<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, 1999

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,                             New York Stock Exchange
  par value $.01 per share

Preferred Share Purchase Rights                  New York 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 16, 1999 there were 6,744,282 Common Shares outstanding.


                                                                    Page 1 of 28


<PAGE>







                                 SUNSOURCE INC.

                                      INDEX





PART I.  FINANCIAL INFORMATION                                PAGE(S)

Item 1.  Consolidated Financial Statements

              Consolidated Balance Sheets as of June 30, 1999
              (Unaudited), December 31, 1998 and June 30, 1998
              (Unaudited)                                                3

              Consolidated Statements of Income for
              the Three Months ended June 30, 1999 and 1998
              (Unaudited)                                                4

              Consolidated Statements of Income for
              the Six Months ended June 30, 1999 and 1998
              (Unaudited)                                                5

              Consolidated Statements of Cash Flows
              for the Three Months ended June 30, 1999 and 1998
              (Unaudited)                                                6

              Consolidated Statements of Cash Flows
              for the Six Months ended June 30, 1999 and 1998
              (Unaudited)                                                7

              Consolidated Statement of Changes in Stockholders'
              Equity for the Six Months ended June 30, 1999
              (Unaudited)                                                8

              Notes to Consolidated Financial Statements
              (Unaudited)                                             9-14

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                         15-26


PART II. OTHER INFORMATION                                              27




SIGNATURES                                                              28



                                                                    Page 2 of 28

<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
<TABLE>
<CAPTION>


                                                                             June 30,                               June 30,
                                                                               1999            December 31,           1998
                                            ASSETS                         (Unaudited)             1998            (Unaudited)
                                                                           -----------          ---------           ---------
Current assets:
<S>                                                                         <C>                 <C>                 <C>
  Cash and cash equivalents                                                 $   2,899           $   2,796           $  14,702
  Accounts receivable, net                                                    101,683              88,629              98,051
  Inventories                                                                 116,898             112,497             104,926
  Deferred income taxes                                                        15,569               9,886              10,298
  Other current assets                                                          4,691               5,421               3,930
                                                                            ---------           ---------           ---------
      Total current assets                                                    241,740             219,229             231,907
Property and equipment, net                                                    24,576              26,770              24,223
Goodwill                                                                       86,528              77,544              69,102
Other Intangibles                                                               1,602               1,807                 812
Deferred income taxes                                                           5,356               5,202               6,654
Cash surrender value of life insurance policies                                12,891              10,262              10,123
Other assets                                                                      792                 754               1,042
                                                                            ---------           ---------           ---------

      Total assets                                                          $ 373,485           $ 341,568           $ 343,863
                                                                            =========           =========           =========


                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                          $  56,058           $  58,353           $  56,850
  Notes payable                                                                 1,243               1,770               1,306
  Current portion of capitalized lease obligations                                276                 276                 276
  Dividends / distributions payable                                              --                   676                 999
  Deferred tax liability                                                          929                 929                 935
  Accrued expenses:
    Salaries and wages                                                          6,516               8,379               5,999
    Income and other taxes                                                      1,777               4,194               4,500
    Other accrued expenses                                                     26,521              23,050              18,205
                                                                            ---------           ---------           ---------
      Total current liabilities                                                93,320              97,627              89,070
Senior notes                                                                   60,000              60,000              60,000
Bank revolving credit                                                          79,000              35,000              42,000
Capitalized lease obligations                                                     423                 566                 686
Deferred compensation                                                          13,177              11,802              11,451
Other liabilities                                                                 851                 308                 704
                                                                            ---------           ---------           ---------
      Total liabilities                                                       246,771             205,303             203,911
                                                                            ---------           ---------           ---------

Guaranteed preferred beneficial interests in the
 Company's junior subordinated debentures                                     115,376             115,551             115,727
                                                                            ---------           ---------           ---------

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,
   7,221,259 issued and 6,742,159 outstanding at June 30, 1999,
   7,217,263 issued and 6,756,163 outstanding at December 31, 1998
   and 7,215,667 shares issued and outstanding at June 30, 1998                    72                  72                  72
  Additional paid-in capital                                                   21,287              21,099              20,816
  Retained earnings                                                             3,274              12,748               6,528
  Unearned compensation                                                          (322)               (229)               --
  Accumulated other comprehensive income                                       (4,268)             (4,596)             (3,191)
  Treasury stock, at cost, 479,100 shares at
   June 30, 1999; 461,100 shares at December 31,
   1998; none at June 30, 1998                                                 (8,705)             (8,380)               --
                                                                            ---------           ---------           ---------

      Total stockholders' equity                                               11,338              20,714              24,225
                                                                            ---------           ---------           ---------

      Total liabilities and stockholders'
        equity                                                              $ 373,485           $ 341,568           $ 343,863
                                                                            =========           =========           =========
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                    Page 3 of 28


<PAGE>






                         SUNSOURCE INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                           FOR THE THREE MONTHS ENDED,
                (dollars in thousands, except for share amounts)


                                                       June 30,       June 30,
                                                         1999          1998
                                                     -----------    -----------

Net sales                                            $   179,807    $   188,931
Cost of sales                                            108,075        113,437
Cost of sales - Inventory write-down
  related to restructuring (Note 1)                        2,130           --
                                                     -----------    -----------
   Gross profit                                           69,602         75,494
                                                     -----------    -----------

Operating expenses:
  Selling, general and administrative expenses            69,892         60,662
  Depreciation                                             1,541          1,173
  Amortization                                               704            556
                                                     -----------    -----------
   Total operating expenses                               72,137         62,391
                                                     -----------    -----------

Restructuring charges and asset write-down (Note 1)        8,118           --
Other expense, net                                            26              8
                                                     -----------    -----------

   Income (loss) from operations                         (10,679)        13,095

Interest expense, net                                      2,321          1,646
Distributions on guaranteed preferred
 beneficial interests                                      3,058          3,058
                                                     -----------    -----------
    Income (loss) before provision
      (benefit) for income taxes                         (16,058)         8,391

Provision (benefit) for income taxes                      (6,353)         3,776
                                                     -----------    -----------

    Net income (loss)                                $    (9,705)   $     4,615
                                                     ===========    ===========


Basic and diluted net income (loss) per common share ($     1.44)   $      0.64

Weighted average number of
  outstanding common shares                            6,742,159      7,215,422








           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                    Page 4 of 28


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


                                                         June 30,       June 30,
                                                          1999           1998
                                                      -----------    -----------

Net sales                                             $   352,918    $   360,108
Cost of sales                                             209,184        216,801
Cost of sales - Inventory write-down
  related to restructuring (Note 1)                         2,130           --
                                                      -----------    -----------
   Gross profit                                           141,604        143,307
                                                      -----------    -----------

Operating expenses:
  Selling, general and administrative expenses            133,300        119,180
  Depreciation                                              3,014          2,282
  Amortization                                              1,363          1,069
                                                      -----------    -----------
   Total operating expenses                               137,677        122,531
                                                      -----------    -----------

Restructuring charges and asset write-down (Note 1)         8,118           --
Other income, net                                             194             13
                                                      -----------    -----------

   Income (loss) from operations                           (3,997)        20,789

Interest expense, net                                       4,384          3,334
Distributions on guaranteed preferred
 beneficial interests                                       6,116          6,116
                                                      -----------    -----------
    Income (loss) before provision
      (benefit) for income taxes                          (14,497)        11,339

Provision (benefit) for income taxes                       (5,697)         5,103
                                                      -----------    -----------

    Net income (loss)                                 $    (8,800)   $     6,236
                                                      ===========    ===========


Basic and diluted net income (loss) per common share ($      1.30)   $      0.91

Weighted average number of
  outstanding common shares                             6,748,389      6,846,904













           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                    Page 5 of 28


<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                           FOR THE THREE MONTHS ENDED,
                             (dollars in thousands)



                                                           June 30,    June 30,
                                                             1999         1998
                                                           --------    --------

Cash flows from operating activities:
  Net income (loss)                                        $ (9,705)   $  4,615
  Adjustments to reconcile net income (loss) to net
   cash used for operating activities:
     Depreciation and amortization                            2,245       1,729
     Restructuring charges and asset write-down              10,248        --
     Increase (decrease) in cash value of life insurance       (627)         41
     Benefit for deferred income taxes                       (5,749)     (1,415)
     Changes in current operating items:
        Decrease (increase) in accounts receivable            2,035      (6,398)
        Decrease in inventories                               1,233       1,073
        Decrease in other current assets                      1,610         435
        Decrease in accounts payable                         (4,817)     (1,745)
        Increase (decrease) in income taxes payable          (3,037)        814
        Decrease in accrued restructuring charges
             and transaction costs                             (500)       (275)
        Increase (decrease) in other accrued liabilities      3,820        (556)
     Other items, net                                         1,091      (1,156)
                                                           --------    --------

    Net cash used for operating activities                   (2,153)     (2,838)
                                                           --------    --------

Cash flows from investing activities:
  Proceeds from sale of property and equipment                    6         192
  Payments for acquired businesses, net of cash acquired     (1,622)    (11,156)
  Capital expenditures                                       (1,516)     (1,199)
  Investment in life insurance policies                        --          (803)
  Other, net                                                   (322)       (252)
                                                           --------    --------

    Net cash used for investing activities                   (3,454)    (13,218)
                                                           --------    --------

Cash flows from financing activities:
  Borrowings under the bank credit agreement, net             7,420      11,000
  Cash distributions / dividends to investors                  (674)       (721)
  Repayments under other credit facilities, net                (265)       (452)
  Principal payments under capitalized lease obligations        (94)       (112)
                                                           --------    --------

    Net cash provided by financing activities                 6,387       9,715
                                                           --------    --------

Net increase (decrease) in cash and cash equivalents            780      (6,341)

Cash and cash equivalents at beginning of period              2,119      21,043
                                                           --------    --------

Cash and cash equivalents at end of period                 $  2,899    $ 14,702
                                                           ========    ========


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





                                                                    Page 6 of 28


<PAGE>



                         SUNSOURCE INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                            FOR THE SIX MONTHS ENDED,
                             (dollars in thousands)




                                                           June 30,    June 30,
                                                             1999        1998
                                                           --------    --------


Cash flows from operating activities:
  Net income (loss)                                        $ (8,800)   $  6,236
  Adjustments to reconcile net income (loss) to net
   cash used for operating activities:
     Depreciation and amortization                            4,377       3,351
     Restructuring charges and asset write-down              10,248        --
     Increase in cash value of life insurance                  (741)       (813)
     Benefit for deferred income taxes                       (5,837)     (1,147)
     Changes in current operating items:
        Increase in accounts receivable                      (7,851)    (14,366)
        Increase in inventories                              (5,202)       (359)
        Decrease in other current assets                        897         633
        Increase (decrease) in accounts payable              (3,757)      5,698
        Increase (decrease) in income taxes payable          (3,095)        331
        Decrease in accrued restructuring charges
             and transaction costs                           (1,119)       (847)
        Decrease in other accrued liabilities                (1,498)       (640)
     Other items, net                                         1,022        (111)
                                                           --------    --------

    Net cash used for operating activities                  (21,356)     (2,034)
                                                           --------    --------

Cash flows from investing activities:
  Proceeds from sale of property and equipment                  280         202
  Payments for acquired businesses, net of cash acquired    (15,138)    (11,156)
  Capital expenditures                                       (3,652)     (2,177)
  Investment in life insurance policies                      (1,300)       (903)
  Other, net                                                   (386)       (389)
                                                           --------    --------

    Net cash used for investing activities                  (20,196)    (14,423)
                                                           --------    --------

Cash flows from financing activities:
  Net proceeds from issuance of common stock                   --        20,824
  Borrowings under the bank credit agreement, net            44,000       9,000
  Purchase of treasury stock at cost                           (325)       --
  Cash distributions / dividends to investors                (1,350)     (3,439)
  Repayments under other credit facilities, net                (527)       (774)
  Principal payments under capitalized lease obligations       (143)        (90)
                                                           --------    --------

    Net cash provided by financing activities                41,655      25,521
                                                           --------    --------

Net increase in cash and cash equivalents                       103       9,064

Cash and cash equivalents at beginning of period              2,796       5,638
                                                           --------    --------

Cash and cash equivalents at end of period                 $  2,899    $ 14,702
                                                           ========    ========


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





                                                                    Page 7 of 28





<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
            EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 (Unaudited)

                             (dollars in thousands)
<TABLE>
<CAPTION>


                                                                                               Accumulated
                                                            Additional                            Other                   Total
                                                  Common      Paid-in   Retained   Unearned   Comprehensive Treasury   Stockholders'
                                                   Stock      Capital   Earnings Compensation   Income (1)   Stock       Equity
                                                --------    ----------  -------- ------------ ------------- --------   ------------


<S>                                              <C>         <C>        <C>       <C>          <C>          <C>          <C>
Beginning Balance - December 31, 1998               $ 72    $ 21,099   $ 12,748    $ (229)      $ (4,596)   $ (8,380)    $ 20,714
                                                                                                                        ---------

  Net loss                                                               (8,800)                                           (8,800)

  Change in cumulative foreign
   translation adjustment                                                                            328                      328

                                                                                                                        ---------
  Comprehensive income                                                                                                     (8,472)
                                                                                                                        ---------

  Issuance of 3,996 shares of common stock
   to certain non-employee directors                              65                                                           65

  Dividends declared on common stock                                       (674)                                             (674)

  Stock options granted at a discount                            123                 (123)                                      -

  Amortization of stock option discount                                                30                                      30

  Repurchase of 18,000 shares of common stock                                                                   (325)        (325)

                                                --------   ---------   --------  --------     ----------   ---------    ---------
Ending Balance - June 30, 1999                      $ 72    $ 21,287   $  3,274    $ (322)      $ (4,268)   $ (8,705)    $ 11,338
                                                ========   =========   ========  ========     ==========   =========    =========

</TABLE>


(1)  Cumulative foreign translation adjustment represents the only item of other
     comprehensive income.














           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                    Page 8 of 28








<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") and its wholly-owned subsidiaries including
SunSource Industrial Services Company, Inc., The Hillman Group, Inc.
("Hillman"), Harding Glass, Inc. ("Harding") and SunSource Capital Trust (the
"Trust"). 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 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,
1998.

        Restructuring Charges and Asset Write-downs

On June 29, 1999, the Board of Directors of SunSource Inc. approved the
Company's restructuring plan to reposition the Industrial Services businesses,
write-down key machines at the Hillman division, and realign corporate overhead
expenses. As a result of this plan, the Company recorded a restructuring charge
of $4,818, key machine write-down of $3,300 and an inventory write-down related
to restructuring of $2,130. Included in these charges and write-downs is $6,412
related to Industrial Services, $3,300 related to Hillman, and $536 related to
Corporate Headquarters.

The Industrial Services charge of $6,412 includes termination benefits of
$3,764, an inventory write-down of $2,130, other exit costs of $415 and a
write-down of unamortized leasehold improvements of $103. The termination
benefits of $3,764 ($2,744 for Technology Services and $1,020 for Expediter)
cover about 100 employees. The other exit costs and write-down of unamortized
leasehold improvements are related to lease buyouts and losses on the sale of
owned facilities as a result of Technology Services' facilities consolidation.
The inventory write-down of $2,130 is the result of a reduction in vendor lines
resulting principally from the facility consolidation process.









                                                                    Page 9 of 28



<PAGE>




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




1.  Basis of Presentation (continued):


The Hillman charge of $3,300 is primarily the result of Hillman's inability to
recover key machines from retailers. The $3,300 charge represents the total net
book value of key machine costs that have been capitalized as of June 30, 1999.

The Corporate Headquarters component of the restructuring charge aggregates $536
comprised of other exit costs of $434 and termination benefits of $102. The
other exit costs include lease termination costs of $101 and unamortized
leasehold improvements of $333 on certain assets.

The following table summarizes the restructuring costs and asset write-downs
charged, the balance sheet classification, and payments or adjustments made in
the second quarter 1999.
<TABLE>
<CAPTION>

                                                        Termina-         Other
                                            Asset        tion            Exit
Balance Sheet Classification           Write-Downs      Benefits         Costs        Total
----------------------------           -----------      --------         -----       -------
<S>                                     <C>             <C>              <C>         <C>
Opening Balance June 29, 1999:
Inventory Write-down                    $  2,130             --             --       $ 2,130
Unamortized Key Machines                $  3,300             --             --       $ 3,300
Unamortized leasehold
improvements                            $    436             --             --       $   436
Current - other accrued expense               --        $ 3,096          $ 435       $ 3,531
Long-term - other liabilities                 --        $   770          $  81       $   851
                                        --------        -------          -----       -------
     Totals                             $  5,866        $ 3,866          $ 516       $10,248



Payments/charges during quarter:
Unamortized Key Machines                $ (3,300)            --             --       $(3,300)
Unamortized leasehold
improvements                                (436)            --             --       $  (436)
Current - other accrued expense               --        $  ( 98)          $(53)      $  (151)
                                        --------        -------          -----       -------
     Totals                             $ (3,736)       $  ( 98)          $(53)      $(3,887)


Ending Balance June 30, 1999:
Inventory Write-down                    $  2,130             --             --       $ 2,130
Current - other accrued expense               --        $ 2,998          $ 382       $ 3,380
Long-term - other liabilities                 --        $   770          $  81       $   851
                                        --------        -------          -----       -------
     Totals                             $  2,130        $ 3,768          $ 463       $ 6,361
                                        ========        =======          =====       =======

</TABLE>


The Board's approval of the restructuring plan provided the Company's management
with the authority to involuntarily terminate employees. The Company has
established the levels of benefits that the terminated employees will receive
and informed the employees of their termination benefits prior to the close of
business on June 30, 1999.





                                                                   Page 10 of 28


<PAGE>





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


2.  Acquisitions:


On February 9, 1999, Harding acquired all of the outstanding common stock of
Pritchard Glass, Inc. and Premier Glass Services, Inc. for an aggregate net cash
consideration of $11,301, including debt repayments of $3,272 and transaction
costs of $429, plus the assumption of certain liabilities aggregating $3,189.
Harding recorded goodwill of $7,367 related to this acquisition.

During the first six months, Harding also acquired the assets of three retail
glass shops for net cash consideration, including transaction costs, of $2,085
plus the assumption of certain liabilities of $467. Harding recorded goodwill of
$1,914 related to these acquisitions.

Cash payments for acquisitions in the first six months of 1999 also includes
disbursements totaling $1,752 related to prior year acquisitions for
post-closing adjustments.

The following disclosures indicate the Company's estimate of financial results
had all 1998 and 1999 acquisitions been consummated on January 1, 1998:

                                                           Pro forma
                                                    ----------------------
                                                       Six Months Ended
                                                     6/30/99     6/30/98
                                                    ---------   ---------
         Net sales                                   $355,973    $384,483
         Income (loss) before extrordinary items       (8,733)      7,008
         Net income (loss)                             (8,733)      7,008
         Basic and diluted earnings per share          ($1.29)      $1.02


3. Lines of Credit and Long-Term Debt:


As of June 30, 1999, the Company had $5,670 available under its $90,000 Bank
Credit Agreement which provides revolving credit for working capital purposes
and acquisitions through September 30, 2002. The Company had $139,699 of
outstanding long-term debt and capital lease obligations at June 30, 1999,
consisting of bank borrowings of $79,000, outstanding senior notes of $60,000
and capital lease obligations of $699. The Company also had $5,330 of Letters of
Credit charged against its available borrowing on the revolving credit facility.
The Company has another credit facility available in the amount of $500 for
letter of credit commitments only, of which no amount was outstanding as of June
30, 1999. In addition, an indirect, wholly-owned Canadian subsidiary of the
Company has a $2,500 Canadian dollar line of credit for working capital purposes
of which no amount was outstanding at June 30, 1999.

Accounts payable has been increased to include a reclassification of $3,552
representing checks issued as of June 30, 1999 for which funds would have had to
have been drawn against the Company's revolving credit facility if they had been
presented on that date.


4.   Guaranteed Preferred Beneficial Interests in the Company's
     Junior Subordinated Debentures:


The sole assets of the Trust are the Junior Subordinated Debentures. The
obligations of the Company under the Declaration of Trust of the Trust, the
Indenture, the Preferred Securities Guarantee and the Junior Subordinated
Debentures in the aggregate constitute a full and unconditional guarantee by the
Company of the Trust's obligations under the Trust Preferred Securities.  The

                                                                   Page 11 of 28


<PAGE>



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



4.   Guaranteed Preferred Beneficial Interests in the Company's
     Junior Subordinated Debentures (continued):


distributions on the Trust Preferred Securities aggregate $12,232 annually. The
Company has guaranteed on a subordinated basis the payment of distributions on
the Trust Preferred Securities and payments on liquidation of the Trust and
redemption of Trust Preferred Securities (the "Preferred Securities Guarantee").
The principal amount of the Junior Subordinated Debentures is $108,707,
consisting of $3,261 related to the Trust Common Securities and $105,446 related
to the Trust Preferred Securities; the interest rate is 11.6%; and their
maturity date is September 30, 2027, unless redeemed earlier.

The Trust Preferred Securities will be redeemed upon maturity on September 30,
2027, or earlier redemption of the Junior Subordinated Debentures at 100% of the
liquidation amount plus accrued and unpaid distributions, provided that any
redemption due to a change in the tax status of the interest payments to the
Trust within the first five years will be at 101%. The Trust Preferred
Securities may be redeemed by the Company at any time after September 30, 2002,
at the liquidation value of $25 per security plus accrued and unpaid
distributions. The Trust Preferred Securities have equity and debt
characteristics but creditor's rights and are therefore classified between
liabilities and stockholders' equity on the balance sheet.


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.


6.  Stockholders' Equity:


         Earnings per Share

The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS
128 requires the presentation of basic and diluted earnings per share for
companies with complex capital structures. Under the Company's Equity
Compensation Plan, certain executives and key employees have been granted a
total of 773,495 options to purchase shares of the Company's common stock having
a potentially dilutive effect on earnings per share. In accordance with SFAS
128, for the three and six months ended June 30, 1999, these shares do not enter
into the calculation of diluted earnings per share as a result of the Company
reporting a net loss from operations in both periods.




                                                                   Page 12 of 28


<PAGE>



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


6.  Stockholders' Equity (continued):


         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 3,996 Common Shares at fair market value in
the first six months of 1999, which results in a compensation charge of $65.

         Stock Options

In March, 1999, the Compensation Committee of the Board of Directors granted
90,000 non-qualified stock options under the Company's 1998 Equity Compensation
Plan at fair market value.

In April, 1999, the Compensation Committee of the Board of Directors granted the
following stock options under the Company's 1998 Equity Compensation Plan:

         (1)  300,000 non-qualified stock options at fair market value.
         (2)   55,000 non-qualified stock options at 85% of fair market value.
         (3)  117,000 incentive stock options at fair market value.

         Common Stock Dividend

On March 29, 1999, the Board of Directors declared a dividend of $0.10 per
Common Share which was paid on April 19, 1999, to holders of record as of April
8, 1999. On June 30, 1999, the Board of Directors of the Company suspended
indefinitely the quarterly cash dividend of $.10 per Common Share.

         Treasury Stock

On August 6, 1998, the Company's Board of Directors authorized $15,000 for
management to repurchase up to 10% of the Company's outstanding common stock
through open market transactions and private block trades, dependent upon market
conditions. At June 30, 1999, the number of shares purchased under this
authorization was 479,100 which are held in treasury at an aggregate cost of
$8,705. The Company is currently restricted from making additional repurchases
as a result of debt covenants under its credit agreements.


7. Segment Information:


The following supplemental table of segment tangible assets is presented due to
the increase in segment tangible assets during the six months ended June 30,
1999, which represents primarily additional investments in accounts receivable
and inventory:


                                                            $             %
                               6/30/99     12/31/98     INC(DEC)      INC(DEC)
                               -------     --------     -------       --------

Technology Services          $ 78,644     $ 85,460     $ (6,816)       (8.0)%
Expediter                      46,165       42,479        3,686         8.7%
Integrated Supply              17,036       15,343        1,693        11.0%
Hillman                        71,934       59,487       12,447        20.9%
Harding                        32,889       27,642        5,247        19.0%
                             --------     --------     --------
 Total Tangible Assets       $246,668     $230,411     $ 16,257         7.1%
                             ========     ========     ========

                                                                   Page 13 of 28


<PAGE>




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



8.  Subsequent Event:


         Sale of Division

On July 1, 1999, the Company sold the net assets of Industrial Services'
Fastener Business serving original equipment manufacturers. Sales from the
Fastener Business aggregated $5,449 and $10,954 for the three and six months
ended June 30, 1999, respectively.















































                                                                   Page 14 of 28



<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") 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 three businesses which are SunSource Industrial
Services Company, Inc., The Hillman Group, Inc.("Hillman") and Harding
Glass,Inc. ("Harding").

SunSource Industrial Services Company operates in three segments which are
Technology Services, Expediter and Integrated Supply. Technology Services offers
a full range of technology-based products and services to small, medium and
large manufacturers. The Expediter segment provides personalized, small parts
inventory management services to low volume customers. The Integrated Supply
segment provides major industrial manufacturing customers with comprehensive
inventory management services for their maintenance, repair and operating
supplies.

Hillman operates in the Hardware Merchandising Segment, providing small hardware
and related items and merchandising services to retail outlets, primarily
hardware stores, home centers and lumberyards.

Harding operates in the Glass Merchandising Segment, selling retail and
wholesale automotive and flat glass and providing auto glass installation and
small contract glazing services to individual consumers, insurance companies,
autobody shops, and other customers through a large network of retail glass
shops.


Restructuring Charges and Asset Write-downs

In the second quarter of 1999, the Company recorded a restructuring charge of
$4.8 million, key machine write-down of $3.3 million and an inventory write-down
related to the restructuring plan of $2.1 million. The charges and write-downs
are a result of the Company's restructuring plan to reposition the Industrial
Services businesses, write-down key machines at the Hillman division, and
realign corporate overhead expenses. Included in these charges and write-downs
are $6.4 million related to Industrial Services, $3.3 million related to
Hillman, and $0.5 million related to Corporate Headquarters. The Company expects
to complete the restructuring plan within six months. The overall restructuring
plan and related management actions are expected to generate over $10.0 million
in annual cost savings company-wide beginning in the fourth quarter of 1999.

The Industrial Services charges and write-downs of $6.4 million includes
termination benefits of $3.8 million, an inventory write-down of $2.1 million,
other exit costs of $0.4 million and a write-down of unamortized leasehold
improvements of $0.1 million. The termination benefits of $3.8 million are
comprised of $2.8





                                                                   Page 15 of 28


<PAGE>




million and $1.0 million for Technology Services and Expediter, respectively as
a result of the termination of about 100 employees. The other exit costs and
write-down of unamortized leasehold improvements are related to lease buyouts
and losses on the sale of owned facilities as a result of Technology Services'
facilities consolidation. The inventory write-down is the result of a reduction
in vendor lines carried resulting from the facility consolidation process.

The Hillman charge of $3.3 million is primarily the result of Hillman's
inability to recover key machines from retailers. The $3.3 million charge
represents the net book value of key machine costs that have been capitalized as
of June 30, 1999.

The Corporate Headquarters component of the restructuring charge is comprised of
other exit costs of $0.4 million and termination benefits of $0.1 million. The
other exit costs include lease termination costs and unamortized leasehold
improvements on certain assets.

See Note 1 of "Notes to Consolidated Financial Statements" for the accounting
recognition of the restructuring charges.


Acquisitions

On February 9, 1999, Harding acquired all of the outstanding common stock of
Pritchard Glass, Inc. ("Pritchard") and Premier Glass Services, Inc. ("Premier")
for an aggregate net cash consideration of $11.3 million, including debt
repayments of $3.3 million and transaction costs of $0.4 million, plus the
assumption of certain liabilities aggregating $3.2 million. Sales of Pritchard
and Premier aggregated approximately $25 million for the twelve-month period
prior to acquisition. This acquisition adds twenty-one retail glass shops,
expanding Harding's business into the North and South Carolina markets.

In addition, in the first six months of 1999, Harding acquired the assets of
three retail glass shops for a net cash consideration of $2.1 million, including
transaction costs, plus the assumption of certain liabilities of $0.5 million
which had sales aggregating approximately $3.2 million for the twelve-month
period prior to acquisition. These acquisitions expand Harding's business into
the Columbus, Georgia, Las Vegas, Nevada and Tampa, Florida markets.


Stock Repurchase

On August 6, 1998, the Company's Board of Directors authorized $15.0 million for
management to repurchase up to 10% of the Company's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. The Company has acquired and placed into treasury 479,100 common
shares through June 30, 1999, at an average cost of $18.12 per common share. The
Company is currently restricted from making additional repurchases as a result
of debt covenants under its credit agreements.










                                                                   Page 16 of 28


<PAGE>






Stock Options

In March, 1999, the Compensation Committee of the Board of Directors granted
90,000 non-qualified stock options under the Company's 1998 Equity Compensation
Plan at fair market value.

In April, 1999, the Compensation Committee of the Board of Directors granted the
following stock options under the Company's 1998 Equity Compensation Plan:

           (1)   300,000 non-qualified stock options at fair market value.
           (2)   55,000 non-qualified stock options at 85% of fair market value.
           (3)   117,000 incentive stock options at fair market value.













































                                                                   Page 17 of 28




<PAGE>



Results of Operations

Segment Sales and Profitability for the Three and Six Months Ended June 30, 1999
and 1998

<TABLE>
<CAPTION>
                                                           (dollars in thousands)

                                                        FOR THE THREE MONTHS ENDED,
                                            --------------------------------------------------------
                                                   June 30, 1999                June 30, 1998
                                            --------------------------  ----------------------------
                                                              % TOTAL                      % TOTAL
Sales                                           AMOUNT         SALES         AMOUNT          SALES
                                            ------------  ------------ ---------------- ------------
SunSource Industrial Services
<S>                                            <C>              <C>           <C>             <C>
    Technology Services                        $ 65,196         36.3%         $ 87,146        46.1%
    Expediter                                    31,835         17.7%           31,902        16.9%
    Integrated Supply (1)                         9,960          5.5%           12,851         6.8%
                                            ------------  ------------ ---------------- ------------
        Industrial Services                     106,991         59.5%          131,899        69.8%
Hillman (2) (3)                                  41,261         22.9%           33,107        17.5%
Harding (4)                                      31,555         17.5%           23,925        12.7%
                                            ------------  ------------ ---------------- ------------
    Consolidated Net Sales                     $179,807        100.0%         $188,931       100.0%
                                            ============  ============ ================ ============

                                                              % OF                          % OF
Gross Profit                                                 SALES                         SALES
                                                          ------------                  ------------
SunSource Industrial Services
    Technology Services (5)                    $ 13,352         20.5%         $ 22,484        25.8%
    Expediter                                    21,956         69.0%           22,699        71.2%
    Integrated Supply                             2,945         29.6%            3,328        25.9%
                                            ------------               ----------------
        Industrial Services                      38,253         35.8%           48,511        36.8%
Hillman                                          21,707         52.6%           17,090        51.6%
Harding                                          11,772         37.3%            9,893        41.4%
                                            ------------               ----------------
    Consolidated Gross Profit
    before inventory write down
    related to restructuring                     71,732         39.9%           75,494        40.0%
Inventory write down
related to restructuring                         (2,130)        (1.2%)               -         0.0%
                                            ------------               ----------------
    Consolidated Gross Profit                  $ 69,602         38.7%         $ 75,494        40.0%
                                            ============               ================

EBITA (7)
SunSource Industrial Services
    Technology Services (6)                    $ (6,309)        (9.7%)          $4,052         4.6%
    Expediter                                     4,427         13.9%            5,446        17.1%
    Integrated Supply                               498          5.0%              609         4.7%
                                            ------------               ----------------
        Industrial Services                      (1,384)        (1.3%)          10,107         7.7%
Hillman                                           4,057          9.8%            3,679        11.1%
Harding                                             523          1.7%            1,522         6.4%
                                            ------------               ----------------
    Total operations before
    corporate expenses                            3,196          1.8%           15,308         8.1%
Corporate expenses                               (2,923)        (1.6%)          (1,657)       (0.9%)
                                            ------------               ----------------
    Consolidated EBITA before
    Restructuring charges
    including inventory write down                  273          0.2%           13,651         7.2%
Restructuring charges including
asset and inventory write downs                 (10,248)        (5.7%)               -         0.0%
                                            ------------               ----------------
    Consolidated EBITA                         $ (9,975)        (5.5%)        $ 13,651         7.2%
                                            ============               ================
</TABLE>

<PAGE>


<TABLE>
<CAPTION>


                                                              FOR THE SIX MONTHS ENDED,
                                             ------------------------------------------------------------
                                                     June 30, 1999                  June 30, 1998
                                             -----------------------------  -----------------------------
                                                                  % TOTAL                        % TOTAL
Sales                                              AMOUNT          SALES          AMOUNT          SALES
                                             ---------------- ------------  ---------------- ------------
SunSource Industrial Services
<S>                                                 <C>             <C>            <C>             <C>
    Technology Services                             $133,466        37.8%          $169,111        47.0%
    Expediter                                         63,068        17.9%            63,233        17.6%
    Integrated Supply (1)                             19,388         5.5%            25,052         7.0%
                                             ---------------- ------------  ---------------- ------------
        Industrial Services                          215,922        61.2%           257,396        71.5%
Hillman (2) (3)                                       77,180        21.9%            58,290        16.2%
Harding (4)                                           59,816        16.9%            44,422        12.3%
                                             ---------------- ------------  ---------------- ------------
    Consolidated Net Sales                          $352,918       100.0%          $360,108       100.0%
                                             ================ ============  ================ ============

                                                                  % OF                           % OF
Gross Profit                                                     SALES                          SALES
                                                              ------------                   ------------
SunSource Industrial Services
    Technology Services (5)                         $ 31,450        23.6%          $ 43,347        25.6%
    Expediter                                         43,775        69.4%            45,139        71.4%
    Integrated Supply                                  5,587        28.8%             6,443        25.7%
                                             ----------------               ----------------
        Industrial Services                           80,812        37.4%            94,929        36.9%
Hillman                                               40,705        52.7%            30,401        52.2%
Harding                                               22,217        37.1%            17,977        40.5%
                                             ----------------               ----------------
    Consolidated Gross Profit
    before inventory write down
    related to restructuring                         143,734        40.7%           143,307        39.8%
Inventory write down
related to restructuring                              (2,130)       (0.6%)                -         0.0%
                                             ----------------               ----------------
    Consolidated Gross Profit                       $141,604        40.1%          $143,307        39.8%
                                             ================               ================

EBITA (7)
SunSource Industrial Services
    Technology Services (6)                         $ (5,181)       (3.9%)           $6,736         4.0%
    Expediter                                          9,622        15.3%            10,400        16.4%
    Integrated Supply                                    914         4.7%             1,169         4.7%
                                             ----------------               ----------------
        Industrial Services                            5,355         2.5%            18,305         7.1%
Hillman                                                6,935         9.0%             5,855        10.0%
Harding                                                  303         0.5%             1,572         3.5%
                                             ----------------               ----------------
    Total operations before
    corporate expenses                                12,593         3.6%            25,732         7.1%
Corporate expenses                                    (4,979)       (1.4%)           (3,874)       (1.1%)
                                             ----------------               ----------------
    Consolidated EBITA before
    Restructuring charges
    including inventory write down                     7,614         2.2%            21,858         6.1%
Restructuring charges including
asset and inventory write downs                      (10,248)       (2.9%)                -         0.0%
                                             ----------------               ----------------
    Consolidated EBITA                              $ (2,634)       (0.7%)         $ 21,858         6.1%
                                             ================               ================
</TABLE>

<PAGE>

(1)  Includes sales of $2,539 and $4,368 for the three and six months ended June
     30, 1998, respectively related to integrated supply contracts cancelled in
     1998.

(2)  Includes sales from businesses acquired in 1998 of $5,226 and $9,821 for
     three and six months ended June 30, 1999, respectively and $2,244 for both
     the three and six months ended June 30, 1998.

(3)  Includes a reduction in sales and gross profit of $1,271 and $2,185 for the
     three and six months ended June 30, 1998, respectively to conform to
     current accounting for customer rebates.

(4)  Includes sales of $11,561 and $1,046 for three months ended June 30, 1999
     and 1998, respectively and $20,365 and $1,458 for the six months ended June
     30, 1999 and 1998, respectively related to businesses acquired in 1999,
     1998 and 1997. Also includes sales from branches closed in 1998 of $440 and
     $1,199 for the three and six months ended June 30, 1998, respectively.

(5)  Includes nonrecurring charges related to warranty claims, customer credits
     and other inventory adjustments in the Technology Services divisions of
     $2,780 and $3,330 for the three and six months ended June 30, 1999,
     respectively. Excluding these charges, Technology Services gross profit was
     $16,132 or 24.7% and $34,780 or 26.1% for the three and six months ended
     June 30, 1999, respectively.

(6)  Includes nonrecurring charges related to the integration of the Technology
     Services Divisions of $4,717 and $5,952 for the three and six months ended
     June 30, 1999, respectively. Excluding these charges, Technology Services
     EBITA was ($1,592) or (2.4%) and $771 or 0.6% for the three and six months
     ended June 30, 1999, respectively.

(7)  "EBITA" (earnings before interest, taxes, and amortization) is defined as
     income (loss) from operations before amortization.

                                                                   Page 18 of 28







<PAGE>



Three Months Ended June 30, 1999 and 1998

Net sales decreased $9.1 million or 4.8% in the three months ended June 30, 1999
to $179.8 million from $188.9 million in 1998. Sales variances by business
segment are as follows:

                                                  Sales Increase    (Decrease)
                                                  ----------------------------
                                                      Amount            %
                                                  --------------    ----------
                                                  (In thousands)
        SunSource Industrial Services Company
             Technology Services                      $(21,950)       (25.2)%
             Expediter                                     (67)        (0.2)%
             Integrated Supply                          (2,891)       (22.5)%
                                                      --------     --------
                Industrial Services                    (24,908)       (18.9)%
        Hillman                                          8,154         24.6 %
        Harding                                          7,630         31.9 %
                                                      --------
                Total Company                         $ (9,124)        (4.8)%
                                                      ========

Technology Services sales decreased $22.0 million or 25.2% in the second quarter
of 1999 to $65.2 million from $87.2 million in 1998 as a result of the
restructuring of the sales force as well as the effects of the global economy on
original equipment manufacturers' end markets. Expediter sales decreased
slightly in 1999 to $31.8 million from $31.9 million in 1998 as a result of
reduced manpower in certain sales territories. Integrated Supply sales decreased
$2.9 million or 22.5% in the second quarter of 1999 to $10.0 million from $12.9
million in the 1998 period as a result of contracts canceled after the second
quarter of 1998 which generated sales of $2.5 million in the second quarter of
1998. Excluding terminated contracts, Integrated Supply sales decreased 3.4% in
the comparison period.

Hillman's sales increased $8.2 million or 24.6% in the second quarter of 1999 to
$41.3 million from $33.1 million in the 1998 comparison period as a result of
sales from newly acquired businesses of $4.5 million and $3.7 million in growth
from new accounts and expansion of new and existing product lines.

Harding's sales increased $7.6 million or 31.9% in the second quarter of 1999 to
$31.5 million from $23.9 million in the 1998 comparison period as a result of an
increase of $5.6 million from newly acquired retail glass shops and an increase
in retail, wholesale, contract and other product line sales of $2.9 million,
offset by the discontinuation of certain low-margin product lines resulting in
reduced sales of $0.9 million. Growth in Harding's retail glass shops is
expected to continue as a result of sales development programs and the recent
acquisitions.

The Company's sales backlog on a consolidated basis was $61.1 million as of June
30, 1999, compared with $66.4 million at December 31, 1998, and $77.3 million as
of June 30, 1998, a decrease of 8.0% and 21.0%, respectively.

The Company's consolidated gross margin (before the inventory write-down related
to restructuring of $2.1 million and non-recurring charges related to
integration of the Technology Services divisions of $2.8 million) was 41.4% in
the second quarter of 1999 compared with 40.0% in the second quarter of 1998.
SunSource Industrial Services Company's gross margin before the aforementioned
charges was 38.4% in the second quarter of 1999 compared with 36.8% in the
second quarter of 1998, an increase of 1.6%. Technology Services' gross margin
before the aforementioned charges decreased 1.1% in the second quarter of 1999
as a result of sales mix. The Expediter activity's gross margin declined 2.2% in
the second quarter of 1999 as a result of increased packaging cost absorption in
the 1999 period, a change in sales mix and competitive pricing pressures. The
Integrated

                                                                   Page 19 of 28


<PAGE>



Supply activity's gross margin increased 3.7% in the second quarter of 1999
resulting from sales mix. Hillman's gross margin increased 1.0% in the second
quarter comparison periods as a result of substantial increases in sales of keys
to major U.S. hardware chains carrying higher margins than other hardware
products. Harding's gross margin decreased 4.1% in the comparison period as a
result of an increase in contract sales at lower gross margins than the overall
retail glass business and pricing pressure from insurance companies in the auto
glass sector.

The Company's selling, general and administrative ("S,G&A") expenses before
non-recurring charges of $1.9 million related to integration of the Technology
Services divisions increased by $7.3 million to $68.0 million in the second
quarter of 1999 from $60.7 million in second quarter of 1998. Selling expenses
increased $1.9 million, primarily as a result of the acquisitions at Hillman and
Harding, offset by decreases in all other businesses as a result of reduced
sales levels. Warehouse and delivery expenses increased $2.1 million as a result
of integration costs for the 1998 acquisitions at Hillman and facility
reorganization costs at Technology Services. The increase in general and
administrative expenses of $3.3 million is also attributable to the integration
of the newly acquired businesses at Harding and Hillman and increased facilities
costs in the Technology Services division.

S,G&A expenses as a percentage of sales excluding the non-recurring charges
compared with the second quarter of 1998 was as follows:

                                                  Three Months ended June 30,
                                                  ---------------------------
                                                     1999             1998
                                                     ----             ----
        Selling Expenses                             18.2%            16.3%
        Warehouse and Delivery Expenses               7.4%             5.9%
        General and Administrative Expenses          12.2%             9.9%
                                                    -----            -----
                 Total S,G&A Expenses                37.8%            32.1%
                                                   ======            =====

Overall, as a percentage of sales, total S,G&A expenses increased due mainly to
the decrease in sales levels in relation to the fixed cost component of S,G&A
expenses.

EBITA from operations after corporate expenses and before restructuring charges
and key machine write-down of $8.1 million, inventory write-down related to
restructuring of $2.1 million and non-recurring charges of $4.7 million related
to the integration of the Technology Services divisions was $5.0 million for the
three months ended June 30, 1999, compared with $13.7 million for the same
prior-year period.

The Company's consolidated operating profit margin (EBITA, as a percentage of
sales) after corporate expenses and before the aforementioned charges declined
to 2.8% in the second quarter of 1999 compared with 7.2% in the same prior-year
quarter. SunSource Industrial Services Company's operating profit margin
excluding these charges decreased to 3.1% in the second quarter of 1999 from
7.7% in the same quarter of 1998, primarily reflecting reduced 1999 sales and
increased expenses related to the reorganization of sales and administrative
functions in the Technology Services segment and Expediter's gross margin
decline discussed above. Hillman's operating profit margin excluding the
write-down of key machines of $3.3 million decreased in the second quarter of
1999 to 9.8% from 11.1% in the same quarter of 1998 as a result of initial sales
returns and allowances to attract new accounts and increased selling expenses
for new field staff related primarily to 1998 acquisition activities. Harding's
operating profit margin declined in the second quarter of 1999 to 1.7% from 6.4%
in same quarter of 1998 as a result of increased selling and administrative
expenses related to integration costs for newly acquired businesses.

                                                                   Page 20 of 28


<PAGE>




Depreciation expense increased $0.4 million to $1.5 million in the second
quarter of 1999 from $1.1 million in same quarter of 1998 as a result of
acquisition activity at Hillman and Harding and an overall increase in the
depreciable fixed asset base due to investment in the Company's core businesses.

Amortization expense increased $0.1 million to $0.7 million in the second
quarter of 1999 as a result of acquisition activity at Hillman and Harding.

Interest expense, net increased $0.7 million in the second quarter of 1999 to
$2.3 million due primarily to increased borrowings on the Company's revolving
credit facility as a result of cash requirements to fund the Company's
acquisition activities and working capital investment.

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. The Trust distributes an
equivalent amount to the holders of the Trust Preferred Securities. For the
three months ended June 30, 1999 and 1998, the Company paid $3.1 million in
interest on the Junior Subordinated Debentures, equivalent to the amounts
distributed by the Trust.

        Six Months Ended June 30, 1999 and 1998

Net sales decreased $7.2 million or 2.0% in the six months ended June 30, 1999
to $352.9 million from $360.1 million in 1998. Sales variances by business
segment are as follows:

                                                     Sales Increase (Decrease)
                                                     -------------------------
                                                        Amount            %
                                                    (In thousands)
                                                    --------------  ----------
        SunSource Industrial Services Company
             Technology Services                       $(35,645)       (21.1)%
             Expediter                                     (165)        (0.3)%
             Integrated Supply                           (5,664)       (22.6)%
                                                       ---------
                Industrial Services                     (41,474)       (16.1)%
        Hillman                                          18,890         32.4 %
        Harding                                          15,394         34.7 %
                                                       --------
                Total Company                          $ (7,190)        (2.0)%
                                                       ========

Technology Services sales decreased $35.6 million or 21.1% in the first half of
1999 to $133.5 million from $169.1 million in 1998 as a result of the
restructuring of the sales force as well as the effects of the global economy on
original equipment manufacturers' end markets. Expediter sales decreased
slightly in 1999 to $63.0 million from $63.2 million in 1998 as a result of
reduced manpower in certain sales territories. Integrated Supply sales decreased
$5.7 million or 22.6% in the first half of 1999 to $19.4 million from $25.1
million in the 1998 period as a result of contracts canceled after the second
quarter of 1998 which generated sales of $4.4 million in the first half of 1998.
Excluding terminated contracts, Integrated Supply sales decreased 6.3% in the
comparison period.

Hillman's sales increased $18.9 million or 32.4% in the first half of 1999 to
$77.2 million from $58.3 million in the 1998 comparison period as a result of
sales from newly acquired businesses of $9.0 million, and $9.2 million in growth
from new accounts and expansion of new and existing product lines. Harding's
sales increased $15.4 million or 34.7% in the first half of 1999 to $59.8
million from $44.4 million in the 1998 comparison period as a result of an


                                                                   Page 21 of 28


<PAGE>



increase of $14.1 million from newly acquired retail glass shops and an increase
in retail, wholesale, contract and other product line sales of $3.0 million,
offset by the discontinuation of certain low-margin product lines resulting in
reduced sales of $1.7 million. Growth in Harding's retail glass shops is
expected to continue as a result of sales development programs and the recent
acquisitions.

The Company's consolidated gross margin before the inventory write-down related
to restructuring of $2.1 million and non-recurring charges related to
integration of the Technology Services divisions of $3.3 million was 41.7% in
the first half of 1999 compared with 39.8% in the first half of 1998. SunSource
Industrial Services Company's gross margin before the aforementioned charges was
39.0% in the first half of 1999 compared with 36.9% in the first half of 1998,
an increase of 2.1%. Technology Services' gross margin before the aforementioned
charges increased 0.5% in the first half of 1999 as a result of tighter pricing
controls offset by decreases resulting from sales mix. The Expediter activity's
gross margin declined 2.0% in the first half of 1999 as a result of increased
packaging cost absorption in the 1999 period, a change in sales mix and
competitive pricing pressures. The Integrated Supply activity's gross margin
increased 3.1% in the first half of 1999 resulting from sales mix. Hillman's
gross margin increased 0.5% in the six-month comparison periods as a result of
substantial increases in sales of keys to major U.S. hardware chains carrying
higher margins than other hardware products. Harding's gross margin decreased
3.4% in the comparison period as a result of an increase in contract sales at
lower gross margins than the overall retail glass business and pricing pressure
from insurance companies in the auto glass sector.

The Company's S,G&A expenses before non-recurring charges related to integration
of the Technology Services divisions of $2.7 million increased by $11.5 million
to $130.7 million in the first half of 1999 from $119.2 million in first half of
1998. Selling expenses increased $3.2 million, primarily as a result of the
acquisitions at Hillman and Harding, offset by decreases in all other businesses
as a result of reduced sales levels. Warehouse and delivery expenses increased
$4.3 million as a result of integration costs for the 1998 acquisitions at
Hillman and facility reorganization costs at Technology Services. The increase
in general and administrative expenses of $4.0 million is also attributable to
the integration of the newly acquired businesses at Harding and Hillman and
increased facilities costs in the Technology Services division.

S,G&A expenses as a percentage of sales excluding the previously mentioned
non-recurring charges compared with the first half of 1998 was as follows:

                                                  Six Months ended June 30,
                                                  -------------------------
                                                     1999         1998
                                                     ----         ----
        Selling Expenses                             17.9%        16.7%
        Warehouse and Delivery Expenses               7.3%         5.9%
        General and Administrative Expenses          11.8%        10.5%
                                                    -----        -----
                 Total S,G&A Expenses                37.0%        33.1%
                                                    =====        =====

Overall, as a percentage of sales, total S,G&A expenses increased due mainly to
the decrease in sales levels in relation to the fixed cost component of S,G&A
expenses.

EBITA from operations after corporate expenses and before restructuring charges
and key machine write-down of $8.1 million, inventory write-down related to
restructuring of $2.1 million and the aforementioned non-recurring charges of
$6.0 million was $13.6 million for the six months ended June 30, 1999, compared
with $21.9 million for the same prior-year period.


                                                                   Page 22 of 28


<PAGE>



The Company's consolidated operating profit margin (EBITA, as a percentage of
sales) after corporate expenses and before the aforementioned charges declined
to 3.8% in the first half of 1999 compared with 6.1% in the same prior-year
period. SunSource Industrial Services Company's operating profit margin
excluding these charges decreased to 5.2% in the first half of 1999 from 7.1% in
1998, primarily reflecting reduced 1999 sales and increased expenses related to
the reorganization of sales and administrative functions in the Technology
Services segment and Expediter's gross margin decline discussed above. Hillman's
operating profit margin excluding restructuring charges related to the write-off
of key machines of $3.3 million decreased in the first half of 1999 to 9.0% from
10.0% in 1998 as a result of initial sales returns and allowances to attract new
accounts and increased selling expenses for new field staff related primarily to
1998 acquisition activities. Harding's operating profit margin declined in the
first half of 1999 to 0.5% from 3.5% in 1998 as a result of increased selling
and administrative expenses related to integration costs for newly acquired
businesses.

Depreciation expense increased $0.7 million to $3.0 million in the first half of
1999 from $2.3 million in 1998 as a result of acquisition activity at Hillman
and Harding and an overall increase in the depreciable fixed asset base due to
investment in the Company's core businesses.

Amortization expense increased $0.3 million to $1.4 million in the first half of
1999 as a result of acquisition activity at Hillman and Harding.

Interest expense, net increased $1.1 million in the first half of 1999 to $4.4
million due primarily to increased borrowings on the Company's revolving credit
facility as a result of cash requirements to fund the Company's acquisition
activities and working capital investment.

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. The Trust distributes an
equivalent amount to the holders of the Trust Preferred Securities. For the six
months ended June 30, 1999 and 1998, the Company paid $6.1 million in interest
on the Junior Subordinated Debentures, equivalent to the amounts distributed by
the Trust.

The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican operations 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.

Liquidity and Capital Resources

Earnings before interest, taxes, depreciation and amortization ("EBITDA")was
$6.5 million in the second quarter of 1999 compared with $14.8 million in the
same quarter of 1998 and $16.6 million in the first six months of 1999 compared
with $24.1 million in 1998, excluding restructuring charges of $4.8 million, key
machine write-down of $3.3 million and inventory write-down related to
restructuring of $2.1 million for the three and six months ended June 30, 1999,
and the aforementioned non-recurring charges of $4.7 million and $6.0 million
for the three and six months ended June 30, 1999, respectively. The Company's
net interest coverage ratio for the six months ended June 30, 1999, declined to
1.16X (earnings before interest, distributions on Trust Preferred Securities and
income taxes, excluding the aforementioned charges, over net interest expense
and

                                                                   Page 23 of 28


<PAGE>




distributions on Trust Preferred Securities), from 2.20X in the 1998 comparison
period as a result of reduced earnings and increased interest expense.

The Company's cash position of $2.9 million as of June 30, 1999, increased $0.1
million from the balance at December 31, 1998. Cash was provided during this
period primarily from net borrowings under the bank revolver ($44.0 million)and
proceeds from the sale of property and equipment ($0.3 million). Cash was used
during this period predominantly for working capital investments in operations
($21.4 million), acquisitions ($15.1 million), cash distributions to investors
($1.4 million), capital expenditures ($3.7 million), repayments under other
credit facilities ($0.5 million), purchase of treasury stock ($0.3 million),
investment in life insurance ($1.3 million) and other items, net ($0.5 million).

The Company's working capital position of $148.4 million at June 30, 1999,
represents an increase of $26.8 million from the December 31, 1998 level of
$121.6 million and an increase of $5.6 million from the June 30, 1998 level of
$142.8 million. The Company's current ratio increased to 2.59x at June 30, 1999
from 2.25x at December 31, 1998, as a result of increased accounts receivable
and inventories. The current ratio decreased slightly from the June 30, 1998
level of 2.60x.

As of June 30, 1999, the Company had $5.7 million available under its credit
facilities. The Company had $139.7 million of outstanding long-term debt at June
30, 1999, consisting of a $60.0 million Senior Note currently at 7.91%, bank
borrowings totaling $79.0 million at an effective interest rate of 6.48%, and
capitalized lease obligations of $0.7 million at various interest rates. An
indirect, wholly-owned Canadian subsidiary of the Company had a $2.5 million
Canadian dollar line of credit for working capital purposes, of which no amount
was outstanding at June 30, 1999.

As of June 30, 1999, the Company's total debt (including dividends payable) as a
percentage of its consolidated capitalization (total debt, Trust Preferred
Securities and stockholders' equity) was 52.4% compared with 41.5% as of
December 31, 1998 and 42.5% as of June 30, 1998. The Company's consolidated
capitalization (including dividends payable) as of June 30, 1999, was $266.4
million compared to $232.8 million at December 31, 1998 and $243.2 million as of
June 30, 1998.

The Company anticipates spending $6.0 million for capital expenditures in 1999,
primarily for warehouse improvements, machinery and equipment and computer
hardware and software.

On March 29, 1999, the board of Directors declared a dividend of $.10 per Common
Share which was paid on April 19, 1999, to holders of record as of April 8,
1999. On June 30, 1999, the Board of Directors of the Company suspended
indefinitely the quarterly cash dividend of $.10 per common share.

The Company has deferred tax assets aggregating $20.9 million as of June 30,
1999, 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.

Year 2000 Issue

The following discussion is an update of the Company's Y2K disclosure contained
in its annual report on Form 10-K for the year-ended December 31, 1998. Each of
the individuals responsible for the Y2K plans within the Company's business
segments continues to update senior management on a quarterly basis regarding
Y2K matters. Plans and locations with critical 1999 dates and activities
required to achieve Y2K compliance are being monitored on a more frequent basis
by management.
                                                                   Page 24 of 28


<PAGE>



State of Readiness

SunSource Industrial Services

o  The remediation of the Expediter segment's proprietary software has been
   completed utilizing an outside consultant. The testing of this remediation
   is approximately 90% complete and is targeted for full completion by the
   end of the third quarter of 1999. Expediter also continues to expect that
   its critical personal computer ("PC") hardware and purchased software will
   be compliant and fully-tested by September 30, 1999.

o  Technology Services' conversion of all its operating units to the
   third-party purchased computer system is approximately 60% complete and is
   currently targeted for full completion and testing by October 31, 1999. The
   remaining unconverted units utilize hardware and software applications that
   are Y2K compliant.

Hillman

Hillman has completed remediation (including full testing) on 100% of its
proprietary software programs. Hillman's critical purchased software
applications and hardware have been certified by the vendors to be compliant,
except for several applications (i.e. payroll and shipping) which are expected
to be upgraded or replaced by October 31, 1999.

Harding

Harding's installation of the Y2K compliant version of its critical purchased
point-of-sale software application and its related hardware operating system is
95% complete and is expected to be completed by the end of the third quarter of
1999. Harding installed a version update to its purchased financial software in
July 1999. Harding completed the necessary upgrades for network servers and PC
hardware during the first quarter of 1999. Since Harding does not have
standardized telephone systems at its 125 locations, an assessment of Y2K
compliance for the different telephone systems is being performed due to the
important role the telephone plays in Harding's retail glass sales and service
activities. Harding has confirmed that 90% of its locations' phone systems are
Y2K compliant. Harding expects the evaluation and remediation (if necessary) of
the final 10% of its locations to be complete by September 30, 1999.

 Costs to Address Year 2000 Issue

The Company's Y2K costs incurred through June 1999 are approximately $1.0
million, of which 80% is for remediation of internally designed software
applications. Y2K costs of $0.7 million are expected to be incurred during the
remainder of 1999 resulting in projected aggregate costs of $1.7 million for the
entire Y2K project. The source of the funds for these Y2K costs will be from the
Company's operating cash flows.

 Risks of Year 2000 Compliance and Contingency Plans

There has been no significant change to the Company's Y2K risk profile or the
Company's plans to address potential operating problems related to Y2K.

The Company has received responses from approximately 87% of its major suppliers
to its request for Y2K compliance letters. At this time, no significant Y2K
issues have been communicated from major suppliers that have responded.




                                                                   Page 25 of 28



<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.

Subsequent Event

Sale of Division

On July 1, 1999 the Company sold the net assets of its Industrial Services'
Fastener Business serving original equipment manufacturers. Sales from the
Fastener Business aggregated $5.4 million and $11.0 million for the three and
six months ended June 30, 1999, respectively. The proceeds from this divestiture
were used for debt repayments on the Company's revolving credit line.










































                                                                   Page 26 of 28



<PAGE>



                                     PART II
                                OTHER INFORMATION

Items 1 - 6 -- None
















































                                                                   Page 27 of 28



<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.



















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





DATE: August 16, 1999








                                                                   Page 28 of 28