<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2001

Commission file number 1-13293


                                 SunSource Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


           Delaware                                               23-2874736
-------------------------------                              -------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

       3000 One Logan Square
       Philadelphia, Pennsylvania                                   19103
----------------------------------------                      ------------------
(Address of principal executive offices)                          (Zip Code)

Registrant's telephone number, including area code:  (215) 282-1290


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

      Title of Class                 Name of Each Exchange on Which Registered
---------------------------          -----------------------------------------
       Common Stock,                           American Stock Exchange
  par value $.01 per share

Preferred Share Purchase Rights                American Stock Exchange


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


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
      -----        ----

On August 14, 2001 there were 6,889,844 Common Shares outstanding.


                                                                   Page 1 of 27


<PAGE>




                                 SUNSOURCE INC.

                                      INDEX

<TABLE>
<CAPTION>



PART I.  FINANCIAL INFORMATION                                                                        PAGE(S)

<S>                       <C>                                                                         <C>
Item 1.  Consolidated Financial Statements

                           Consolidated Balance Sheets as of June 30, 2001
                           (Unaudited), December 31, 2000 and June 30, 2000
                           (Unaudited)                                                                    3

                           Consolidated Statements of Operations for
                           the Three Months ended June 30, 2001 and 2000
                           (Unaudited)                                                                    4

                           Consolidated Statements of Operations for
                           the Six Months ended June 30, 2001 and 2001
                           (Unaudited)                                                                    5

                           Consolidated Statements of Cash Flows
                           for the Three Months ended June 30, 2001 and 2000
                           (Unaudited)                                                                    6

                           Consolidated Statements of Cash Flows
                           for the Six Months ended June 30, 2001 and 2001
                           (Unaudited)                                                                    7

                           Consolidated Statement of Changes in Stockholders'
                           Equity for the Six Months ended June 30, 2001
                           (Unaudited)                                                                    8

                           Notes to Consolidated Financial Statements
                           (Unaudited)                                                                 9-16

Item 2.                    Management's Discussion and Analysis of Financial
                           Condition and Results of Operations                                        17-25


PART II. OTHER INFORMATION                                                                               26




SIGNATURES                                                                                               27

</TABLE>





                                                                    Page 2 of 27

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                  June 30,                     June 30,
                                                                                    2001      December 31,       2000
                                               ASSETS                           (Unaudited)      2000         (Unaudited)
                                               ------                           -----------   -----------     -----------
<S>                                                                            <C>            <C>             <C>
Current assets:
  Cash and cash equivalents                                                     $   1,876     $  2,811         $  2,002
  Restricted cash                                                                       -       10,955                -
  Marketable securities                                                             7,636            -                -
  Accounts receivable, net                                                         58,274       46,912           62,324
  Inventories                                                                      78,121       78,658           79,781
  Deferred income taxes                                                            14,483       14,483            9,964
  Net assets held for sale and liquidation                                            260        1,767            3,622
  Income taxes receivable                                                               -           27           11,884
  Other current assets                                                              6,463        6,167            2,753
                                                                                ---------     --------         --------
      Total current assets                                                        167,113      161,780          172,330
Property and equipment, net                                                        59,334       58,314           59,533
Goodwill and other intangibles                                                     77,274       77,949           80,314
Deferred financing fees                                                             5,131        5,835            4,694
Deferred income taxes                                                              13,930       15,118            3,755
Cash surrender value of life insurance policies                                         -            -           12,411
Other assets                                                                        3,669        3,145            8,791
                                                                                ---------     --------         --------

      Total assets                                                              $ 326,451     $322,141         $341,828
                                                                                =========     ========         ========

                                LIABILITIES AND STOCKHOLDERS' EQUITY
                                ------------------------------------
Current liabilities:
  Accounts payable                                                              $  41,646     $ 39,785         $ 42,626
  Notes payable                                                                       212          624              127
  Current portion of capitalized lease obligations                                    690          915              930
  Dividends / distributions payable                                                 1,019        1,019                -
  Deferred tax liability                                                              594          594                -
  Current portion of unsecured subordinated notes                                       -        2,677            2,400
  Current portion of long term senior bank debt                                       500          375            5,000
  Accrued expenses:
    Salaries and wages                                                              3,650        4,307            3,941
    Income and other taxes                                                          6,085        6,605            4,585
    Accrued liabilities on discontinued operations                                  1,460        2,407            2,781
    Other accrued expenses                                                         20,044       25,520           20,659
                                                                                ---------     --------         --------
      Total current liabilities                                                    75,900       84,828           83,049
Long term unsecured subordinated notes                                             41,672       40,960           11,267
Long term senior bank debt                                                          1,875        2,125           12,500
Bank revolving credit                                                              72,085       55,111           76,900
Capitalized lease obligations                                                         405          627            1,018
Deferred compensation                                                               6,449        7,868           12,498
Deferred tax liability                                                              1,629        1,629                -
Other liabilities                                                                   1,427        1,541            2,186
                                                                                ---------     --------         --------
      Total liabilities                                                           201,442      194,689          199,418
                                                                                ---------     --------         --------

Guaranteed preferred beneficial interests in the
 Company's junior subordinated debentures                                         114,672      114,848          115,024
                                                                                ---------     --------         --------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.01 par, 1,000,000 shares
   authorized, none issued                                                              -            -                -
  Common stock, $.01 par, 20,000,000 shares authorized,
   7,368,944 issued and 6,889,844 outstanding at June 30, 2001, 7,352,137 issued
   and 6,873,037 outstanding at December 31, 2000
   and 7,339,384 issued and 6,860,284 outstanding at June 30, 2000                     74           74               73
  Additional paid-in capital                                                       22,866       22,808           21,854
  Retained earnings (accumulated deficit)                                          (3,032)        (617)          18,241
  Unearned compensation                                                              (338)        (428)            (542)
  Accumulated other comprehensive income                                             (528)        (528)          (3,535)
  Treasury stock, at cost, 479,100 shares                                          (8,705)      (8,705)          (8,705)
                                                                                ---------     --------         --------
      Total stockholders' equity                                                   10,337       12,604           27,386
                                                                                ---------     --------         --------

      Total liabilities and stockholders' equity                                $ 326,451     $322,141         $341,828
                                                                                =========     ========         ========
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                   Page 3 of 27

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
                           FOR THE THREE MONTHS ENDED,
                (dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
                                                                                  June 30,            June 30,
                                                                                    2001                2000
                                                                                    ----                ----
<S>                                                                               <C>                 <C>
Net sales                                                                       $  116,611          $  124,394
Cost of sales                                                                       67,232              75,581
                                                                                ----------          ----------
   Gross profit                                                                     49,379              48,813
                                                                                ----------          ----------
Operating expenses:
  Selling, general and administrative expenses                                      37,441              40,183
  Depreciation                                                                       3,043               2,574
  Amortization                                                                       1,003                 967
                                                                                ----------          ----------
   Total operating expenses                                                         41,487              43,724
                                                                                ----------          ----------
Other income                                                                            76                 248
                                                                                ----------          ----------
   Income from operations                                                            7,968               5,337

Interest expense, net                                                                3,086               3,058
Distributions on guaranteed preferred
 beneficial interests                                                                3,058               3,058
Equity in earnings of affiliate (Note 3)                                               444                 505
                                                                                ----------          ----------
    Income (loss) before provision for income taxes                                  2,268                (274)

Provision for income taxes                                                           2,054                 237
                                                                                ----------          ----------
    Income (loss) from continuing operations                                           214                (511)
                                                                                ----------          ----------
Discontinued operations (Note 1)
 Income from operations of discontinued
  segments, net of income taxes of $5                                                    -                   4
 Loss on disposal of discontinued segments,
  net of income tax benefit of $721                                                      -                (479)
                                                                                ----------          ----------
    Loss from discontinued operations                                                    -                (475)
                                                                                ----------          ----------
    Net income (loss)                                                           $      214          $     (986)
                                                                                ==========          ==========
Income (loss) per common share - basic:
  Income (loss) from continuing operations                                      $     0.03          $    (0.07)
  Income from operations of discontinued
    segments, net of taxes                                                               -                   -
  Loss on disposal of discontinued
    segments, net of taxes                                                               -               (0.07)
                                                                                ----------          ----------
  Net income (loss) per common share - basic                                    $     0.03          $    (0.14)
                                                                                ==========          ==========
Weighted average number of
  outstanding common shares (Note 6)                                             6,889,844           6,860,036

Income (loss) per common share - assuming dilution:
  Income (loss) from continuing operations                                      $     0.03          $    (0.07)
  Income from operations of discontinued
    segments, net of taxes                                                               -                   -
  Loss on disposal of discontinued
    segments, net of taxes                                                               -               (0.07)
                                                                                ----------          ----------
  Net income (loss) per common share - assuming dilution                        $     0.03          $    (0.14)
                                                                                ==========          ==========
Weighted average number of
  outstanding common shares
  for purposes of computing dilution (Note 6)                                    7,688,371           6,860,036
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                   Page 4 of 27

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
                            FOR THE SIX MONTHS ENDED,
                (dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>

                                                                            June 30,                   June 30,
                                                                              2001                       2000
                                                                              ----                       ----
<S>                                                                       <C>                        <C>
Net sales                                                                 $  226,540                 $  244,006
Cost of sales                                                                132,192                    146,359
                                                                          ----------                 ----------
   Gross profit                                                               94,348                     97,647
                                                                          ----------                 ----------
Operating expenses:
  Selling, general and administrative expenses                                75,141                     84,886
  Depreciation                                                                 6,088                      3,588
  Amortization                                                                 1,906                      1,372
                                                                          ----------                 ----------
   Total operating expenses                                                   83,135                     89,846
                                                                          ----------                 ----------
Other income (expense)                                                          (293)                       332
                                                                          ----------                 ----------
   Income from operations                                                     10,920                      8,133

Interest expense, net                                                          6,301                      5,457
Distributions on guaranteed preferred
 beneficial interests                                                          6,116                      6,116
Gain on contribution of subsidiaries (Note 3)                                      -                     49,115
Equity in earnings of affiliate (Note 3)                                         945                        954
                                                                          ----------                 ----------
    Income (loss) before provision for income taxes                             (552)                    46,629

Provision for income taxes                                                     1,863                      5,523
                                                                          ----------                 ----------
    Income (loss) from continuing operations                                  (2,415)                    41,106
                                                                          ----------                 ----------
Discontinued operations (Note 1)
 Income from operations of discontinued
  segments, net of income taxes of $75                                             -                         75
 Gain on disposal of discontinued segments,
  net of income tax benefit of $6,929                                              -                      2,357
                                                                          ----------                 ----------
    Income from discontinued operations                                            -                      2,432
                                                                          ----------                 ----------
    Net income (loss)                                                     $   (2,415)                $   43,538
                                                                          ==========                 ==========
Income (loss) per common share-basic:
  Income (loss) from continuing operations                                $    (0.35)                $     6.01
  Income from operations of discontinued
    segments, net of taxes                                                         -                       0.01
  Gain on disposal of discontinued
    segments, net of taxes                                                         -                       0.34
                                                                          ----------                 ----------
  Net income (loss) per common share - basic                              $    (0.35)                $     6.36
                                                                          ==========                 ==========
Weighted average number of
  outstanding common shares (Note 6)                                       6,886,147                  6,843,599

Income (loss) per common share - assuming dilution:
  Income (loss) from continuing operations                                $    (0.35)                $     6.01
  Income from operations of discontinued
    segments, net of taxes                                                         -                       0.01
  Gain on disposal of discontinued
    segments, net of taxes                                                         -                       0.34
                                                                          ----------                 ----------
  Net income (loss) per common share - assuming dilution                  $    (0.35)                $     6.36
                                                                          ==========                 ==========
Weighted average number of
  outstanding common shares
  for purposes of computing dilution (Note 6)                              6,886,147                  6,843,599
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                   Page 5 of 27

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                           FOR THE THREE MONTHS ENDED,
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                                June 30, 2001           June 30, 2000
                                                                                -------------           -------------
<S>                                                                             <C>                     <C>
Cash flows from operating activities:
  Net income (loss)                                                                   $   214                 $  (986)
  Adjustments to reconcile net income (loss) to net
    cash provided by operating activities:
     Depreciation and amortization                                                      4,046                   3,541
     Loss from discontinued segments before taxes                                           -                   1,191
     Equity in earnings of affiliate                                                     (444)                   (505)
     Deferred income tax provision                                                      1,544                       -
     Changes in current operating items:
        (Increase) decrease in accounts receivable                                     (4,700)                     17
        Decrease in inventories                                                           118                   4,223
        Increase in income taxes receivable                                                 -                    (737)
        (Increase) decrease in other current assets                                      (572)                  1,966
        Increase (decrease) in accounts payable                                         1,798                  (6,973)
        Increase in other accrued liabilities                                              67                   1,859
     Other items, net                                                                     549                       5
                                                                                      -------                 -------
    Net cash provided by operating activities                                           2,620                   3,601
                                                                                      -------                 -------
Cash flows from investing activities:
  Proceeds from sale/liquidation of discontinued operations                               450                  31,446
  Costs associated with sale/liquidation of discontinued operations                      (251)                 (1,127)
  Payment for acquired business                                                             -                 (87,000)
  Proceeds from sale of property and equipment                                            181                   1,053
  Increase in net assets held for sale                                                   (203)                   (402)
  Capital expenditures and contruction in process                                      (4,437)                 (3,057)
  Other, net                                                                             (310)                    600
                                                                                      -------                 -------
    Net cash used for investing activities                                             (4,570)                (58,487)
                                                                                      -------                 -------
Cash flows from financing activities:
  Borrowings under bank credit agreements, net                                          4,801                  69,835
  Repayment of long term debt                                                            (125)                 (4,000)
  Repayment of subordinated notes                                                      (2,785)                 (9,600)
  Repayments under other credit facilities, net                                          (208)                   (126)
  Principal payments under capitalized lease obligations                                 (240)                   (230)
  Other, net                                                                                5                  (1,632)
                                                                                      -------                 -------
    Net cash provided by financing activities                                           1,448                  54,247
                                                                                      -------                 -------
Net decrease in cash and cash equivalents                                                (502)                   (639)

Cash and cash equivalents at beginning of period                                        2,378                   2,641
                                                                                      -------                 -------
Cash and cash equivalents at end of period                                            $ 1,876                 $ 2,002
                                                                                      =======                 =======
</TABLE>


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                   Page 6 of 27

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                            FOR THE SIX MONTHS ENDED,
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                              June 30, 2001                 June 30, 2000
                                                                              -------------                 -------------
<S>                                                                             <C>                         <C>
Cash flows from operating activities:
  Net income (loss)                                                             $  (2,415)                   $   43,538
  Adjustments to reconcile net income (loss) to net
    cash used for operating activities:
     Depreciation and amortization                                                  7,994                         4,960
     Loss from discontinued segments before taxes                                       -                         4,422
     Gain on contribution from subsidiaries                                             -                       (49,115)
     Equity in earnings of affiliate                                                 (945)                         (954)
     Deferred income tax provision                                                  1,188                             -
     Changes in current operating items:
        Increase in accounts receivable                                           (11,362)                       (7,357)
        Decrease in inventories                                                       537                         5,266
        Decrease (increase) in income taxes receivable                                 27                          (226)
        (Increase) decrease in other current assets                                  (871)                        2,286
        Increase (decrease) in accounts payable                                     1,861                        (2,025)
        Decrease in other accrued liabilities                                      (3,391)                       (5,016)
     Other items, net                                                               1,377                          (916)
                                                                                ---------                    ----------
    Net cash used for operating activities                                         (6,000)                       (5,137)
                                                                                ---------                    ----------
Cash flows from investing activities:
  Proceeds from contribution of subsidiaries                                            -                       105,000
  Costs associated with contribution of subsidiaries                                    -                          (655)
  Proceeds from sale/liquidation of discontinued operations                         1,450                        31,446
  Costs associated with sale/liquidation of discontinued operations                  (947)                       (1,127)
  Payment for acquired business                                                         -                       (87,000)
  Proceeds from sale of property and equipment                                        625                         1,124
  Decrease (increase) in net assets held for sale                                      57                        (1,206)
  Capital expenditures and contruction in process                                  (7,779)                       (3,482)
  Other, net                                                                       (1,517)                         (380)
                                                                                ---------                    ----------
    Net cash (used for) provided by investing activities                           (8,111)                       43,720
                                                                                ---------                    ----------
Cash flows from financing activities:
  Borrowings (repayments) under bank credit agreements, net                        16,974                       (25,891)
  Repayment of long term debt                                                        (125)                       (4,000)
  Repayment of subordinated notes                                                  (2,785)                       (9,600)
  Repayments under other credit facilities, net                                      (412)                         (249)
  Principal payments under capitalized lease obligations                             (481)                         (484)
  Other, net                                                                            5                        (1,632)
                                                                                ---------                    ----------
    Net cash provided by (used for) financing activities                           13,176                       (41,856)
                                                                                ---------                    ----------
Net decrease in cash and cash equivalents                                            (935)                       (3,273)

Cash and cash equivalents at beginning of period                                    2,811                         5,275
                                                                                ---------                    ----------
Cash and cash equivalents at end of period                                      $   1,876                    $    2,002
                                                                                =========                    ==========
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                   Page 7 of 27
<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
            EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2001 (Unaudited)

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                             Accumulated
                                                     Additional                                 Other                      Total
                                            Common    Paid-in    Accumulated     Unearned   Comprehensive    Treasury  Stockholders'
                                             Stock    Capital    Deficit (2)   Compensation   Income (1)      Stock        Equity
                                            ------   ----------  -----------   ------------ -------------    --------- ------------
<S>                          <C> <C>          <C>    <C>         <C>              <C>            <C>         <C>        <C>
Beginning Balance - December 31, 2000         $ 74   $ 22,808    $   (617)        $ (428)        $ (528)     $ (8,705)   $ 12,604

  Net loss                                                         (2,415)                                                 (2,415)

  Issuance of 16,807 shares of common stock
   to certain non-employee directors                       58                                                                  58

  Amortization of stock option discount                                               40                                       40

  Amortization of vested portion of
   restricted stock                                                                   50                                       50

                                            ------   --------    --------         ------         ------      --------    --------
Ending Balance - June 30, 2001                $ 74   $ 22,866    $ (3,032)        $ (338)        $ (528)     $ (8,705)   $ 10,337
                                            ======   ========    ========         ======         ======      ========    ========
</TABLE>


(1)  Cumulative foreign translation adjustment represents the only item of other
     comprehensive income.
(2)  Ending accumulated deficit includes $814 in undistributed earnings related
     to the Company's investment in G-C Sun Holdings, L.P. which the Company
     accounts for under the equity mehtod.




           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                   Page 8 of 27


<PAGE>



                         SUNSOURCE INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (dollars in thousands)



1.  Basis of Presentation:

The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company" or "SunSource") and its wholly-owned subsidiaries,
principally The Hillman Group, Inc. (the "Hillman Group" or "Hillman"), and
SunSource Technology Services Company, L.L.C. ("Technology Services" or "STS"),
and includes an investment trust, SunSource Capital Trust (the "Trust"). The
Company also has an investment in an affiliate, G-C Sun Holdings, L.P.,
operating as Kar Products. All significant intercompany balances and
transactions have been eliminated. The Company is one of the leading providers
of value-added services and products to retail and industrial markets in North
America.

The accompanying consolidated financial statements and related notes are
unaudited; however, in management's opinion all adjustments (consisting of
normal recurring accruals) considered necessary for the fair presentation of
financial position, income and cash flows for the periods shown have been
reflected. Results for the interim period are not necessarily indicative of
those to be expected for the full year.

Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission for quarterly reports on Form 10-Q
requirements although the Company believes that disclosures are adequate to make
the information presented not misleading. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's report on Form 10-K for the year ended
December 31, 2000, Form 10-Q for the quarter ended March 31, 2001, and Form 8-K,
Report of Unscheduled Material Events, filed on June 21, 2001.

Discontinued Operations:

In December 1999, the Company's Board of Directors approved management's plan to
dispose of the glass business, Harding Glass, Inc. ("Harding"). In December
2000, the Company's Board of Directors also approved management's plan to
liquidate the Company's Integrated Supply - Mexico business (the "Mexican
segment"). Accordingly, Harding and the Mexican business segments have been
accounted for as discontinued operations with their respective results of
operations segregated from results of the Company's ongoing businesses including
restatement of the prior periods presented. On April 13, 2000, the Company
consummated the sale of Harding. The liquidation of the Mexican Segment was
substantially completed as of June 30, 2001. See Note 3, Contribution of
Subsidiaries/Acquisitions/Divestitures.






                                                                  Page 9 of 27

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                             (dollars in thousands)

1.         Basis of Presentation, continued:

Discontinued Operations, continued:

Following is summary financial information for the Company's discontinued
Harding and Mexican operations:
<TABLE>
<CAPTION>
                                                            Three Months                 Six Months
                                                            Ended 6/30/00                Ended 6/30/00
---------------------------------------------------------------------------------------------------------
<S>                                                         <C>                           <C>
Net Sales:                                                  $  2,259                      $ 27,884
   Harding                                                     3,654                         7,881
   Mexican segment                                          --------                      --------
Consolidated net sales                                      $  5,913                      $ 35,765
---------------------------------------------------------------------------------------------------------
Income from discontinued operations:
   Before income taxes
    Harding                                                 $     --                      $     --
    Mexican segment                                                9                           150
                                                            --------                      --------
   Total income from
    discontinued operations
    before income taxes                                     $      9                      $    150
                                                            --------                      --------
   Income tax expense:
    Harding                                                       --                            --
    Mexican segment                                               (5)                          (75)
                                                            --------                      --------
   Total income tax expense                                 $     (5)                     $    (75)
                                                            --------                      --------
   Net income from
    discontinued operations:
    Harding                                                 $     --                      $     --
    Mexican segment                                                4                            75
                                                            --------                      --------
   Total net income
    from discontinued operations                            $      4                      $     75
                                                            ========                      ========
Gain (loss) on disposal:
   Harding                                                  $ (1,200)                     $ (4,572)
   Mexican segment                                                --                            --
                                                            --------                      --------
Total loss on disposal                                      $ (1,200)                     $ (4,572)
                                                            --------                      --------
Income tax benefit on disposal:
   Harding                                                  $    721                      $  6,929
   Mexican segment                                                --                            --
                                                            --------                      --------
Total tax benefit on disposal                               $    721                      $  6,929
                                                            --------                      --------
Total gain (loss) on disposal
 from discontinued operations                               $   (479)                     $  2,357
                                                            ========                      ========
Total (loss) income from discontinued operations:
    Harding                                                 $   (479)                     $  2,357
    Mexican segment                                                4                            75
                                                            --------                      --------
Total (loss) income
 from discontinued operations                               $   (475)                     $  2,432
                                                            ========                      ========
</TABLE>

                                                                  Page 10 of 27

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                             (dollars in thousands)

1.         Basis of Presentation, continued:

Discontinued Operations, continued:

No additional loss on disposal of the discontinued segments has been recorded
during the six months ended June 30, 2001.

As of June 30, 2001, the Company had net assets held for sale of the
discontinued operations of $260 consisting of receivables, prepaid assets, and
property and equipment, and accrued liabilities of $1,460 which consists
primarily of severance and other termination related benefits.

Inventories

Inventories consisting predominantly of finished goods are valued at the lower
of cost or market, cost being determined principally on the first-in, first-out
method.

2.  Recent Accounting Pronouncements:

In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 established accounting
and reporting standards for derivative financial instruments and hedging
activities, and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value are accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. In June 1999, the FASB issued SFAS 137, which deferred the
implementation of SFAS 133. The Company adopted SFAS 133 during the first
quarter of 2001. The adoption of SFAS 133 has not had a material impact on the
Company's financial position and results of operations.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141
requires that all business combinations be accounted for under the purchase
method, and the use of the pooling-of-interests method is prohibited for
business combinations initiated after June 30, 2001. FAS 141 also establishes
criteria for the separate recognition of intangible assets acquired in a
business combination. FAS 142 requires that goodwill no longer be amortized to
earnings, but instead be subject to periodic testing for impairment. FAS 142 is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted only in specified circumstances. Management is currently
evaluating the expected impact of FAS 142.

3.  Contribution of Subsidiaries/Acquisitions/Divestitures:

On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, "Kar" or the
"Kar Products" business) to a newly-formed partnership affiliated with Glencoe
Capital, L.L.C. ("Glencoe"). Glencoe contributed cash equity to the new
partnership, G-C Sun Holdings, L.P. ("G-C"). The Company received $105,000 in
cash proceeds from the transaction through repayment of assumed debt by G-C and
retained a minority ownership in G-C. Affiliates of Glencoe hold a controlling
interest in G-C. SunSource recorded a pre-tax gain on the transaction of
approximately $49,115 in the first quarter of 2000. Sales from Kar aggregated
$22,122 from January 1, 2000 to March 2, 2000. The Company accounts for its
investment in the partnership under the equity method. As of June 30, 2001,
SunSource's consolidated balance sheet includes $1,429 in other assets which
represents the Company's investment in G-C.
                                                                  Page 11 of 27
<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                             (dollars in thousands)


3.  Contribution of Subsidiaries/Acquisitions/Divestitures, con't.:

On April 7, 2000, the Company's Hillman Group acquired Axxess Technologies, Inc.
("Axxess" or "Axxess Technologies") of Tempe, Arizona through a stock merger
transaction. Axxess is a manufacturer of key duplication and identification
systems. The transaction was structured as a purchase of 100% of the stock of
the privately held company and repayment of outstanding Axxess debt in exchange
for $87,000 in cash and $23,000 in subordinated notes. In connection with the
sale of Harding on April 13, 2000, the Company repaid $9,600 of these
subordinated notes leaving a balance of $13,400 comprised as follows: 1) a
$2,400 15% note which was paid on April 7, 2001 and 2) an $11,000 note which is
payable in seven equal quarterly installments commencing the earlier of i) the
first calendar quarter after payment in full of the Term Loan extended by the
Company's senior lenders or ii) March 31, 2004. Interest on the $11,000
subordinated note ranges from prime plus 1% to prime plus 5% with a maximum rate
at any time of 15%. The aggregate consideration for the transaction was
$111,537, including transaction costs of $1,537, plus the assumption of certain
liabilities aggregating $14,018. The Hillman Group recorded goodwill and other
intangible assets of $48,259 related to this acquisition. Axxess' sales
aggregated $19,364 for the three months ended March 31, 2000, and its results of
operations are included in the results of the Hillman Group from the date of
acquisition.

The following disclosures indicate the Company's estimate of pro forma financial
results for the six months ended June 30, 2000 had the Axxess acquisition been
consummated on January 1, 2000:

         Net sales                                                  $263,370
         Income before discontinued operations                        40,650
         Net income                                                   43,082
         Basic and diluted earnings per share:
                  Before discontinued operations                    $   5.94
                  Net income                                        $   6.30


On April l3, 2000, the Company sold substantially all of the assets of Harding
for a cash purchase price of $30,592 plus the assumption by the buyer of certain
liabilities aggregating $12,693, subject to certain post-closing adjustments.

On October 4, 2000, the Company's Kar Products affiliate through the partnership
formed with Glencoe Capital acquired all of the outstanding stock of Brampton
Fastener Co. Limited, d/b/a Brafasco, based in Toronto, Canada. G-C purchased
the outstanding stock of Brafasco for cash and notes. Brafasco is a supplier of
maintenance and repair products serving primarily industrial customers. Brafasco
had sales of $28,534 ($CDN) for the year ended December 31, 2000. As a result of
this transaction, the Company holds a 44% ownership in the Kar Products
affiliate.

On November 3, 2000, the Company's Hillman Group purchased inventory and other
assets of the Sharon-Philstone division of Pawtucket Fasteners, L.P. of Rhode
Island. Hillman assumed the sales and servicing of the Sharon-Philstone
division, distributors of fasteners to the retail hardware marketplace with
annual sales of approximately $14,000 for the twelve-month period prior to
acquisition. The purchase price was $5,460 for inventory and other assets
including certain post-closing adjustments.

In December 2000, the Board approved a plan to liquidate the Mexican segment
which provided comprehensive inventory management services of maintenance,
repair and operating materials to large manufacturing plants in Mexico. The
Company recorded a pre-tax loss on liquidation of approximately $4,572
representing non-cash charges for accumulated translation losses, the write-down
of inventories and other assets, and other liquidation-related costs. The
liquidation process was substantially completed as of June 30, 2001.




                                                                  Page 12 of 27


<PAGE>



                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                             (dollars in thousands)



3.       Contribution of Subsidiaries/Acquisitions/Divestitures, con't.:

On June 19, 2001, the Company announced that it had signed a definitive merger
agreement in which Allied Capital Corporation ("Allied") would acquire all of
the outstanding common stock of the Company for cash or stock aggregating
approximately $72,000 or $10.375 per SunSource common share. Upon consummation
of the merger SunSource will become a privately owned portfolio company
controlled by Allied. Management of the Company will participate with Allied in
the buyout transaction and will retain an approximate 6% ownership position on a
fully diluted basis in the new portfolio company. On July 2, 2001, Allied
announced that it had elected the cash option to complete the acquisition. It is
anticipated that the merger transaction will close by September 30, 2001.


4.  Lines of Credit/Notes Payable/Long-Term Debt:

On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior credit facilities (the
"Credit Agreement") consisting of $130,000 in revolving bank credit (the
"Revolver") and a $25,000 term loan (the "Term Loan"). The Credit Agreement has
a five-year term whose revolver availability is based on the Company's eligible
receivables and inventory balances (the "Borrowing Base") evaluated on a monthly
basis. On April 7, 2000, the Company amended the Credit Agreement to reduce the
Revolver to $115,000.

As of June 30, 2001, the Company's Borrowing Base was $89,592 consisting of
eligible receivables and inventory balances totaling $95,770 less letter of
credit commitments outstanding of $6,178. As of June 30, 2001, the Company had
$17,507 available under the Revolver. The Company had $75,767 of outstanding
debt at June 30, 2001, consisting of bank revolver borrowings of $72,085, an
outstanding Term Loan of $2,375 and capital lease obligations and other debt of
$1,307. The Company and its domestic and foreign corporate subsidiaries are
borrowers and guarantors ("Credit Parties") under the Credit Agreement. Each
credit party assigned, pledged and granted a security interest in and to all its
assets as collateral.

Accounts payable includes $6,690 representing checks issued and outstanding as
of June 30, 2001, for which funds would have been drawn against the Company's
revolving credit facility if they had been presented on that date.




                                                                  Page 13 of 27


<PAGE>



                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                             (dollars in thousands)


4.       Lines of Credit/Notes Payable/Long-Term Debt, continued:

On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued a $12,000 unsecured subordinated note. In connection with the sale of
Harding on April 13, 2000, the Company repaid $9,600 of this unsecured
subordinated note and the balance of $2,400 was repaid on April 6, 2001 along
with accrued interest of $385.

On April 7, 2000, in connection with the acquisition of Axxess, the Company
through its Hillman Group subsidiary issued an $11,000 unsecured subordinated
note. The note is payable in seven equal quarterly installments commencing the
earlier of i) the first calendar quarter after payment in full of the Term Loan
or ii) March 31, 2004. Interest on the subordinated note ranges from prime plus
1% to prime plus 5% with a maximum rate at any time of 15%. Interest is payable
upon maturity and compounds annually. On June 29, 2001, Allied purchased the
subordinated note from its holders for $8,500. To induce Allied to purchase the
note, SunSource entered into a letter agreement in which SunSource agreed to
conditions that would, during such time that Allied owns the note: 1) limit
additional debt that the Company can incur, 2) restrict prepayment of the
guaranteed preferred beneficial interests, 3) require the Company to use its
best efforts to obtain the consent of its senior lenders to allow the repurchase
of this note and allow a concurrent investment by Allied in the Company, and 4)
prohibit the Hillman Group from transferring or assigning its obligation under
the note. As of June 30, 2001, the Company's consolidated balance sheet included
$12,494 in long-term unsecured subordinated notes related to the Axxess
acquisition of which $1,494 represents accrued interest.

On December 28, 2000, the Company issued $30,000 of unsecured subordinated notes
(the "Subordinated Debt Issuance") which mature December 28, 2006. Interest on
the Subordinated Debt Issuance is 12.5%, and interest payments are required
quarterly commencing January 1, 2001. The Company issued the holder of the
subordinated notes the right to purchase 285,000 shares of the Company's common
stock at a nominal value. As of June 30, 2001, the Company's consolidated
balance sheet carries the subordinated debt at $29,178 which reflects a discount
of $822 to record the fair market value of stock purchase rights issued to the
holders of the subordinated debt. The note discount is being amortized over the
life of the debt issuance.

5.   Contingencies:

On February 27, 1996, a lawsuit was filed against the Company by the buyer of
its Dorman Products division for alleged misrepresentation of certain facts by
the Company upon which the buyer allegedly based its offer to purchase Dorman.
The complaint seeks damages of approximately $21,000.

Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity.

In the opinion of management, the ultimate resolution of the pending litigation
matters will not have a material effect on the consolidated financial position,
operations or cash flows of the Company.




                                                                  Page 14 of 27

<PAGE>



                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                             (dollars in thousands)



6.  Stockholders' Equity:

Earnings per Share

The Company computes earnings per share in accordance with SFAS 128, "Earnings
per Share". SFAS 128 requires the presentation of basic and diluted earnings per
share for companies with complex capital structures. Basic earnings per share is
a per share measure of an entity's performance computed by dividing income or
loss available to common stockholders (the numerator) by the weighted average
number of common shares outstanding during the period (the denominator). Diluted
earnings per share measures the entity's performance taking into consideration
common shares outstanding (as computed under basic earnings per share) and
dilutive potential common shares, such as stock options. However, entities with
a net loss do not include common stock equivalents in the computation of diluted
earnings per share, as the effect would be anti-dilutive.

For the three months ended June 30, 2000 and the six months ended June 30, 2001,
the Company recorded a net loss. Therefore, basic and diluted earnings per share
are equal during these periods, as potential common shares are not included as
inclusion of such shares would have an anti-dilutive effect.

Under the Company's Equity Compensation Plan, certain executives and key
employees were granted a total of 1,156,500 options through June 30, 2001, to
purchase the Company's common shares having a potentially dilutive effect on
earnings per share. Due to market conditions, the shares granted under this plan
did not have a material dilutive effect on earnings per share for the reporting
periods with net income which were the three months ended June 30, 2001 and the
six months ended June 30, 2000.

Common Shares Issued to Certain Non-Employee Directors

Under the Company's Stock Compensation Plan for Non-Employee Directors, certain
non-employee directors were issued 16,807 common shares in the first six months
of 2001, which resulted in a compensation charge of $58.





                                                                  Page 15 of 27


<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                             (dollars in thousands)

7.  Segment Information:

The Company has two reportable segments which are the Hillman Group and
Technology Services. The two segments are disaggregated based on the products
and services provided, markets served, marketing strategies and delivery
methods. The Company measures segment profitability and allocates corporate
resources based on each segment's Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA") which is defined as income from operations before
depreciation and amortization. The Company also measures the segments on
performance of their tangible asset base.

Following is a tabulation of segment information for the three and six months
ended June 30, 2001 and 2000. Corporate information is included to reconcile
segment data to the consolidated financial statements.
<TABLE>
<CAPTION>
                                                        For the Three Months Ended,          For the Six Months Ended,
                                                    June 30, 2001        June 30, 2000   June 30, 2001      June 30, 2000
                                                    -------------        -------------   -------------      -------------
<S>                                                  <C>                 <C>              <C>               <C>
Net Sales
---------
Hillman Group                                         $ 65,390              $ 62,175        $122,391           $ 97,760
Technology Services                                     51,221                62,219         104,149            123,076
                                                      --------              --------        --------            -------
  Consolidated net sales -
  business segments                                   $116,611              $124,394        $226,540           $220,836
                                                      --------              --------        --------           --------
Expediter Segment                                           --                    --              --             22,122
Integrated Supply-terminated contract                       --                    --              --              1,048
                                                      --------              --------        --------           --------
  Consolidated net sales                              $116,611              $124,394        $226,540           $244,006
                                                      ========              ========        ========           ========
EBITDA
------
Hillman Group                                         $ 13,145              $ 10,258        $ 21,742           $ 13,762
Technology Services                                        144                   207            (278)                17
                                                      --------              --------        --------           --------
 EBITDA - business segments                           $ 13,289              $ 10,465        $ 21,464           $ 13,779
                                                      ========              ========        ========           ========
Reconciliation of Segment Profit
 to Income (loss) Before Income Taxes
-------------------------------------
EBITDA - business segments                            $ 13,289              $ 10,465        $ 21,464           $ 13,779
Equity in earnings of affiliate                            444                   505             945                954
Corporate expenses                                      (1,275)               (1,587)         (2,550)            (3,509)
EBITDA from contributed
 subsidiaries, sold business,
 and terminated contracts                                   --                    --              --              2,823
                                                      --------              --------        --------           --------
Consolidated EBITDA                                     12,458                 9,383          19,859             14,047
Depreciation                                            (3,043)               (2,574)         (6,088)            (3,588)
Amortization                                            (1,003)                 (967)         (1,906)            (1,372)
Interest expense, net                                   (3,086)               (3,058)         (6,301)            (5,457)
Distributions on guaranteed
 preferred beneficial interests                         (3,058)               (3,058)         (6,116)            (6,116)
Gain on contribution of
 subsidiaries                                                -                     -               -             49,115
                                                      --------              --------        --------           --------
Income(loss) before income taxes                      $  2,268              $   (274)       $   (552)          $ 46,629
                                                      ========              ========        ========           ========
</TABLE>

Following is a supplemental table of segment tangible assets for ongoing
operations as of June 30, 2001, and December 31, 2000.

<TABLE>
<CAPTION>
                                                                                 $                %
                                             6/30/01         12/31/00         INC(DEC)         INC(DEC)
                                          --------------   -------------   --------------  ---------------
<S>                                       <C>              <C>                 <C>           <C>
     Hillman Group                        $      142,978   $     128,198      $ 14,780           11.5%

     Technology Services                          58,670          62,132        (3,462)         (5.6)%
                                          --------------   -------------      --------
       Total                              $      201,648   $     190,330      $ 11,318            5.9%
                                          ==============   =============      ========
</TABLE>

                                                                  Page 16 of 27
<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
------------------------------------------------------------------

The following discussion provides information which management believes is
relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.

General

SunSource Inc. (the "Company" or "SunSource") is one of the largest providers of
value-added services and products to retail and industrial markets in North
America. The Company is organized into two business segments which are The
Hillman Group, Inc.(the "Hillman Group" or "Hillman") and SunSource Technology
Services Company, L.L.C. ("Technology Services" or "STS"). Also, the Company has
an investment in an affiliate, G-C Sun Holdings, L.P., operating as Kar
Products.

The Hillman Group provides merchandising services and products, such as,
fasteners and related hardware items, key duplication equipment, keys and
related accessories and identification equipment and items to retail outlets,
primarily hardware stores, home centers and mass merchants. Technology Services
offers a full range of technology-based products and services to small, medium
and large manufacturers. Kar Products offers personalized inventory management
systems of maintenance, repair and operations ("MRO") products to industrial
manufacturing customers and maintenance and repair facilities.


Acquisitions/Divestitures

On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, the "Kar"
business) to a newly-formed partnership affiliated with Glencoe Capital, L.L.C.
("Glencoe"). Glencoe contributed cash equity to the new partnership, G-C Sun
Holdings, L.P. ("G-C"). The Company received $105 million in cash proceeds from
the transaction through repayment of assumed debt by G-C and retained a minority
ownership in G-C. Affiliates of Glencoe hold a controlling interest in G-C.
SunSource recorded a pre-tax gain on the transaction of approximately $49.1
million in the first quarter of 2000. SunSource accounts for its investment in
the partnership under the equity method.

On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess") of
Tempe, Arizona through a stock merger transaction. Axxess is a manufacturer of
key duplication and identification systems. The transaction was structured as a
purchase of 100% of the stock of the privately held company and repayment of
outstanding Axxess debt in exchange for $87 million in cash and $23 million in
subordinated notes. Axxess' sales aggregated $19.4 million for the three months
ended March 31, 2000. Axxess' results of operations are included in the results
of Hillman from the date of acquisition.

On April 13, 2000, the Company completed the sale of its Harding Glass, Inc.
("Harding") subsidiary to VVP America. The Company sold substantially all of the
assets of Harding for a cash purchase price of $30.6 million plus the assumption
by the buyer of certain liabilities aggregating $12.7 million, subject to
certain post-closing adjustments. Proceeds from the sale of Harding were used to
repay the Company's outstanding debt. Harding sales aggregated $28.0 million
from January 1, 2000 through April 12, 2000.


                                                                  Page 17 of 27
<PAGE>


In December 1999, the Board of Directors approved a plan to dispose of the
Company's Harding business. Since December 1999, Harding has been accounted for
as a discontinued operation and, accordingly, its results of operations were
segregated from results of the Company's ongoing businesses including
restatement of prior periods presented. Through December 31, 2000, the Company
had recorded a loss on the discontinued Harding segment of $22.0 million in the
aggregate or $3.20 and $3.19 per basic and diluted common share, respectively,
net of tax benefits. No additional loss on disposal has been recorded for the
six months ended June 30, 2001.

On October 4, 2000, SunSource's Kar Products affiliate, through the partnership
formed with Glencoe Capital, acquired all of the outstanding stock of Brampton
Fastener Co. Limited, d/b/a Brafasco, a supplier of maintenance and repair
products to industrial customers based in Toronto, Canada. Brafasco had sales of
$28.5 million ($CDN) for the year ended December 31, 2000. As a result of this
transaction, the Company holds a 44% ownership in the Kar Products affiliate.

On November 3, 2000, the Company's Hillman Group purchased inventory and other
assets of the Sharon-Philstone division of Pawtucket Fasteners, L.P. of Rhode
Island. Hillman assumed the sales and servicing of the Sharon-Philstone
division, distributors of fasteners to the retail hardware marketplace with
annual sales of approximately $14 million for the twelve months ended prior to
the acquisition. The purchase price was $5.5 million for inventory and other
assets including certain post-closing adjustments.

In December 2000, the Board approved a plan to liquidate the Mexican segment
which provided comprehensive inventory management services of MRO materials to
large manufacturing plants in Mexico. The Company recorded a pre-tax loss on
liquidation of approximately $4.6 million representing non-cash charges for
accumulated translation losses, the write-down of inventories and other assets,
and other liquidation-related costs. The liquidation process was substantially
completed as of June 30, 2001. No additional loss on disposal was recorded for
the six months ended June 30, 2001.

On June 19, 2001, the Company announced that it had signed a definitive merger
agreement in which Allied Capital Corporation ("Allied") would acquire all of
the outstanding common equity of the Company for cash or stock aggregating
approximately $72.0 million or $10.375 per SunSource common share. Upon
consummation of the merger, SunSource will become a privately owned portfolio
company controlled by Allied. Management of the Company will participate with
Allied in the buyout transaction and will retain an approximate 6% ownership
position on a fully diluted basis in the new portfolio company. On July 2, 2001,
Allied announced that it had elected the cash option to complete the
acquisition. It is anticipated that this transaction will close by September 30,
2001.


Stock Exchange Listing

Effective June 19, 2001, the Company transferred listing of its common stock and
trust preferred securities from the New York Stock Exchange to the American
Stock Exchange utilizing its same ticker symbols SDP and SDP.PR, respectively.




                                                                  Page 18 of 27

<PAGE>

Results of Operations
<TABLE>
<CAPTION>

            Segment Sales and Profitability from Ongoing Operations for the Three and Six Months Ended June 30, 2001 & 2000
------------------------------------------------------------------------------------------------------------------------------------
                                                                  (dollars in thousands)

                                              FOR THE THREE MONTHS ENDED,                       FOR THE SIX MONTHS ENDED,
                                     ----------------------------------------------   ----------------------------------------------
                                         June 30, 2001            June 30, 2000            June 30, 2001           June 30, 2000
                                     ----------------------  ----------------------   ----------------------  ----------------------
                                                     % OF                    % OF                     % OF                    % OF
Sales                                   AMOUNT       TOTAL      AMOUNT       TOTAL       AMOUNT       TOTAL      AMOUNT       TOTAL
-----                                ------------  --------  ------------  --------   ------------  --------  ------------  --------
<S>                                     <C>          <C>        <C>          <C>        <C>           <C>        <C>           <C>
Hillman Group (a)                       $ 65,390     56.1%      $ 62,175     50.0%      $ 122,391     54.0%      $ 97,760     44.3%
Technology Services                       51,221     43.9%        62,219     50.0%        104,149     46.0%       123,076     55.7%
                                        --------    ------      --------    ------      ---------    ------      --------    ------
   Consolidated net sales -
   ongoing operations                    116,611    100.0%       124,394    100.0%        226,540    100.0%       220,836    100.0%
Expediter Segment (b)                          -                       -                        -                  22,122
Integrated Supply - terminated
  contract (c)                                 -                       -                        -                   1,048
                                       ---------               ---------                ---------               ---------
    Consolidated Net Sales             $ 116,611               $ 124,394                $ 226,540               $ 244,006
                                       =========               =========                =========               =========

                                                     % OF                    % OF                     % OF                    % OF
Gross Profit                                         SALES                   SALES                    SALES                   SALES
------------                                       --------                --------                 --------                --------
Hillman Group (a)                       $ 36,973     56.5%     $  34,233     55.1%      $  69,158     56.5%     $  53,461     54.7%
Technology Services                       12,406     24.2%        14,580     23.4%         25,190     24.2%        29,134     23.7%
                                       ---------               ---------                ---------               ---------
   Consolidated gross profit -
   ongoing operations                     49,379     42.3%        48,813     39.2%         94,348     41.6%        82,595     37.4%
Expediter Segment (b)                          -                       -                        -                  15,052
                                       ---------               ---------                ---------               ---------
     Consolidated Gross Profit         $  49,379               $  48,813                $  94,348               $  97,647
                                       =========               =========                =========               =========

EBITDA from ongoing operations (e)
----------------------------------
Hillman Group (a)                      $  13,145     20.1%     $  10,258     16.5%      $  21,742     17.8%     $  13,762     14.1%
Technology Services                          144      0.3%           207      0.3%           (278)    (0.3%)           17      0.0%
Equity in Earnings of
   Expediter Segment (d)                     444                     505                      945                     954
Corporate expenses                        (1,275)    (1.1%)       (1,587)    (1.3%)        (2,550)    (1.1%)       (3,509)    (1.6%)
                                       ---------               ---------                ---------               ---------
   Consolidated EBITDA -
   ongoing operations                     12,458     10.7%         9,383      7.5%         19,859      8.8%        11,224      5.1%
Expediter Segment (b)                          -                       -                        -                   2,823
                                       ---------               ---------                ---------               ---------
     Consolidated EBITDA               $  12,458               $   9,383                $  19,859               $  14,047
                                       =========               =========                =========               =========
</TABLE>

(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc. since
its date of acquisition on April 7, 2000.

(b) Represents sales, gross profit and EBITDA from the Company's Kar Products,
Inc. and A & H Bolt & Nut Company Limited business (collectively, the "Expediter
Segment") which was contributed on March 2, 2000 to a newly formed partnership
affiliated with Glencoe Capital L.L.C.

(c) Represents sales from an Integrated Supply contract that was terminated in
2000. A loss from termination of this contract was recorded in the fourth
quarter of 1999.

(d) Represents Equity in Earnings from the contributed Expediter Segment.

(e) "EBITDA" (earnings before interest, taxes, depreciation and amortization) is
defined as income (loss) from ongoing operations before depreciation and
amortization.

                                                                 page 19 of  27

<PAGE>

         Three Months Ended June 30, 2001 and 2000

Net sales from ongoing operations decreased $7.8 million or 6.3% in the second
quarter of 2001 to $116.6 million from $124.4 million in 2000. Sales variances
by business segment are as follows:

<TABLE>
<CAPTION>
                                                             Sales Increase            (Decrease)
                                                                  Amount                    %
                                                             ------------------------------------
                                                             (In thousands)
<S>                                                             <C>                       <C>
         Hillman Group                                          $  3,215                  5.2%
         Technology Services                                     (10,998)               (17.7)%
                                                                --------
            Total Company - Ongoing Operations                  $ (7,783)                (6.3)%
                                                                ========
</TABLE>

The Hillman Group's sales increased $3.2 million in the second quarter of 2001
to $65.4 million from $62.2 million in the second quarter of 2001 primarily as a
result of the acquisition of Sharon-Philstone and strong sales from national
accounts. Technology Services' sales decreased $11.0 million or 17.7% in the
second quarter of 2001 to $51.2 million from $62.2 million in 2000 mainly as a
result of soft market conditions experienced by original equipment manufacturers
in certain industrial sectors in the second quarter of 2001.

The Company's sales backlog on a consolidated basis from ongoing operations was
$41.9 million as of June 30, 2001, compared with $48.6 million at December 31,
2000, representing a decrease of 13.8%.

The Company's consolidated gross margin from ongoing operations was 42.3% in the
second quarter of 2001 compared with 39.2% in the second quarter of 2000. The
Hillman Group's gross margin improved 1.4% in the comparison period as a result
of price increases on certain fastener products and productivity gains in the
various manufacturing operations. Technology Services' gross margin of 24.2% in
the second quarter of 2001 increased from 23.4% in the second quarter of 2000
primarily as a result of a change in sales mix.

The Company's selling, general and administrative expenses ("S,G&A") from
ongoing operations decreased $2.7 million from $40.2 million in the second
quarter of 2000 to $37.5 million in the second quarter of 2001. Selling expenses
decreased $1.3 million primarily as a result of headcount and travel expense
reductions at STS. Warehouse and delivery expenses decreased $0.5 million as a
result of reduced property taxes at the Hillman Group and reduced equipment
costs and license fees at STS. General and administrative expenses decreased by
$0.9 million primarily as a result of headcount reductions which occurred in the
fourth quarter of 2000 at STS and reduced corporate expenses.

Total S,G&A expenses from ongoing operations on a comparable basis, including
Axxess, as a percentage of sales compared with the second quarter of 2000 are as
follows:
<TABLE>
<CAPTION>
                                                              Three Months ended June 30,
                                                              ---------------------------
         As of a % of Sales                                     2001               2000
         ------------------                                     ----               ----
<S>                                                             <C>                <C>
         Selling Expenses                                       18.0%              18.0%
         Warehouse and Delivery Expenses                         7.0%               6.9%
         General and Administrative Expenses                     7.1%               7.4%
                                                                -----              -----
                  Total S,G&A Expenses                          32.1%              32.3%
                                                                =====              =====
</TABLE>

EBITDA from ongoing operations after corporate expenses for the second quarter
of 2001 was $12.5 million compared with $9.4 million for the same prior-year
period.



                                                                  Page 20 of 27
<PAGE>

The Company's consolidated operating profit margin (EBITDA as a percentage of
sales) after corporate expenses increased to 10.7% in the second quarter of 2001
compared with 7.5% in the second quarter of 2000. The Hillman Group's operating
profit margin increased to 20.1% in the second quarter comparison period from
16.5% primarily as a result of price increases, operational efficiencies and
integration of the Axxess acquisition. STS had an operating profit margin of
0.3% which was comparable to the same prior-year period. Reduced sales at STS
were offset by improved gross margins as a result of a change in sales mix and a
reduction in operating expenses.

Depreciation expense increased $0.5 million to $3.0 million in the second
quarter of 2001 from $2.5 million in the same quarter of 2000 primarily as a
result of an increase in the depreciable fixed asset base in connection with the
production of new key duplication machines at the Hillman Group for national
accounts.

Amortization expenses increased slightly as a result of the Hillman Group's
acquisition of Sharon-Philstone.

Interest expense, net was slightly higher in the second quarter of 2001 from the
comparison period. Interest expense in the second quarter of 2001 increased due
to additional amortization of deferred financing fees as a result of the
Company's December 2000 issuance of $30.0 million of unsecured subordinated
notes. This increase in the second quarter of 2001 was offset by a reduction of
interest payments in connection with the Company's repayment on April 6, 2001 of
the current portion of unsecured subordinated notes related to the Axxess
acquisition on April 7, 2000.

The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the three months ended June 30, 2001 and 2000,
the Company paid $3.1 million in interest on the Junior Subordinated Debentures,
equivalent to the amounts distributed by the Trust on the Trust Preferred
Securities.

The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian operation as accounted for
in accordance with Statement of Financial Accounting Standard ("SFAS") 109,
"Accounting for Income Taxes". Deferred income taxes represent differences
between the financial statement and tax bases of assets and liabilities as
classified on the Company's balance sheet. The Company recorded a provision for
income taxes of $2.1 million on pre-tax income of $2.3 million in the second
quarter of 2001 primarily as a result of non-deductible goodwill and other items
related to acquisition and divestiture activities. The Company recorded a
provision for income taxes of $0.2 million on a pre-tax loss of $0.3 million in
the second quarter of 2000 primarily as a result of non-deductible items related
to the acquisition of Axxess.

         Six Months Ended June 30, 2001 and 2000

Net sales from ongoing operations increased $5.7 million or 2.6% in the second
half of 2001 to $226.5 million from $220.8 million in 2000. Sales variances by
business segment are as follows:
<TABLE>
<CAPTION>
                                                                 Sales Increase (Decrease)
                                                              --------------------------------
                                                                  Amount                   %
                                                              --------------            ------
                                                              (In thousands)
<S>                                                             <C>                      <C>
         Hillman Group                                          $ 24,631                 25.2%
         Technology Services                                     (18,927)               (15.4)%
                                                                --------
           Total Company - Ongoing Operations                   $  5,704                  2.6%
                                                                ========
</TABLE>


                                                                   Page 21 of 27


<PAGE>

The Hillman Group's sales increased $24.6 million in the first half of 2001 to
$122.4 million from $97.8 million in the first half of 2000 primarily as a
result of the acquisition of Axxess and Sharon Philstone, and strong sales from
the national accounts. On a pro forma basis including Axxess, the Hillman
Group's sales increased 4.5% in the first half of 2001 over the same prior-year
period. Technology Services' sales decreased $18.9 million or 15.4% in the first
half of 2001 to $104.2 million from $123.1 million in 2000 mainly as a result of
soft market conditions experienced by original equipment manufacturers in
certain industrial sectors in the first half of 2001.

The Company's consolidated gross margin from ongoing operations was 41.6% in the
first half of 2001 compared with 37.4% in the first half of 2000. On a
comparable basis, including Axxess, the consolidated gross margin from ongoing
operations was 39.1% for the six months ended June 30, 2000. The Hillman Group's
gross margin improved 1.8% in the comparison period as a result of higher margin
sales of keys and identification items related to the acquisition of Axxess,
price increases for certain fastener products and productivity gains in the
various manufacturing operations. Technology Services' gross margin of 24.2% in
the first half of 2001 increased slightly from 23.7% in the first half of 2000
primarily as a result of a change in sales mix.

The Company's S,G&A expenses from ongoing operations on a comparable basis,
including Axxess, decreased $4.8 million from $79.9 million in the first half of
2000 to $75.1 million in the first half of 2001. Selling expenses on a
comparable basis, including Axxess, decreased $1.7 million primarily as a result
of headcount and travel expense reductions at STS offset by conversion costs
associated with the Hillman Group's purchase of inventory and other assets of
Sharon-Philstone. Warehouse and delivery expenses on a comparable basis,
including Axxess, decreased by $0.7 million as a result of reduced property
taxes at the Hillman Group and reduced equipment costs and license fees at STS.
General and administrative expenses on a comparable basis, including Axxess,
decreased by $2.4 million primarily as a result of headcount reductions which
occurred in the fourth quarter of 2000 at STS and reduced corporate expenses.

Total S,G&A expenses from ongoing operations on a comparable basis, including
Axxess, as a percentage of sales compared with the first half of 2000 are as
follows:
<TABLE>
<CAPTION>
                                                              Six Months ended June 30,
                                                              -------------------------
         As of a % of Sales                                     2001            2000
         ------------------                                     ----            ----
<S>                                                            <C>              <C>
         Selling Expenses                                      18.6%            18.2%
         Warehouse and Delivery Expenses                        7.1%             7.0%
         General and Administrative Expenses                    7.5%             8.1%
                                                               -----            -----
                  Total S,G&A Expenses                         33.2%            33.3%
                                                               =====            =====
</TABLE>

EBITDA from ongoing operations for the first half of 2001 was $19.9 million
including Axxess and corporate expenses compared with $11.2 million for the same
prior-year period. EBITDA from ongoing operations on a pro forma basis including
Axxess for the first half of 2000 was $14.5 million.

The Company's consolidated operating profit margin for ongoing operations
(EBITDA as a percentage of sales) after corporate expenses increased to 8.8% in
the first half of 2001 compared with 5.1% in the first half of 2000. The Hillman
Group's operating profit margin increased to 17.8% in the first half of 2001
compared with 14.1% primarily as a result of the acquisition of Axxess and
operational efficiencies. STS had an operating loss of 0.3% compared with a
nominal operating profit in the first half of 2000 primarily as a result of
reduced sales levels.

                                                                  Page 22 of 27
<PAGE>


Depreciation expense increased $2.5 million to $6.1 million in the first half of
2001 from $3.6 million in the same period of 2000 primarily as a result of the
acquisition of Axxess.

Amortization expenses increased $0.5 million to $1.9 million as a result of the
acquisition of Axxess.

Interest expense, net increased $0.8 million in the first half of 2001 from $5.5
million in the first half of 2000, primarily as a result of additional interest
and related amortization of deferred financing fees in connection with the
Company's December 2000 issuance of $30.0 million of unsecured subordinated
notes.

The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the six months ended June 30, 2001 and 2000, the
Company paid $6.1 million in interest on the Junior Subordinated Debentures,
equivalent to the amounts distributed by the Trust on the Trust Preferred
Securities.

The Company recorded a provision for income taxes of $1.9 million on a pre-tax
loss of $0.6 million for the six months ended June 30, 2001 as a result of
non-deductible goodwill and other items related to acquisition and divestiture
activities. The Company's effective tax rate was 11.8% in the first half of 2000
due primarily to a significant portion of the gain from the contribution of Kar
being non-taxable as a result of the Company's remaining ownership in G-C,
offset by non-deductible items related to the acquisition of Axxess.

Liquidity and Capital Resources

The Company's cash position of $1.9 million as of June 30, 2001, decreased $0.9
million from the balance at December 31, 2000. Cash was provided during this
period primarily from net borrowings under the bank revolver ($17.0 million) and
proceeds from the liquidation of the Mexico segment ($1.5 million). Cash was
used during this period predominantly for net working capital investments in
operations ($6.0 million), capital expenditures ($6.8 million), construction in
progress ($1.0 million), costs associated with the sale and liquidation of
discontinued operations ($0.9 million), repayment of subordinated notes ($2.8
million), repayments under other credit facilities ($0.4 million), principal
payments under capitalized lease obligations ($0.5 million), and other items,
net ($1.0 million).

The Company's net interest coverage ratio from continuing operations for the six
months ended June 30, 2001 increased to .96X (earnings before interest,
distributions on trust preferred securities and income taxes, excluding
non-recurring events, over net interest expense and distributions on trust
preferred securities), from .79X in the 2000 comparison period (including Kar
for the first two months of 2000) as a result of increased earnings.

SunSource is compliant with its debt covenant requirements as of and for the six
months ended June 30, 2001. The Company's fixed charge coverage ratio for the
first half of 2001 is 1.05x (adjusted EBITDA less capital expenditures over
fixed charges, as defined in the credit agreements) compared with a minimum
requirement of 1.0x. In addition, the Company's senior debt leverage ratio as of
June 30, 2001 was 3.17x (total debt excluding trust preferred securities over
adjusted EBITDA) compared with a maximum requirement of 4.0x resulting in excess
senior borrowing capacity of $12.8 million.


                                                                  Page 23 of 27

<PAGE>


The Company's working capital position of $91.2 million at June 30, 2001,
represents an increase of $14.3 million from the December 31, 2000 level of
$76.9 million as a result of working capital reinvestments of $16.6 million and
repayment of subordinated notes of $2.8 million, offset by a decrease in
restricted cash used for deferred compensation funding of $3.3 million, a
decrease in net assets held for sale due to collection of liquidation proceeds
of $1.5 million and other items, net of $.3 million. The Company's current ratio
increased to 2.2x at June 30, 2001 from 1.9x at December 31, 2000.

As of June 30, 2001, the Company had $17.5 million available under its secured
credit facilities. The Company had approximately $75.8 million of outstanding
debt at June 30, 2001, consisting of a $2.4 million senior secured term loan
currently at 6.75%, bank revolver borrowings totaling $72.1 million at an
effective interest rate of 6.75%, and capitalized lease obligations and other
debt of $1.3 million at various interest rates.

On June 29, 2001, Allied purchased an unsecured subordinated note, with an
original principal balance of $11 million, from a SunSource creditor for $8.5
million. SunSource, through its Hillman Group subsidiary, had entered into the
note on April 7, 2000, in connection with its acquisition of Axxess. The note
had a balance of approximately $12.5 million on June 30, 2001, and is currently
accruing interest at a rate of prime plus 3%, in accordance with the existing
terms of the note. To induce Allied to purchase the note, SunSource entered into
a letter agreement in which SunSource agreed to conditions that would, during
such time that Allied owns the note: 1) limit additional debt that SunSource can
incur, 2) restrict prepayment of the guaranteed preferred beneficial interests,
3) require SunSource to use its best efforts to obtain the consent of its senior
lenders to allow the repurchase of this note and allow a concurrent investment
by Allied in SunSource, and 4) prohibit the Hillman Group from transferring or
assigning its obligation under the note.

As of June 30, 2001, the Company's total debt (including distributions payable)
as a percentage of its consolidated capitalization (total debt, trust preferred
securities and stockholders' equity) was approximately 48.7% compared with 45.0%
at December 31, 2000 and 43.6% as of June 30, 2000. The Company's consolidated
capitalization (including distributions payable) as of June 30, 2001, was
approximately $243.5 million compared to $231.9 million at December 31, 2000 and
$252.6 million at June 30, 2000.

The Company has spent $6.8 million for capital expenditures through June 30,
2001, primarily for key duplication machines and machinery and equipment. In
addition, the Company has spent $1.0 million in the second quarter of 2001 for
materials and supplies and component parts for construction in progress of key
duplication machines for placement next quarter. The Company expects to incur
total fixed capital spending of $15.2 million in 2001 primarily for the Hillman
Group which represents an increase of $6.8 million compared to total year 2000
as a result of the acquisition of Axxess and growth in national accounts for key
machines.

The Company has deferred tax assets aggregating $28.4 million as of June 30,
2001, as determined in accordance with SFAS 109. Management believes that the
Company's deferred tax assets will be realized through the reversal of existing
temporary differences between the financial statement and tax bases, as well as
through future taxable income.



                                                                  Page 24 of 27

<PAGE>


Inflation

Inflation in recent years has had a modest impact on the operations of the
Company. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Company's operating divisions to raise prices is dependent on competitive market
conditions.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 established accounting
and reporting standards for derivative financial instruments and hedging
activities, and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value are accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. In June 1999, the FASB issued SFAS 137, which deferred the
implementation of SFAS 133. The Company adopted SFAS 133 during the first
quarter of 2001. The adoption of SFAS 133 has not had a material impact on the
Company's financial position and results of operations.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141
requires that all business combinations be accounted for under the purchase
method, and the use of the pooling-of-interests method is prohibited for
business combinations initiated after June 30, 2001. FAS 141 also establishes
criteria for the separate recognition of intangible assets acquired in a
business combination. FAS 142 requires that goodwill no longer be amortized to
earnings, but instead be subject to periodic testing for impairment. FAS 142 is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted only in specified circumstances. Management is currently
evaluating the expected impact of FAS 142.

Forward Looking Statements

Certain disclosures related to acquisitions and divestitures, refinancing,
capital expenditures, liquidation of the Mexican segment, resolution of pending
litigation and realization of deferred tax assets contained in this report
involve risks and uncertainties and may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. We
have based these forward-looking statements on our current expectations,
assumptions and projections about future events. These forward-looking
statements are subject to known and unknown risks, uncertainties and assumptions
that may cause our actual results, levels of activity, performance, or
achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such
forward-looking statements. Actual results could differ materially from those
currently anticipated as a result of a number of factors, including the risks
and uncertainties discussed under captions "Risk Factors" set forth in Item 1 of
the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Given these uncertainties, current or prospective investors are cautioned not to
place undue reliance on any such forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "would," "expect," "plan," "anticipate,"
"believe," "estimate," "continue" or the negative of such terms or other similar
expressions. All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements included in this Report. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this Report might not
occur.


                                                                  Page 25 of 27


<PAGE>




                                     PART II
                                OTHER INFORMATION


Items 1, 2, 3, 4 & 5 - None



Item 6 - Exhibits and Reports on Form 8-K


A Report of Unscheduled Material Events was filed on Form 8-K on June 21, 2001.



























                                                                  Page 26 of 27


<PAGE>


                                   SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                 SUNSOURCE INC.

















/s/ Joseph M. Corvino                               /s/ Edward L. Tofani
--------------------------                          ---------------------------
Joseph M. Corvino                                   Edward L. Tofani
Vice President - Finance                            Controller
(Chief Financial Officer)                           (Chief Accounting Officer)





DATE: August 14, 2001



                                                                  Page 27 of 27