<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 September 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 November 15, 1999 there were 6,749,456 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 September 30, 1999
               (Unaudited), December 31, 1998 and September 30, 1998
               (Unaudited)                                                     3

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

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

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

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

               Consolidated Statement of Changes in Stockholders'
               Equity for the Nine Months ended September 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>
<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                September 30,                          September 30,
                                                                                     1999           December 31,            1998
                                                                                 (Unaudited)           1998             (Unaudited)
                                                                                -------------       ------------       -------------
<S>                                                                                  <C>               <C>                 <C>
                              ASSETS

Current assets:
  Cash and cash equivalents                                                        $  3,945           $  2,796            $ 10,174
  Accounts receivable, net                                                           92,839             88,629             101,557
  Inventories                                                                       107,444            112,497             102,710
  Deferred income taxes                                                              13,815              9,886              10,593
  Other current assets                                                                7,172              5,421               3,649
                                                                                   --------           --------            --------
      Total current assets                                                          225,215            219,229             228,683
Property and equipment, net                                                          21,958             26,770              24,642
Goodwill                                                                             84,715             77,544              74,541
Other Intangibles                                                                     1,562              1,807                 918
Deferred income taxes                                                                 5,178              5,202               5,146
Cash surrender value of life insurance policies                                      12,427             10,262               8,823
Other assets                                                                          1,301                754               1,034
                                                                                   --------           --------            --------

      Total assets                                                                 $352,356           $341,568            $343,787
                                                                                   ========           ========            ========


                LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                 $ 51,775           $ 58,353            $ 55,008
  Notes payable                                                                         974              1,770                 974
  Current portion of capitalized lease obligations                                      305                276                 276
  Dividends / distributions payable                                                      --                676                 726
  Deferred tax liability                                                                929                929               1,322
  Accrued expenses:
    Salaries and wages                                                                7,768              8,379               7,294
    Income and other taxes                                                              218              4,194               3,087
    Other accrued expenses                                                           24,436             23,050              22,092
                                                                                   --------           --------            --------
      Total current liabilities                                                      86,405             97,627              90,779
Senior notes                                                                         60,000             60,000              60,000
Bank revolving credit                                                                63,520             35,000              46,000
Capitalized lease obligations                                                           412                566                 626
Deferred compensation                                                                12,825             11,802              10,256
Other liabilities                                                                     2,665                308                 704
                                                                                   --------           --------            --------
      Total liabilities                                                             225,827            205,303             208,365
                                                                                   --------           --------            --------

Guaranteed preferred beneficial interests in the
 Company's junior subordinated debentures                                           115,288            115,551             115,639
                                                                                   --------           --------            --------

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,
   7,223,382 issued and 6,744,282 outstanding at September 30, 1999,
   7,217,263 issued and 6,756,163 outstanding at December 31, 1998
   and 7,216,199 issued and 6,849,799 outstanding at September 30, 1998                  72                 72                  72
  Additional paid-in capital                                                         21,315             21,099              21,081
  Retained earnings                                                                   3,350             12,748              10,393
  Unearned compensation                                                                (302)              (229)               (244)
  Accumulated other comprehensive income                                             (4,489)            (4,596)             (5,020)
  Treasury stock, at cost, 479,100 shares at
   September 30, 1999; 461,100 shares at December 31,
   1998; 366,400 at September 30, 1998                                               (8,705)            (8,380)             (6,499)
                                                                                   --------           --------            --------

      Total stockholders' equity                                                     11,241             20,714              19,783
                                                                                   --------           --------            --------

      Total liabilities and stockholders'
        equity                                                                     $352,356           $341,568            $343,787
                                                                                   ========           ========            ========
</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)

<TABLE>
<CAPTION>
                                                                          September 30,          September 30,
                                                                               1999                   1998
                                                                          -------------          -------------
<S>                                                                        <C>                    <C>
Net sales                                                                  $  169,384             $  183,593
Cost of sales                                                                  98,881                107,779
                                                                           ----------             ----------
   Gross profit                                                                70,503                 75,814
                                                                           ----------             ----------

Operating expenses:
  Selling, general and administrative expenses                                 63,837                 61,931
  Depreciation                                                                  1,185                  1,259
  Amortization                                                                    710                    576
                                                                           ----------             ----------
   Total operating expenses                                                    65,732                 63,766
                                                                           ----------             ----------

Provision for litigation matters -
  divested operations                                                              --                  1,600
Other income (expense), net                                                       470                    (63)
                                                                           ----------             ----------

   Income from operations                                                       5,241                 10,385

Interest expense, net                                                           2,463                  1,752
Distributions on guaranteed preferred
 beneficial interests                                                           3,058                  3,058
                                                                           ----------             ----------
    Income (loss) before provision
      (benefit) for income taxes                                                 (280)                 5,575

Provision (benefit) for income taxes                                             (356)                 1,025
                                                                           ----------             ----------

    Net income                                                             $       76                $ 4,550
                                                                           ==========             ==========


Basic and diluted net income per common share                                   $0.01                  $0.64

Weighted average number of
  outstanding common shares                                                 6,744,282              7,120,576

</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                    Page 4 of 28
<PAGE>

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


<TABLE>
<CAPTION>
                                                                          September 30,          September 30,
                                                                               1999                   1998
                                                                          -------------          -------------
<S>                                                                        <C>                    <C>
Net sales                                                                  $  522,302             $  543,701
Cost of sales                                                                 308,065                324,580
Cost of sales - Inventory write-down
  related to restructuring (Note 1)                                             2,130                     --
                                                                           ----------             ----------
   Gross profit                                                               212,107                219,121
                                                                           ----------             ----------

Operating expenses:
  Selling, general and administrative expenses                                197,137                181,111
  Depreciation                                                                  4,199                  3,541
  Amortization                                                                  2,073                  1,645
                                                                           ----------             ----------
   Total operating expenses                                                   203,409                186,297
                                                                           ----------             ----------

Provision for litigation matters -
  divested operations                                                              --                  1,600
Restructuring charges and asset write-down (Note 1)                             8,118                     --
Other income (expense), net                                                       664                    (50)
                                                                           ----------             ----------

   Income from operations                                                       1,244                 31,174

Interest expense, net                                                           6,847                  5,086
Distributions on guaranteed preferred
 beneficial interests                                                           9,174                  9,174
                                                                           ----------             ----------
    Income (loss) before provision
      (benefit) for income taxes                                              (14,777)                16,914

Provision (benefit) for income taxes                                           (6,053)                 6,128
                                                                           ----------             ----------

    Net income (loss)                                                      $   (8,724)            $   10,786
                                                                           ==========             ==========


Basic and diluted net income (loss) per common share                           ($1.29)                 $1.55

Weighted average number of
  outstanding common shares                                                 6,746,362              6,939,106

</TABLE>




           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)



<TABLE>
<CAPTION>
                                                                           September 30,          September 30,
                                                                               1999                   1998
                                                                           -------------          -------------
<S>                                                                        <C>                    <C>
Cash flows from operating activities:
  Net income                                                                 $     76               $  4,550
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Depreciation and amortization                                              1,895                  1,835
     Decrease in cash value of life insurance                                     676                  1,300
     Provision (benefit) for deferred income taxes                              1,932                   (361)
     Gain on sale of division                                                    (365)                    --
     Changes in current operating items:
        Decrease (increase) in accounts receivable                              5,757                 (2,937)
        Decrease in inventories                                                 3,546                  2,477
        Decrease (increase) in other current assets                              (950)                   315
        Decrease in accounts payable                                           (2,247)                (2,764)
        Increase (decrease) in income taxes payable                            (2,318)                     7
        Decrease in accrued restructuring charges
             and transaction costs                                             (1,693)                  (115)
        Increase (decrease) in other accrued liabilities                         (413)                 5,593
     Other items, net                                                            (903)                (3,096)
                                                                             --------               --------

    Net cash provided by operating activities                                   4,993                  6,804
                                                                             --------               --------

Cash flows from investing activities:
  Proceeds from sale of property and equipment                                  5,090                    177
  Proceeds from sale of division                                                9,160                     --
  Payments for acquired businesses, net of cash acquired                         (386)                (6,488)
  Capital expenditures                                                         (1,494)                (1,526)
  Other, net                                                                     (490)                   120
                                                                             --------               --------

    Net cash provided by (used for) investing activities                       11,880                 (7,717)
                                                                             --------               --------

Cash flows from financing activities:
  Borrowings (repayments) under the bank credit agreement, net                (15,480)                 4,000
  Cash distributions / dividends to investors                                      --                   (724)
  Repayments under other credit facilities, net                                  (269)                  (332)
  Purchase of treasury stock at cost                                               --                 (6,499)
  Principal payments under capitalized lease obligations                          (78)                   (60)
                                                                             --------               --------

    Net cash used for financing activities                                    (15,827)                (3,615)
                                                                             --------               --------

Net increase (decrease) in cash and cash equivalents                            1,046                 (4,528)

Cash and cash equivalents at beginning of period                                2,899                 14,702
                                                                             --------               --------

Cash and cash equivalents at end of period                                   $  3,945               $ 10,174
                                                                             ========               ========
</TABLE>





           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                    Page 6 of 28
<PAGE>

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


<TABLE>
<CAPTION>
                                                                           September 30,          September 30,
                                                                               1999                   1998
                                                                           -------------          -------------
<S>                                                                            <C>                    <C>
Cash flows from operating activities:
  Net income (loss)                                                          $ (8,724)              $ 10,786
  Adjustments to reconcile net income (loss) to net
   cash provided by (used for) operating activities:
     Depreciation and amortization                                              6,272                  5,186
     Restructuring charges and asset write-down                                10,248                     --
     Decrease (increase) in cash value of life insurance                          (65)                   487
     Benefit for deferred income taxes                                         (3,905)                (1,508)
     Gain on sale of division                                                    (365)                    --
     Changes in current operating items:
        Increase in accounts receivable                                        (2,094)               (17,303)
        Decrease (increase) in inventories                                     (1,656)                 2,118
        Decrease (increase) in other current assets                               (53)                   948
        Increase (decrease) in accounts payable                                (6,004)                 2,934
        Increase (decrease) in income taxes payable                            (5,413)                   338
        Decrease in accrued restructuring charges
             and transaction costs                                             (2,812)                  (962)
        Increase (decrease) in other accrued liabilities                       (1,911)                 4,953
     Other items, net                                                             119                 (3,196)
                                                                             --------               --------

    Net cash (used for) provided by operating activities                      (16,363)                 4,781
                                                                             --------               --------

Cash flows from investing activities:
  Proceeds from sale of property and equipment                                  5,370                    379
  Proceeds from sale of division                                                9,160                     --
  Payments for acquired businesses, net of cash acquired                      (15,524)               (17,644)
  Capital expenditures                                                         (5,146)                (3,703)
  Investment in life insurance policies                                        (1,300)                  (903)
  Other, net                                                                     (876)                  (269)
                                                                             --------               --------

    Net cash used for investing activities                                     (8,316)               (22,140)
                                                                             --------               --------

Cash flows from financing activities:
  Net proceeds from issuance of common stock                                       --                 20,813
  Borrowings under the bank credit agreement, net                              28,520                 13,000
  Purchase of treasury stock at cost                                             (325)                (6,499)
  Cash distributions / dividends to investors                                  (1,350)                (4,163)
  Repayments under other credit facilities, net                                  (796)                (1,106)
  Principal payments under capitalized lease obligations                         (221)                  (150)
                                                                             --------               --------

    Net cash provided by financing activities                                  25,828                 21,895
                                                                             --------               --------

Net increase in cash and cash equivalents                                       1,149                  4,536

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

Cash and cash equivalents at end of period                                   $  3,945               $ 10,174
                                                                             ========               ========

</TABLE>




           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 NINE MONTHS ENDED SEPTEMBER 30, 1999 (Unaudited)

                             (dollars in thousands)




<TABLE>
<CAPTION>
                                                                                                                       Accumulated
                                                                        Additional                                        Other
                                                           Common        Paid-in        Retained      Unearned        Comprehensive
                                                            Stock        Capital        Earnings    Compensation        Income (1)
                                                           ------       ----------      --------    ------------      -------------
<S>                                                          <C>           <C>             <C>            <C>               <C>
Beginning Balance - December 31, 1998                       $ 72        $ 21,099        $ 12,748       $ (229)           $ (4,596)


  Net loss                                                                                (8,724)

  Change in cumulative foreign
   translation adjustment                                                                                                     107


  Comprehensive income


  Issuance of 6,119 shares of common stoc
   to certain non-employee directors                                          93

  Dividends declared on common stock                                                        (674)

  Stock options granted at a discount                                        123                         (123)

  Amortization of stock option discount                                                                    50

  Repurchase of 18,000 shares of common stock
                                                            ----        --------         -------       ------            --------
Ending Balance - September 30, 1999                         $ 72        $ 21,315         $ 3,350       $ (302)           $ (4,489)
                                                            ====        ========         =======       ======            ========

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                                               Total
                                                            Treasury       Stockholders'
                                                              Stock           Equity
                                                            --------       -------------
<S>                                                           <C>               <C>
Beginning Balance - December 31, 1998                      $ (8,380)         $ 20,714
                                                                             --------

  Net loss                                                                     (8,724)

  Change in cumulative foreign
   translation adjustment                                                         107

                                                                             --------
  Comprehensive income                                                         (8,617)
                                                                             --------

  Issuance of 6,119 shares of common stoc
   to certain non-employee directors                                               93

  Dividends declared on common stock                                             (674)

  Stock options granted at a discount                                              --

  Amortization of stock option discount                                            50

  Repurchase of 18,000 shares of common stock                  (325)             (325)
                                                           --------          --------
Ending Balance - September 30, 1999                        $ (8,705)         $ 11,241
                                                           ========          ========

</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. ("Industrial Services"), 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, a 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 Hillman charge of $3,300 is primarily the result of Hillman's inability to
recover key machines from retailers which represents the remaining net book
value of key machine capitalized costs 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.

                                                                    Page 9 of 28

<PAGE>

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

1. Basis of Presentation (continued):

The following table summarizes the restructuring costs, the balance sheet
classification, and payments or adjustments made since adoption of the
restructuring plan.

                                                          Other
Opening Balance June 29, 1999:         Termination         Exit
                                         Benefits          Costs          Total
                                         --------          -----          -----
Current - other accrued expense            3,096             435           3,531
Long-term - other liabilities                770              81             851
                                         -------           -----         -------
     Totals                              $ 3,866           $ 516         $ 4,382

Payments/charges since adoption:
Current - other accrued expense           (1,175)           (220)        (1,395)
Long-term - other liabilities                (56)             --            (56)
                                         -------           -----        -------
     Totals                              $(1,231)          $(220)       $(1,451)

Ending Balance September 30, 1999:
Current - other accrued expense            1,921             215          2,136
Long-term - other liabilities                714              81            795
                                         -------           -----        -------
     Totals                              $ 2,635            $296        $ 2,931
                                         =======           =====        =======

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.

2. Acquisitions/Divestments:

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 $11,496, including debt repayments of $3,272 and transaction
costs of $595, plus the assumption of certain liabilities aggregating $3,189.
Harding recorded goodwill of $7,533 related to this acquisition.

During the first four months, Harding also acquired the assets of three retail
glass shops for net cash consideration, including transaction costs, of $2,284
plus the assumption of certain liabilities of $260. Harding recorded goodwill of
$1,866 related to these acquisitions.

Cash payments for acquisitions in the first nine months of 1999 also includes
disbursements totaling $1,744 related to prior year acquisitions for
post-closing adjustments.

                                                                   Page 10 of 28

<PAGE>

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

2. Acquisitions/Divestments (continued):

Cash payments for acquisitions in the first nine months of 1999 also includes
disbursements totaling $1,744 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
                                               --------------------------
                                                    Nine Months Ended
                                                9/30/99          9/30/98
                                               ---------         --------
   Net sales                                   $525,232          $575,122
   Income (loss) before extraordinary items      (8,683)           11,810
   Net income (loss)                             (8,683)           11,810
   Basic and diluted earnings per share          ($1.29)            $1.70

On July 1, 1999, the Company sold the assets of Industrial Services' Fastener
Business serving original equipment manufacturers ("OEM") for a cash
consideration, net of expenses, of approximately $9,160 (subject to certain
post-closing adjustments) plus the assumption of certain liabilities. The
Company recorded an after-tax gain on the sale in the amount of $365 or $0.05
per Common share. Sales from the OEM Fastener Business aggregated $10,954 for
the six months ended June 30, 1999 and $23,006 for the year ended December
31, 1998.

3. Sale Leaseback transaction:

The Company sold certain assets of its Expediter business for $5,025 on
September 30, 1999. The assets were leased back from the purchaser under two
separate lease agreements over periods of five and seven years, respectively.
The related leases are being accounted for as operating leases, and the
resulting gains aggregating $2,318 are being amortized over the respective lives
of the leases. Both leases require the Company to pay customary operating and
repair expenses and to observe certain operating restrictions.

4. Lines of Credit and Long-Term Debt:

As of September 30, 1999, the Company had $21,180 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 $124,237
of outstanding long-term debt and capital lease obligations at September 30,
1999, consisting of bank borrowings of $63,520, outstanding senior notes of
$60,000 and capital lease obligations of $717. The Company also had $5,300 of
Letters of Credit charged against its available borrowing on the revolving
credit facility. The bank revolving debt and senior note are secured by the
Company's accounts receivable, inventory, intercompany notes, 100% of the
capital stock of each of the domestic subsidiaries of the Company and 65% of the
capital stock of each foreign subsidiary of the Company. 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 September 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 September 30, 1999.

Accounts payable has been increased to include a reclassification of $9,201
representing checks issued as of September 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.

                                                                   Page 11 of 28

<PAGE>

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

5. 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
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.

6. 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 ordinary routine
litigation 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.

7. 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. Currently, due to market
conditions, the shares granted under the plan do not have a material dilutive
effect on earnings per share for the three and nine months ended September 30,
1999.

                                                                   Page 12 of 28

<PAGE>

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

7. 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 6,119 Common Shares at fair market value in
the first nine months of 1999, which resulted in a compensation charge of $93.

   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 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 September 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.

8. Segment Information:

The following supplemental table of segment tangible assets is presented due to
fluctuations during the nine months ended September 30, 1999, which represents
primarily reduced accounts receivable and investments in inventory, as well as a
decrease resulting from divestment activity, offset by increases as a result of
acquisitions:

                                                               $           %
                                      9/30/99   12/31/98    INC(DEC)    INC(DEC)
                                     --------   --------   ---------    --------
   Technology Services               $ 72,666   $ 85,460   $(12,794)     (15.0)%
   Expediter                           42,961     42,479        482        1.1%
   Integrated Supply                   10,067     15,343     (5,276)     (34.4)%
   Hillman                             64,200     59,487      4,713        7.9%
   Harding                             32,403     27,642      4,761       17.2%
                                     --------   --------   --------       -----
    Total Tangible Assets            $222,297   $230,411   $ (8,114)      (3.5)%
                                     ========   ========   ========       =====

                                                                   Page 13 of 28

<PAGE>

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

9. Subsequent Event:

On October 27, 1999, the Company signed a definitive merger agreement to acquire
Axxess Technologies, Inc., of Tempe, Arizona, a manufacturer and marketer of key
duplication and identification systems ("Axxess"). The purchase price of
approximately $125,000 includes cash consideration of $80,000 and a note from
Hillman for $45,000. The Company expects to close the transaction upon meeting
certain closing conditions, including regulatory approval and financing.













                                                                   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. ("Industrial Services"), The Hillman Group,
Inc.("Hillman") and Harding Glass,Inc. ("Harding").

Industrial Services 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 as 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 as 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, a key machine write-down of $3.3 million and an inventory
write-down of $2.1 million. The charges and write-downs are a result of the
Company's plan to reposition the Industrial Services businesses, write-down key
machines at the Hillman division, and realign corporate overhead expenses(the
"Restructuring Plan"). 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 Hillman charge of $3.3 million is primarily the result of Hillman's
inability to recover key machines from retailers which represents the remaining
net book value of key machine capitalized costs as of June 30, 1999.

                                                                   Page 15 of 28

<PAGE>

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.

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

Acquisitions / Divestitures

On October 27, 1999, the Company signed a definitive merger agreement to acquire
Axxess Technologies, Inc., of Tempe, Arizona, a manufacturer and marketer of key
duplication and identification systems ("Axxess"). The purchase price of
approximately $125.0 million includes cash consideration of approximately $80.0
million and a note from Hillman for $45.0 million. The Company expects to close
the transaction upon meeting certain closing conditions, including regulatory
approval and financing. Sales of Axxess aggregated approximately $84 million for
the twelve-month period ended September 30, 1999.

On July 1, 1999, the Company sold the assets of Industrial Services' Fastener
Business serving original equipment manufacturers ("OEM") for a cash
consideration, net of expenses, of approximately $9.2 million (subject to
certain post-closing adjustments) plus the assumption of certain liabilities.
The Company recorded an after-tax gain on the sale in the amount of $0.4 million
or $0.05 per Common Share. Sales from the OEM Fastener Business aggregated $11.0
million for the six months ended June 30, 1999 and $23.0 million for the
year ended December 31, 1998. The proceeds from this divestiture were used for
debt repayments on the Company's revolving credit line.

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 $11.5 million, including debt
repayments of $3.3 million and transaction costs of $0.6 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 added twenty-one retail glass shops,
expanding Harding's business into the North and South Carolina markets.

In addition, in the first nine months of 1999, Harding acquired the assets of
three retail glass shops for a net cash consideration of $2.3 million, including
transaction costs, plus the assumption of certain liabilities of $0.3 million
which had sales aggregating approximately $3.2 million for the twelve-month
period prior to acquisition. These acquisitions expanded 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 September 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>


<PAGE>

Results of Operations

Segment Sales and Profitability for the Three and Nine Months Ended
September 30, 1999 and 1998

<TABLE>
<CAPTION>

        (dollars in thousands)                             FOR THE THREE MONTHS ENDED,
                                               --------------------------------------------------
                                                     September 30,               September 30,
                                                         1999                        1998
                                               --------------------          --------------------
                                                             % TOTAL                      % TOTAL
Sales                                           AMOUNT        SALES           AMOUNT        SALES
-----                                          --------       -----          --------       -----
<S>                                            <C>             <C>           <C>             <C>
SunSource Industrial Services
    Technology Services                        $ 62,225        36.7%         $ 80,374        43.8%
    Expediter                                    31,489        18.6%           31,576        17.2%
    Integrated Supply (1) (7)                     4,626         2.7%           11,425         6.2%
                                               --------       -----          --------       -----
        Industrial Services                      98,340        58.1%          123,375        67.2%
Hillman (2) (3)                                  39,896        23.6%           34,477        18.8%
Harding (4)                                      31,148        18.4%           25,741        14.0%
                                               --------       -----          --------       -----
    Consolidated Net Sales                     $169,384       100.0%         $183,593       100.0%
                                               ========       =====          ========       =====

                                                               % OF                          % OF
Gross Profit                                                  SALES                         SALES
------------                                                  -----                         -----
SunSource Industrial Services
    Technology Services (5)                    $ 14,564        23.4%         $ 21,754        27.1%
    Expediter                                    21,648        68.7%           22,361        70.8%
    Integrated Supply (7)                           916        19.8%            3,075        26.9%
                                               --------                      --------
        Industrial Services                      37,128        37.8%           47,190        38.2%
Hillman                                          21,446        53.8%           18,254        52.9%
Harding                                          11,929        38.3%           10,370        40.3%
                                               --------                      --------
    Consolidated Gross Profit
    before inventory write-down
    related to Restructuring Plan                70,503        41.6%           75,814        41.3%
Inventory write-down
  related to restructuring                            -                             -
                                               --------                      --------
    Consolidated Gross Profit                  $ 70,503        41.6%         $ 75,814        41.3%
                                               ========                      ========

EBITA (9)
---------
SunSource Industrial Services
    Technology Services (6)                    $ (2,012)       (3.2%)          $3,491         4.3%
    Expediter                                     4,556        14.5%            5,004        15.8%
    Integrated Supply (7)                           243         5.3%              447         3.9%
                                               --------                      --------
        Industrial Services                       2,787         2.8%            8,942         7.2%
Hillman                                           4,312        10.8%            3,732        10.8%
Harding                                             436         1.4%            1,875         7.3%
                                               --------                      --------
    Total operations before
    corporate expenses                            7,535         4.4%           14,549         7.9%
Corporate expenses, net (8)                      (1,584)       (0.9%)          (1,988)       (1.1%)
                                               --------                      --------
    Consolidated EBITA before
    Restructuring Plan charges and
      provision for litigation matters            5,951         3.5%           12,561         6.8%
Restructuring Plan charges                            -                             -
Litigation charge - divested operations               -                        (1,600)       (0.9%)
                                               --------                      --------
    Consolidated EBITA                           $5,951         3.5%         $ 10,961         6.0%
                                               ========                      ========
</TABLE>


<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
        (dollars in thousands)                                      FOR THE NINE MONTHS ENDED,
                                                       ---------------------------------------------------
                                                           September 30,                  September 30,
                                                               1999                           1998
                                                       --------------------           --------------------
                                                                    % TOTAL                        % TOTAL
Sales                                                   AMOUNT        SALES            AMOUNT        SALES
-----                                                  --------       -----           --------       -----
<S>                                                    <C>             <C>            <C>             <C>
SunSource Industrial Services
    Technology Services                                $195,948        37.5%          $249,485        45.9%
    Expediter                                            94,557        18.1%            94,809        17.4%
    Integrated Supply (1) (7)                            23,757         4.5%            36,477         6.7%
                                                       --------       -----           --------       -----
        Industrial Services                             314,262        60.2%           380,771        70.0%
Hillman (2) (3)                                         117,076        22.4%            92,767        17.1%
Harding (4)                                              90,964        17.4%            70,163        12.9%
                                                       --------       -----           --------       -----
    Consolidated Net Sales                             $522,302       100.0%          $543,701       100.0%
                                                       ========       =====           ========       =====

                                                                       % OF                           % OF
Gross Profit                                                          SALES                          SALES
------------                                                          -----                          -----
SunSource Industrial Services
    Technology Services (5)                            $ 46,102        23.5%          $ 65,101        26.1%
    Expediter                                            65,423        69.2%            67,500        71.2%
    Integrated Supply (7)                                 6,415        27.0%             9,518        26.1%
                                                       --------                       --------
        Industrial Services                             117,940        37.5%           142,119        37.3%
Hillman                                                  62,151        53.1%            48,655        52.4%
Harding                                                  34,146        37.5%            28,347        40.4%
                                                       --------                       --------
    Consolidated Gross Profit
    before inventory write-down
    related to Restructuring Plan                       214,237        41.0%           219,121        40.3%
Inventory write-down
related to restructuring                                 (2,130)       (0.4%)                -
                                                       --------                       --------
    Consolidated Gross Profit                          $212,107        40.6%          $219,121        40.3%
                                                       ========                       ========

EBITA (9)
SunSource Industrial Services
    Technology Services (6)                            $ (7,153)       (3.7%)         $ 10,227         4.1%
    Expediter                                            14,178        15.0%            15,404        16.2%
    Integrated Supply (7)                                 1,117         4.7%             1,616         4.4%
                                                       --------                       --------
        Industrial Services                               8,142         2.6%            27,247         7.2%
Hillman                                                  11,247         9.6%             9,587        10.3%
Harding                                                     739         0.8%             3,447         4.9%
                                                       --------                       --------
    Total operations before
    corporate expenses                                   20,128         3.9%            40,281         7.4%
Corporate expenses, net (8)                              (6,563)       (1.3%)           (5,862)       (1.1%)
                                                       --------                       --------
    Consolidated EBITA before
    Restructuring Plan charges and
    provision for litigation matters                     13,565         2.6%            34,419         6.3%
Restructuring Plan charges                              (10,248)       (2.0%)                -
Litigation charge - divested operations                       -                         (1,600)       (0.3%)
                                                       --------                       --------
    Consolidated EBITA                                   $3,317         0.6%          $ 32,819         6.0%
                                                       ========                       ========
</TABLE>

(1)  Includes sales related to integrated supply contracts cancelled in 1999 and
     1998 of $1,333 for the nine months ended September 30, 1999 and $2,285 and
     $8,295 for the three and nine months ended September 30, 1998,
     respectively.

(2)  Includes sales from businesses acquired in 1998 of $4,822 and $14,643 for
     the three and nine months ended September 30, 1999, respectively and $3,712
     and 5,956 for the three and nine months ended September 30, 1998,
     respectively.

(3)  Includes a reduction in sales and gross profit of $1,252 and $3,437 for the
     three and nine months ended September 30, 1998, respectively to conform to
     current accounting for customer rebates.

(4)  Includes sales of $10,454 and $2,760 for the three months ended September
     30, 1999 and 1998, respectively and $30,819 and $4,218 for the nine months
     ended September 30, 1999 and 1998, respectively related to businesses
     acquired in 1999, 1998 and 1997. Also includes sales from branches closed
     in 1998 of $266 and $1,465 for the three and nine months ended September
     30, 1998, respectively.


<PAGE>

(5)  Includes other nonrecurring charges related to warranty claims, customer
     credits and other inventory adjustments in the Technology Services
     divisions of $3,330 for the nine months ended September 30, 1999. Excluding
     these charges, Technology Services gross profit was $49,432 or 25.2% for
     nine months ended September 30, 1999.

(6)  Includes other nonrecurring charges related to the integration and
     consolidation of the Technology Services divisions of $5,952 for the nine
     months ended September 30, 1999. Excluding these charges, Technology
     Services EBITA was ($1,201) or (0.6%) for the nine months ended September
     30, 1999.

(7)  The three months ended September 30, 1998 includes sales of $5,435, gross
     profit of $1,731 and EBITA of $83 related to Industrial Service's OEM
     Fastener Business, which was sold on July 1, 1999. The nine months ended
     September 30, 1999 and 1998 include sales of $10,954 and $17,687, gross
     profit of $3,658 and $5,712 and EBITA of $500 and $832, respectively
     related to the sold OEM Fastener Business.

(8)  Includes other income of $365 and $327 for the three months ended September
     30, 1999 and 1998, respectively and $383 and $325 for the nine months ended
     September 30, 1999 and 1998, respectively.

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


                                                                   Page 18 of 28






<PAGE>

Three Months Ended September 30, 1999 and 1998

Net sales decreased $14.2 million or 7.7% in the three months ended September
30, 1999 to $169.4 million from $183.6 million in 1998. Sales variances by
business segment are as follows:
                                                       Sales Increase (Decrease)
                                                       -------------------------
                                                           Amount           %
                                                       --------------    -------
                                                       (In thousands)
   SunSource Industrial Services Company
     Technology Services                                  $(18,149)      (22.6)%
     Expediter                                                 (87)       (0.3)%
     Integrated Supply                                      (6,799)      (59.5)%
                                                          --------
        Industrial Services                                (25,035)      (20.3)%
   Hillman                                                   5,419        15.7 %
   Harding                                                   5,407        21.0 %
                                                          --------
        Total Company                                     $(14,209)       (7.7)%
                                                          ========

Technology Services sales decreased $18.2 million or 22.6% in the third quarter
of 1999 to $62.2 million from $80.4 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 $31.5 million from $31.6 million in 1998 as a result of
reduced manpower in certain sales territories. Integrated Supply sales decreased
$6.8 million or 59.5% in the third quarter of 1999 to $4.6 million from $11.4
million in the 1998 period as a result of the sale of the OEM Fastener Business
on July 1, 1999, which contributed sales of $5.4 million in the third quarter of
1998 and contracts canceled after the second quarter of 1998 and in the first
half of 1999 which generated sales of $2.3 million in the third quarter of 1998,
offset by growth in the Mexican Integrated Supply business of $1.4 million.
Excluding the sold OEM Fastener Business and terminated contracts, Integrated
Supply sales increased 24.9% in the comparison period.

Hillman's sales increased $5.4 million or 15.7% in the third quarter of 1999 to
$39.9 million from $34.5 million in the 1998 comparison period as a result of
sales from newly acquired businesses of $1.1 million and growth from new
accounts and expansion of new and existing product lines of $4.3 million.

Harding's sales increased $5.4 million or 21.0% in the third quarter of 1999 to
$31.1 million from $25.7 million in the 1998 comparison period as a result of an
increase of $7.6 million from newly acquired retail glass shops and an increase
in wholesale and other product line sales of $0.2 million, offset by decreases
in retail and contract sales of $1.7 million as a result of competitive pricing
pressures and reduced sales of $0.7 million as a result of the discontinuation
of certain low-margin product lines.

The Company's sales backlog on a consolidated basis was $59.0 million as of
September 30, 1999, compared with $66.4 million at December 31, 1998, and $65.3
million as of September 30, 1998, a decrease of 11.1% and 9.6%, respectively.

The Company's consolidated gross margin was 41.6% in the third quarter of 1999
compared with 41.3% in the third quarter of 1998. SunSource Industrial Services
Company's gross margin was 37.8% in the third quarter of 1999 compared with
38.2% in the third quarter of 1998, a decrease of 0.4%. Technology Services'
gross margin decreased 3.7% in the third quarter of 1999 as a result of the
decrease in sales levels in relation to the fixed cost component of cost of
goods sold for service and repair facilities and sales mix. The Expediter
segment's gross margin declined 2.1% in the third quarter of 1999 as a result of
increased packaging cost absorption in the 1999 period, a change in sales mix
and competitive pricing

                                                                   Page 19 of 28

<PAGE>

pressures. The Integrated Supply segment's gross margin decreased 7.1% in the
third quarter of 1999 resulting from the sale of the OEM Fastener Business which
carried higher margins than the retained Integrated Supply business and sales
mix. Hillman's gross margin increased 0.9% in the third quarter comparison
period as a result of substantial increases in sales of keys to major U.S.
hardware chains and home centers carrying higher margins than hardware and
related products. Harding's gross margin decreased 2.0% in the comparison period
as a result of continued erosion in contract sales and pricing pressure from
insurance companies in the auto glass sector.

The Company's selling, general and administrative ("S,G&A") expenses increased
by $1.9 million to $63.8 million in the third quarter of 1999 from $61.9 million
in third quarter of 1998. Selling expenses increased $0.5 million, primarily as
a result of the acquisitions at Hillman and Harding, offset by decreases in most
other businesses as a result of cost savings associated with the Restructuring
Plan and reduced sales levels. Warehouse and delivery expenses increased $1.3
million as a result of integration costs for the 1998 acquisitions at Hillman
and facility reorganization costs at Technology Services offset by decreases
resulting from cost savings associated with the Restructuring Plan. The increase
in general and administrative expenses of $0.1 million is attributable to the
integration of the newly acquired businesses at Harding and Hillman offset by
cost savings associated with the Restructuring Plan.

S,G&A expenses as a percentage of sales compared with the third quarter of 1998
was as follows:

                                            Three Months ended September 30,
                                            --------------------------------
                                                1999             1998
                                                ----             ----
   Selling Expenses                             18.5%            16.8%
   Warehouse and Delivery Expenses               7.8%             6.4%
   General and Administrative Expenses          11.4%            10.5%
                                                ----             ----
                  Total S,G&A Expenses          37.7%            33.7%
                                                ====             ====

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 was $6.0 million for the three
months ended September 30, 1999, compared with $11.0 million for the same
prior-year period. The 1998 period includes a $1.6 million charge for
outstanding litigation matters related to divested businesses.

The Company's consolidated operating profit margin (EBITA, as a percentage of
sales) after corporate expenses declined to 3.5% in the third quarter of 1999
compared with 6.0% in the same prior-year quarter. SunSource Industrial Services
Company's operating profit margin decreased to 2.8% in the third quarter of 1999
from 7.2% 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 remained constant in
the third quarter of 1999 and 1998 at 10.8%. Harding's operating profit margin
declined in the third quarter of 1999 to 1.4% from 7.3% in same quarter of 1998
as a result of increased selling and administrative expenses related to
integration costs for newly acquired businesses.

Depreciation expense decreased $0.1 million to $1.2 million in the third quarter
of 1999 from $1.3 million in same quarter of 1998 as a result of an overall
decrease in spending at most segments.

                                                                   Page 20 of 28


<PAGE>

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

The Company recorded a nonrecurring charge of $1.6 million for outstanding
litigation matters related to divested businesses during the three months ended
September 30, 1998.

Interest expense, net increased $0.7 million in the third quarter of 1999 to
$2.5 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 per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the three months ended September 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 on the Trust
Preferred Securities.

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

   Nine Months Ended September 30, 1999 and 1998

Net sales decreased $21.4 million or 3.9% in the nine months ended September 30,
1999 to $522.3 million from $543.7 million in 1998. Sales variances by business
segment are as follows:

                                                       Sales Increase (Decrease)
                                                       -------------------------
                                                          Amount            %
                                                       ------------     --------
                                                      (In thousands)
    SunSource Industrial Services Company
         Technology Services                             $(53,537)      (21.5)%
         Expediter                                           (252)       (0.3)%
         Integrated Supply                                (12,720)      (34.9)%
                                                         --------
            Industrial Services                           (66,509)      (17.5)%
    Hillman                                                24,309        26.2 %
    Harding                                                20,801        29.6 %
                                                         --------
            Total Company                                $(21,399)       (3.9)%
                                                         ========

Technology Services sales decreased $53.5 million or 21.5% in the first nine
months of 1999 to $196.0 million from $249.5 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 $94.6 million from $94.8 million in 1998 as a result of
reduced manpower in certain sales territories. Integrated Supply sales decreased
$12.7 million or 34.9% in the first nine months of 1999 to $23.8 million from
$36.5 million in the 1998 period as a result of the sale of the OEM Fastener
Business on July 1, 1999 which contributed sales of $11.0 million in the first
nine months of 1999 versus $17.7 million in the prior-year period and contracts
canceled after the second quarter of 1998 and in the first half of 1999 which
generated sales of $1.3 million in the first nine months of 1999 versus $8.3
million in the first

                                                                   Page 21 of 28

<PAGE>

nine months of 1998, offset by growth in the Mexican Integrated Supply business
of $1.6 million. Excluding terminated contracts and sales from the sold OEM
Fastener Business, Integrated Supply sales increased 9.3% in the comparison
period.

Hillman's sales increased $24.3 million or 26.2% in the first nine months of
1999 to $117.1 million from $92.8 million in the 1998 comparison period as a
result of sales from newly acquired businesses of $8.9 million, and $15.4
million in growth from new accounts and expansion of new and existing product
lines.

Harding's sales increased $20.8 million or 29.6% in the first nine months of
1999 to $91.0 million from $70.2 million in the 1998 comparison period as a
result of an increase of $21.6 million from newly acquired retail glass shops
and an increase in retail, wholesale, contract and other product line sales of
$1.6 million, offset by the discontinuation of certain low-margin product lines
resulting in reduced sales of $2.4 million.

The Company's consolidated gross margin was 41.7% in the first nine months of
1999 (before the inventory write-down of $2.1 million related to the
Restructuring Plan and non-recurring charges of $3.3 million related to
integration of the Technology Services divisions) compared with 40.3% in the
first nine months of 1998. SunSource Industrial Services Company's gross margin
before the aforementioned charges was 38.6% in the first nine months of 1999
compared with 37.3% in the first nine months of 1998, an increase of 1.3%.
Technology Services' gross margin before the aforementioned charges decreased
0.9% in the first nine months of 1999 as a result of the decrease in sales
levels in relation to the fixed cost component of cost of goods sold for service
and repair facilities and sales mix. The Expediter segment's gross margin
declined 2.0% in the first nine months 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 segment's gross margin
increased 0.9% in the first nine months of 1999 resulting from sales mix offset
by the sale of the OEM Fastener Business which carried higher margins than the
retained Integrated Supply business. Hillman's gross margin increased 0.7% in
the nine-month comparison period as a result of substantial increases in sales
of keys to major U.S. hardware chains and home centers carrying higher margins
than hardware and related products. Harding's gross margin decreased 2.9% 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 increased by $13.4
million to $194.5 million in the first nine months of 1999 from $181.1 million
in first nine months of 1998. Selling expenses increased $3.7 million, primarily
as a result of the acquisitions at Hillman and Harding, offset by decreases in
all other businesses as a result of cost savings associated with the
Restructuring Plan and reduced sales levels. Warehouse and delivery expenses
increased $5.7 million as a result of integration costs for the 1998
acquisitions at Hillman and facility reorganization costs at Technology Services
offset slightly by decreases from cost savings associated with the Restructuring
Plan. The increase in general and administrative expenses of $4.0 million is
attributable to the integration of the newly acquired businesses at Harding and
Hillman and increased facilities costs in the Technology Services division
offset by cost savings associated with the Restructuring Plan.

                                                                   Page 22 of 28

<PAGE>

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

                                             Nine Months ended September 30,
                                             -------------------------------
                                                1999             1998
                                                ----             ----
   Selling Expenses                             18.1%            16.7%
   Warehouse and Delivery Expenses               7.4%             6.1%
   General and Administrative Expenses          11.7%            10.5%
                                                ----             ----
            Total S,G&A Expenses                37.2%            33.3%
                                                ====             ====

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 was $19.5 million for the nine months ended September 30,
1999 after corporate expenses and before Restructuring Plan charges of $10.2
million, and the aforementioned non-recurring charges of $6.0 million, compared
with $32.8 million for the same prior-year period. The 1998 period includes a
nonrecurring charge of $1.6 million for outstanding litigation matters related
to divested businesses.

The Company's consolidated operating profit margin (EBITA, as a percentage of
sales) after corporate expenses and before the aforementioned non-recurring
charges declined to 3.7% in the first nine months of 1999 compared with 6.0% in
the same prior-year period. SunSource Industrial Services Company's operating
profit margin excluding these charges decreased to 4.5% in the first nine months
of 1999 from 7.2% 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 Plan charges
decreased in the first nine months of 1999 to 9.6% from 10.3% 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
nine months of 1999 to 0.8% from 4.9% 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 $4.2 million in the first nine
months of 1999 from $3.5 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 $0.4 million to $2.1 million in the first nine
months of 1999 as a result of acquisition activity at Hillman and Harding.

The Company recorded a nonrecurring charge of $1.6 million for outstanding
litigation matters related to divested businesses for the nine months ended
September 30, 1998.

Interest expense, net increased $1.8 million in the first nine months of 1999 to
$6.8 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

                                                                   Page 23 of 28

<PAGE>

face amount of $105.4 million, or $12.2 million per annum in the aggregate. The
Trust distributes an equivalent amount to the holders of the Trust Preferred
Securities. For the nine months ended September 30, 1999 and 1998, the Company
paid $9.2 million in interest on the Junior Subordinated Debentures, equivalent
to the amounts distributed by the Trust on the Trust Preferred Securities.

Liquidity and Capital Resources

Earnings before interest, taxes, depreciation and amortization ("EBITDA")was
$7.1 million in the third quarter of 1999 compared with $12.2 million in the
same quarter of 1998 and $23.7 million in the first nine months of 1999 compared
with $36.4 million in 1998, excluding Restructuring Plan and other non-recurring
charges aggregating $16.2 million for the nine months ended September 30, 1999.
The 1998 period includes a nonrecurring charge of $1.6 million for outstanding
litigation matters related to divested businesses. The Company's net interest
coverage ratio for the nine months ended September 30, 1999, declined to 1.09X
(earnings before interest, distributions on Trust Preferred Securities and
income taxes, excluding the aforementioned charges, over net interest expense
and distributions on Trust Preferred Securities), from 2.30X in the 1998
comparison period as a result of reduced earnings and increased interest
expense.

The Company's cash position of $3.9 million as of September 30, 1999, increased
$1.1 million from the balance at December 31, 1998. Cash was provided during
this period primarily from net borrowings under the bank revolver ($28.5
million) proceeds from sale of the OEM Fastener Business ($9.2 million))and
proceeds from the sale of property and equipment($5.4 million). Cash was used
during this period predominantly for working capital investments in operations
($16.4 million), acquisitions ($15.5 million), cash distributions to investors
($1.4 million), capital expenditures ($5.2 million), repayments under other
credit facilities ($0.8 million), purchase of treasury stock ($0.3 million),
investment in life insurance ($1.3 million) and other items, net ($1.1 million).

The Company's working capital position of $138.8 million at September 30, 1999,
represents an increase of $17.2 million from the December 31, 1998 level of
$121.6 million and an increase of $1.0 million from the September 30, 1998 level
of $137.8 million. However, the Company's working capital position has decreased
$9.6 million from the June 30, 1999 level of $148.4 million. The Company's
current ratio increased to 2.61x at September 30, 1999 from 2.25x at December
31, 1998, as a result of decreased accounts payable. The current ratio increased
from the June 30, 1999 level of 2.59x and the September 30, 1998 level of 2.52x.

As of September 30, 1999, the Company had $21.2 million available under its
credit facilities. The Company had $124.2 million of outstanding long-term debt
at September 30, 1999, consisting of a $60.0 million Senior Note currently at
7.91%, bank borrowings totaling $63.5 million at an effective interest rate of
8.14%, 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 September 30, 1999.

As of September 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 49.5% compared with 52.4% at June 30,
1999, 41.5% at December 31, 1998 and 44.3% at September 30, 1998. The Company's
consolidated capitalization (including dividends payable) as of September 30,
1999, was $250.8 million compared to $232.8 million at December 31, 1998 and
$243.1 million as of September 30, 1998.

                                                                   Page 24 of 28

<PAGE>

The Company anticipates spending $6.0 million for capital expenditures in 1999,
primarily for warehouse improvements, machinery and equipment and computer
hardware and software of which $5.1 million was spent during the first nine
months of 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 $19.0 million as of September
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.

The Company intends to refinance its existing senior credit facilities
consisting of the $60 million Senior Note and $90 million bank revolver by
year-end. The refinancing is expected to enhance the Company's financial
capacity and flexibility. The Company currently has a financing commitment in
the aggregate amount of $155 million from a leading financial institution to
complete the refinancing.

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.

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
   complete.

o  Technology Services' conversion of all its operating units to the third-party
   purchased computer system is 100% complete.

Hillman

Hillman has completed remediation (including full testing) on 100% of its
proprietary software programs. Hillman's critical purchased software
applications and hardware are certified by the vendors to be compliant.

Harding

Harding's installation of the Y2K compliant version of its critical purchased
point-of-sale software application and its related hardware operating system has
been completed in October. 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. The phone
system at all of Harding's 125 locations and general offices were upgraded to
Y2K compliant versions during the third quarter.

   Costs to Address Year 2000 Issue

The Company's Y2K costs incurred through September 1999 are approximately $1.5
million, of which 80% is for remediation of internally designed software
applications. Y2K costs of $0.2 million are expected to be incurred during the

                                                                   Page 25 of 28

<PAGE>

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 90% 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.

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.

Forward Looking Statements

Certain disclosures related to Year 2000, acquisitions, the Restructuring Plan,
capital expenditures and the intended refinancing of existing credit facilities
contained in this report involve risks and uncertainties and may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect management's current
views and are based upon certain assumptions. Actual results could differ
materially from those currently anticipated as a result of a number of factors,
including the risks and uncertainties discussed under captions "Risk Factors" -
Restructuring and Risks associated with Acquisitions set forth in Item 1 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 as
filed with the Securities and Exchange Commission. Given these uncertainties,
current or prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. Furthermore, the Company disclaims any
obligation or intent to update any such forward-looking statement to reflect
future events or developments.

                                                                   Page 26 of 28

<PAGE>

                                     PART II
                                OTHER INFORMATION

Items 2 - 6 -- None

Item 1 - Legal proceedings

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 $21.0 million.

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

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

                                                                   Page 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: November 15, 1999


                                                                   Page 28 of 28