |           |       |             |       |              |       |             |       |
| Purchase of  property and equipment, net                                          |       | —      |       | (3,711         | )          | —           |       | —            |       | (3,711           | )          |
| Purchase of  businesses, net of cash acquired                                     |       | —      |       | (355           | )          | —           |       | —            |       | (355             | )          |
| Net cash used in  investing activities                                            |       | —      |       | (4,066         | )          | —           |       | —            |       | (4,066           | )          |
| Cash flows from  financing activities:                                            |       |        |       |           |       |             |       |              |       |             |       |
| Repayment of  debt and capital lease obligations                                  |       | —      |       | (152,004       | )          | —           |       | —            |       | (152,004         | )          |
| 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                                              |       | —      |       | 100,000        |       | —           |       | —            |       | 100,000          |       |
| Payment of debt  issuance costs                                                   |       | —      |       | (7,326         | )          | —           |       | —            |       | (7,326           | )          |
| Other                                                                             |       | —      |       | 1,073          |       | —           |       | —            |       | 1,073            |       |
| Net cash  provided by (used in) financing activities                              |       | —      |       | (3,354         | )          | —           |       | —            |       | (3,354           | )          |
| Effect of exchange rate  changes on cash and cash equivalents                     |       | —      |       | 172            |       | —           |       | —            |       | 172              |       |
| Net (decrease) increase  in cash and cash equivalents                             |       | —      |       | 4,667          |       | —           |       | —            |       | 4,667            |       |
| Cash and cash  equivalents at beginning of period                                 |       | —      |       | 2,935          |       | 23               |       | —            |       | 2,958            |       |
| Cash and cash equivalents at end of period                                        |       | $           | —     |           | $          | 7,602            |       | $                 | 23         |             | $          | — |   | $ | 7,625 |   |

 

18

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**ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*Referencesto “us” and “we” are to the Company. You should read the following discussionin conjunction with our unaudited condensed consolidated financial statementsand related notes included in this quarterly report, and our auditedconsolidated financial statements and related notes and Management’s Discussionand Analysis of Financial Condition and Results of Operations included in ourAnnual Report on Form 10-K filed with the SEC.*

**Forward-Looking Statements**

This reportcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934(the “Exchange Act”) that are subject to risks and uncertainties. You shouldnot 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,

·                  general marketconditions,

·                  adverse changesin trends in the home improvement and remodeling and home building markets,

·                  the highlycompetitive nature of the maintenance, repair and operations distributionindustry,

·                  failure torealize expected benefits from acquisitions,

·                  our ability topurchase products from suppliers on favorable terms,

·                  the length ofour supply chains,

·                  fluctuations inthe cost of commodity-based products, raw materials and fuel prices,

·                  currencyexchange rates,

·                  the loss ofsignificant customers,

·                  our ability toaccurately predict market trends,

·                  product cost andprice fluctuations due to market conditions,

·                  failure tolocate, acquire and successfully integrate acquisition candidates,

·                  dependence onkey employees,

·                  our inability toprotect trademarks,

·                  adversepublicity and litigation,

·                  our level ofdebt,

·                  interest ratefluctuations,

·                  future cashflows,

·                  changes inconsumer preferences,

·                  labor andbenefit costs, and

·                  the other factors described under “PartI. Item 1A—Risk Factors” in our Annual Report on Form 10-K filed with the SEC.

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.

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**Overview**

We are a leading nationaldistributor and direct marketer of maintenance, repair and operations (“MRO”)products. We stock over 80,000 plumbing, electrical, hardware, security,heating, ventilation and air conditioning, janitorial and sanitary and otherMRO products and sell to approximately 200,000 active customer accounts. Ourproducts are primarily used for the repair, maintenance, remodeling andrefurbishment of properties and non-industrial facilities. We are able torealize high operating margins by focusing on repair, maintenance, remodelingand refurbishment customers, who generally make smaller, more frequentpurchases and require high levels of service. Our diverse customer baseincludes facilities maintenance customers, which consist of multi-familyhousing facilities, educational institutions, lodging and health carefacilities, government properties and building service contractors;professional contractors who are primarily involved in the repair, remodelingand construction of residential and non-industrial facilities; and specialtydistributors, including plumbing and hardware retailers. Our customers range insize from individual contractors and independent hardware stores to apartmentmanagement companies and national purchasing groups.

We market and sell our productsprimarily through ten distinct and targeted brands, each of which is nationallyrecognized in the markets we serve for providing premium products atcompetitive prices with reliable same-day and/or next-day delivery. Wilmar,Sexauer, Maintenance USA and AmSan brands generally serve our facilitiesmaintenance customers; Barnett, U.S. Lock, Sun Star and Copperfield brandsgenerally serve our professional contractor customers; Hardware Express and AFLighting brands generally serve our specialty distributors customers. Ourmulti-brand operating model, which we believe is unique in the industry, allowsus to use a single platform to deliver tailored products and services to meetthe individual needs of each respective customer group served. We reach ourmarkets using a variety of sales channels, including a sales force of over 660field sales representatives, over 500 telesales and customer servicerepresentatives, a direct marketing program of approximately five millionpieces annually, brand-specific websites and a national accounts salesprogram. We deliver our products through our network of 72 regionaldistribution centers, 39 professional contractor showrooms located throughoutthe United States and Canada, a national distribution center, or NDC, inNashville, Tennessee, 16 vendor managed inventory locations at large customerlocations and a dedicated fleet of trucks. Our broad distribution networkallows us the ability to provide reliable, same-day and/or next-day deliveryservice to 98% of the U.S. population.

Our information technology andlogistics platform supports our major business functions, allowing us to marketand sell our products at varying price points depending on the customer’sservice requirements. While we market our products under a variety of brandedcatalogs, generally our brands draw from the same inventory within commondistribution centers and share associated employee and transportation costs. Inaddition, we have centralized marketing, purchasing and catalog productionoperations to support our brands. We believe that our information technologyand logistics platform also benefits our customers by allowing us to offer abroad product selection at highly competitive prices while maintaining theunique customer appeal of each of our targeted brands. Overall, our commonoperating platform has enabled us to improve customer service, maintain loweroperating costs, efficiently manage working capital and support our growthinitiatives.

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**Results of Operations**

The following table presents information derived fromthe condensed consolidated statements of earnings expressed as a percentage ofrevenues for the three and six months ended June 29, 2007 and June 30, 2006:

 
| ** **                                   | ** ** | **% of Net Sales** | ** ** | ** **        | ** ** | **% of Net Sales** | ** ** | ** **        | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-----------------------------------|------------|-------------------|------------|
| ** **                                   | ** ** | ** **                        | ** ** | ** **        | ** ** | **% Increase**               | ** ** | ** **        | ** ** | ** ** | ** ** | **% Increase** | ** ** |
| ** **                                   | ** ** | **Three Months Ended**  | ** ** | **(Decrease)**    | ** ** | **Six Months Ended**    | ** ** | **(Decrease)**    | ** ** |
| ** **                                   | ** ** | **June 29,**                 | ** ** | **June 30,** | ** ** | **2007**                          | ** ** | **June 29,** | ** ** | **June 30,** | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **2007**                          | ** ** | **2006**          | ** ** | **vs. 2006 (1)**        | ** ** | **2007**          | ** ** | **2006** | ** ** | **vs. 2006 (1)** | ** ** |
|                                         |       |                              | ** ** | ** **        |       |                              |       |              |       |   |   |   |   |
| Net sales                                    |       | 100.0                             | %          | 100.0             | %          | 33.1                              | %          | 100.0             | %          | 100.0 | % | 32.3 | % |
| Cost of sales                                |       | 62.3                              |       | 62.0              |       | 33.8                              |       | 62.2              |       | 61.9 |   | 32.8 |   |
| Gross profit                                 |       | 37.7                              |       | 38.0              |       | 31.8                              |       | 37.8              |       | 38.1 |   | 31.4 |   |
|                                         |       |                              |       |              |       |                              |       |              |       |   |   |   |   |
| Operating  expenses:                         |       |                              |       |              |       |                              |       |              |       |   |   |   |   |
| Selling, general and administrative expenses |       | 27.8                              |       | 26.9              |       | 37.3                              |       | 28.3              |       | 27.2 |   | 37.8 |   |
| Depreciation and amortization                |       | 1.2                               |       | 1.5               |       | 4.5                               |       | 1.2               |       | 1.5 |   | 3.8 |   |
| Total operating expense                      |       | 28.9                              |       | 28.4              |       | 35.6                              |       | 29.5              |       | 28.7 |   | 36.0 |   |
| Operating income                             |       | 8.7                               |       | 9.6               |       | 20.6                              |       | 8.3               |       | 9.4 |   | 17.4 |   |
|                                         |       |                              |       |              |       |                              |       |              |       |   |   |   |   |
| Loss on extiguishment  of debt               |       | —                            |       | (8.8              | )          | (100.0                            | )          | —            |       | (4.5 | ) | (100.0 | ) |
| Interest expense                             |       | (2.7                              | )          | (3.0              | )          | 21.6                              |       | (2.8              | )          | (3.0 | ) | 22.3 |   |
| Interest income                              |       | 0.2                               |       | 0.1               |       | 238.5                             |       | 0.2               |       | 0.1 |   | 322.6 |   |
| Other income                                 |       | 0.0                               |       | 0.1               |       | 19.4                              |       | 0.1               |       | 0.1 |   | 40.8 |   |
| Income (Loss) before income taxes            |       | 6.3                               |       | (2.0              | )          | 517.9                             |       | 5.8               |       | 2.0 |   | 284.7 |   |
| Income tax  (provision) benefit              |       | (2.4                              | )          | 0.8               |       | 517.8                             |       | (2.2              | )          | (0.8 | ) | 285.8 |   |
| Net income (loss)                            |       | 3.8                               | %          | (1.2              | )%         | 518.0                             | %          | 3.5               | %          | 1.2 | % | 284.1 | % |

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

Thefollowing discussion includes references to the terms average daily sales andaverage organic daily sales. Average daily sales are defined as sales for aperiod of time divided by the number of shipping days in that period of time. 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 (amounts inthousands):
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                   | ** ** | **June 29,**                | ** ** | **June 30,**              | ** ** | ** ** | ** ** | **June 29,** | ** ** | **June 30,** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **% Variance** | ** ** | **2007** | ** ** | **2006** | ** ** | **% Variance** | ** ** |
| ** **                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                    |       | $                                | 313,247    |                           | $          | 235,409 |   | 33.1 | % | $ | 608,650 |   | $ | 460,083 |   | 32.3 | % |
| Less  acquisitions:          |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| AmSan                        |       | (68,058                          | )          | —                         |       |   |   | (131,605 | ) | — |   |   |   |
| Organic sales                |       | $                                | 245,189    |                           | $          | 235,409 |   | 4.2 | % | $ | 477,045 |   | $ | 460,083 |   | 3.7 | % |
|                         |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Daily sales:                 |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Ship days                    |       | 64                               |       | 64                             |       |   |   | 128 |   | 128 |   |   |   |
| Average daily sales          |       | $                                | 4,894      |                           | $          | 3,678 |   | 33.1 | % | $ | 4,755 |   | $ | 3,594 |   | 32.3 | % |
| Average organic  daily sales |       | $                                | 3,831      |                           | $          | 3,678 |   | 4.2 | % | $ | 3,727 |   | $ | 3,594 |   | 3.7 | % |

 

Averageorganic daily sales is presented herein because we believe it to be relevantand useful information to our investors since it is used by our management toevaluate the operating performance of our business, as adjusted to exclude theimpact of the acquisition of AmSan, 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.

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*Overview.*During the threemonths ended June 29, 2007, our average daily sales grew 33.1%, of which 28.9%is attributable to our July 2006 acquisition of AmSan LLC (“AmSan”). Average organicdaily sales growth in the second quarter was 4.2%. Sales growth during thequarter was driven by market conditions and solid demand from customers in ourfacilities maintenance end-market, which, together with AmSan, makes up over65% of our total sales. Overall sales growth was offset by a continued slowdown in the professional contractor and specialty distributor end-markets.Operating income as a percentage of sales was 8.7% in the second quarter comparedto 9.6% in the comparable prior year period. This decline in operating marginis primarily related to having a higher operating cost structure at AmSan, ourcontinued investment in organic growth initiatives such as the expansion of ournational accounts program and the addition of field sales professionals, aswell as incremental share-based compensation expense during the quarter.

*Three Months Ended June 29, 2007Compared to Three Months Ended June 30, 2006*

*NetSales.*Our net sales increased by $77.8 million, or33.1%, to $313.2 million in the three months ended June 29, 2007 from$235.4 million in the three months ended June 30, 2006. Of the $77.8million increase, $68.1 million was attributable to our AmSan acquisition andthe remaining $9.7 million was driven by continued growth in our facilitiesmaintenance markets partially offset by the slow down in our professionalcontractor and specialty distributor markets.

*GrossProfit.*Gross profit increased by $28.5 million, or31.8%, to $118.0 million in the three months ended June 29, 2007 from$89.5 million in the three months ended June 30, 2006. Our gross profitmargin decreased 30 basis points to 37.7% for the three months ended June 29,2007 compared to 38.0% for the three months ended June 30, 2006. The slightdecrease in gross margin is reflective of the continued expansion of ourproduct mix, including lower margin HVAC equipment sales, and a morecompetitive professional contractor end-market.

*Selling,General and Administrative Expenses.*SG&A expensesincreased by $23.6 million, or 37.3%, to $86.9 million in the threemonths ended June 29, 2007 from $63.3 million in the three months endedJune 30, 2006. Increased SG&A expenses related to our AmSan acquisitionaccounted for $19.3 million of the $23.6 million increase. Excluding AmSan,SG&A expenses increased 6.9% in the three months ended June 29, 2007.SG&A expenses as a percentage of sales were 27.8% in the three months endedJune 29, 2007 compared to 26.9% in the three months ended June 30, 2006.Certain expenses within SG&A, such as the costs of running regionaldistribution centers, delivery expenses and selling expenses, fluctuate withsales volume. The increase in SG&A expenses included these increases, aswell as increased investment in new sales and marketing initiatives andadditional share-based compensation associated with restricted share units,deferred stock units and stock options during the three months ended June 29,2007, higher health insurance costs and continued investments in our growthdrivers.

*Depreciation and Amortization.*Depreciation and amortization expense increased by$0.2 million, or 4.5%, to approximately $3.7 million in the three monthsended June 29, 2007 from $3.5 million in the three months ended June 30,2006. This increase was due to our AmSan acquisition, including higher capitalspending associated with our information systems infrastructure anddistribution center consolidation and integration efforts. As a percentage ofsales, depreciation and amortization was 1.2% or 30 basis points lower than the1.5% of sales that it represented in the comparable prior year period.

*Operating Income.*Asa result of the foregoing, operating income increased by $4.7 million, or20.6%, to $27.4 million in the three months ended June 29, 2007 from $22.7million in the three months ended June 30, 2006. As a percent of sales,operating income decreased to 8.7% in the three months ended June 29, 2007compared to 9.6% in the three months ended June 30, 2006. This decrease wasprimarily due to our AmSan acquisition as well as additional share-basedcompensation associated with restricted share units, deferred stock units andstock options granted during the three and six months ended June 29, 2007.

*Losson Extinguishment of Debt.* Loss on extinguishment of debt was $20.7 million for the three monthsended June 30, 2006. In connection with the offering of $200.0 million of81¤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 wascomprised of $13.7 million in tender premiums associated with the repurchase ofthe 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.

*Interest Expense.*Interestexpense increased by $1.5 million in the three months ended June 29, 2007 to$8.5 million from $7.0 million in the three months ended June 30,2006. This increase was primarily due to incrementally higher debt balancesresulting from our $130.0 million debt financed acquisition of AmSan in July2006.

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*Provision for Income Taxes.*Theeffective tax rate for the three months ended June 29, 2007 remained consistentat 39.0% compared to the effective tax rate for the three months ended June 30,2006 as a result of the additional liability associated with unrecognized taxbenefits arising from the adoption of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes—an Interpretation of FASB Statement No. 109*, (“FIN48”) being offset by the change in a state’s measurement of tax from an incometax-based method to a non-income tax-based method.

*Six Months Ended June 29, 2007Compared to Six Months Ended June 30, 2006*

*NetSales.*Our net sales increased by $148.6 million, or32.3%, to $608.7 million in the six months ended June 29, 2007 from$460.1 million in the six months ended June 30, 2006. Of the $148.6million increase, $131.6 million was attributable to our AmSan acquisition andthe remaining $17.0 million was driven by continued growth in our facilitiesmaintenance markets partially offset by the slow down in our professionalcontractor and specialty distributor markets.

*GrossProfit.*Gross profit increased by $55.1 million, or31.4%, to $230.3 million in the six months ended June 29, 2007 from$175.2 million in the six months ended June 30, 2006. Gross profit marginsdecreased 30 basis points to 37.8% for the six months ended June 29, 2007compared to 38.1% for the six months ended June 30, 2006.

*Selling,General and Administrative Expenses.*SG&A expensesincreased by $47.3 million, or 37.8%, to $172.2 million in the sixmonths ended June 29, 2007 from $125.0 million in the six months endedJune 30, 2006. Increased SG&A expenses related to our AmSan acquisitionaccounted for $38.2 million of the $47.3 million increase. Excluding AmSan,SG&A expenses increased 7.2% in the six months ended June 29, 2007.SG&A expenses as a percentage of sales were 28.3% in the three months endedJune 29, 2007 compared to 27.2% in the six months ended June 30, 2006. Certainexpenses within SG&A, such as the costs of running regional distributioncenters, delivery expenses and selling expenses, fluctuate with sales volume.The increase in SG&A expenses included these increases, as well asincreased investment in new sales and marketing initiatives and additionalshare-based compensation associated with restricted share units, deferred stockunits and stock options during the six months ended June 29, 2007, higher healthinsurance costs and continued investments in our growth drivers.

*Depreciation and Amortization.*Depreciation and amortization expense increased by$0.3 million, or 3.8%, to approximately $7.2 million in the six monthsended June 29, 2007 from $7.0 million in the six months ended June 30,2006. This increase was due to our AmSan acquisition. As a percentage of sales,depreciation and amortization was 1.2% or 30 basis points lower that the 1.5%of sales than it represented in the comparable prior year period.

*Operating Income.*Asa result of the foregoing, operating income increased by $7.5 million, or17.4%, to $50.8 million in the six months ended June 29, 2007 from $43.3million in the six months ended June 30, 2006. As a percent of sales, operatingincome decreased to 8.3% in the six months ended June 29, 2007 compared to 9.4%in the six months ended June 30, 2006. This decrease was primarily due to ourAmSan acquisition as well as additional share-based compensation associatedwith restricted share units, deferred stock units and stock options grantedduring the six months ended June 29, 2007.

*Losson Extinguishment of Debt.* Loss on extinguishment of debt was $20.7 million for the six monthsended June 30, 2006. In connection with the offering of $200.0 millionof 81¤8%senior subordinated notes and entering into a $330.0 million bank creditfacility in June 2006, we repurchased the 111⁄2% senior subordinated notes ofInterline New Jersey and repaid the indebtedness under the prior creditfacility of Interline New Jersey. The111⁄2% senior subordinated notes were repurchased at a price equal to 110.51% oftheir principal amount. In connection with the repurchase 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. The loss wascomprised of $13.7 million in tender premiums associated with the repurchase ofthe 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.

*Interest Expense.*Interestexpense increased by $3.1 million in the six months ended June 29, 2007 to$17.0 million from $13.9 million in the six months ended June 30,2006. This increase was primarily due to incrementally higher debt balancesresulting from our $130.0 million debt financed acquisition of AmSan in July2006.

*Provision for Income Taxes.*Theeffective tax rate for the six months ended June 29, 2007 was 39.0% compared to38.9% in the six months ended June 30, 2006. The increase in the effective taxrate was due primarily to the additional liability associated with unrecognizedtax benefits arising from the adoption of Financial Accounting Standards Board(“FASB”) Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes—an Interpretation of FASB Statement No. 109*, (“FIN48”) partially offset by the change in a state’s measurement of tax from anincome tax-based method to a non-income tax-based method.

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**Liquidity and Capital Resources**

*Overview*

We are a holding companywhose only asset is the stock of our subsidiaries. We conduct virtually all ofour business operations through Interline New Jersey. Accordingly, our onlymaterial sources of cash are dividends and distributions with respect to ourownership interests in Interline New Jersey that are derived from the earningsand cash flow generated by Interline New Jersey.

We have $200.0 million of81⁄8% senior subordinated notes due 2014 and a $330.0 million bank creditfacility. The bank credit facility consists of a $230.0 million 7-year termloan and a $100.0 million 6-year revolving credit facility of which a portionnot exceeding $40.0 million is available in the form of letters of credit.

The 81¤8% seniorsubordinated notes were priced at 99.3%, or $198.6 million, of their principalamount, representing a yield to maturity of 81¤4%. We willamortize the discount of $1.4 million over the term of the 81⁄8% seniorsubordinated notes. As of June 29, 2007, the 81¤8% seniorsubordinated notes had a fair market value of $201.5 million or 100.75% ofpar. The 81¤8%senior subordinated notes mature on June 15, 2014 and interest is payableon June 15 and December 15 of each year.

The debt instruments ofInterline New Jersey, primarily the credit facility entered into on June 23,2006 and the indenture governing the terms of the 81¤8% senior subordinated notes, contain significantrestrictions on the payment of dividends and distributions to us by InterlineNew Jersey. Interline New Jersey’s credit facility allows it to pay dividends,make distributions to us or make investments in us in an aggregate amount notto exceed $2.0 million during any fiscal year, so long as Interline NewJersey is not in default or would be in default as a result of such payments.In addition, ordinary course distributions for overhead (up to $3.0 millionannually) and taxes are permitted, as are annual payments of up to $7.5 millionin respect of our stock option or other benefit plans for management oremployees and (provided Interline New Jersey is not in default) aggregatepayments of up to $40.0 million depending on the pro forma net leverageratio as of the last day of the previous quarter. In addition, the indenturefor the 81¤8% senior subordinated notes generallyrestricts the ability of Interline New Jersey to pay distributions to us and tomake advances to, or investments in, us to an amount generally equal to 50% ofthe net income of Interline New Jersey, plus an amount equal to the netproceeds from certain equity issuances, subject to compliance with a leverageratio and no default having occurred and continuing. The indenture alsocontains certain permitted exceptions including (1) allowing us to pay ourfranchise taxes and other fees required to maintain our corporate existence, topay for general corporate and overhead expenses and to pay expenses incurred inconnection with certain financing, acquisition or disposition transactions, inan aggregate amount not to exceed $10.0 million per year; (2) allowingcertain tax payments; and (3) allowing certain permitted distributions upto $75.0 million. For a further description of the credit facility, see “—CreditFacility” below.

*Financial Condition*

Working capital increasedby $23.2 million to $300.4 million as of June 29, 2007 from $277.2 million asof December 29, 2006. The increase in working capital was primarily funded bycash flows from operating activities.

*Cash Flow*

Net cash provided by operatingactivities was $35.4 million in the six months ended June 29, 2007compared to net cash provided by operating activities of $11.9 million inthe six months ended June 30, 2006.The increase of $23.5 million in net cash provided by operating activities inthe six months ended June 29, 2007 compared to the six months ended June30, 2006 was primarily as a result ofstrong operating performance and working capital management. Changes in our workingcapital for the comparable six month period includes higher seasonal purchasesof inventory in May and June which are not due and payable as of the end of thequarter, reflective of a $32.2 million increase in trade accounts payablebalances offset in part by higher trade receivable balances driven by organicsales growth. Changes in our working capital components generated $2.2 millionduring the six months ended June 29, 2007 compared to $21.5 million used duringthe six months ended June 30, 2006. The increase in cash from working capitalprimarily consists of incremental cash generated from inventory, accountspayable and income tax payable of $2.5 million, $26.1 million and $7.2 million,respectively, offset by incremental cash used by trade accounts receivable andaccrued expenses of $9.3 million and $2.7 million, respectively.

Net cash used ininvesting activities was $8.0 million in the six months ended June 29,2007 compared to net cash used in investing activities of $4.1 million in thesix months ended June 30, 2006. Net cash used in investing activities in thesix months ended June 29, 2007 and June 30, 2006 was primarily attributable tocapital expenditures made in the ordinary course of business and costs

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related to purchases of businesses, net of cash. Theincrease in net cash used in investing activities in the six months ended June29, 2007 was attributable to capital expenditures associated with our AmSanacquisition as well as the expansion of existing distribution centers and warehouseequipment and investments in our information technology systems necessary forthe integration of our AmSan acquisition.

Net cash used in financingactivities totaled $0.9 million in the six months ended June 29,2007 compared to net cash used in financingactivities of $3.4 million in the six months ended June 30, 2006. Net cash used in financing activities in the sixmonths ended June 29, 2007 was primarily attributable to our repayment of $1.4million of borrowings on our credit facilityand capital lease obligations partially offset by $0.5 million ofproceeds from stock options exercised and excess tax benefits from share-basedcompensation. Net cash used in financing activities in the six months endedJune 30, 2006 was primarily attributable to (1) our repayment of $3.2 millionof borrowings on our revolving credit facilityand capital lease obligations partially offset by $1.1 million ofproceeds from stock options exercised and excess tax benefits from share-basedcompensation and (2) our repayment of $148.8 million of term debt, ourrepurchase of $130.0 million of our 111¤2% seniorsubordinated notes and $13.7 million in redemption premiums offset by the issuance of $198.6 million of  81⁄8% senior subordinated notes,net of $1.4 million discount, and $100.0 million of term debt, less $7.3 million in debt issuance costsassociated with the issuance of the 81⁄8% senior subordinated notesand the term debt.

*Capital Expenditures*

Capital expenditures were $4.5million in the three months ended June 29, 2007 compared to $2.2 millionin the three months ended June 30, 2006.Capital expenditures as a percentage of sales were 1.4% in the three monthsended June 29, 2007 compared to 0.9% in the three months ended June 30, 2006.Capital expenditures were $8.0 million in the six months ended June 29, 2007compared to $3.7 million in the six months ended June 30, 2006. Capital expenditures as a percentage of saleswere 1.3% in the six months ended June 29, 2007 compared to 0.8% in the sixmonths ended June 30, 2006. The increases in capital expenditures are due to ourAmSan acquisition as well as the expansion of existing distribution centers andwarehouse equipment and investments in our information technology systemsnecessary for the integration of our AmSan acquisition.

*Credit Facility*

Borrowings under the termloan, the delayed draw facility and the 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 June 29, 2007, the interestrate in effect with respect to the term loan and the delayed draw facility was7.12% for the LIBOR option and 9.00% for the alternate base rate option. Outstandingletters of credit under the revolving credit facility are subject to a perannum fee equal to the applicable margin under the revolving credit facility.The interest rate margin is subject to pricing adjustments at the end of eachfiscal quarter based on net total indebtedness to consolidated earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”). The term loan andthe delayed draw facility mature on June 23, 2013 and the revolving loanfacility matures on June 23, 2012. Amounts under the term loan and the delayeddraw facility are due and payable in quarterly installments equal to 1.0% ofthe original principal amount on an annual basis through June 23, 2013, withthe balance payable in one final installment at the maturity date.

The bank credit facility,which is secured by substantially all of the assets of Interline New Jersey andis guaranteed by us and by the domestic subsidiaries of Interline New Jersey,contains affirmative, negative and financial covenants that limit Interline NewJersey’s ability to incur additional indebtedness, pay dividends on its commonstock or redeem, repurchase or retire its common stock or subordinatedindebtedness, make certain investments, sell assets, and consolidate, merge ortransfer assets, and that require Interline New Jersey to maintain certainfinancial ratios as of the last day of each fiscal quarter, including a minimumratio based on an adjusted and consolidated 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 June 29, 2007.

In connection with thebank 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 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.

Asof June 29, 2007, Interline New Jersey had $16.5 million of letters ofcredit issued under the revolving loan facility and $217.7 millionaggregate principal outstanding under the term loan facility.

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*Liquidity*

Historically, our capital requirements have been fordebt service obligations, working capital requirements, including forinventory, accounts receivable and accounts payable, acquisitions, theexpansion and maintenance of our distribution network and upgrades of ourinformation systems. We expect this to continue in the foreseeable future. Historically,we have funded these requirements through cash flow generated from operatingactivities and funds borrowed under our credit facility. We expect our cashflow from operations and the loan availability under our credit facility tocontinue to be our primary source of funds in the future. Letters of credit,which are issued under the revolving loan facility under our credit facility,are used to support payment obligations incurred for our general corporatepurposes.

As of June 29, 2007, we had approximately$83.5 million of availability under Interline New Jersey’s$100.0 million revolving credit facility.

We believe that cash flow fromoperations and available borrowing capacity under our new credit facility willbe adequate to finance our ongoing operational cash flow needs and debt serviceobligations for the next twelve months.

*Contractual Obligations*

Ourcontractual obligations are disclosed in our Annual Report on Form 10-K for theyear ended December 29, 2006 filed with the SEC. Other than the adoptionof FIN 48 as described in “Note 6. Income Taxes” to the unaudited condensedconsolidated financial statements above, there have been no material changes toour contractual obligations since December 29, 2006. As of June 29, 2007, wecannot reasonably estimate the period of cash settlement on our unrecognizedtax benefits. In addition, we do not anticipate that our total unrecognized taxbenefits will significantly change prior to June 27, 2008.

**Critical Accounting Policies**

In preparing the unaudited condensed consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, management is 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, management evaluates theseestimates and assumptions. Management bases its estimates and assumptions onhistorical experience and on various other factors that are believed to bereasonable at the time the estimates and assumptions are made. Actual resultsmay differ from these estimates and assumptions under different circumstancesor conditions.

Our critical accounting policies are included inour Annual Report on Form 10-K for the year ended December 29, 2006 filed withthe SEC. During the six months ended June 29, 2007, there were no significantchanges to any of our critical accounting policies.

**ITEM 3. Quantitative andQualitative Disclosures About Market Risk**

*Commodity Price Risk*

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. However, such commodity pricefluctuations have from time to time created cyclicality in our financialperformance, and could continue to do so in the future. In addition, our use ofpriced catalogs may not allow us to offset such cost increases quickly,resulting in a decrease in gross margins and profit.

*Interest Rate Risk*

Our variable rate termdebt is sensitive to changes in the general level of interest rates. As of June29, 2007, the interest rate in effect with respect to our $217.7 millionvariable rate term debt was 7.12% for the LIBOR option and 9.00% for thealternate base rate option. While our variable rate term debt obligationsexpose us to the risk of rising interest rates, we do not believe that thepotential exposure is material to our overall financial performance or resultsof operations. Based on the outstanding variable rate term

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debt as of June 29, 2007, a 1.0% annual increase ordecrease in current market interest rates would have the effect of causing a$1.1 million pre-tax change to our statement of operations for the six monthsended June 29, 2007.

The fair market value of our fixed rate debt issubject to interest rate risk. As of June 29, 2007, the fair market valueof our $200.0 million 81⁄8% senior subordinated notes was $201.5 millionor 100.75% of par.

*Foreign Currency Exchange Risk*

The majority of ourpurchases from foreign-based suppliers are from China and other countries inAsia and are transacted in U.S. dollars. Accordingly, our risk to foreigncurrency exchange rates was not material as of June 29, 2007.

*Derivative Financial Instruments*

Historically, we enteredinto derivative financial instruments from time to time, including interestrate exchange agreements, or swaps, to manage our exposure to fluctuations ininterest rates on our debt. As of June 29, 2007, we did not have any interestrate swap exchange agreements, or swaps. Under our former swap agreements, wepay a fixed rate on the notional amount to our banks and the banks pay us avariable rate on the notional amount equal to a base LIBOR rate. Our derivativeactivities, all of which are for purposes other than trading, are initiatedwithin the guidelines of corporate risk-management policies.

We periodically evaluatethe costs and benefits of any changes in our interest rate risk. Based on suchevaluation, we may enter into new interest rate swaps to manage our interestrate exposure.

**ITEM 4.Controls and Procedures**

*Evaluation of Disclosure Controlsand 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) under theExchange Act) as of June 29, 2007. Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of June 29,2007, our disclosure controls and procedures were (1) designed to ensure thatmaterial information relating to us, including our consolidated subsidiaries,is made known to our Chief Executive Officer and Chief Financial Officer byothers within those entities, particularly during the period in which thisreport was being prepared and (2) effective, in that they provide reasonableassurance that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

*Changes in Internal Control overFinancial Reporting*

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the quarter ended June 29, 2007 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

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**PART II. OTHER INFORMATION**

**ITEM1. Legal Proceedings**

We areinvolved in various legal proceedings that have arisen in the ordinary courseof our business and have not been fully adjudicated. These actions, whenultimately concluded and determined, will not, in the opinion of management,have a material effect upon our consolidated financial position, results ofoperations or liquidity.

**ITEM 1A. Risk Factors**

For information regardingfactors that could affect our financial position, results of operations andcash flows, see the risk factors discussion provided in our Annual Report onForm 10-K for the year ended December 29, 2006 in Part I. Item 1A. RiskFactors. See also “Part I. Item 2—Forward Looking Statements” above.

There have been nomaterial changes from the risk factors previously disclosed in our AnnualReport on Form 10-K for the year ended December 29, 2006.

**ITEM 2. Unregistered Sales of Equity Securitiesand Use of Proceeds**

None.

**ITEM3. Defaults Upon Senior Securities**

None.

**ITEM 4. Submission of Matters to a Vote ofSecurity Holders**

Our2007 Annual Meeting of Stockholders (the “2007 Annual Meeting”) was held onThursday, May 10, 2007. The matters submitted to our stockholders for approvalat the 2007 Annual Meeting included (1) the election of two Class IIImembers of the Board of Directors for a term of three years; and (2) aproposal to ratify the selection of Deloitte & Touche, LLP asindependent registered public accounting firm for the fiscal year endingDecember 28, 2007.

As ofMarch 23, 2007, the record date for the 2007 Annual Meeting, there were32,325,282 shares issued, 32,285,884 shares outstanding and 32,188,470 sharesentitled to vote at the 2007 Annual Meeting. There were 27,497,512 sharespresent in person or by proxy, which constitutes approximately 85 percent ofthe shares entitled to vote at the 2007 Annual Meeting.

Thetabulation of the votes present in person or by proxy at the 2007 AnnualMeeting with respect to the above matters was as follows:

*DirectorElections*

| Nominee          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| Gideon Argov     |       | 17,199,779 |       | 10,297,733   |       |
| Michael J. Grebe |       | 27,386,563 |       | 110,949      |       |

 

Thenominees for election to the board were elected to serve until the annualmeeting in 2010, and until their respective successors are elected andqualified.

Thosedirectors whose term of office continued after the Annual Meeting were asfollows: Michael E. DeDomenico, John J. Gavin, Barry J. Goldstein,Ernest K. Jacquet, Charles W. Santoro and Drew T. Sawyer.

*Approvalto ratify the selection of Deloitte & Touche LLP*

| For        | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|------------|------------|-------------|------------|---------------|------------|
| 27,269,051 |       | 118,449     |       | 110,012       |       |

 

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**ITEM 5. Other Information**

None.

**ITEM6. Exhibits**

The following exhibitsare being filed as part of this Quarterly Report on Form 10-Q:
|        | 31.1 | Certification of the Chief Executive Officer of  Interline Brands, Inc., 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 of  Interline Brands, Inc., 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).   |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.
|                      | ** ** | **INTERLINE  BRANDS, INC.**                                                                      |
|----------------------|------------|--------------------------------------------------------------------------------------------------|
|                 |       | Registrant                                                                                       |
|                 |       |                                                                                             |
|                 |       |                                                                                             |
|                 |       |                                                                                             |
| Date: August 3, 2007 | By:        |   /S/ THOMAS J. TOSSAVAINEN                                                       |
|                 |       |   Thomas J. Tossavainen                                                                |
|                 |       |   Chief Financial Officer                                                              |
|                 |       |   (Duly Authorized Signatory, Principal  Financial and   Accounting Officer) |

 

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