**UNITED STATESSECURITIES 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 SEPTEMBER 29, 2006** |
| ** **                                             | ** **                                                                                    |
| **OR**                                                 |
| ** **                                             | ** **                                                                                    |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**FOR THE TRANSITION PERIOD FROM             TO**

**COMMISSION FILE NUMBER 001-32380**

**INTERLINE BRANDS, INC.**

(Exact name of registrant as specified in its charter)
| **DELAWARE**                              | ** ** | **03-0542659**       |
|-------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer     |
| incorporation or  organization)           |       | Identification  No.) |
|                                      |       |                 |
| **801  WEST BAY STREET**                  | ** ** | ** **           |
| **JACKSONVILLE,  FLORIDA**                | ** ** | **32204**            |
| (Address of  principal executive offices) |       | (Zip code)           |

** **

**(904) 421-1400**

(Registrant’s telephone number, including area code)

**NOT APPLICABLE**

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x      No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

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

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

Yes o      No x

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:  As of October 31, 2006, there were 32,265,994shares of the registrant’s common stock outstanding (excluding 24,152 sharesheld in treasury), par value $0.01.

 

----

**TABLE OF CONTENTS**
| ITEM       | ** ** | ** **                                                                                                                                            | ** ** | ** ** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|       |       |                                                                                                                                                  |       |       |
|       |       | PART  I. FINANCIAL INFORMATION                                                                                                                        |       |       |
| 1.         |       | Financial  Statements                                                                                                                                 |       |       |
|       |       | Condensed Consolidated Balance Sheets (Unaudited)  as of September 29, 2006 and December 30, 2005                                                     |       |       |
|       |       | Condensed Consolidated Statements of Earnings  (Unaudited)  for the Three and Nine Months Ended September 29, 2006 and September 30, 2005             |       |       |
|       |       | Condensed Consolidated Statements of Comprehensive  Income (Unaudited)  for the Three and Nine Months Ended September 29, 2006 and September 30, 2005 |       |       |
|       |       | Condensed Consolidated Statements of Cash Flows  (Unaudited)  for the Nine Months Ended September 29, 2006 and September 30, 2005                     |       |       |
|       |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                                       |       |       |
| 2.         |       | Management’s Discussions and Analysis of Financial  Condition and Results of Operations                                                          |       |       |
| 3.         |       | Quantitative and Qualitative Disclosures about Market  Risk                                                                                           |       |       |
| 4.         |       | Controls and Procedures                                                                                                                               |       |       |
|       |       |                                                                                                                                                  |       |       |
|       |       | PART  II. OTHER INFORMATION                                                                                                                           |       |       |
| 1.         |       | Legal  Proceedings                                                                                                                                    |       |       |
| 1A.        |       | Risk Factors                                                                                                                                          |       |       |
| 2.         |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                          |       |       |
| 3.         |       | Defaults Upon Senior Securities                                                                                                                       |       |       |
| 4.         |       | Submission of Matters to a Vote of Security Holders                                                                                                   |       |       |
| 5.         |       | Other  Information                                                                                                                                    |       |       |
| 6.         |       | Exhibits                                                                                                                                              |       |       |
| SIGNATURES |       |                                                                                                                                                  |

 

----

**PART I. FINANCIAL INFORMATION**

**ITEM 1. Financial Statements**

**INTERLINE BRANDS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)AS OF SEPTEMBER 29, 2006 AND DECEMBER 30, 2005(in thousands, except share and per share data)**
| ** **                                                                                                                                                                                         | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current Assets:                                                                                                                                                                                    |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                         |       | $                      | 3,905      |                  | $          | 2,958 |   |
| Accounts  receivable—trade (net of allowance for doubtful accounts of $9,666 and  $8,150)                                                                                                     |       | 166,005                |       | 113,271               |       |
| Accounts  receivable—other                                                                                                                                                                    |       | 14,697                 |       | 12,163                |       |
| Inventory                                                                                                                                                                                          |       | 208,745                |       | 165,282               |       |
| Prepaid expenses  and other current assets                                                                                                                                                         |       | 5,895                  |       | 5,498                 |       |
| Deferred income  taxes                                                                                                                                                                             |       | 18,304                 |       | 13,945                |       |
| Total current  assets                                                                                                                                                                              |       | 417,551                |       | 313,117               |       |
|                                                                                                                                                                                               |       |                   |       |                  |       |
| Property and equipment,  net                                                                                                                                                                       |       | 31,441                 |       | 29,865                |       |
| Goodwill                                                                                                                                                                                           |       | 311,938                |       | 249,574               |       |
| Other intangible  assets, net                                                                                                                                                                      |       | 145,276                |       | 104,244               |       |
| Other assets                                                                                                                                                                                       |       | 9,872                  |       | 8,969                 |       |
| Total assets                                                                                                                                                                                       |       | $                      | 916,078    |                  | $          | 705,769 |   |
|                                                                                                                                                                                               |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                     | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current Liabilities:                                                                                                                                                                               |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                   |       | $                      | 89,373     |                  | $          | 69,182 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                    |       | 35,433                 |       | 21,574                |       |
| Accrued merger  expenses                                                                                                                                                                           |       | 3,789                  |       | 5,408                 |       |
| Accrued interest                                                                                                                                                                                   |       | 7,714                  |       | 2,152                 |       |
| Income taxes  payable                                                                                                                                                                              |       | 4,510                  |       | 1,780                 |       |
| Revolver                                                                                                                                                                                           |       | —                 |       | 3,000                 |       |
| Current portion  of long-term debt                                                                                                                                                                 |       | 2,432                  |       | 1,400                 |       |
| Capital lease—current                                                                                                                                                                         |       | 460                    |       | 452                   |       |
| Total current  liabilities                                                                                                                                                                         |       | 143,711                |       | 104,948               |       |
|                                                                                                                                                                                               |       |                   |       |                  |       |
| Long-Term Liabilities:                                                                                                                                                                             |       |                   |       |                  |       |
| Deferred income  taxes                                                                                                                                                                             |       | 33,935                 |       | 34,646                |       |
| Long-term debt,  net of current portion                                                                                                                                                            |       | 429,231                |       | 280,675               |       |
| Capital lease—long  term                                                                                                                                                                      |       | 629                    |       | 958                   |       |
| Other  liabilities                                                                                                                                                                                 |       | 399                    |       | —                |       |
| Total  liabilities                                                                                                                                                                                 |       | 607,905                |       | 421,227               |       |
| Commitments and  contingencies                                                                                                                                                                     |       |                   |       |                  |       |
| Senior preferred stock,  $0.01 par value, 20,000,000 shares authorized,  no shares outstanding as of September 29,  2006 and December 30, 2005                                      |       | —                 |       | —                |       |
|                                                                                                                                                                                               |       |                   |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                         |       |                   |       |                  |       |
| Common stock;  $0.01 par value, 100,000,000 authorized; 32,290,146 issued and 32,265,994  outstanding as of September 29, 2006 and 32,220,669 issued and outstanding as  of December 30, 2005 |       | 323                    |       | 322                   |       |
| Additional  paid-in capital                                                                                                                                                                        |       | 560,429                |       | 558,183               |       |
| Accumulated  deficit                                                                                                                                                                               |       | (253,242               | )          | (273,037              | )          |
| Accumulated  other comprehensive income                                                                                                                                                            |       | 1,161                  |       | 992                   |       |
| Deferred  compensation                                                                                                                                                                             |       | —                 |       | (1,918                | )          |
| Treasury stock, at  cost, 24,152 shares as of September 29, 2006                                                                                                                              |       | (498                   | )          | —                |       |
| Total  stockholders’ equity                                                                                                                                                                   |       | 308,173                |       | 284,542               |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                   |       | $                      | 916,078    |                  | $          | 705,769 |   |

 

*See accompanying notes to unaudited condensed consolidated financial statements.*

 

1

----

**INTERLINE BRANDS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2006 AND SEPTEMBER 30, 2005(in thousands, except share and per share data)**
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 29,**           | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                     |       | $                                | 314,182    |                            | $          | 225,811 |   | $ | 774,265 |   | $ | 625,968 |   |
| Cost of sales                                 |       | 194,099                          |       | 139,648                         |       | 478,978 |   | 387,064 |   |
| Gross profit                                  |       | 120,083                          |       | 86,163                          |       | 295,287 |   | 238,904 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Operating Expenses:                           |       |                             |       |                            |       |   |   |   |   |
| Selling, general  and administrative expenses |       | 84,578                           |       | 58,938                          |       | 209,559 |   | 167,194 |   |
| Depreciation and  amortization                |       | 3,866                            |       | 3,361                           |       | 10,820 |   | 9,699 |   |
| Secondary  offering costs                     |       | —                           |       | 923                             |       | — |   | 923 |   |
| Total operating  expense                      |       | 88,444                           |       | 63,222                          |       | 220,379 |   | 177,816 |   |
| Operating income                              |       | 31,639                           |       | 22,941                          |       | 74,908 |   | 61,088 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Loss on extinguishment  of debt               |       | —                           |       | —                          |       | (20,700 | ) | (10,340 | ) |
| Interest expense                              |       | (8,806                           | )          | (6,694                          | )          | (22,740 | ) | (18,709 | ) |
| Interest income                               |       | 177                              |       | 45                              |       | 411 |   | 171 |   |
| Other income                                  |       | 262                              |       | 188                             |       | 517 |   | 474 |   |
| Income before  income taxes                   |       | 23,272                           |       | 16,480                          |       | 32,396 |   | 32,684 |   |
| Income tax provision                          |       | 9,053                            |       | 6,762                           |       | 12,601 |   | 13,008 |   |
| Net income                                    |       | $                                | 14,219     |                            | $          | 9,718 |   | $ | 19,795 |   | $ | 19,676 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Earnings Per Share:                           |       |                             |       |                            |       |   |   |   |   |
| Basic                                         |       | $                                | 0.44       |                            | $          | 0.30 |   | $ | 0.62 |   | $ | 0.62 |   |
| Diluted                                       |       | $                                | 0.43       |                            | $          | 0.30 |   | $ | 0.60 |   | $ | 0.61 |   |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Weighted-Average Shares  Outstanding:         |       |                             |       |                            |       |   |   |   |   |
| Basic                                         |       | 32,159,251                       |       | 32,061,828                      |       | 32,124,106 |   | 31,979,374 |   |
| Diluted                                       |       | 32,762,492                       |       | 32,521,809                      |       | 32,720,724 |   | 32,399,670 |   |

 

*See accompanying notes to unaudited condensed consolidated financial statements.*

 

2

----

**INTERLINE BRANDS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2006 AND SEPTEMBER 30, 2005(in thousands)**
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 29,**           | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                          |       | $                                | 14,219     |                            | $          | 9,718 |   | $ | 19,795 |   | $ | 19,676 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Other comprehensive  income (loss): |       |                             |       |                            |       |   |   |   |   |
| Foreign currency  translation       |       | (3                               | )          | 213                             |       | 169 |   | 145 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Total comprehensive income          |       | $                                | 14,216     |                            | $          | 9,931 |   | $ | 19,964 |   | $ | 19,821 |   |

 

*See accompanying notes to unauditedcondensed consolidated financial statements.*

 

3

----

**INTERLINE BRANDS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)NINE MONTHS ENDED SEPTEMBER 29, 2006 AND SEPTEMBER 30, 2005(in thousands)**
| ** **                                                                               | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                               | ** ** | **September 29,**          | ** ** | **September 30,** | ** ** |
| ** **                                                                               | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Cash Flows from  Operating Activities:                                                   |       |                            |       |   |   |
| Net income                                                                               |       | $                               | 19,795     |   | $ | 19,676 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:       |       |                            |       |   |   |
| Depreciation and  amortization                                                           |       | 10,820                          |       | 9,699 |   |
| Amortization of  debt issuance costs                                                     |       | 1,154                           |       | 1,192 |   |
| Amortization of  discount on 81¤8%  senior subordinated notes                       |       | 33                              |       | — |   |
| Write-off of  debt issuance costs                                                        |       | 7,037                           |       | 2,290 |   |
| Tender and  redemption premiums on 111¤2% senior  subordinated notes                |       | 13,663                          |       | 8,050 |   |
| Share-based  compensation                                                                |       | 2,739                           |       | 718 |   |
| Deferred income  taxes                                                                   |       | (4,105                          | )          | (2,160 | ) |
| Provision for  doubtful accounts                                                         |       | 2,454                           |       | 2,017 |   |
| Loss on disposal  of property and equipment                                              |       | 80                              |       | 53 |   |
| Income tax  effect from exercise of stock options                                        |       | —                          |       | 215 |   |
|                                                                                     |       |                            |       |   |   |
| Changes in  assets and liabilities which provided (used) cash, net of business acquired: |       |                            |       |   |   |
| Accounts  receivable — trade                                                        |       | (27,129                         | )          | (25,899 | ) |
| Accounts  receivable — other                                                        |       | (1,261                          | )          | 4,974 |   |
| Inventory                                                                                |       | (25,907                         | )          | (3,782 | ) |
| Prepaid expenses  and other current assets                                               |       | 409                             |       | (428 | ) |
| Other assets                                                                             |       | (724                            | )          | (354 | ) |
| Accounts payable                                                                         |       | 3,240                           |       | 11,598 |   |
| Accrued expenses  and other current liabilities                                          |       | 3,368                           |       | 3,066 |   |
| Accrued merger  expenses                                                                 |       | (169                            | )          | (307 | ) |
| Accrued interest                                                                         |       | 5,469                           |       | 2,885 |   |
| Income taxes  payable                                                                    |       | 2,612                           |       | (2,670 | ) |
| Other  liabilities                                                                       |       | 8                               |       | — |   |
| Net cash  provided by operating activities                                               |       | 13,586                          |       | 30,833 |   |
| Cash Flows from  Investing Activities:                                                   |       |                            |       |   |   |
| Purchase of  property and equipment, net                                                 |       | (5,303                          | )          | (5,899 | ) |
| Purchase of  businesses, net of cash acquired                                            |       | (131,282                        | )          | (71,195 | ) |
| Net cash used in  investing activities                                                   |       | (136,585                        | )          | (77,094 | ) |
|                                                                                          |            |                                 |            |  |  |  |  |

 

*(Continued)*

4

----

 
| ** **                                                                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **September 29,  2006**    | ** ** | **September 30,  2005** | ** ** |
| Cash Flows from  Financing Activities:                                              |       |                            |       |   |   |
| (Decrease) Increase in revolver, net                                                |       | (3,000                          | )          | 5,000 |   |
| Repayment of term debt                                                              |       | (149,381                        | )          | (850 | ) |
| Repayment of 111¤2%  senior subordinated notes                                 |       | (130,000                        | )          | (70,000 | ) |
| Payment of tender and redemption premiums on 111¤2%  senior subordinated notes |       | (13,663                         | )          | (8,050 | ) |
| Proceeds from issuance of 81¤8%  senior subordinated notes, net of discount    |       | 198,566                         |       | — |   |
| Proceeds from issuance of term debt                                                 |       | 230,000                         |       | 50,000 |   |
| Payment of debt issuance costs                                                      |       | (9,804                          | )          | (836 | ) |
| Proceeds from stock options exercised                                               |       | 945                             |       | 1,693 |   |
| Excess tax benefits from share-based compensation                                   |       | 453                             |       | — |   |
| Payments on capital lease obligations                                               |       | (339                            | )          | (126 | ) |
| Initial public offering costs                                                       |       | —                          |       | (616 | ) |
| Proceeds from exercise of underwriters  over-allotment options                      |       | —                          |       | 2,333 |   |
| Net cash provided by (used in) financing activities                                 |       | 123,777                         |       | (21,452 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                       |       | 169                             |       | 145 |   |
| Net increase  (decrease) in cash and cash equivalents                               |       | 947                             |       | (67,568 | ) |
| Cash and cash  equivalents at beginning of period                                   |       | 2,958                           |       | 69,178 |   |
| Cash and cash  equivalents at end of period                                         |       | $                               | 3,905      |   | $ | 1,610 |   |
| Supplemental  Disclosure of Cash Flow Information:                                  |       |                            |       |   |   |
| Cash paid during the period for :                                                   |       |                            |       |   |   |
| Interest                                                                            |       | $                               | 16,648     |   | $ | 13,124 |   |
| Income taxes, net of refunds                                                        |       | $                               | 14,107     |   | $ | 17,633 |   |
|                                                                                |       |                            |       |   |   |
| Schedule of  Non-Cash Investing and Financing Activities:                           |       |                            |       |   |   |
| Treasury stock acquired with accrued expenses and  other current liabilities        |       | $                               | 498        |   | $ | — |   |
| Adjustments to  liabilities assumed and goodwill on businesses acquired             |       | $                               | 977        |   | $ | 9,473 |   |

 

*See accompanying notes to unaudited condensedconsolidated financial statements.*

 

5

----

**INTERLINE BRANDS, INC. ANDSUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

*Business*

Interline Brands, Inc., aDelaware corporation, and its subsidiaries (“Interline” or the “Company”) is adirect marketer and specialty distributor of maintenance, repair and operations(“MRO”) products. The Company sells plumbing, electrical, hardware, security,heating, ventilation and air conditioning (“HVAC”), janitorial and sanitarysupplies and other MRO products. Interline’s highly diverse customer baseconsists of multi-family housing, educational, lodging, government and healthcare facilities, professional contractors and specialty distributors.

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

During December 2004, the Company completed 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 ofPresentation*

The accompanying unaudited interim condensedconsolidated financial statements of Interline have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,certain information and footnote disclosures normally included in financialstatements included in the Company’s Annual Report on Form 10-K have beencondensed or omitted. The accompanying unaudited interim condensed consolidatedfinancial statements should be read in conjunction with Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in thisreport and the audited consolidated financial statements and related notesincluded in the Company’s Annual Report on Form 10-K for the fiscal year endedDecember 30, 2005 filed with the Securities and Exchange Commission (“SEC”).

All 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 of condensed consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the condensed consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Significant estimates include valuation reserves foraccounts receivable, inventory and income taxes, reserves for self-insuranceprograms, valuation of goodwill and valuation of assets and liabilities assumedin the acquisition of AmSan LLC (“AmSan”). Actual results could differ fromthose estimates.

*Reclassifications*

Certain prior yearamounts in the unaudited condensed consolidated financial statements and thenotes thereto have been reclassified to conform to the current yearpresentation. These reclassifications had no effect on total stockholders’equity or net income.

6

----

*Segment Information*

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 131, *Disclosure about Segments of an Enterprise and Related Information*,the Company has two operating segments: Interline Brands and AmSan. Thesesegments are aggregated into one reportable segment, the distribution of MRO products,because they possess similar economic characteristics and have common products,customers and methods of distribution. Our net sales for the three andnine-month periods ended September 29, 2006 and September 30, 2005 by productcategory were as follows (in thousands):
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **September 29,**           | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| **Product Category**                  | ** ** | ** **                       | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Plumbing                                   |       | $                                | 96,768     |                            | $          | 91,002 |   | $ | 285,241 |   | $ | 268,964 |   |
| Janitorial and  Sanitary                   |       | 72,890                           |       | 6,097                           |       | 83,932 |   | 16,101 |   |
| Electrical                                 |       | 33,303                           |       | 31,162                          |       | 94,954 |   | 90,371 |   |
| Heating,  Ventilation and Air Conditioning |       | 32,561                           |       | 29,852                          |       | 92,611 |   | 64,495 |   |
| Appliances                                 |       | 16,652                           |       | 14,226                          |       | 43,123 |   | 38,439 |   |
| Security                                   |       | 14,767                           |       | 14,000                          |       | 41,890 |   | 41,196 |   |
| Hardware                                   |       | 13,510                           |       | 12,871                          |       | 39,050 |   | 37,899 |   |
| Other                                      |       | 33,731                           |       | 26,601                          |       | 93,464 |   | 68,503 |   |
|                                       |       |                             |       |                            |       |   |   |   |   |
| Total                                      |       | $                                | 314,182    |                            | $          | 225,811 |   | $ | 774,265 |   | $ | 625,968 |   |
|                                            |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

*NewAccounting Pronouncements*

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48 (“FIN No. 48”), *Accounting for Uncertainty in Income Taxes — an Interpretation of FASBStatement No. 109*, which clarifies the accounting foruncertainty in income taxes recognized in accordance with SFAS No. 109, *Accounting for Income Taxes*. FIN No. 48 clarifies theapplication of SFAS No. 109 by defining criteria that an individual taxposition must meet for any part of the benefit of that position to berecognized in the financial statements. Additionally, FIN No. 48 providesguidance on the measurement, derecognition, classification and disclosure oftax positions, along with accounting for the related interest and penalties.The provisions of FIN No. 48 are effective for fiscal years beginning afterDecember 15, 2006, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to opening retained earnings. The Companyis currently evaluating the impact that adoption of FIN No. 48 will have on itsfinancial position, results of operations and cash flows.

In June 2006, the FASB ratified the consensus reachedby the Emerging Issues Task Force (“EITF”) with respect to EITF Issued No. 06-3,*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*, which addresses how taxes imposed ona revenue producing transaction between a buyer and a customer, such as sales,use, value-added and excise and other taxes imposed at the point of sale,should be recorded in the income statement. The consensus reached requiresthat a policy decision be made as to the presentation of taxes in the incomestatement. This policy should be disclosed within the notes to the financialstatements and the amount of taxes included in revenue, if any, should also bedisclosed. This EITF is effective for financial reports for interim andannual periods beginning after December 15, 2006 with earlier applicationpermitted. Currently, the Company records sales taxes net and it will disclosesuch policy in its Annual Report on Form10-K for the fiscal year ended December29, 2006. The adoption of this EITF will result in additional disclosure andwill not change the way the Company accounts for taxes collected and remitted.

In September 2006, the SEC issued Staff AccountingBulletin (“SAB”) No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*, which provides interpretive guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. SAB No. 108 iseffective for fiscal years ending after November 15, 2006 with earlyapplication encouraged. The Company believes adoption of SAB No. 108 will not havean impact on its financial position, results of operations and cash flows.

7

----

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*. SFAS No. 157 defines fair value,establishes a framework for measuring fair value with accounting principlesgenerally accepted in the United States of America and expands disclosuresabout fair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements. Accordingly,SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007 with earlyadoption permitted. The Company is currently evaluating the impact thatadoption of SFAS No. 157 will have on its financial position, results ofoperations and cash flows.

In September 2006, the FASB issued SFAS No. 158, *Employer’s Accounting for Defined Benefit Pension and OtherPostretirement Plans*—*an amendment of FASBStatements No. 87, 88, 106 and 132(R)*. SFAS No. 158 requiresemployers to fully recognize the obligations associated with single-employerdefined benefit pension, retiree healthcare and other postretirement plans inthe financial statements. Specifically, SFAS No. 158 requires as employer to(a) recognize in its statement of financial position an asset for a plan’soverfunded status or a liability for a plan’s underfunded status and recognizechanges in the funded status of a defined benefit postretirement plan incomprehensive income in the year in which the changes occur. These provisionsof SFAS No. 158 are effective for fiscal years ending after December 15, 2006.In addition, SFAS No. 158 requires an employer to measure a plan’s assets andits obligations that determine its funded status as of the end of the employer’sfiscal year (with limited exceptions). This provision of SFAS No. 158 iseffective for fiscal years ending after December 15, 2008. The Company iscurrently evaluating the impact that adoption of SFAS No. 158 will have on itsfinancial position, results of operations and cash flows.

**2.     SHARE-BASED COMPENSATION**

Effective December31, 2005, the Company adopted the provisions of SFAS No. 123(R), *Share-Based Payment*, using the modified prospectiveapplication transition method. Under this method, the share-based compensationcost recognized beginning December 31, 2005 includes compensation cost for (1)all share-based payments granted prior to, but not vested as of December 31,2005, based on the grant date fair value originally estimated in accordancewith the provisions of SFAS No. 123, *Accounting for Stock-BasedCompensation*, and (2) all share-based payments granted subsequent toDecember 30, 2005, based on the grant date fair value estimated in accordancewith the provisions of SFAS No. 123(R). Compensation cost under SFAS No. 123(R)is recognized ratably using the straight-line attribution method over theexpected vesting period or to the retirement eligibility date, if less than thevesting period when vesting is not contingent upon any future performance. Inaddition, pursuant to SFAS No. 123(R), the Company is required to estimate theamount of expected forfeitures when calculating the compensation costs, insteadof accounting for forfeitures as incurred, which was the method previously usedby the Company. As of December 31, 2005, the cumulative effect of adopting theestimated forfeiture method was not significant. Prior periods are not restatedunder this transition method.

SFAS No. 123(R)also requires the Company to reflect the tax benefit from the exercise of stockoptions in the statement of cash flows as a cash inflow from financingactivities. Prior to the adoption of SFAS No. 123(R), these tax benefits havebeen reflected as a cash inflow from operating activities. The prior yearstatement of cash flows has not been restated. The tax benefit from theexercise of stock options was $0.1 million and $0.3 million during the threeand nine months ended September 29, 2006; respectively, and $0.2 million duringthe nine months ended September 30, 2005. There were no stock options exercisedduring the three months ended September 30, 2005.

8

----

Prior to December31, 2005, the Company accounted for share-based compensation plans in accordancewith the provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, as permitted bySFAS No. 123. The Company elected to use the intrinsic value method ofaccounting for employee and director share-based compensation expense for itsnonqualified employee and director stock option awards and did not recognizecompensation expense for the issuance of options with an exercise price equalto or greater than the market price of the underlying common stock at the dateof grant. Had the Company elected to adopt the fair value approach asprescribed by SFAS No. 123, which charges earnings for the estimated fair valueof stock options, the pro forma net income and pro forma earnings per share forthe three and nine months ended September 30, 2005 would have been as follows(in thousands, except per share amounts):
| ** **                                                                                                                               | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                                                                               | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **                                                                                                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                                                                                               | ** ** | **2005**               | ** ** | **2005**               | ** ** |
|                                                                                                                                     | ** ** | ** **             | ** ** | ** **             | ** ** |
| Net income as  reported                                                                                                                  |       | $                      | 9,718      |                   | $          | 19,676 |   |
|                                                                                                                                     |       |                   |       |                   |       |
| Add: Share-based  compensation expense included in reported net income, net of related tax  effects                                      |       | 142                    |       | 432                    |       |
|                                                                                                                                     |       |                   |       |                   |       |
| Deduct: Total  share-based compensation expense determined under the fair value-based method  for all awards, net of related tax effects |       | (180                   | )          | (567                   | )          |
|                                                                                                                                     |       |                   |       |                   |       |
| Pro forma net  income                                                                                                                    |       | $                      | 9,680      |                   | $          | 19,541 |   |
|                                                                                                                                     |       |                   |       |                   |       |
| Earnings per  share:                                                                                                                     |       |                   |       |                   |       |
| Basic-as reported                                                                                                                        |       | $                      | 0.30       |                   | $          | 0.62 |   |
| Basic-pro forma                                                                                                                          |       | $                      | 0.30       |                   | $          | 0.61 |   |
|                                                                                                                                     |       |                   |       |                   |       |
| Diluted-as reported                                                                                                                      |       | $                      | 0.30       |                   | $          | 0.61 |   |
| Diluted-pro  forma                                                                                                                       |       | $                      | 0.30       |                   | $          | 0.60 |   |

 

As a result ofadopting SFAS No. 123(R) on December 31, 2005, the Company’s income beforeincome taxes and net income for the three months ended September 29, 2006, are$0.3 million and $0.2 million lower, respectively, than if the Company hadcontinued to account for share-based compensation under APB Opinion No. 25.Basic and diluted earnings per share are $0.01 lower for the three months endedSeptember 29, 2006 than if the Company had continued to account for share-basedcompensation under APB Opinion No. 25. As a result of adopting SFAS No. 123(R)on December 31, 2005, the Company’s income before income taxes and net incomefor the nine months ended September 29, 2006, are $0.6 million and $0.4 millionlower, respectively, than if the Company had continued to account forshare-based compensation under APB Opinion No. 25. Basic and diluted earningsper share are $0.01 lower for the nine months ended September 29, 2006 than ifthe Company had continued to account for share-based compensation under APBOpinion No. 25.

*Stock Incentive Plans*

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

9

----

During 2004, the Company adopted the 2004 EquityIncentive Plan, (the “2004 Plan”), under which the Company may award 3,175,000shares in the form of incentive stock options, nonqualified stock options,stock appreciation rights, or SARs, restricted stock, restricted stock units (“RSUs”),deferred stock units (“DSUs”) and stock bonus awards, all of which may beawarded to any employee, director, officer or consultant of the Company. In May2006, the stockholders of the Company approved an amendment to the 2004 Planwhereby the number of shares of the Company’s common stock reserved forissuance under the 2004 Plan was increased by 2,000,000 shares and to furtherrestrict the repricing of awards granted under the 2004 Plan without firstobtaining approval by the Company’s stockholders.

These plans allow the Company to fulfill its incentivestock option, nonqualified stock option, SAR, restricted stock, RSU, DSU andstock bonus award obligations using unissued or treasury shares. The totalshare-based compensation expense, which is included in the unaudited condensedconsolidated statement of earnings, was $1.1 million and $2.7 million for thethree and nine months ended September 29, 2006, respectively.

*Stock Options*

Under the terms of the 2000 Plan, the exercise priceper share for an incentive stock option may not be less than 100% of the fairmarket value of a share of common stock on the grant date. The exercise priceper share for an incentive stock option granted to a person owning stockpossessing more than 10% of the total combined voting power of all classes ofstock may not be less than 110% of the fair market value of a share of commonstock on the grant date. These incentive stock options vest in 25% incrementsover four years and may not be exercisable after the expiration of ten yearsfrom the date of grant.

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

As permitted by SFAS No. 123(R), the fair values ofstock options were estimated using the Black-Scholes option-pricing model.Expected volatility is based on historical performance of the Company’s stock.The Company also uses historical data to estimate the timing and amount ofstock option exercises and forfeitures. The expected life represents the periodof time that stock options are expected to remain outstanding and is based onthe contractual term of the stock options and expected exercise behavior. Therisk-free interest rate is based on U.S. Treasury zero-coupon issues with a remainingterm equal to the expected option life assumed at the date of grant. TheBlack-Scholes weighted-average assumptions for the three and nine months endedSeptember 29, 2006 were as follows:

 

|                          | ** ** | **Three Months**  | ** ** | **Nine Months**   | ** ** |
|--------------------------|------------|------------------------|------------|------------------------|------------|
| ** **               | ** ** | **Ended**              | ** ** | **Ended**              | ** ** |
| ** **               | ** ** | **September 29,** | ** ** | **September 29,** | ** ** |
| ** **               | ** ** | **2006**               | ** ** | **2006**               | ** ** |
| Expected  volatility     |       | 34.9                   | %          | 27.7                   | %          |
| Expected dividends       |       | 0.0                    | %          | 0.0                    | %          |
| Expected life (in years) |       | 5.0                    |       | 5.0                    |       |
| Risk-free  interest rate |       | 5.1                    | %          | 4.9                    | %          |

 

The weightedaverage fair value of stock options granted during the three and nine monthsended September 29, 2006 was $9.26 per option and $7.96 per option,respectively. The weighted average fair value of stock options granted duringthe three and nine months ended September 30, 2005 was $7.13 per option and$6.35 per option, respectively.

10

----

A summary of stock option activity as of September 29,2006 and changes during the nine months then ended is presented below:
| ** **                         | ** ** | ** ** | ** ** | ** **    | ** ** | **Weighted-**       | ** ** | ** **              | ** ** |
|------------------------------------|------------|------------|------------|---------------|------------|---------------------|------------|-------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Weighted-** | ** ** | **Average**         | ** ** | ** **              | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **Average**   | ** ** | **Remaining**       | ** ** | **Aggregate**           | ** ** |
| ** **                         | ** ** | ** ** | ** ** | **Exercise**  | ** ** | **Contractual**     | ** ** | **Intrinsic**           | ** ** |
| **Options**                        | ** ** | ** ** | ** ** | **Shares**    | ** ** | **Price**           | ** ** | **Term**                | ** ** | **Value (a)** | ** ** |
| ** **                         | ** ** | ** ** | ** ** | ** **    | ** ** | **(in years)** | ** ** | **(in thousands)** | ** ** |
| Outstanding at December  30, 2005  |       | 2,274,027  |       | $             | 17.42      |                |       |                    |       |   |
|                               |       |       |       |          |       |                |       |                    |       |
| Granted                            |       | 442,502    |       | 23.66         |       |                |       |                    |       |
|                               |       |       |       |          |       |                |       |                    |       |
| Exercised                          |       | (62,977    | )          | 15.00         |       |                |       |                    |       |
|                               |       |       |       |          |       |                |       |                    |       |
| Forfeited or expired               |       | (69,301    | )          | 15.02         |       |                |       |                    |       |
|                               |       |       |       |          |       |                |       |                    |       |
| Outstanding at  September 29, 2006 |       | 2,584,251  |       | $             | 18.61      |                | 8.1        |                    | $          | 14,217 |   |
|                               |       |       |       |          |       |                |       |                    |       |
| Exercisable at September 29, 2006  |       | 2,114,469  |       | $             | 17.40      |                | 8.3        |                    | $          | 14,109 |   |
|                                    |            |            |            |               |            |                     |            |                         |            |  |  |  |  |

----

**(a)****            **Theaggregate intrinsic value represents the amount by which the fair value of theunderlying stock at period end exceeds the stock option exercise price.

The totalintrinsic value, the difference between the exercise price and the market priceon the date of exercise, of all options exercised during the nine months endedSeptember 29, 2006 was $0.7 million. As of September 29, 2006, there was $3.1million of total unrecognized compensation cost related to unvested stockoptions. The cost is expected to be recognized over a weighted-average periodof 3.5 years.

*Restricted Stock, Restricted Stock Units andDeferred Stock Units*

Shares ofrestricted stock granted under the 2004 Plan to employees, senior managementand non-employee directors do not have an exercise price. The share-basedcompensation expense associated with the restricted stock is based on thequoted market price of the Company’s shares of common stock on the date ofgrant. One half of the restricted stock awards granted to employees vest evenlyover two years and one half vest evenly over five years. The restricted stockawards for senior management vest either on an accelerated basis in one-thirdinstallments over three years provided that certain pre-established annualpercentage increases in the Company’s earnings per share are attained or on theseventh anniversary of the date of grant. The restricted stock awards fornon-employee directors vest evenly over two years or at the end of three years;depending on the grant.

RSUs granted underthe 2004 Plan to management do not have an exercise price. The share-basedcompensation expense associated with the RSUs is based on the quoted marketprice of the Company’s shares of common stock on the date of grant. Dependingon the grant, one half of the RSUs vest on an accelerated basis in twoinstallments over two years provided that certain pre-established annualpercentage increases in the Company’s earnings per share are attained and onehalf vest evenly over three years or one half of the RSUs vest on the secondgrant date anniversary if certain earnings before interest, taxes, depreciationand amortization (“EBITDA”) targets are met and one half vest on the thirdgrant date anniversary if certain EBITDA targets are met.

DSUs granted underthe 2004 Plan to non-employee directors do not have an exercise price. Theshare-based compensation expense associated with the DSUs is based on thequoted market price of the Company’s shares of common stock on the date ofgrant. DSUs vest on the grant date or evenly over the non-employee directors’current service term; depending on the grant. All DSUs are to be settled inshares of the Company’s common stock upon termination of the non-employeedirectors’ service or one year after termination of the non-employee directors’service; depending on the grant.

In prior periods,unearned stock compensation was recorded as deferred compensation withinstockholders’ equity at the date of the award based on the quoted market priceof the Company’s common stock on the date of grant and amortized to expenseusing the straight-line method from the grant date through the vesting date.Upon adoption of SFAS No. 123(R), the $1.9 million of deferred compensation asof December 30, 2005 was required to be charged against additional paid-in capital.

11

----

A summary statusof restricted stock, RSUs and DSUs as of September 29, 2006, and changes duringthe nine months then ended is presented below:
| ** **                         | ** ** | **Restricted Stock** | ** ** | **Restricted Stock Units** | ** ** | **Deferred Stock Units** | ** ** |
|------------------------------------|------------|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | ** **                | ** ** | **Weighted-**                        | ** ** | ** **                         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                         | ** ** | ** **                | ** ** | **Average**                          | ** ** | ** **                         | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                         | ** ** | ** **                | ** ** | **Grant Date**                  | ** ** | ** **                         | ** ** | **Grant Date** | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                         | ** ** | **Shares**                | ** ** | **Fair Value**                  | ** ** | **Shares**                         | ** ** | **Fair Value** | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Outstanding at  December 30, 2005  |       | 190,820                   |       | $                                    | 15.11      |                               | —     |   | $ | — |   | — |   | $ | — |   |
|                               |       |                      |       |                                 |       |                               |       |   |   |   |   |   |   |
| Granted                            |       | 6,500                     |       | 22.92                                |       | 198,145                            |       | 23.35 |   | 11,508 |   | 25.44 |   |
|                               |       |                      |       |                                 |       |                               |       |   |   |   |   |   |   |
| Vested                             |       | (63,608                   | )          | 15.00                                |       | —                             |       | — |   | — |   | — |   |
|                               |       |                      |       |                                 |       |                               |       |   |   |   |   |   |   |
| Forfeited                          |       | (7,675                    | )          | 15.00                                |       | —                             |       | — |   | — |   | — |   |
|                               |       |                      |       |                                 |       |                               |       |   |   |   |   |   |   |
| Outstanding at  September 29, 2006 |       | 126,037                   |       | $                                    | 15.58      |                               | 198,145    |   | $ | 23.35 |   | 11,508 |   | $ | 25.44 |   |

 

The total fairvalue of restricted stock vested during the nine months ended September 29,2006 was $1.5 million. No restricted stock vested during the nine months endedSeptember 30, 2005. As of September 29, 2006, there was $4.8 million of totalunrecognized compensation cost related to nonvested restricted stock, RSUs andDSUs. The cost is expected to be recognized over a weighted-average period of1.8 years.

**3.     EARNINGS PER SHARE**

Earnings per sharefor all periods has been computed in accordance with SFAS No. 128, *Earnings per Share*. Basic earnings per share is computed bydividing net income applicable to common stockholders by the weighted-averagenumber of shares of common stock outstanding during the period. Dilutedearnings per share is computed by dividing net income applicable to commonstockholders by the weighted-average number of shares of common stockoutstanding during the period as adjusted for the potential dilutive effect ofstock options and non-vested shares of restricted stock, RSUs and DSUs usingthe treasury stock method. The following summarizes the shares of common stockused to calculate earnings per share including the potentially dilutive impactof stock options, restricted stock, RSUs and DSUs, calculated using thetreasury stock method, as included in the calculation of dilutedweighted-average shares:

 
| ** **                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **September 29,**           | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  shares outstanding - basic   |       | 32,159,251                       |       | 32,061,828                      |       | 32,124,106 |   | 31,979,374 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Dilutive shares  resulting from:               |       |                             |       |                            |       |   |   |   |   |
| Stock options                                  |       | 509,046                          |       | 386,753                         |       | 482,880 |   | 342,019 |   |
| Restricted stock                               |       | 42,272                           |       | 73,228                          |       | 53,069 |   | 78,277 |   |
| Restricted stock units                         |       | 50,051                           |       | —                          |       | 59,545 |   | — |   |
| Deferred stock units                           |       | 1,872                            |       | —                          |       | 1,124 |   | — |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares  outstanding - diluted |       | 32,762,492                       |       | 32,521,809                      |       | 32,720,724 |   | 32,399,670 |   |

 

During the threemonths ended September 29, 2006 and September 30, 2005, options to purchase280,807 shares and 471,456 shares of common stock, respectively, were excludedfrom the computations of diluted weighted-average shares outstanding becausethe exercise prices of those options are greater than the average market valueof common stock and the effect would be anti-dilutive. During the nine monthsended September 29, 2006 and September 30, 2005, options to purchase 262,124shares and 517,956 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.

12

----

**4.**   DEBT

Long-term debt atSeptember 29, 2006 and December 30, 2005 consists of the following (inthousands):

|                                                                              | ** ** | **September 29,** | ** ** | **December 30,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                                                         |       |                   |       |                  |       |
| Term loans                                                                   |       | $                      | 229,425    |                  | $          | 148,800 |   |
| Notes payable                                                                |       | 3,639                  |       | 3,275                 |       |
| 81¤8%  senior subordinated notes, net of unamortized discount of $1,401 |       | 198,599                |       | —                |       |
| 111⁄2% senior  subordinated notes                                         |       | —                 |       | 130,000               |       |
|                                                                         |       |                   |       |                  |       |
|                                                                         |       | 431,663                |       | 282,075               |       |
| Less current  portion                                                        |       | (2,432                 | )          | (1,400                | )          |
|                                                                         |       |                   |       |                  |       |
|                                                                         |       | $                      | 429,231    |                  | $          | 280,675 |   |

 

In April 2003,Interline New Jersey issued a non-recourse note payable in the principal amountof $3.3 million for the purchase of an investment. This note, which is securedonly by the investment, bears interest at a rate of 4.0% per annum, withprincipal due in full in April 2010.

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

On December 20,2004, Interline New Jersey elected to redeem $70.0 million of the 11 1⁄2% seniorsubordinated notes using proceeds from the Company’s IPO and gave the 30-daynotice required by the indenture. In January 2005, the Company recorded a losson extinguishment of debt of $10.3 million, consisting of the write-off ofdeferred financing costs of $2.3 million and the redemption premium of $8.1million on the $70.0 million redemption of 111⁄2% senior subordinated notes. OnJune 23, 2006, Interline New Jersey repurchased the remaining $130.0 million of111⁄2% senior subordinated notes as part of the refinancing transactionsdescribed below.

In December 2004,Interline New Jersey amended its term loan facility and revolving loanfacility. The term loan was reduced to $100.0 million from $140.0 million andthe revolving loan facility was increased to $100.0 million from $65.0 million.As part of the amendment in December 2004, Interline New Jersey paid down $31.3million of the term loan using proceeds from the Company’s IPO. Interline NewJersey also amended its credit facility on July 7, 2005, in connection with theacquisition of CCS Enterprises, Inc. (“Copperfield”), to permit the incurrenceof an additional $50.0 million term loan, having substantially the same termsas the existing term loan. On August 8, 2005, Interline New Jersey againamended its credit facility to lower the interest rate spreads applicable tothe additional $50.0 million term loan. The amended credit facility providedfor aggregate commitments of $250.0 million, consisting of (1) a revolving loanfacility of $100.0 million, of which a portion not exceeding $20.0 million wasavailable in the form of letters of credit, and (2) a term loan facility of$150.0 million.

Borrowings underthe amended term loan facility and revolving loan facility bore interest, atInterline New Jersey’s option, at either LIBOR or at the alternate base rateplus a spread. The indebtedness under the amended credit facility wasguaranteed by the Company and by the domestic subsidiaries of Interline NewJersey. Interest rates in effect on borrowings under the term loan facilitiesat June 23, 2006, the date such borrowings were paid off, ranged from 7.72% forLIBOR based borrowings and 9.25% for prime based borrowings under the $100.0million tranche B-1 term loan and 7.22% for LIBOR based borrowings and 9.00%for prime based borrowings under the $50.0 million tranche B-2 term loan.Outstanding letters of credit under the revolving loan facility were subject toa per annum fee equal to the applicable spread over the adjusted LIBOR forrevolving loans. The term loan facility was due to mature on December 31, 2010and the revolving loan facility was due to mature on May 31, 2008. Debtissuance costs capitalized in connection with the amended credit facility were$1.1 million. On June 23, 2006, Interline New Jersey paid off the term loanfacility as part of the refinancing transactions described below.

13

----

In June 2006, Interline New Jersey completeda series of refinancing transactions consisting of (1) an offering of $200.0million of 81¤8%senior subordinated notes due 2014 and (2) entering into a $330.0 million bankcredit facility. The new bank credit facility consists of a $100.0 million7-year term loan, a $130.0 million 7-year delayed draw term loan and a $100.0million 6-year revolving credit facility of which a portion not exceeding $40.0million is available in the form of letters of credit. The delayed draw termloan was available solely to fund the acquisition of substantially all of theassets of American Sanitary Incorporated and the acquisition-related fees andexpenses (see Note 5. Acquisition). The proceeds from the 81¤8% seniorsubordinated notes and the new bank credit facility were used to repurchase the111⁄2% senior subordinated notes and to repay the indebtedness under the priorcredit facility. The 111⁄2% senior subordinated notes were repurchased at a priceequal to 110.51% of their principal amount.

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

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%. The discount of $1.4 millionwill be amortized over the term of the 81¤8% seniorsubordinated notes. The 81¤8%senior subordinated notes mature on June 15, 2014 and interest is payable onJune 15 and December 15 of each year beginning on December 15, 2006. Debtissuance costs capitalized in connection with the 81¤8% seniorsubordinated notes were $5.9 million.

Borrowings underthe new term loan, the delayed draw facility and the new revolving creditfacility bear interest, at Interline New Jersey’s option, at either LIBOR plus1.75% or at the alternate base rate plus 0.75%. As of September 29, 2006, the interestrate in effect with respect to the new term loan and the delayed draw facilitywas 7.11% for the LIBOR option and 9.00% for the alternate base rate option.Outstanding letters of credit under the new revolving credit facility aresubject to a per annum fee equal to the applicable margin under the newrevolving credit facility. The interest rate margin is subject to pricingadjustments at the end of each fiscal quarter based on net total indebtednessto consolidated EBITDA. The new term loan and the delayed draw facility matureon June 23, 2013 and the revolving loan facility matures on June 23, 2012.Amounts under the new term loan and the delayed draw facility are due andpayable in quarterly installments equal to 1.0% of the principal amount on an annualbasis through June 23, 2013, with the balance payable in one final installmentat the maturity date. Debt issuance costs capitalized in connection with thenew term loan, the delayed draw facility and the new revolving credit facilitywere $3.9 million.

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

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

The debt instruments of Interline New Jersey,primarily the credit facility and the indenture governing the terms of the 81¤8%senior subordinated notes, contain significant restrictions on the payment ofdividends and distributions to the Company by Interline New Jersey. InterlineNew Jersey’s credit facility allows it to pay dividends, make distributions tothe Company or make investments in the Company in an aggregate amount not toexceed $2.0 million during any fiscal year, so long as Interline New Jersey isnot in default or would be in default as a result of such payments. Inaddition, 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 the Company’s stock option or other benefit plans for managementor employees and (provided Interline New Jersey is not in default) aggregatepayments of up to $40.0 million depending on the pro forma net leverage ratioas of the last day of the previous quarter. In addition, the indenture for the81¤8%senior subordinated notes generally restricts the ability of Interline NewJersey to pay distributions to the Company and to make advances to, orinvestments in, the Company to an amount generally equal to 50% of the netincome of Interline New Jersey, plus an amount equal to the net proceeds fromcertain equity issuances, subject to compliance with a leverage ratio and nodefault having occurred and continuing. The indenture also contains certain permittedexceptions including (1) allowing the Company to pay its franchise taxes andother fees required to maintain its corporate existence, to pay for generalcorporate and overhead expenses and to 

14

----

pay expenses incurred in connection with certainfinancing, acquisition or disposition transactions, in an aggregate amount notto exceed $10.0 million per year; (2) allowing certain tax payments; and (3)allowing certain permitted distributions up to $75 million.

As of September29, 2006, Interline New Jersey had $89.5 million available under its revolvingcredit facility. Total letters of credit issued under this facility as ofSeptember 29, 2006 were $10.5 million. There were no borrowings under therevolving credit facility as of September 29, 2006.

**5.**              ACQUISITION

On July 3, 2006,Interline New Jersey acquired all of the outstanding equity interests of AmSanfrom American Sanitary Incorporated for $132.8 million in cash, including cashacquired of $2.2 million and transaction fees of $2.8 million. AmSan is a leadingnational distributor and direct marketer of janitorial and sanitary supplies.The acquisition was funded with the $130.0 million delayed draw facility underInterline New Jersey’s new bank credit facility (see Note 4. Debt).

AmSan, one of thelargest national distributors in the U.S. janitorial and sanitary maintenancesupply industry, offers over 40,000 products from 43 locations to approximately40,000 customers in 39 states. AmSan’s primary end markets are institutionalfacilities, such as schools and universities, health care, lodging andgovernment properties, as well as professional cleaning contractors. Thisacquisition represents an expansion of the Company’s MRO product offering andinstitutional facilities and professional contractor business.

The followingtable summarizes the preliminary allocation of the purchase price to the AmSanassets acquired and liabilities assumed at estimated fair values (inthousands):

| Current assets            |   | $       | 50,613  |   |
|---------------------------|--------|---------|---------|--------|
| Property and  equipment   |   | 2,983   |    |
| Goodwill                  |   | 63,305  |    |
| Intangible  assets        |   | 43,600  |    |
| Other assets              |   | 183     |    |
| Total assets acquired     |   | 160,684 |    |
|                      |   |    |    |
| Current  liabilities      |   | 27,091  |    |
| Other  liabilities        |   | 780     |    |
| Total liabilities assumed |   | 27,871  |    |
|                      |   |    |    |
| Net assets  acquired      |   | $       | 132,813 |   |

 

Given the recentacquisition date, Interline New Jersey has not completed its integration plan;therefore, the final fair value assessment is not yet complete. Interline NewJersey expects to complete the allocation process during the second quarter offiscal 2007.

This acquisitionwas treated as a purchase and sale of assets for federal income tax purposes.Accordingly, of the $63.3 million of goodwill, $62.5 million is expected to bedeductible for tax purposes.

Of the $43.6million of acquired intangible assets, $19.4 million was assigned to registeredtrademarks that are not subject to amortization. The remaining $24.2 million ofacquired intangible assets consists of customer relationships and have aweighted-average useful life of approximately 16 years.

15

----

The results ofAmSan have been included in the condensed consolidated financial statementssince July 3, 2006. The following unaudited pro forma financial informationreflects the AmSan acquisition as if it had occurred on January 1, 2005 aftergiving effect to certain adjustments including amortization of other intangibleassets and interest expense (in thousands, except per share data):
| ** **           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **September 29,**           | ** ** | **September 30,**          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** |
| ** **           | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues             |       | $                                | 314,182    |                            | $          | 294,272 |   | $ | 907,957 |   | $ | 823,019 |   |
| Net income           |       | $                                | 14,241     |                            | $          | 11,000 |   | $ | 22,207 |   | $ | 22,223 |   |
|                 |       |                             |       |                            |       |   |   |   |   |
| Earnings Per  Share: |       |                             |       |                            |       |   |   |   |   |
| Basic                |       | $                                | 0.44       |                            | $          | 0.34 |   | $ | 0.69 |   | $ | 0.69 |   |
| Diluted              |       | $                                | 0.43       |                            | $          | 0.34 |   | $ | 0.68 |   | $ | 0.69 |   |

 

The pro forma financial information does not purport to represent what the Company’s actual results of operations would have been had the acquisition occurred as of January 1, 2005 and may not be indicative of operating results for any future periods.

The following summarizes the changes to goodwill for the nine months ended September 29, 2006 (in thousands):

| Beginning balance                   |   | $      | 249,574 |   |
|-------------------------------------|--------|--------|---------|--------|
| AmSan acquisition                   |   | 63,305 |    |
| Adjustments to acquisition accruals |   | (941   | )       |
| Ending balance                      |   | $      | 311,938 |   |

Adjustments to acquisition accruals relate primarily to the write-off of an unused acquisition accrual created for the estimated loss on property and equipment associated with the Florida Lighting acquisition as well as the adjustment to deferred taxes associated with the final valuation of Copperfield.

**6.**              SUBSIDIARY GUARANTORS

In June 2006, Interline New Jersey issued $200.0million of 81¤8%senior subordinated notes due 2014 and entered into a $330.0 million bankcredit facility (see Note 4. Debt). The 81¤8% seniorsubordinated notes and the bank credit facility are fully and unconditionallyguaranteed, jointly and severally, on a subordinated basis by the Company andall of Interline New Jersey’s 100% owned domestic subsidiaries: WilmarHoldings, Inc., Wilmar Financial, Inc., Glenwood Acquisition LLC and AmSanLLC.  The guarantees by these subsidiaryguarantors (the “Subsidiary Guarantors”) are senior to any of their existingand future subordinated obligations, equal in right of payment with any oftheir existing and future senior subordinated indebtedness and subordinated toany of their existing and future senior indebtedness.

The Company is a holding company whose only asset isthe stock of its subsidiaries. The Company conducts virtually all of its businessoperations through Interline New Jersey. Accordingly, the Company’s onlymaterial sources of cash are dividends and distributions with respect to itsownership interests in Interline New Jersey that are derived from the earningsand cash flow generated by Interline New Jersey. Since the Company has noindependent assets or operations and subsidiaries not guaranteeing the 81¤8%senior subordinated notes and the bank credit facility are minor, condensedconsolidating financial information for the Company and subsidiaries is notpresented.

16

----

**ITEM 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*References to “us”and “we” are to the Company. You should read the following discussion inconjunction with our unaudited condensed consolidated financial statements andrelated notes included in this quarterly report, and our audited consolidatedfinancial statements and related notes and Management’s Discussion and Analysisof Financial Condition and Results of Operations included in our Annual Reporton 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,

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

·                  economicslowdowns,

·                  general marketconditions,

·                  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,

·                  the otherfactors described under “Part I. Item 1A—Risk Factors” in our Annual Report onForm 10-K filed with the SEC, and

·                  theother factors described under “Part II. Item 1A—Risk Factors” in this QuarterlyReport on Form 10-Q.

You should keep inmind that any forward-looking statement made by us in this report, orelsewhere, speaks only as of the date on which we make it. New risks anduncertainties arise from time to time, and it is impossible for us to predictthese events or how they may affect us. In light of these risks anduncertainties, you should keep in mind that any forward-looking statement madein this report or elsewhere might not occur. Notwithstanding the foregoing, allinformation contained in this report is materially accurate as of the date ofthis report.

**Overview**

We are a leading nationaldistributor and direct marketer of specialty maintenance, repair and operations(“MRO”) products. We stock approximately 75,000 plumbing, electrical, hardware,security hardware, heating, ventilation and air conditioning, janitorial andsanitary supplies and other MRO products and sell to approximately 200,000active customer accounts. Our products are primarily used for the repair,maintenance, remodeling and refurbishment of properties and non-industrialfacilities. We are able to realize higher 

17

----

operating margins by focusing on repair,maintenance, remodeling and refurbishment customers, who generally makesmaller, more frequent purchases and require high levels of service. Ourdiverse customer base includes facilities maintenance customers, which consistof multi-family housing, educational, lodging, governmental and healthcare facilities; professional contractors who primarily repair and maintainproperties and non-industrial facilities; and specialty distributors, includingplumbing and hardware retailers. Our customers range in size from individualcontractors and independent hardware stores to apartment management companiesand 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 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 approximately650 field sales representatives, approximately 525 telesales and customerservice representatives, a direct marketing program of approximately fivemillion pieces annually, brand-specific websites and a national accountssales program. We deliver our products through our network of 96 regionaldistribution centers, 26 professional contractor showrooms located throughoutthe United States and Canada, a national distribution center, or NDC, inNashville, Tennessee, 12 vendor managed inventory locations at largeprofessional contractor customer locations and a dedicated fleet of trucks. Ourbroad distribution network allows us the ability to provide reliable, same-dayor next-day delivery service to 98% of the U.S. population.

Our common information technologyand logistics platform supports our major business functions, allowing us tomarket and 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 common informationtechnology and logistics platform also benefits our customers by allowing us tooffer a broad product selection at highly competitive prices while maintainingthe unique 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.

As a result of the Acquisitionand Refinancing Transactions described below, our historical financial resultsor results of operations may not be indicative of our financial results orresults of operations in the future.

**Acquisition**

On July 3, 2006,we acquired all of the outstanding equity interests of AmSan LLC (“AmSan”) fromAmerican Sanitary Incorporated for $132.8 million in cash, including cashacquired of $2.2 million and transaction fees of $2.8 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 our new bank credit facility (see Refinancing Transactionsbelow). Given the recent acquisition date, we have not completed our integrationplan; therefore, the final fair value assessment is not yet complete. We expectto complete the allocation process during the second quarter of fiscal 2007.

AmSan, one of thelargest national distributors in the U.S. janitorial and sanitary maintenancesupply industry, offers over 40,000 products from 43 locations to approximately40,000 customers in 39 states. AmSan’s primary end markets are institutionalfacilities, such as schools and universities, health care, lodging andgovernment properties, as well as professional cleaning contractors. Thisacquisition represents an expansion of our (1) MRO product offering and (2)institutional facilities and professional contractor business.

As a result ofthis acquisition, we analyzed our reportable segment. In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 131, *Disclosure about Segments of an Enterprise and Related Information*,we have two operating segments: Interline Brands and AmSan. We aggregated thesesegments into one reportable segment, the distribution of MRO products, becausethey posses similar economic characteristics and have common products,customers and methods of distribution.

**Refinancing Transactions**

On June 23, 2006, Interline New Jersey completed aseries of refinancing transactions consisting of (1) an offering of $200.0million of 81¤8%senior subordinated notes due 2014 and (2) entering into a $330.0 million bankcredit facility. The new bank credit facility consists of a $100.0 million7-year term loan, a $130.0 million 7-year delayed draw term loan and a $100.0million 6-year revolving credit facility of which a portion not exceeding $40.0million is available in the form of letters of credit. The delayed draw termloan was drawn on July 3, 2006 to fund the acquisition of AmSan and theacquisition-related fees and expenses (see Acquisition above). We used theproceeds from the 81¤8%senior subordinated notes and the new bank credit facility to repurchase theoutstanding 111⁄2% senior subordinated notes of Interline New Jersey and to repayindebtedness under the prior credit facility of Interline New Jersey. Werepurchased the 111⁄2% senior subordinated notes at a price equal to 110.51% oftheir principal amount.

18

----

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, which was comprised of$13.7 million in tender premiums associated with the repurchase of the 111⁄2%senior subordinated notes and a non-cash charge of $7.0 million in deferred financingcosts associated with the repurchase of the 111⁄2% senior subordinated notes andthe repayment of the prior credit facility.

**Accounting and Disclosure Changes**

Effective December31, 2005, we adopted the provisions of SFAS No. 123(R), *Share-BasedPayment*, using the modified prospective application transitionmethod. Under this method, the share-based compensation cost recognizedbeginning December 31, 2005 includes compensation cost for (1) all share-basedpayments granted prior to, but not vested as of December 31, 2005, based on thegrant date fair value originally estimated in accordance with the provisions ofSFAS No. 123, *Accounting for Stock-Based Compensation*,and (2) all share-based payments granted subsequent to December 30, 2005, basedon the grant date fair value estimated in accordance with the provisions ofSFAS No. 123(R). Compensation cost under SFAS No. 123(R) is recognized ratablyusing the straight-line attribution method over the expected vesting period orto the retirement eligibility date, if less than the vesting period whenvesting is not contingent upon any future performance. In addition, pursuant toSFAS No. 123(R), we are required to estimate the amount of expected forfeitureswhen calculating the compensation costs, instead of accounting for forfeituresas incurred, which was the method previously used by us. As of December 31,2005, the cumulative effect of adopting the estimated forfeiture method was notsignificant. Prior periods are not restated under this transition method.

SFAS No. 123(R)also requires us to reflect the tax benefit from the exercise of stock optionsin the statement of cash flows as a cash inflow from financing activities.Prior to the adoption of SFAS No. 123(R), these tax benefits have beenreflected as a cash inflow from operating activities. The prior year statementof cash flows has not been restated. The tax benefit from the exercise of stockoptions was $0.1 million and $0.3 million during the three and nine monthsended September 29, 2006; respectively, and $0.2 million during the three andnine months ended September 30, 2005. There were no stock options exercisedduring the three months ended September 30, 2005.

As of September29, 2006, there was $7.9 million of total unrecognized compensation costrelated to unvested stock awards. The cost is expected to be recognized over aweighted-average period of 2.5 years.

Prior to December31, 2005, we accounted for share-based compensation plans in accordance withthe provisions of Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*, as permitted bySFAS No. 123. We elected to use the intrinsic value method of accounting foremployee and director share-based compensation expense for its non-compensatoryemployee and director stock option awards and did not recognize compensationexpense for the issuance of options with an exercise price equal to or greaterthan the market price of the underlying common stock at the date of grant. Hadwe elected to adopt the fair value approach as prescribed by SFAS No. 123,which charges earnings for the estimated fair value of stock options, our netincome and earnings per share for the three and nine months ended September 30,2005 would not have been materially affected.

As a result ofadopting SFAS No. 123(R) on December 31, 2005, our income before income taxesand net income for the three months ended September 29, 2006, are $0.3 millionand $0.2 million lower, respectively, than if we had continued to account forshare-based compensation under APB Opinion No. 25. Basic and diluted earningsper share are $0.01 lower for the three months ended September 29, 2006 than ifwe had continued to account for share-based compensation under APB Opinion No.25. As a result of adopting SFAS No. 123(R) on December 31, 2005, our incomebefore income taxes and net income for the nine months ended September 29,2006, are $0.6 million and $0.4 million lower, respectively, than if we hadcontinued to account for share-based compensation under APB Opinion No. 25.Basic and diluted earnings per share are $0.01 lower for the nine months endedSeptember 29, 2006 than if we had continued to account for share-basedcompensation under APB Opinion No. 25.

19

----

**Results of Operations**

The followingtable presents information derived from the condensed consolidated statementsof earnings expressed as a percentage of revenues for the three and nine monthsended September 29, 2006 and September 30, 2005:
| ** **                                   | ** ** | **% of Net Sales** | ** ** | **% Increase**    | ** ** | **% of Net Sales** | ** ** | **% Increase**    | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|------------------------|------------|-----------------------------------|------------|------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended**  | ** ** | **(Decrease)**         | ** ** | **Nine Months Ended**   | ** ** | **(Decrease)**         | ** ** |
| ** **                                   | ** ** | **September 29,**            | ** ** | **September 30,** | ** ** | **2006**                          | ** ** | **September 29,** | ** ** | **September 30,** | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **2006**                          | ** ** | **2005**               | ** ** | **vs. 2005**                 | ** ** | **2006**               | ** ** | **2005** | ** ** | **vs. 2005** | ** ** |
| Net sales                                    |       | 100.0                             | %          | 100.0                  | %          | 39.1                              | %          | 100.0                  | %          | 100.0 | % | 23.7 | % |
| Cost of sales                                |       | 61.8                              |       | 61.8                   |       | 39.0                              |       | 61.9                   |       | 61.8 |   | 23.7 |   |
| Gross profit                                 |       | 38.2                              |       | 38.2                   |       | 39.4                              |       | 38.1                   |       | 38.2 |   | 23.6 |   |
|                                         |       |                              |       |                   |       |                              |       |                   |       |   |   |   |   |
| Operating  Expenses:                         |       |                              |       |                   |       |                              |       |                   |       |   |   |   |   |
| Selling, general and administrative expenses |       | 26.9                              |       | 26.1                   |       | 43.5                              |       | 27.1                   |       | 26.7 |   | 25.3 |   |
| Depreciation and amortization                |       | 1.2                               |       | 1.5                    |       | 15.0                              |       | 1.4                    |       | 1.5 |   | 11.6 |   |
| Secondary offerting costs                    |       | —                            |       | 0.4                    |       | (100.0                            | )          | —                 |       | 0.1 |   | (100.0 | ) |
| Total operating expense                      |       | 28.2                              |       | 28.0                   |       | 39.9                              |       | 28.5                   |       | 28.4 |   | 23.9 |   |
| Operating income                             |       | 10.1                              |       | 10.2                   |       | 37.9                              |       | 9.7                    |       | 9.8 |   | 22.6 |   |
|                                         |       |                              |       |                   |       |                              |       |                   |       |   |   |   |   |
| Loss on  extinguishment of debt              |       | —                            |       | —                 |       | —                            |       | (2.7                   | )          | (1.7 | ) | 100.2 |   |
| Interest expense                             |       | (2.8                              | )          | (3.0                   | )          | 31.6                              |       | (2.9                   | )          | (3.0 | ) | 21.5 |   |
| Interest income                              |       | 0.1                               |       | 0.0                    |       | N/M                               |       | 0.1                    |       | 0.0 |   | N/M |   |
| Other income                                 |       | 0.1                               |       | 0.1                    |       | 39.4                              |       | 0.1                    |       | 0.1 |   | 9.1 |   |
| Income before income taxes                   |       | 7.4                               |       | 7.3                    |       | 41.2                              |       | 4.2                    |       | 5.2 |   | (0.9 | ) |
| Income tax  provision                        |       | (2.9                              | )          | (3.0                   | )          | 33.9                              |       | (1.6                   | )          | (2.1 | ) | (3.1 | ) |
| Net income                                   |       | 4.5                               | %          | 4.3                    | %          | 46.3                              | %          | 2.6                    | %          | 3.1 | % | 0.6 | % |

----

N/M - Not Meaningful.

The following discussion includes references to the terms average dailysales and average organic daily sales. Average daily sales are defined as salesfor a period of time divided by the number of shipping days in that period oftime. Average organic daily sales are defined as sales from a period oftime divided by the number of shipping days in that period of time excludingany sales from acquisitions made subsequent to the beginning of the prior yearperiod. The computation of average organic daily sales is as follows (amountsin thousands):
| ** **                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **September 29,**           | ** ** | **September 30,**          | ** ** | ** ** | ** ** | **September 29,** | ** ** | **September 30,** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **% Variance** | ** ** | **2006** | ** ** | **2005** | ** ** | **% Variance** | ** ** |
| Net Sales                    |       | $                                | 314,182    |                            | $          | 225,811 |   | 39.1 | % | $ | 774,265 |   | $ | 625,968 |   | 23.7 | % |
| Less  Acquisitions:          |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| AmSan                        |       | (68,263                          | )          |                            |       |   |   | (68,263 | ) |   |   |   |   |
| Copperfield                  |       | —                           |       |                            |       |   |   | (18,615 | ) |   |   |   |   |
| Organic Sales                |       | $                                | 245,919    |                            | $          | 225,811 |   | 8.9 | % | $ | 687,387 |   | $ | 625,968 |   | 9.8 | % |
|                         |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Daily Sales:                 |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Ship Days                    |       | 63                               |       | 63                              |       |   |   | 191 |   | 192 |   |   |   |
| Average Daily Sales          |       | $                                | 4,987      |                            | $          | 3,584 |   | 39.1 | % | $ | 4,054 |   | $ | 3,260 |   | 24.3 | % |
| Average Organic  Daily Sales |       | $                                | 3,903      |                            | $          | 3,584 |   | 8.9 | % | $ | 3,599 |   | $ | 3,260 |   | 10.4 | % |

 

Average organic daily sales is presented herein because we believe it tobe relevant and useful information to our investors since it is used by ourmanagement to evaluate the operating performance of our business, as adjustedto exclude the impact of the acquisition of CCS Enterprises, Inc., orCopperfield, and AmSan, and compare our organic operating performance with thatof our competitors. However, average organic daily sales is not a measure offinancial performance under GAAP and it should be considered in addition to,but not as a substitute for, other measures of financial performance reportedin accordance with GAAP, such as net sales. Management utilizes average organicdaily sales as an operating performance measure in conjunction with GAAPmeasures such as net sales.

20

----

*Overview.*During the third quarter of 2006, we acquired all of theoutstanding equity interests of AmSan, a national distributor of janitorial andsanitary maintenance supply products with annual sales of approximately $245million offering over 40,000 products from 43 locations to approximately 40,000customers in 39 states. This acquisition was closed on July 3, 2006 andfinanced as part of a comprehensive series of refinancing transactions.

Average daily sales grew39.1% during the third quarter including 8.9% average organic daily salesgrowth and 30.2% average daily sales growth attributable to our July 2006acquisition of AmSan. Our gross margins during the third quarter remainedconsistent with the prior year quarter at 38.2% including AmSan and improved 20basis points to 38.4% excluding AmSan as a result of successfully managingprice increases from our suppliers, improvements in supplier purchasingprograms and efficiencies at our national distribution center. Total SG&Aexpenses during the third quarter were 26.9% of sales or 80 basis points higherthan the prior year quarter, reflecting the effect of the AmSan acquisition andhigher share based compensation expense. We continued to see leverage in thearea of freight and distribution center labor. Operating income for the quarterwas 10.1% of sales, down 10 basis points from the prior year period, from theeffect of our AmSan acquisition, as well as our continued investment in organicgrowth initiatives at a rate of approximately $2.0 million per quarterincluding the expansion of our national accounts program, the addition of fieldsales and telesales professionals and the addition of new products andgeographic expansion.

*Three Months Ended September 29,2006 Compared to Three Months Ended September 30, 2005*

*NetSales.*Our net sales increased by $88.4 million, or39.1%, to $314.2 million in the three months ended September 29, 2006 from$225.8 million in the three months ended September 30, 2005. Of the $88.4million increase, $68.3 million was attributable to our AmSan acquisition andthe remaining $20.1 million was driven by continued strong demand for ourproducts, new sales and growth initiatives and from price increases.

*GrossProfit.*Gross profit increased by $33.9 million, or39.4%, to $120.1 million in the three months ended September 29, 2006 from$86.1 million in the three months ended September 30, 2005. Gross profitmargins remained consistent at 38.2% for the three months ended September 29,2006 compared to the three months ended September 30, 2005.

*Selling,General and Administrative Expenses.*SG&A expensesincreased by $25.6 million, or 43.5%, to $84.6 million in the threemonths ended September 29, 2006 from $58.9 million in the three monthsended September 30, 2005. Increased SG&A expenses related to our AmSanacquisition accounted for $19.3 million of the $25.6 million increase.Excluding these expenses, SG&A expenses increased 10.8% in the three monthsended September 29, 2006. Certain expenses within SG&A, such as the costsof running regional distribution centers, delivery expenses and sellingexpenses, fluctuate with sales volume. The increase in SG&A expensesincluded these increases, as well as increased investment in new sales andmarketing initiatives and additional share-based compensation associated withrestricted stock units, deferred stock units and stock options during the threemonths ended September 29, 2006. SG&A expenses as a percentage of sales was26.9% in the three months ended September 29, 2006 compared to 26.1% in thethree months ended September 30, 2005. This increase was primarily due to ourAmSan acquisition as well as additional share-based compensation associatedwith restricted stock units, deferred stock units and stock options recordedduring the three months ended September 29, 2006.

*Depreciation and Amortization.*Depreciation and amortization expense increased by$0.5 million, or 15.0%, to $3.9 million in the three months endedSeptember 29, 2006 from $3.4 million in the three months ended September30, 2005. This increase was primarily due to our AmSan acquisition.

*Operating Income.*Asa result of the foregoing, operating income increased by $8.7 million, or37.9%, to $31.6 million in the three months ended September 29, 2006 from$22.9 million in the three months ended September 30, 2005. As a percent ofsales, operating income decreased ten basis points to 10.1% in the three monthsended September 29, 2006 compared to 10.2% in the three months ended September30, 2005. This decrease was primarily due to our AmSan acquisition.

*Interest Expense.*Interestexpense increased by $2.1 million in the three months ended September 29, 2006to $8.8 million from $6.7 million in the three months ended September30, 2005. This increase was due to higher overall debt balances resulting fromthe additional $130.0 million term loan incurred during the three months endedSeptember 30, 2006 associated with our AmSan acquisition, as well as higherinterest rates.

*Provision for Income Taxes.*Theeffective tax rate for the three months ended September 29, 2006 was 38.9%compared to 41.0% in the three months ended September 30, 2005. The decrease inthe effective tax rate was due primarily to the incurrence of non-deductibleexpenses associated with our secondary stock offering during the three monthsended September 30, 2005.

21

----

*Nine Months EndedSeptember 29, 2006 Compared to Nine Months Ended September 30, 2005*

*NetSales.*Our net sales increased by $148.3 million, or23.7%, to $774.3 million in the nine months ended September 29, 2006 from$626.0 million in the nine months ended September 30, 2005, with one lessshipping day in 2006 than in the comparable prior year period. Of the $148.3million increase, $68.3 million was attributable to our AmSan acquisition,$18.6 million was attributable to our Copperfield acquisition and the remaining$61.4 million was driven by continued strong demand for our products, new salesand growth initiatives and from price increases.

*GrossProfit.*Gross profit increased by $56.4 million, or23.6%, to $295.3 million in the nine months ended September 29, 2006 from$238.9 million in the nine months ended September 30, 2005. Gross profitmargins decreased 10 basis points to 38.1% for the nine months ended September29, 2006 compared to 38.2% for the nine months ended September 30, 2005. Thisdecline in our gross profit margins is primarily a result of a change in salesmix related to the increase in the sale of big ticket items such as HVAC equipment,water heaters and appliances.

*Selling,General and Administrative Expenses.*SG&A expensesincreased by $42.4 million, or 25.3%, to $209.6 million in the ninemonths ended September 29, 2006 from $167.2 million in the nine monthsended September 30, 2005. Of the $42.4 million increase in SG&A expenses,$19.3 million related to our AmSan acquisition and $5.8 million related to ourCopperfield acquisition. Excluding these expenses, SG&A expenses increased10.3% in the nine months ended September 29, 2006. Certain expenses withinSG&A, such as the costs of running regional distribution centers, deliveryexpenses and selling expenses, fluctuate with sales volume. The increase inSG&A expenses included these increases, as well as increased investment in newsales and marketing initiatives and additional share-based compensationassociated with grants of restricted stock units, deferred stock units andstock options during the nine months ended September 29, 2006. SG&Aexpenses as a percentage of sales was 27.1% in the nine months ended September29, 2006 compared to 26.7% in the nine months ended September 30, 2005. Thisincrease was primarily due to our AmSan acquisition as well as additionalshare-based compensation associated with grants of restricted stock units,deferred stock units and stock options recorded during the nine months endedSeptember 29, 2006.

*Depreciation and Amortization.*Depreciation and amortization expense increased by$1.1 million, or 11.6%, to $10.8 million in the nine months endedSeptember 29, 2006 from $9.7 million in the nine months ended September30, 2005. This increase was primarily due to our AmSan and Copperfieldacquisitions.

*Operating Income.*Asa result of the foregoing, operating income increased by $13.8 million, or 22.6%,to $74.9 million in the nine months ended September 29, 2006 from $61.1million in the nine months ended September 30, 2005. As a percent of sales,operating income decreased to 9.7% in the nine months ended September 29, 2006from 9.8% in the nine months ended September 30, 2005. This decrease wasprimarily due to additional share-based compensation associated with grants ofrestricted stock units, deferred stock units and stock options recorded duringthe nine months ended September 29, 2006.

*Loss on Extinguishment of Debt.* Loss on extinguishment of debtwas $20.7 million for the nine months ended September 29, 2006 compared to$10.3 million for the nine months ended September 30, 2005. In connection withthe offering of $200.0million of 81¤8% senior subordinated notes and entering into a $330.0million bank credit facility 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 priceequal to 110.51% of their principal amount. In connection with the repurchaseof the 111⁄2% senior subordinated notes and the repayment of the prior creditfacility, we recorded a loss on early extinguishment of debt of $20.7 million.The loss was comprised of $13.7 million in tender premiums associated with therepurchase of the 111⁄2% senior subordinated notes and a non-cash charge of $7.0million in deferred financing costs associated with the repurchase of the 111⁄2%senior subordinated notes and the repayment of the prior credit facility.During the nine months ended September 30, 2005, we recorded a $10.3 millionloss on the early extinguishment of debt consisting of $8.1 million inredemption premium and $2.3 million of deferred financing written-offs. The $10.3 million loss was recorded due toour redemption of $70.0 million of the 111⁄2% senior subordinated notes.The redemption was made 30 days after the closing of our initial publicoffering, or IPO, in accordance with the redemption provision of the indenturegoverning the 111⁄2% senior subordinated notes.

*Interest Expense.*Interestexpense increased by $4.0 million in the nine months ended September 29, 2006to $22.7 million from $18.7 million in the nine months endedSeptember 30, 2005. This increase was due to higher overall debt balancesresulting from the additional $50.0 million term loan incurred during the threemonths ended September 30, 2005 and the $130.0 million term loan incurredduring the three months ended September 30, 2006 associated with our AmSan acquisition,as well as higher interest rates.

*Provision for Income Taxes.*Theeffective tax rate for the nine months ended September 29, 2006 was 38.9%compared to 39.8% in the nine months ended September 30, 2005. The decrease inthe effective tax rate was due primarily to the incurrence of non-deductibleexpenses associated with our secondary offering during the nine months endedSeptember 30, 2005.

22

----

**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.

The debt instruments of Interline New Jersey,primarily the new credit facility entered into on June 23, 2006 and theindenture governing the terms of the 81¤8% seniorsubordinated notes, contain significant restrictions on the payment ofdividends and distributions to us by Interline New Jersey. Interline New Jersey’scredit facility allows it to pay dividends, make distributions to us or makeinvestments in us in an aggregate amount not to exceed $2.0 million during anyfiscal year, so long as Interline New Jersey is not in default or would be indefault as a result of such payments. In addition, ordinary coursedistributions for overhead (up to $3.0 million annually) and taxes arepermitted, as are annual payments of up to $7.5 million in respect of our stockoption or other benefit plans for management or employees and (provided InterlineNew Jersey is not in default) aggregate payments of up to $40.0 milliondepending on the pro forma net leverage ratio as of the last day of theprevious quarter. In addition, the indenture for the 81¤8% seniorsubordinated notes generally restricts the ability of Interline New Jersey topay distributions to us and to make advances to, or investments in, us to anamount generally equal to 50% of the net income of Interline New Jersey, plusan amount equal to the net proceeds from certain equity issuances, subject tocompliance with a leverage ratio and no default having occurred and continuing.The indenture also contains certain permitted exceptions including (1) allowingus to pay our franchise taxes and other fees required to maintain our corporateexistence, to pay for general corporate and overhead expenses and to payexpenses incurred in connection with certain financing, acquisition ordisposition transactions, in an aggregate amount not to exceed $10.0 millionper year; (2) allowing certain tax payments; and (3) allowing certain permitteddistributions up to $75 million.

On June 23, 2006,Interline New Jersey completed a series of refinancing transactions consistingof (1) an offering of $200.0 million of 81¤8% seniorsubordinated notes due 2014 and (2) entering into a $330.0 million bank creditfacility. The new bank credit facility consists of a $100.0 million 7-year termloan, a $130.0 million 7-year delayed draw term loan and a $100.0 million6-year revolving credit facility of which a portion not exceeding $40.0 millionis available in the form of letters of credit. We used the proceeds from the 81¤8%senior subordinated notes and the new bank credit facility to redeem the 111⁄2%senior subordinated notes and to repay our indebtedness under the prior creditfacility of Interline New Jersey. We funded our July 3, 2006 acquisition ofAmSan with the $130.0 million delayed draw facility under our new bank creditfacility. See “—Acquisition” above.

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 will amortize the discountof $1.4 million over the term of the 81¤8%senior subordinated notes. The 81¤8%senior subordinated notes mature on June 15, 2014 and interest is payable onJune 15 and December 15 of each year beginning on December 15, 2006. Our debtissuance costs capitalized in connection with the 81¤8% seniorsubordinated notes were $5.5 million. For a description of certain terms of the81¤8%senior subordinated notes, see Note 4 to the Unaudited Condensed ConsolidatedFinancial Statements.

As of September 29, 2006, we had approximately$89.5 million of availability under Interline New Jersey’s new$100.0 million revolving credit facility. Historically, our capitalrequirements have been for debt service obligations, working capitalrequirements, acquisitions, the expansion and maintenance of our distributionnetwork, and upgrades of our proprietary information systems. We expect this tocontinue in the foreseeable future. Historically, we have funded theserequirements through internally generated cash flow and funds borrowed underour credit facility. We expect our cash flow from operations and the loanavailability under our credit facility to be our primary source of funds in thefuture. Letters of credit, which are issued under the revolving loan facilityunder our credit facility, are used to support payment obligations incurred forour general corporate purposes. As of September 29, 2006, we had $10.5 millionof letters of credit issued under the new credit facility. For a furtherdescription of the new credit facility, see “—Credit Facility” below.

*Cash Flow*

Net cash provided by operatingactivities was $13.6 million in the nine months ended September 29, 2006compared to net cash provided by operating activities of $30.8 million inthe nine months ended September 30, 2005. Net cash provided by operating activities in the nine months endedSeptember 29, 2006 was lower than the prior year period primarily as aresult of our increase in investment in working capital of $31.7 millioncomprised primarily of a $1.2 million increase in accounts receivable, a $22.1million increase in inventory and a $8.4 million decrease in accounts payablepartially offset by the increase in the non-cash add-back to net income of$13.9 million, consisting primarily of depreciation and amortization of $1.1million, write-off of debt issuance costs of $4.7 million, tender andredemption premiums of 111⁄2% senior subordinated notes of $5.6 million,share-based compensation of $2.0 million, and provision for doubtful accountsof $0.4 million, as well as, the net change in all other asset and liabilityaccounts of $0.6 million.

23

----

Net cash used ininvesting activities was $136.6 million in the nine months ended September29, 2006 compared to net cash used in investing activities of $77.1 million inthe nine months ended September 30, 2005. Net cash used in investing activitiesin the nine months ended September 29, 2006 was attributable to capitalexpenditures made in the ordinary course of business of $5.3 million and costsrelated to purchases of businesses, net of cash, of $131.3 million, including$130.6 for AmSan. Net cash used in investing activities in the nine monthsended September 30, 2005 were attributable to capital expenditures made in theordinary course of business of $5.9 million and costs related to purchases ofbusinesses of $71.2 million, including $70.0 million for Copperfield.

Net cash provided by financingactivities totaled $123.8 million in the nine months endedSeptember 29, 2006 compared to net cash usedin financing activities of $21.5 million in the nine months endedSeptember 30, 2005. Net cash used infinancing activities in the nine months ended September 29, 2006 was primarilyattributable to (1) our repayment of $3.3 million of borrowings on ourrevolving credit facilityand capitallease obligations partially offset by $1.4 million from stock options exercisedand excess tax benefits from share-based compensation and (2) our repayment of$149.4 million of term debt, our repurchase of $130.0 million of our 111⁄2%senior subordinated 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 $230.0 million ofterm debt, less $9.8 million in debtissuance costs associated with the issuance of the 81¤8% seniorsubordinated notes and the term debt. Net cashused in financing activities in the nine months ended September 30, 2005 wasprimarily due to the early redemption of $70.0 million of Interline New Jersey’s111⁄2% senior subordinated notes and$8.1 million in related redemption premiums, partially offset by $50.0million of term debt, less $0.9 million indebt issuance costs, $5.0 million increase on our revolving line of credit,$2.3 million received in January 2005 for the over-allotment of shares sold tounderwriters, net of expenses, in conjunction with our IPO, $1.7 million ofproceeds received from stock options exercised.

*Capital Expenditures*

Capital expenditures were $5.3million in the nine months ended September 29, 2006 compared to $5.9million in the nine months ended September 30, 2005. Capital expenditures as a percentage of sales were 0.7% in the nine monthsended September 29, 2006 compared to 0.9% in the nine months ended September30, 2005.

*Liquidity*

Our principal working capitalneed is for inventory and trade accounts receivable, which have generallyincreased with the growth in our business, both organically and throughacquisitions. Our principal sources of cash to fund our working capital needsare cash generated from operating activities and borrowings under our revolvingcredit facility.

*CreditFacility*

On June 23, 2006, Interline NewJersey entered into a $330.0 million bank credit facility. The new bankcredit facility consists of a $100.0 million 7-year term loan, a $130.0 million7-year delayed draw term loan and a $100.0 million 6-year revolving creditfacility of which a portion not exceeding $40.0 million is available in theform of letters of credit. The delayed draw term loan is available solely tofund the acquisition of substantially all of the assets of American SanitaryIncorporated and the acquisition-related fees and expenses (see “—Acquisition”above).

Borrowings under the new term loan, the delayed drawfacility and the new revolving credit facility bear interest, at Interline NewJersey’s option, at either LIBOR plus 1.75% or at the alternate base rate plus0.75%. As of September 29, 2006, the interest rate in effect with respect tothe new term loan and the delayed draw facility was 7.11% for the LIBOR optionand 9.00% for the alternate base rate option. Outstanding letters of creditunder the revolving credit facility are subject to a per annum fee equal to theapplicable margin under the revolving credit facility. The interest rate marginis subject to pricing adjustments at the end of each fiscal quarter based onnet total indebtedness to consolidated EBITDA. The new term loan and thedelayed draw facility mature on June 23, 2013 and the revolving loan facilitymatures on June 23, 2012. Amounts under the new term loan and the delayed drawfacility are due and payable in quarterly installments equal to 1.0% of theprincipal amount on an annual basis through June 23, 2013, with the balancepayable in one final installment at the maturity date. Our debt issuance costscapitalized in connection with the new term loan, the delayed draw facility andthe new revolving credit facility were $3.9 million.

The new bank credit facility, which is secured bysubstantially all of the assets of Interline New Jersey and is guaranteed by usand by the domestic subsidiaries of Interline New Jersey, contains affirmative,negative and financial covenants that limit Interline New Jersey’s ability toincur additional indebtedness, pay dividends on its common stock or redeem,repurchase or retire its common stock or subordinated indebtedness, makecertain investments, sell assets, and consolidate, merge or transfer assets,and that require Interline New Jersey to maintain certain financial ratios asof the last day of each fiscal quarter, including a minimum ratio ofconsolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”)to consolidated cash interest expense and a 

24

----

maximum ratio of net total indebtedness toconsolidated EBITDA. Interline New Jersey and the Company were in compliancewith all covenants at September 29, 2006.

In connection with the new bank credit facility, InterlineNew Jersey is required to pay administrative fees, commitment fees, letter ofcredit issuance and administration fees and certain expenses and to providecertain indemnities, all of which are customary for financings of this type.The new bank credit facility also allows for certain incremental term loans andincremental commitments under the revolving credit facility which are availableto Interline New Jersey to repay indebtedness and make acquisitions if certainconditions, including various financial ratios are met.

During the nine months endedSeptember 29, 2006, we borrowed periodically on the prior revolving creditfacility to accommodate our daily working capital needs. The weighted averagedaily outstanding balance during the nine-month period was $0.3 million,with ordinary course borrowings ranging from $0.0 million to$3.5 million.

As of September 29, 2006,Interline New Jersey had $10.5 million of letters of credit issued underthe new revolving loan facility and $100.0 million aggregate principaloutstanding under the new term loan 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.

**Critical Accounting Policies**

In preparing the unauditedcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America, management isrequired to make certain estimates, judgments and assumptions. These estimates,judgments and assumptions affect the reported amounts of assets andliabilities, including the disclosure of contingent assets and liabilities, atthe date of the financial statements and the reported amounts of revenues andexpenses during the periods presented. On an ongoing basis, managementevaluates these estimates and assumptions. Management bases its estimates andassumptions on historical experience and on various other factors that are believedto be reasonable at the time the estimates and assumptions are made. Actualresults may differ from these estimates and assumptions under differentcircumstances or conditions.

Our critical accounting policiesare included in our Annual Report on Form 10-K for the year ended December 30,2005 filed with the SEC. During the nine months ended September 29, 2006, therewere no significant changes to any of our critical accounting policies.

**RecentAccounting Pronouncements**

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FASB Interpretation No. 48 (“FIN No. 48”), *Accounting for Uncertainty in Income Taxes—an Interpretation of FASBStatement No. 109*, which clarifies the accounting foruncertainty in income taxes recognized in accordance with FASB StatementNo. 109 (“SFAS No. 109”), *Accounting for IncomeTaxes*. FIN No. 48 clarifies the application of SFAS No. 109 bydefining criteria that an individual tax position must meet for any part of thebenefit of that position to be recognized in the financial statements.Additionally, FIN No. 48 provides guidance on the measurement, derecognition,classification and disclosure of tax positions, along with accounting for therelated interest and penalties. The provisions of FIN No. 48 are effective forfiscal years beginning after December 15, 2006, with the cumulative effectof the change in accounting principle recorded as an adjustment to openingretained earnings. We are currently evaluating the impact that adoption of FINNo. 48 will have on our financial position, results of operations and cashflows.

In June 2006, the FASB ratified the consensus reachedby the Emerging Issues Task Force (“EITF”) with respect to EITF Issued No.06-3, *How Taxes Collected from Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation)*, which addresses how taxes imposed ona revenue producing transaction between a buyer and a customer, such as sales,use, value-added and excise and other taxes imposed at the point of sale,should be recorded in the income statement. The consensus reached requiresthat a policy decision be made as to the presentation of taxes in the incomestatement. This policy should be disclosed within the notes to the financialstatements and the amount of taxes included in revenue, if any, should also bedisclosed. This EITF is effective for financial reports for interim andannual periods beginning after December 15, 2006 with earlier applicationpermitted. Currently, we record sales taxes net and we will disclose suchpolicy in our Annual Report on Form10-K for the fiscal year ended December 29,2006. The adoption of this EITF will result in additional disclosure and willnot change the way we account for taxes collected and remitted.

25

----

In September 2006, the SEC issued Staff AccountingBulletin (“SAB”) No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*, which provides interpretive guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. SAB No. 108 iseffective for fiscal years ending after November 15, 2006 with earlyapplication encouraged. We believe adoption of SAB No. 108 will not have animpact on our financial position, results of operations and cash flows.

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*.SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue with accounting principles generally accepted in the United States ofAmerica and expands disclosures about fair value measurements. SFAS No. 157applies under other accounting pronouncements that require or permit fair valuemeasurements. Accordingly, SFAS No. 157 does not require any new fair valuemeasurements. SFAS No. 157 is effective for fiscal years beginning afterNovember 15, 2007 with early adoption permitted. We are currently evaluatingthe impact that adoption of SFAS No. 157 will have on our financial position,results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 158, *Employer’s Accounting for Defined Benefit Pension and OtherPostretirement Plans*—*an amendment of FASBStatements No. 87, 88, 106 and 132(R)*. SFAS No. 158 requiresemployers to fully recognize the obligations associated with single-employerdefined benefit pension, retiree healthcare and other postretirement plans inthe financial statements. Specifically, SFAS No. 158 requires as employer to(a) recognize in its statement of financial position an asset for a plan’soverfunded status or a liability for a plan’s underfunded status and recognizechanges in the funded status of a defined benefit postretirement plan incomprehensive income in the year in which the changes occur. These provisionsof SFAS No. 158 are effective for fiscal years ending after December 15, 2006.In addition, SFAS No. 158 requires an employer to measure a plan’s assets andits obligations that determine its funded status as of the end of the employer’sfiscal year (with limited exceptions). This provision of SFAS No. 158 iseffective for fiscal years ending after December 15, 2008. We are currentlyevaluating the impact that adoption of SFAS No. 158 will have on our financialposition, results of operations and cash flows.

**ITEM 3.Quantitative and Qualitative 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.

Our results of operations in the nine months endedSeptember 29, 2006 and September 30, 2005 were favorably impacted by increasesin the pricing of certain commodity-based products. 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.

*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.

*Interest Rate Risk*

The fair value oflong-term debt is subject to interest rate risk. While changes in marketinterest rates may affect the fair value of our fixed-rate long-term debt, webelieve a change in interest rates would not have a material impact on ourfinancial condition, future results of operations or cash flows.

26

----

*DerivativeFinancial 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 September 29, 2006, we did not have anyinterest rate swap exchange agreements, or swaps. Under our former swapagreements, we pay a fixed rate on the notional amount to our banks and thebanks pay us a variable rate on the notional amount equal to a base LIBOR rate.Our derivative activities, all of which are for purposes other than trading,are initiated within 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 September 29, 2006. Based on this evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of September29, 2006, our disclosure controls and procedures were (1) designed to ensurethat material information relating to us, including our consolidatedsubsidiaries, is made known to our Chief Executive Officer and Chief FinancialOfficer by others within those entities, particularly during the period inwhich this report was being prepared and (2) effective, in that they providereasonable assurance that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand 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 September 29, 2006 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

27

----

**PART II. OTHERINFORMATION**

**ITEM 1. 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**

***One of the key markets in which we operate is impacted by trends in home improvement andremodeling, and home building. **Adverse changes in economic factors specific to theseindustries may negatively impact the rate of growth of our net sales.*****

Theprofessional contractor market is impacted by trends in home improvement, homeremodeling, and home new construction. Trends in these areas are in turndependent upon a number of factors, including demographic trends, interestrates, tax policy, employment levels, consumer confidence, and the economygenerally. Unfavorable changes in demographics or a weakening of the nationaleconomy or of any regional or local economy in which we operate could adverselyaffect consumer spending, result in decreased demand for repair, improvement,remodeling or construction products, and adversely affect our business.

***If the government of China wereto reduce or withdraw the tax benefits they provide our Chinese suppliers, thecosts of some of our products could increase and therefore our profitabilitymay be significantly reduced.***

China’s turnover tax system consists of value-addedtax, or VAT, consumption tax and business tax. Export sales are exempted underVAT rules and an exporter who incurs input VAT on manufacture of goods canclaim a tax rebate from Chinese tax authorities. Currently, our Chinesesuppliers benefit from the tax rebates that China provides them to export theirproducts. If these tax rebates are reduced or eliminated some of ourChinese-sourced products could become more expensive for us, thereby reducingour profitability.

***Fluctuations in the cost of rawmaterials, fuel prices or in currency exchange rates could significantly reduceour revenues and profitability.***

As a distributor ofmanufactured products, our profitability is tied to the prices we pay to themanufacturers from which we purchase our products and to the cost oftransporting the products to us and our customers. The price that our supplierscharge us for our products is dependent in part upon the availability and costof the raw materials used to produce those products. Such raw materials are oftensubject to price fluctuations, frequently due to factors beyond our control,including changes in supply and demand, general U.S. and international economicconditions, labor costs, competition and government regulations. Increases inthe cost of raw materials, such as copper, oil, stainless steel, aluminum,zinc, plastic and PVC and other commodities and raw materials, have occurred inthe past and adversely impacted our operating results. Transportation pricesare significantly dependent on fuel prices, which generally change due tofactors beyond our control, such as changes in worldwide demand, disruptions insupply, changes in the political climate in the Middle East and other regionsand changes in government regulations. Fluctuations in raw materials and fuelprices may increase our costs and significantly reduce our revenues andprofitability.

A significant decline inraw materials, fuel and transportation costs may also adversely affect us.During the last three years, the cost of our products has increased materiallybecause of raw materials, fuel and transportation cost increases and otherdemand factors. During this period, a significant portion of our sales growthhas resulted from our price increases related to these increased costs. To the extentthe costs of products decrease, the prices we charge for our products maycorrespondingly decrease, adversely affecting our revenues and profitability.

In addition, many of oursuppliers price their products in currencies other than the U.S. dollar orincur costs of production in non-U.S. currencies. Accordingly, depreciation ofthe U.S. dollar against foreign currencies could increase the price we pay forthese products. For example, a substantial portion of our products are sourcedfrom suppliers in China. On July 21, 2005, the People’s Bank of China announcedthat the Yuan will no longer be pegged to the U.S. dollar, but will be allowedto float in a band (and, to a limited extent, increase in value) against abasket of foreign currencies, a move that increases the risk thatChinese-sourced products could become more expensive for us. Adverse currencyfluctuations have occurred in the past and have impacted our operating results.If currency fluctuations occur in the future and were prolonged, our revenuesand profitability could be significantly diminished.

***We cannot assure you that AmSanwill be successfully integrated by us.***

If we cannot successfullyintegrate the operations of AmSan with our existing operations, we mayexperience material negative consequences to our business, financial conditionor results of operations. The integration of companies that have previouslybeen operated separately involves a number of risks, including, but not limitedto:

·                  demands on management related to theincrease in our size after the AmSan acquisition;

·                  the diversion of management’s attentionfrom the management of daily operations to the integration of operations;

·                  difficulties in the assimilation andretention of employees;

28

----

·                  difficulties in the integration ofdepartments, systems, including accounting systems, technologies, books andrecords and procedures, as well as in maintaining uniform standards, controls,including internal accounting controls, procedures and policies; and expensesof any undisclosed or potential legal liabilities.

Prior to the acquisition, AmSan and Interline Brandsoperated as separate entities. We may not be able to maintain the levels ofrevenue, earnings or operating efficiency that each entity had achieved ormight achieve separately. Successful integration of AmSan’s operations willdepend on our ability to manage those operations, realize opportunities forrevenue growth presented by strengthened product offerings and, to some degree,to eliminate redundant and excess costs.

For further information regarding factors that couldaffect our results of operations, financial position and liquidity, see therisk factors discussion provided in Item 1A of our Annual Report on Form 10-Kfor the fiscal year ended December 30, 2005. See also “Part I. Item 2—ForwardLooking Statements” above.

**ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds**

None.

**ITEM 3. DefaultsUpon Senior Securities**

None.

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

None.

**ITEM 5. OtherInformation**

                None.

29

----

**ITEM 6. Exhibits**

Thefollowing exhibits are being filed as part of this Quarterly Report on Form10-Q:

| 4.1  |   | Second Supplemental Indenture, dated as of July 3,  2006, by and among Interline New Jersey, Interline Delaware, AmSan as a  subsidiary guarantor, certain other subsidiaries of Interline New Jersey and  the Bank of New York Trust Company, N.A., as trustee (incorporated by  reference to the Company’s interim report on Form 8-K filed July 10, 2006). |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2  |   | Supplement No.1, dated as of July 3, 2006, to the  Guarantee and Collateral Agreement, dated June 23, 2006, between AmSan LLC  and JPMorgan Chase Bank, N.A., as collateral agent (incorporated by reference  to the Company’s interim report on Form 8-K filed July 10, 2006).                                                                               |
| 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).                                                                                                                                              |

 

30

----

**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: November  8, 2006 | By:                     | /S/ THOMAS J. TOSSAVAINEN |
|                    |                    | Thomas J. Tossavainen |
|                    |                    | Chief Financial Officer |
|                    |                    | (Duly Authorized Signatory, Principal Financial and  Accounting Officer) |
|                    |                    |   |
|                    |                    |   |

 

31

----