<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 1998

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     
      ----         ----     

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.    X  
                                           ---

The aggregate market value of the Common Shares held by non-affiliates of the
registrant on March 25, 1999 was $75,337,000. On March 25, 1999 there were
6,740,208 Common Shares outstanding.

Documents Incorporated by Reference: Portions of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 27, 1999 are incorporated by
reference in Part III of this Form 10-K.



                                        1

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                                     PART I


   
Item I - Business
    

General

SunSource Inc., a Delaware corporation (the "Company" or "SunSource"), is one of
the largest providers of value-added services and products to retail and
industrial markets in North America. The Company operates its three businesses
through indirect wholly-owned subsidiary corporations which are SunSource
Industrial Services Company Inc. ("SunSource Industrial Services Company" or
"Industrial Services"), The Hillman Group, Inc. ("Hillman") and Harding Glass,
Inc. ("Harding"). These operating units represent businesses within the
distribution industry which are characterized by a potential for value-added
services, economies of scale and opportunities for further consolidation, as
follows:

Industrial Services. SunSource Industrial Services Company, with sales of $492
million in 1998, provides a broad range of products and services throughout
North America, operating in three business segments which are Technology
Services, Expediter and Integrated Supply. The Company believes that the
Technology Services segment is a leading provider of systems and parts and
engineering services for hydraulic, pneumatic, electronic and related systems to
major industrial concerns, as well as small and medium-size businesses.
Technology Services provides services, including engineering and design of both
products and processes and the assembly and repair of complex systems, which
enable its customers to outsource engineering and other functions which they
previously performed in-house. 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. The Expediter and Integrated Supply segments enable their
customers to reduce inventory investment and the associated expenses of
purchasing, receiving, disbursing and accounting for parts and materials.

Hardware Merchandising. Hillman, with sales of $126 million in 1998, provides
small hardware items and merchandising services to retail hardware outlets
through a nationwide sales and service organization. Hillman offers a full range
of fasteners, letters, numbers, signs, keys, rope and chain accessories and many
other inexpensive specialty goods, which are "must-have" items for hardware
retailers that cannot be managed economically by the retailer's own employees
because of the large number of items and their low prices.

Glass Merchandising. Harding, with sales of $95 million in 1998, operates one of
the largest networks of full service retail glass shops in the United States
with approximately 125 retail locations, including 1999 acquisitions to-date.
Harding sells and installs automotive glass and also sells, fabricates and
installs flat glass. Customers include individual retail consumers, insurance
companies and commercial accounts.




                                        2

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The Company's current organization consists of a corporate headquarters and the
three businesses, as follows:
<TABLE>
<CAPTION>
                                               Principal                       Year Acquired/
                                               Location                          Organized   
                                               --------                          ---------   
SunSource Headquarters                         Philadelphia, PA                    1975
<S>                                                                                <C> 
SunSource Industrial
 Services Company, Inc.                        Chicago, IL                         1996

  Technology Services Companies
   - SunSource Technology Services Inc.        Chicago, IL                          (1)
   - Hydra Power de Mexico, S.A. de C.V.       Tlalnepantla, C.P., Mexico          1992

  Expediter Companies
   - Kar Products Inc. ("Kar")                 Chicago, IL                         1977
   - A&H Bolt & Nut Co., Ltd. ("A&H")          Windsor, Ontario                    1989

  Integrated Supply Companies
   - SunSource Inventory Management
      Company, Inc. ("SIMCO")                  Lenexa, KS                          1992/1981
   - SIMCO de Mexico, S.A. de C.V.             Mexico City, Mexico                 1992

Hardware Merchandising
   - The Hillman Group, Inc.                   Cincinnati, OH                      1982

Glass Merchandising
   - Harding Glass, Inc.                       Kansas City, MO                     1980
</TABLE>

(1) Consists of various companies acquired from 1976 through 1991.

Industry Overview

The Company operates in large, fragmented industries characterized by multiple
channels of supply. These channels of supply are currently experiencing
significant changes driven by the higher quality and widespread availability of
management information systems. With better information, manufacturers,
distributors and customers are all able to track their expenses, investments and
returns on investments more accurately. The distribution industry is driven by
the following trends which are rendering the traditional producer-controlled
channels obsolete and subject to being replaced by new channels organized around
customer requirements and value-added services.

   (i) Manufacturers are increasing their reliance on distributors in order to
enhance their profitability and improve their returns on capital.

   (ii) Customers are increasing their reliance on value-added distributors as
their contacts with the manufacturers diminish or cease altogether.

  (iii) Customers are outsourcing non-core functions to high quality service
providers.

   (iv) Channels of distribution are in the process of consolidation.

    (v) Managerial skills required for success in industrial distribution are
changing dramatically.

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SunSource, through its applications engineers and technical support personnel,
provides customized solutions to complex problems encountered by its customers.
The Company believes that its Industrial Services business differentiates itself
from other industrial distributors by providing superior technical and
problem-solving capabilities in addition to an extensive product offering and
broad array of related services, such as engineering design and integrated
supply arrangements. In addition, the Company operates certain businesses
focused on the retail sector, delivering merchandising systems, point-of-sale
displays, product support through a field service force, national account sales
and services and installation (Hillman and Harding).

Risk Factors

         Restructuring

In December 1996, the Company announced a three-year restructuring plan to
integrate and consolidate the sales, distribution and administrative operations
of its five domestic Technology Services divisions. The Company expects the
restructuring plan to result in the elimination of approximately 175 employees
in Technology Services and produce certain net annualized cost savings of
approximately $5.0 million per year upon its completion. Technology Services
consists of hydraulic and pneumatic distributors that were acquired by the
Company between 1976 and 1991. Until the restructuring, each of the Technology
Services divisions was operated on a decentralized basis.

The restructuring plan includes the consolidation of all financial, information
system and other administrative responsibilities for Technology Services in one
location, which is expected to be completed in 1999. The restructuring of the
sales organization is expected to be completed by mid-1999. Consolidation of the
distribution network is partially complete and scheduled for full completion
early in 2000, shortly beyond the projected three-year time frame of the plan,
due to the need for additional logistical studies of the geographic placement of
new distribution facilities. The failure to complete the restructuring or
successfully integrate the Technology Services divisions would have an adverse
impact on the Company's ability to fully achieve the net cost savings indicated
above. There can be no assurance that the Company will be able to complete the
plan effectively or on a timely basis.

         Changing Industry Environment

The industrial distribution industry is undergoing significant change.
Historically, industrial distributors have served as suppliers of industrial
products and as extensions of manufacturers' sales forces, selling products
through the distribution channels to original equipment manufacturers,
retailers, end users and other customers. In recent years, both manufacturers
and customers have been increasingly relying on suppliers such as the Company to
reduce purchasing costs and provide a broad range of value-added services,
including inventory management programs, integrated supply arrangements,
electronic ordering capabilities, engineering design and technical support
services. In addition, customers' desire to consolidate their supplier
relationships has required the suppliers to achieve purchasing efficiencies,
expand their geographic coverage and increase product and service offerings
through acquisitions of other distributors. These changes in the industrial
distribution business are causing the industry to become more competitive. There
can be no assurance that the Company will be able to compete effectively in or
adapt to the changing industry environment.

                                        4

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         Risks Associated with Acquisitions

An element of the Company's future growth strategy is to pursue selected
acquisitions that either expand or complement its businesses in new or existing
markets. However, there can be no assurance that the Company will be able to
identify or acquire acceptable acquisition candidates on terms favorable to the
Company and in a timely manner to the extent necessary to fulfill the Company's
growth strategy. Future acquisitions may be financed through the issuance of
Common Shares, which may be dilutive to the Company's stockholders, or through
the incurrence of additional indebtedness. Furthermore, there can be no
assurance that competition for acquisition candidates will not escalate, thereby
increasing the costs of acquisitions. The process of integrating acquired
businesses into the Company's operations may result in unforeseen difficulties
and may require a disproportionate amount of resources and management's
attention, and there can be no assurance that the Company will be able to
successfully integrate acquired businesses into its operations. The failure to
complete or successfully integrate prospective acquisitions may have an adverse
impact on the Company's growth strategy.

The Company is not currently a party to any agreement or understanding regarding
a material acquisition but is pursuing discussions with a number of prospective
sellers of businesses.

         Competition

The distribution industry is highly competitive, with the principal methods of
competition being price, quality of service, quality of products, product
availability, credit terms and the provision of value-added services, such as
engineering design, integrated supply and inventory management. The Company
encounters competition from a large number of regional and local distributors
and from several national distributors, some of which have greater financial
resources than the Company and offer a greater variety of products.

         Seasonality and Industry Cycles

The Company has in the past experienced seasonal fluctuations in sales and
operating results from quarter to quarter. Typically, the first calendar quarter
is the weakest due to the effect of weather on construction activity which
produces a slowdown of sales of material and equipment in the construction
market. Fluctuations in the Company's quarterly operating results could result
in significant volatility in, and otherwise adversely affect, the market price
of the Common Shares.

Some of the principal markets for the products and services offered by the
Company are subject to cyclical fluctuations that generally affect demand for
industrial, commercial and consumer durable goods. Cyclical fluctuations can
affect a number of factors such as pricing, availability and demand for the
Company's products, growth rates in the markets served by the Company's
customers, the delivery and performance of vendors, and the availability of
suitable acquisition candidates. Changes in general economic conditions could
have a material adverse effect on the Company's business, results of operations
and financial condition.



                                        5

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         Dependence on Information Systems; Year 2000 Issue

The Company believes that its proprietary computer software programs are an
integral part of its business and growth strategies. The Company depends on its
information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis, to maintain cost-effective operations and to provide
superior service to its customers. There can be no assurance that the
precautions which the Company has taken against certain events that could
disrupt the operations of its information systems will prevent the occurrence of
such a disruption. Any such disruption could have a material adverse effect on
the Company's business and results of operations.

The Company faces the "Year 2000" issue. The Year 2000 issue is the result of
computer programs being written using two digits (rather than four) to define
the applicable year, resulting in incorrect calculations for the year 2000 and
beyond. The Company's issues relate not only to its own systems being Year 2000
compliant, but also the systems of its suppliers and customers. The Company
presently believes that, with modifications to existing software and converting
to new software, the Year 2000 issue will not pose significant operational
problems for its computer systems as so modified or converted. However, if such
modifications and conversions are not completed in a timely manner, or if the
Company's suppliers and customers fail to address the problem, the Year 2000
issue could have a material adverse effect on the operations of the Company.
Refer to Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information regarding the Year 2000
issue.

Segment Information

Refer to Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for Segment financial data for the three years ended
December 31, 1998.

Industrial Services (Technology Services, Expediter and Integrated Supply)

SunSource Industrial Services Company provides a single nationwide source for a
broad array of industrial products and supporting technical services. SunSource
Industrial Services Company operates in three segments, comprised of Technology
Services, Expediter and Integrated Supply. The common strategy of these segments
is to capitalize on the increasing awareness of many industrial companies of
their inefficiencies in performing activities that are ancillary to their
principal business. These segments include repairing equipment, running
preventive maintenance programs, maintaining in-house engineering capabilities
and inventory management. In most instances, the only alternative available to
many industrial companies for such services has been small, local firms, many of
which lack the resources necessary to assure the quality of services that they
provide. SunSource Industrial Services Company's customers are located
throughout the United States, Mexico and Canada and include major industrial
concerns, as well as small and medium-size businesses.

                                        6

<PAGE>

         Technology Services

Technology Services, with sales of approximately $322 million in 1998, offers a
full range of technology-based products and services to its customers. Its
product lines include hydraulic, pneumatic, electronic and filtration parts and
equipment. Services include engineering design, equipment repair and product
upgrades.

Technology Services seeks to build strong relationships with its customers by
providing technological/problem-solving capabilities along with quality
products. Technology Services relies on its engineering and fabricating
capabilities to provide customized solutions for specific applications requiring
product engineering, assembly or fabrication. To help a customer better
understand how it is performing relative to best industry practices, Technology
Services can perform a technology review of the customer's facilities covering
areas such as electronic systems, hydraulics, pneumatics, repair activities and
inventory management. Technology Services can demonstrate to its customers those
areas in which they meet best industry practices and, when they do not, offer
detailed, cost-efficient steps to improve their performance to meet those
standards. Technology Services also conducts multiple-day training programs to
help customers stay current with evolving technologies relevant to their
operations.

Technology Services has benefitted from the trend for manufacturers to move
towards increased standardization of products. The result is that many such
products have to be modified and used in combination with other components in
order to meet customers' performance requirements. Technology Services
recognized this trend as an opportunity to set up a formal system to customize
standardized products to meet the more specialized needs of its customers.
Management believes that there is a growing market for such customized solutions
among medium and smaller original equipment manufacturers ("OEM") who do not
have the capabilities to develop such products.

Since 1991, Technology Services has opened 26 repair centers throughout the
United States to provide customers with convenient and reliable sources for the
repair of worn-out hydraulic power equipment. Repair centers have been useful in
gaining market share as they have helped Technology Services achieve an expanded
relationship with many of its customers. They also provide Technology Services
with an opportunity to win new customers because many of the local distributors
do not have the resources to provide comparable repair services. Technology
Services plans to continue its successful program of establishing service
centers for the repair and overhaul of hydraulic equipment in major industrial
markets around the country.

The six distribution companies which today comprise Technology Services were
acquired by the Company between 1976 and 1991. The acquired companies typically
enjoyed profitable market niches created either through exclusive territories
granted by their vendors or the unique services they offered. Until recently,
Technology Services operated each of its divisions on a decentralized basis with
each division having its own president and vice president of sales. In December
1996, the Company announced a three-year restructuring plan to integrate and
consolidate the five domestic Technology Services divisions. The integration of
the finance, information systems and administrative functions of Technology
Services is expected to be completed in 1999.

                                        7

<PAGE>

The restructuring of the sales organization is expected to be completed by mid-
1999 after which the sales force will focus on account management and expanded
customer relationships in a defined geography. The outside sales representatives
will be supported by technical product specialists to assist in the delivery and
application of product. Technology Services is also in the process of
consolidating 36 inventory stocking locations into fewer than ten facilities
which the Company believes will result in significantly lower operating costs
and better product availability. This process is partially complete and is
scheduled for full completion early in 2000. Centralized purchasing and
inventory management is expected to result in improved fill rates for customers
while at the same time reducing Technology Services' inventory investment,
leveraging its purchasing power with many suppliers and reducing suppliers'
operating costs.

Products and Suppliers. Technology Services believes that it carries the most
diverse selection of fluid power and related technical products of any
distributor in the United States, totaling an estimated 100,000 items in five
major product categories. Typically, hydraulic systems are employed for dealing
with heavy loads in applications such as mining, manufacturing, construction or
agriculture. An example of a hydraulic application is the system that controls
the positioning of the scraping blade of a road grader - an integrated system of
motors, pumps, valves, tubing, sensors and electronic controls. Pneumatic
systems are similar to hydraulic systems except that air or some other gas is
substituted for hydraulic fluid. Pneumatic systems are preferred for lighter
weight applications such as light manufacturing and packaging lines.

Technology Services has a broad supply base which includes almost all major
manufacturers of fluid power and related technical products in the United
States. Technology Services' top ten suppliers account for less than 30% of its
1998 sales. Because of the fragmented nature of the industry, manufacturers of
this type of equipment historically have awarded their franchises on a limited
geographical basis. Technology Services has secured exclusive franchises within
certain geographic areas from significant suppliers such as Vickers, Hydroline,
Trabon, Versa, SMC, Denison, Norgren, Mosier and Hansen. Two of Technology
Services' larger suppliers are Sauer-Sunstrand and Commercial, whose products
are distributed in most of Technology Services' territories.

In recent years there has been considerable consolidation among suppliers, a
trend which management believes will continue and benefit Technology Services.
In addition, Technology Services seeks to provide valuable market and product
information that enhances its relationships with its key suppliers by helping
them improve their product offering in response to changing market demands.

Markets and Customers. Technology Services currently serves over 35,000
customers, the top ten of which accounted for approximately 11% of its 1998
sales. Approximately 60% of sales are to OEM customers who incorporate the
equipment or system purchased from Technology Services into their final
products. The remaining 40% of sales are to maintenance, repair and operation
("MRO") customers who use Technology Services products as part of their
production process.

Within the MRO and OEM markets, Technology Services sells to construction and
mining equipment manufacturers, industrial wholesale distributors, metalworking
equipment manufacturers, farm and garden equipment manufacturers, industrial
specialized machinery manufacturers and automobile and auto parts manufacturers.

                                        8

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Sales and Marketing. Technology Services markets its products nationwide,
principally through a network of outside sales representatives supported by
customer service representatives and a telemarketing operation. In order to
become more responsive to the increasing demands of customers, Technology
Services has devoted substantial resources to make its sales force more
specialized both in terms of technical training and industry knowledge.

Technology Services employs approximately 315 outside sales representatives.
Each customer has a primary sales representative who might be assisted by
technology specialists or industry specialists. Technology specialists are
available in the fields of hydraulics, pneumatics, mobile equipment,
lubrication, filtration, automation and other specialties while industry
specialists bring particular expertise in industries such as pulp and paper,
construction equipment, injection molding or heavy metal working. Technology
Services is in the process of adding additional industry specialists to its
sales organization.

To support the outside sales representatives, Technology Services employs
approximately 235 customer service representatives who collectively function to
take orders from customers on the telephone, answer questions and solve
problems. Technology Services also employs approximately 20 people in its
telemarketing group which is responsible for customers with sales potential not
large enough to justify the cost of service by an outside sales representative.
Technology Services has established an electronic data interchange ("EDI")
capability for use with selected customers and vendors and is in the early
stages of establishing a presence on the Internet.

Competition. The great majority of Technology Services' competitors are
relatively small companies with sales of less than $10 million from one or two
facilities. Many of these companies offer considerable depth in certain product
lines, together with related technical support. Technology Services competes
with these companies on price, the strength of its product offering and an
extensive range of ancillary technical services. The largest national competitor
is Motion Industries which competes on the basis of price and product
availability. Another national competitor is Applied Industrial Technologies,
Inc., formerly known as Bearings, Inc.

         Expediter (Kar and A&H)

The Expediter segment of SunSource Industrial Services Company provides
inventory management services to small and medium-size accounts. The Expediter
segment, with sales of $125 million in 1998, offers personalized, small parts
inventory management service to the low volume customer. The Expediter sales
force relieves the customer of the inconvenience and expense of purchasing
numerous, small, inexpensive maintenance parts and provides assurance against
the expense and inconvenience of stock outs. Sales in this market segment tend
to be of relatively small dollar value items with limited technology content but
high service demands. The Company believes that its Expediter business has a
competitive advantage in this market segment due to its large sales force, a
broad inventory of parts for diverse applications, a reputation for high-quality
products, a responsive physical distribution system and a computerized material
management system which permits 98% of all orders to be shipped within 24 hours.
In 1998, the Expediter segment sold more than 25,000 products to over 50,000
customers in the United States and Canada.

                                        9

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Products and Suppliers. The Expediter segment packages and inventories over
25,000 items in nine major product categories. The largest category is
fasteners, which accounted for approximately 30% of 1998 Expediter sales. The
Expediter segment purchases the parts it needs from over 600 regular vendors,
none of which account for greater than 2% of this segment's annual purchases.
This segment has long-standing relationships with a majority of its suppliers
and continually seeks to upgrade vendor performance by measuring it and
educating vendors on the Expediter segment's quality and service standards. A
majority of the products sold by the Expediter segment are packaged by vendors
under the private brand labels of Kar Products, Inc. and A&H Bolt and Nut Co.
(as "The Fastener Centre").

To maintain its reputation for leading product lines and "one-stop shopping,"
the Expediter segment emphasizes new product innovation and is an active
participant in trade shows and trade publications. The Expediter segment works
with its vendors to introduce more than 500 new products per year.

Markets and Customers. Customers of the Expediter segment tend to be smaller
companies that make frequent small purchases. A typical expediter customer
purchases less than $10,000 per year from this segment and includes truck fleet
operators, construction and mining operations, industrial plants, paper plants,
welding shops, hospitals, schools, government facilities and automobile
dealerships.

Sales and Marketing. The Expediter sales representatives serve their customers
by providing merchandising systems, helping control inventory and physically
stocking and organizing products. Items typically include nuts, bolts, small
cutting tools, lubricants and related items. The service provided to the
customer is to insure that all of these small consumables remain in stock,
thereby enabling the customer to avoid the expense of maintaining inventories,
placing purchase orders and receiving materials. Even more importantly, the
customer's highly trained technicians do not have to waste time and money
tracking down missing parts of nominal dollar value. Larger accounts are offered
programmed inventory maintenance service ("PIMS") to ensure that inventory is
maintained at appropriate levels. PIMS sales account for approximately 20% of
total Expediter sales. The Expediter segment also offers customized product
literature which is targeted to selected niche markets.

The Expediter sales force consists of approximately 750 sales representatives,
each of whom sells the entire product line and serves an average of 65 customer
accounts. Ten to twelve sales representatives in a geographical area report to a
district manager, who in turn reports to one of ten regional vice presidents.
Sales management support includes training on new product applications and
technical information to assist customers in solving operational and maintenance
problems. The marketing department provides support in the form of product line
management, promotional programs, catalogs and related materials. Logistics
support is provided by seven strategically located distribution centers and a
computerized material management system which assures fast, accurate and
complete shipments.



                                       10

<PAGE>

Competition. The Expediter segment competes primarily with other national
expediters that similarly provide a high level of service, and to a lesser
extent with more narrowly focused regional or small local distributors competing
mainly on the basis of low price with minimal service. The four largest national
expediters are Premier Industrial, Bowman Products, Curtis Industries and Lawson
Products, none of which has a significant market share. SunSource Industrial
Service Company's Expediter business serves all segments of the highly
fragmented MRO market and has less than 1% market share. The Company believes
that its Expediter segment can capture additional market share by increasing the
number of its qualified sales representatives and has a program in place to
improve the quality and training of its sales representatives.

         Integrated Supply (SIMCO and SIMCO de Mexico)

The Integrated Supply segment of SunSource Industrial Services Company, with
sales of $46 million in 1998, is focused on major industrial manufacturing
customers. In some instances, Integrated Supply will take over complete
responsibility for a customer's purchases of maintenance, repair and operating
supplies. In those cases, Integrated Supply places the purchase orders, receives
the material and dispenses it to the customer's employees from the customer's
tool cribs. The advantage to the customer is substantial reduction in the total
cost of procuring and handling the thousands of items which are routinely used
by a large facility, while at the same time improving the availability of these
materials.

Products and Suppliers. The products and suppliers used by the Integrated Supply
segment vary considerably depending on the nature of the customer's
manufacturing activity. Integrated Supply seeks to maximize its purchasing power
by aggregating purchases of common items used by multiple customers and also by
purchasing through the other SunSource businesses. Integrated Supply often
obtains lower prices and provides improved availability for many products
without changing the customer's vendors.

Markets and Customers. Integrated Supply customers tend to be large industrial
facilities which purchase in excess of $1 million per year from this segment.
Integrated Supply's major industrial customers include Colgate Palmolive,
Mercedes Benz and Marley Cooling Tower.

Sales and Marketing. Integrated Supply approaches its larger integrated supply
customers by offering to perform a survey of their existing procurement
practices. The goal of the study is to determine whether the customer's total
costs can be reduced by utilizing the outsourcing services offered by Integrated
Supply. Typically, savings occur in the customer's purchasing department, in its
tool cribs or other dispensing locations within its facility and in lower
inventory carrying costs. The net result of a decision to outsource to
Integrated Supply is typically lower total costs, substantial reduction in
inventory investment and improved product availability.

Competition. The competition for the Integrated Supply segment comes from a
large number of companies following a variety of strategies. Some competitors
seek to be perceived as an integrated supplier by continually increasing the
number of product lines offered. Other competitors provide staff to dispense
product in a customer's plant. The Company's Integrated Supply segment also
competes with "strategic alliances" among established distributors of
traditional product lines.

                                       11

<PAGE>

 Hardware Merchandising (Hillman)

The Company believes that Hillman, with sales of $126 million in 1998, is the
leading supplier of merchandising services, fasteners and related small hardware
repair items to retail outlets in the United States. Through its sales and
service force, Hillman provides hardware retailers in all 50 states and in
Mexico, Central and South America with an extensive line of fasteners and
related hardware items. More importantly, Hillman complements its extensive
product selection with value-added services for the retailer.

Fasteners and related hardware items typically account for approximately 25% of
a hardware store's traffic, but less than 5% of its revenues. A typical hardware
store maintains in inventory thousands of different items, many of which
generate small dollar sales but large profits. It is difficult for a retailer to
monitor economically all stock levels and to reorder the products from multiple
vendors. The problem is compounded by the necessity of receiving small shipments
of inventory at different times and having to stock the goods. However, failure
to have these small items consistently available will have an adverse effect on
store traffic, thereby denying the retailer the opportunity to sell items that
generate higher dollar sales.

Hillman's service representatives regularly visit retail outlets to review stock
levels and to reorder those items in need of replacement. Thousands of items can
thus be actively managed with the retailer experiencing a substantial reduction
in paperwork and labor costs. Hillman's service representatives also assist in
organizing the products in a user-friendly manner. Hillman complements its broad
range of products with value-added merchandising services such as displays,
product identification stickers, retail price stickers, store rack and drawer
systems, assistance in rack positioning and store layout and inventory and
restocking services. Hillman periodically introduces new package designs and
color-coding for ease of shopping by hardware store customers, and also modifies
rack designs to improve attractiveness of individual store displays.
Furthermore, Hillman provides the retailer with inventory management software
that ties to the retailer's point-of-sale system. In effect, Hillman functions
as a merchandising manager for the hardware store. Hillman supports these
services with high order fill rates and rapid delivery from its eight
distribution centers across the United States. Orders are shipped within 48
hours with a 96% order fill rate.

Products and Suppliers. Hillman buys its products from approximately 500
vendors, the largest of which accounted for 14.2% of Hillman's 1998 purchases
and the top ten of which accounted for less than 49% of Hillman's 1998 total
purchases. Hillman's wide variety of products includes standard and specialty
nuts, bolts, screws, washers and anchors, plus brass, stainless steel, plastic
and miscellaneous fasteners. Management believes that Hillman's selection of
over 40,000 fastener items is the largest in the industry. Non-fastener products
include locks, keys, letters, numbers, signs, rope and chain accessories and an
extensive list of special-purpose items having a relatively limited product line
such as corks, electrical connectors, flashlight bulbs, specialty fuses, and
picture hangers. Hillman buys approximately half of its purchases directly from
foreign suppliers and coordinates its overseas purchasing with the Company's
Expediter and Integrated Supply segments. The balance of purchases are made from
domestic manufacturers and master distributors.


                                       12

<PAGE>

To assure quality from its vendors, Hillman conducts annual on-site evaluations
and random sampling of products and communicates the results to vendors. Hillman
also tracks the performance of its vendors based on delivery time and accuracy
of shipments.

Markets and Customers. Hillman services approximately 9,100 full service retail
outlets. Hillman historically has serviced individual dealers of the larger
cooperatives, such as Tru-Serv, Ace and Do it Best. Hillman sells directly to
the cooperative's retail locations and also supplies many fastener items to the
cooperative's central warehouses. These central warehouses continue to
distribute to their smaller members that do not have the purchase volume to
justify direct service from Hillman. These arrangements with the cooperatives
reduce credit risk and logistic expense for Hillman and reduce central warehouse
inventory and delivery costs for the cooperatives.

Hillman is also increasing its focus on regional and national lumber yards and
home centers, particularly companies with three to fifteen locations. Management
believes that the dynamics which make its services attractive to hardware
retailers are present with these larger customers as well. At the present time,
Hillman sells approximately $17 million to this market segment. Management has
established a special sales and service force to further penetrate this market
segment.

Hillman also sells to approximately 5,000 smaller hardware outlets and over
6,000 non-hardware accounts that are not large enough to qualify for Hillman's
full service program, through its Tele-Source division.

Sales and Marketing. Hillman believes that it is able to be more responsive to
customers' needs than its competitors because it employs one of the largest
direct national sales and service organizations in the industry. Hillman's sales
force consists of over 200 people, managed by 23 field sales managers. Each
sales representative is responsible for approximately 50 full service accounts
that are called on by such representative every two weeks on average. The
service organization consists of 80 full-time and 20 part-time people, managed
by 13 field managers. Hillman's National Accounts group focuses on "Big Box"
retailers, large national chains and grocery stores. In addition, the sales
force is supported by Hillman's Inside Sales and Customer Service group that is
responsible for the expediting of orders, quoting special items and issuing
credits. With the efforts of the Marketing Department, the sales force not only
sells products, but can sell merchandising and technological capabilities as
well. The Marketing Department provides the support through the development of
sales collateral, promotional items, merchandising aids and marketing services,
such as advertising and trade show management. Hillman's EDI system is used by a
number of its large customers.

Competition. The principal competitors for Hillman's core business are Midwest
Fasteners, Serv-A-lite, Elco and Sharon Bolt & Screw, the latter two of which
carry mainly fastener products. Hillman competes primarily on the strength of
the merchandising services it provides, as well as product availability, price
and breadth of product line. Management estimates that Hillman sells to
approximately 65% of the full service retail outlets that comprise its core
market. The smaller hardware outlets who purchase products but not services from
Hillman also purchase products from local and regional distributors and
cooperatives. Competition in this segment is primarily on the basis of price and
availability.

                                       13

<PAGE>

The primary competitors in the home center, regional and national lumberyard
markets are Crown Bolt with an estimated 50% market share and Elco and The
Newell Group. Hillman estimates its share in this market to be less than 10%.
Competition is based primarily on in-store service and price. Other competitors
are local and regional distributors.


Glass Merchandising (Harding)

Harding, with sales of approximately $95 million in 1998, is one of the largest
networks of full service retail glass shops in the United States. Harding
operates in the following businesses: retail automotive and flat glass,
insulating glass, small contract glazing and the wholesale distribution of
automotive and flat glass.

Harding provides retail glass products and related services through a network of
approximately 125 retail locations throughout the United States, including 1999
acquisitions to-date. Customers include individuals, insurance companies and
commercial accounts. The retail glass market is highly fragmented within the
U.S. market, consisting primarily of small, privately owned companies with one
or two locations. The industry is in the early stages of consolidation and
Harding believes that it is well positioned to capitalize on this opportunity
due to its substantial purchasing power and its comprehensive management
information systems.

As a result of emphasizing the higher margin retail business and de-emphasizing
lower margin businesses, such as large contract glazing, Harding has increased
its overall gross margins from 34.9% in 1994 to 40.0% in 1998. Harding is
positioned as a full-service glass retailer offering one of the broadest product
lines in the retail glass industry as well as installation services for
automotive glass, windows and commercial store fronts. The role of the
fabrication and wholesale activities is to ensure that the full service shops
receive the products they require at the lowest total cost.

Harding's new management information system links all of its formerly
independent locations and improves its ability to manage operations. The system
also allows Harding to centralize its purchasing function, thereby enabling it
to take advantage of its significant purchasing power. Another important benefit
is that acquired businesses can immediately begin following Harding's
standardized business practices. The Company believes that this will allow
Harding to integrate acquisitions substantially faster than previously and
reduce the dependence on key employees at any location.


Products and Suppliers. Harding maintains in inventory over 8,000 items and many
more products can be fabricated to meet customer requirements. Harding purchases
both automotive and flat glass from four leading national manufacturers, as well
as from regional glass companies and local distributors. These four
manufacturers account for approximately 25% of Harding's purchases. In addition
to flat and automotive glass, Harding purchases a number of other items,
including sheet mirror, framed mirror, shower door frames and accessories from a
variety of manufacturers and distributors. Harding has in inventory over 90% of
the products ordered by its customers.


                                       14

<PAGE>

Markets and Customers. Approximately 37% of retail autoglass sales are
attributable to insurance companies while the remaining sales are divided among
individuals, autobody shops, rental car agencies and car dealerships. Retail
flat glass sales are split fairly evenly between individual consumers and small
contract jobs under $5,000. Wholesale autoglass sales are primarily to glass
shops, while wholesale flat glass sales are divided among independent retail
glass shops, window manufacturers and large contract glaziers. Harding's top ten
customers accounted for approximately 10% of 1998 sales.

Sales and Marketing. The majority of Harding's retail customers are located
within ten miles of a store and typically order in person or via phone. The
retail marketing effort relies on the strategic location of the stores as well
as advertising in the local media. Harding's retail organization also maintains
a 33 person sales force of whom 22 sell both flat and automotive glass and 11
focus exclusively on flat glass.

The retail sales force calls on replacement automotive glass users such as auto
body shops, rental car agencies, automotive dealerships and insurance agents who
direct insured claims to approved suppliers. Sales management calls on regional
and national fleet accounts, insurance companies and network providers in order
to become an approved or preferred supplier. Network providers are companies
that handle the entire glass replacement process for many insurance companies.

Harding's wholesale operation has a five person sales force, all of whom sell
both flat and automotive glass. Sales representatives call on flat glass
customers such as window manufacturers, glass shops, and other large users of
glass such as contract glaziers.

Competition. Because of the diversity of markets and geographic locations it
serves, Harding has numerous competitors at the retail level. Harding's retail
competitors can be categorized as follows: national automotive chains, large
regional glass retailers and local independent glass shops. Harding, with its
broad offering of both automotive and flat glass, has positioned itself as one
of the largest comprehensive glass retailers. At the wholesale level, Harding
faces competition from national, regional and local competitors. In addition, in
recent years, the major manufacturers of automotive and flat glass have been
taking steps to integrate vertically into wholesale distribution, thereby
assuring themselves of greater control over the sale of their products. The
Company believes that Harding is currently the largest full service retail glass
shop business in the United States with approximately 125 retail locations.
Although a number of chains are larger than Harding, they deal primarily in auto
glass replacement and are not full service shops. Competition for Harding's full
service shops comes mainly from single location operations or small chains.
Harding's purchasing power and comprehensive information system give it
significant advantages over these competitors.



                                       15

<PAGE>

Insurance Arrangements

Under the Company's current insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of expected
claims. Since October 1991, the Company has retained the exposure on certain
expected losses related to worker's compensation, general liability and
automobile. The Company also retains the exposure on expected losses related to
health benefits of certain employees. The Company believes that its present
insurance is adequate for its businesses. See Note 17 of Notes to Consolidated
Financial Statements of the Company as of and for the three years ended December
31, 1998.


Employees

As of December 31, 1998, the Company employed approximately 4,070 employees, of
which approximately 1,800 were sales personnel, approximately 1,400 were
employed as warehouse and delivery personnel, and approximately 870 held
administrative positions. The Company has collective bargaining agreements with
5 unions representing a total of approximately 75 employees. In the opinion of
management, employee relations are good.


Backlog

The Company's sales backlog was $66.4 million as of December 31, 1998, and $68.3
million as of December 31, 1997. On average, the Company's backlog is less than
one month's sales.


   
Item 2 - Properties.
    

The Company currently has approximately 189 warehouse and stocking facilities
located throughout the United States, Canada and Mexico. Most of these include
sales offices. Approximately 14% of these facilities are owned and the remainder
are leased. The Company's principal properties are warehouse facilities, as
follows:

   Division                Location                     Description
   --------                --------                     -----------
   Hillman              Cincinnati, Ohio             250,000 sq.ft. (leased)
   Harding              Denver, Colorado             184,000 sq.ft. (owned)
   Kar                  Itasca, Illinois              80,000 sq.ft. (owned)

In the opinion of management, the Company's existing facilities are in good
condition.


                                       16

<PAGE>
   
Item 3 - Legal Proceedings.
    

Litigation originally instituted on February 27, 1996 is pending in the Court of
Common Pleas of Montgomery County, Pennsylvania in which Dorman Products of
America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege that
misrepresentations of certain facts were made by the Company, upon which R&B
allegedly based its offer to purchase the assets of the Company's Dorman
Products division. Dorman and R&B seek damages of approximately $21.0 million.
In the opinion of management, the ultimate resolution of this matter will not
have a material effect on the consolidated financial position, operations or
cash flows of the Company.


   
Item 4 - Submission of Matters to a Vote of Security Holders.
    

Not applicable.














                                       17

<PAGE>

   
Executive Officers of the Company
    

The following table sets forth certain information regarding the Company's
executive officers.

Name                   Age    Position
----                   ---    --------
Donald T. Marshall     65     Chairman of the Board and Chief Executive Officer

John P. McDonnell      64     President and Chief Operating Officer; Chief
                              Executive Officer, SunSource Industrial Services
                              Company

Joseph M. Corvino      44     Vice President - Finance; Chief Financial Officer;
                              Treasurer and Secretary

Max W. Hillman, Jr.    52     Chief Executive Officer, Hillman

Harold J. Cornelius    50     Chief Executive Officer, Harding

All executive officers are currently elected for a one-year term by the Board of
Directors. There are no family relationships between any of the Company's
executive officers and directors.

The following is a summary of the business experience of the executive officers
listed above during at least the last five years. Periods prior to the
Conversion on September 30, 1997 relate to the Company's predecessor.

Donald T. Marshall has been the Chairman and Chief Executive Officer since
December 1988.

John P. McDonnell has been the President and Chief Operating Officer since
December 1994. Mr. McDonnell served as Group Vice President from December 1987
to December 1994.

Joseph M. Corvino has been Vice President-Finance, Chief Financial Officer,
Treasurer and Secretary since December 1995. Mr. Corvino served as Vice
President and Controller from May 1993 to December 1995 and as Controller from
December 1985 to May 1993.

Max W. Hillman, Jr. has been the Chief Executive Officer of Hillman since
December 1996. Mr. Hillman served as Group Vice President from December 1991 to
December 1996.

Harold J. Cornelius has been the Chief Executive Officer of Harding since
December 1996. Mr. Cornelius served as Group Vice President from December 1988
to December 1996.




                                       18

<PAGE>

                                     PART II


   
Item 5 - Market for Registrant's Common Shares and
         Related Stockholder Matters
    


Market Prices

As a result of the Company's September 30, 1997 conversion from partnership to
corporate form (the "Conversion"), the Common Shares began trading on the New
York Stock Exchange on October 1, 1997, under the symbol "SDP". The following
table sets forth the high and low closing sale prices on the New York Stock
Exchange composite Tape for the Common Shares since that date:

                                            
         1998                             HIGH                      LOW
         ----                             ----                      ---
         First Quarter                  $29 1/2                   $23 5/16
         Second Quarter                  29 3/8                    21 3/4
         Third Quarter                   21 3/4                    15
         Fourth Quarter                  21 9/16                   14

         1997
         ----
         Fourth Quarter                 $25 13/16                 $23 1/2

As a result of the Conversion, each Class B limited partnership interest of the
Partnership was exchanged on September 30, 1997 for 0.25 of a Common Share,
effectively a one-for-four reverse split. The following table shows the
quarterly range of high and low closing sales prices on the New York Stock
Exchange Composite Tape for the Class B limited partnership interests for the
periods indicated, adjusted for the one-for-four reverse split:

         1997                          HIGH                       LOW
         ----                          ----                       ---
         First Quarter                $18                       $16 1/2
         Second Quarter                20 1/2                    16
         Third Quarter                 23 1/2                    19


As of March 25, 1999 there were approximately 750 holders of record of the
Common Shares. The total number of Common Shares outstanding as of March 25,
1999 was 6,740,208.


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 stock
through open market transactions and private block trades dependent upon market
conditions. The Company had reacquired and placed into treasury 461,100 Common
Shares through December 31, 1998 at a cost of $8.4 million and has reacquired
18,000 Common Shares from January 1, 1999 through March 16, 1999, at a cost of
$0.3 million. The Company suspended the repurchase program on March 16, 1999,
pending release of its earnings for the first quarter of 1999, but intends to
continue the repurchase program provided the investment is beneficial to the
Company's shareholders.




                                       19

<PAGE>

Offering

On March 25, 1998 the Company closed an offering of its Common Shares (the
"Offering"). The Company issued and sold 500,000 Common Shares in addition to
Common Shares sold by certain selling stockholders in the Offering. The
underwriters in the Offering exercised their option to purchase 296,408
additional Common Shares of the Company to cover over-allotments on March 27,
1998.

Dividends

The Company paid a cash dividend of $0.10 per Common Share on January 7, 1999.
On March 29, 1999, the Board of Directors declared a dividend of $0.10 per
Common Share payable on April 19, 1999 to holders of record as of April 8, 1999.
The Company expects to declare future quarterly dividends on the Common Shares
of $0.40 per Common Share annually, subject to the discretion of the Board of
Directors and dependent upon, among other things, the Company's future earnings,
financial condition, capital requirements, funds needed for acquisitions, level
of indebtedness, contractual restrictions and other factors that the Board of
Directors deems relevant.







                                       20

<PAGE>

   
Item 6 - Selected Financial Data.
    

         The following table sets forth selected consolidated financial data of
         the Company and the predecessor Partnership as of and for the five
         years ended December 31, 1998. Data for all periods shown are derived
         from financial statements of the Company and the Partnership which have
         been audited by PricewaterhouseCoopers LLP, independent accountants, as
         indicated in their reports thereon. See accompanying Notes to
         Consolidated Financial Statements and "Management's Discussion and
         Analysis of Financial Condition and Results of Operations" for
         information regarding the Conversion and Refinancing as well as
         acquisitions and divestitures that affect comparability.

     (dollars in thousands, except for partnership interest and share data)

<TABLE>
<CAPTION>
   
Income Statement Data for Years
Ended December 31:                                    1998          1997           1996           1995           1994  
                                                    --------      --------       --------       --------       --------
<S>                                                 <C>           <C>            <C>            <C>            <C>     
Net sales                                           $712,470      $694,707       $646,503       $626,863       $734,299
Gross profit                                         291,168       280,307        258,314        249,556        282,782
Income from operations                                41,211        36,108         25,002         31,558         36,011
Gain on sale of divisions                                 --            --             --         20,644          3,523
Distributions on guaranteed preferred
    
 beneficial interests                                 12,232         3,058            N/A            N/A            N/A
Provision (benefit) for income taxes                   8,324        (6,680)        (1,140)           537            100

Income before extraordinary loss
  and cumulative effect of change
  in accounting principle                             13,817        32,532         19,267         44,745         29,544

Extraordinary loss                                        --        (3,392)            --           (629)            --

Net income                                            13,817        29,140         19,267         44,116         29,544

Basic and diluted net income
 per common share                                   $   2.00           N/A            N/A            N/A            N/A

Pro forma net income per common share                    N/A         $1.88            N/A            N/A            N/A

Earnings per limited partnership interest:
Income before extraordinary loss
  - Class A                                              N/A           N/A          $1.10       $   1.10       $   1.10
  - Class B                                              N/A           N/A          $0.32       $   1.48       $   0.79

Extraordinary loss
  - Class A                                              N/A           N/A          $  --       $     --       $     --
  - Class B                                              N/A           N/A          $  --       $  (0.03)      $     --

Net income
  - Class A                                              N/A           N/A          $1.10       $   1.10       $   1.10
  - Class B                                              N/A           N/A          $0.32       $   1.45       $   0.79

Cash provided by operations                          $18,376      $ 27,913       $ 23,298       $ 17,050       $ 17,704

Dividends declared per common share                  $  0.40      $   0.10            N/A            N/A            N/A

Cash distributions declared per
  limited partnership interest
  - Class A                                              N/A           N/A          $1.10       $   1.10       $   1.10
  - Class B                                              N/A           N/A          $0.33       $   0.67       $   0.49

   
Balance Sheet Data at December 31:
    
Total assets                                        $341,568      $306,142       $262,555       $254,591       $266,186
Long-term debt and capitalized
  lease obligations                                   95,842        93,728         69,150         63,934         75,168
</TABLE>



                                       21

<PAGE>
   
Item 7 - 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, Hillman and Harding.

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

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

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


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 reacquired and placed into treasury 479,100 common
shares through March 16, 1999, at an average cost of $18.12 per common share.
The Company intends to continue the repurchase program provided the investment
is beneficial to the Company's shareholders.

Public Offering

On March 27, 1998, the Company closed an offering of its Common Shares (the
"Offering"). Of the 2,284,471 shares sold in the Offering, 796,408 shares
("Primary") were issued and sold by the Company and 1,488,063 shares
("Secondary") were sold by selling stockholders, affiliates of Lehman Brothers,
Inc. The Company did not receive any of the proceeds from the Secondary shares
sold by the selling stockholders. The Company used the net proceeds raised (of
approximately $20.8 million) from the Primary shares sold in the Offering to
repay borrowings under its revolving credit facility.



                                       22

<PAGE>
Restructuring

In December 1996, the Company recorded restructuring charges of $6.0 million (on
a pre-tax basis) related to a restructuring and consolidation of Technology
Services (approximately $4.4 million) and the one-time write-off of certain
non-performing assets of Harding (approximately $1.6 million). The restructuring
plan is expected to result in the elimination of approximately 175 employees in
the Technology Services divisions and result in net cost savings of
approximately $5.0 million annually upon its completion. The restructuring plan
is a three-year project that will consolidate all financial, information systems
and administrative responsibilities for Technology Services in a centralized
location which is expected to be completed in 1999. The restructuring of the
Technology Services sales organization is expected to be completed by mid-1999.
Consolidation of the distribution network is partially complete and is scheduled
for full completion early in 2000, shortly beyond the projected three-year time
frame of the plan, due to the need for additional logistical studies of the
geographic placement of new distribution facilities. Of the $4.2 million of
restructuring charges that will result in cash payments, amounts paid by the
Company during the years ended December 31, 1996, 1997 and 1998 were $0.2
million $1.8 million and $0.8 million, respectively. Of the remaining balance of
$1.4 million, approximately $1.2 million is expected to be paid during 1999 and
$0.2 million in 2000.


Acquisitions

During 1997, the Company resumed its strategy to acquire retail glass shops for
integration with Harding. From August 31, 1997 through December 31, 1997,
Harding acquired the assets of three retail glass shops which contributed $1.7
million in sales for the twelve months ended December 31, 1998.

During 1998, Harding acquired the assets of eleven retail glass shops which had
sales aggregating approximately $17.6 million for the twelve-month period prior
to acquisition and approximately $5.9 million from the date acquired through
December 31, 1998. These acquisitions expand Harding's business into the
Arizona, New Mexico, Texas, Georgia, New Hampshire and Northern California
markets.

On February 9, 1999, Harding acquired all of the outstanding common stock of
Pritchard Glass, Inc., which concurrently acquired all of the outstanding common
stock of Premier Glass Services, Inc. Sales of Pritchard and Premier aggregated
approximately $25 million for the twelve-month period prior to acquisition. This
acquisition adds twenty-one retail glass shops, expanding Harding's business
into the North and South Carolina markets.

In addition, during 1999 to-date, Harding has acquired the assets of two retail
glass shops which had sales aggregating approximately $2.0 million for the
twelve-month period prior to acquisition. These acquisitions expand Harding's
business into the Columbus, Georgia and Las Vegas, Nevada markets.

On April 22, 1998, Hillman acquired the assets of a manufacturer of letters,
numbers and signs which had sales of approximately $1.0 million for the
twelve-month period prior to acquisition.




                                       23

<PAGE>
On May 6, 1998, Hillman acquired the assets of the franchise and independent
hardware segment of Axxess Technologies, Inc., including its PMI division, a
distributor of keys, letters, numbers and signs and other products to retail
hardware stores throughout the United States. Sales from the acquired operations
were approximately $17.0 million in 1997. Hillman integrated the sales force and
operations of the acquired business with its existing operations.

On October 21, 1998, Hillman acquired the assets of SIGN-KO, a Dallas-based
manufacturer and distributor of letters, numbers, signs and related products.
SIGN-KO serves a customer base that includes large home improvement retailers
and independent hardware stores. Sales from the acquired operations were
approximately $3.0 million in 1997.

Sales from hardware-related companies acquired by Hillman during 1998 aggregated
approximately $21.0 million for the twelve-month period prior to acquisition and
generated sales of $10.3 million from the date acquired through December 31,
1998.

Net cash consideration paid for the businesses acquired by the Company in 1998,
1997 and 1996, including transaction costs, was $22.8 million, $0.8 million and
$0.7 million, respectively, plus the assumption of certain liabilities of $3.1
million, $0.2 million and $0.1 million, respectively.

Net cash consideration paid for the businesses acquired by the Company to-date
in 1999, including transaction expenses, was $12.4 million (of which $0.8
million is held in escrow pending the resolution of post-closing adjustments),
the repayment of outstanding debt of $3.3 million plus the assumption of certain
liabilities estimated at $1.2 million.










                                       24

<PAGE>

Results of Operations

   Segment Sales and Profitability for the Three Years Ended December 31, 1998
   ---------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                   Year Ended December 31,
                                                 1998                     1997                               1996      
                                           ----------------         ----------------                   ----------------
                                                               (dollars in thousands)
                                                       % Total                 % Total                           % Total
Sales                                                   Sales                   Sales                             Sales  
-----                                                  -------                 -------                           ------- 
<S>                                         <C>        <C>          <C>        <C>                     <C>        <C>  
SunSource Industrial Services                          
  Technology Services                       $321,526   45.1%        $322,148   46.4%                   $299,068   46.3%
  Expediter                                  124,536   17.5%         125,911   18.1%                    121,389   18.8%
  Integrated Supply (1)                       45,626    6.4%          54,420    7.8%                     43,392    6.7%
                                            --------   -----        --------   -----                   --------   -----
    Industrial Services                      491,688   69.0%         502,479   72.3%                    463,849   71.7%
Hillman (2) (3)                              125,830   17.7%         103,970   15.0%                     92,285   14.3%
Harding (4)                                   94,952   13.3%          88,258   12.7%                     90,369   14.0%
                                            --------   -----        --------   -----                   --------   -----
  Consolidated Net Sales                    $712,470  100.0%        $694,707  100.0%                   $646,503  100.0%
                                            ========  ======        ========  ======                   ========  ======

Gross Profit                                          %Sales                  %Sales                             %Sales
------------                                          ------                  ------                             ------
SunSource Industrial Services
  Technology Services (5)                   $ 86,257   26.8%        $ 85,896   26.7%                   $ 77,367   25.9%
  Expediter                                   88,175   70.8%          90,171   71.6%                     87,839   72.4%
  Integrated Supply                           12,265   26.9%          13,669   25.1%                     11,436   26.4%
                                            --------                --------                           --------
    Industrial Services                      186,697   38.0%         189,736   37.8%                    176,642   38.1%
Hillman (3)                                   66,485   52.8%          54,901   52.8%                     46,127   50.0%
Harding                                       37,986   40.0%          35,670   40.4%                     35,545   39.3%
                                            --------                --------                           --------
  Consolidated Gross Profit                 $291,168   40.9%        $280,307   40.3%                   $258,314   40.0%
                                            ========                ========                           ========

EBITA (6)
SunSource Industrial Services
  Technology Services                       $ 13,583    4.2%        $ 14,825    4.6%                   $ 13,690    4.6%
  Expediter                                   20,215   16.2%          20,697   16.4%                     18,770   15.5%
  Integrated Supply                            2,299    5.0%           3,292    6.0%                      2,008    4.6%
                                            ---------               ---------                          ---------
    Industrial Services                       36,097    7.3%          38,814    7.7%                     34,468    7.4%
Hillman                                       12,130    9.6%          10,833   10.4%                      7,130    7.7%
Harding                                        4,128    4.3%           2,224    2.5%                      3,211    3.6%
                                            ---------               ---------                          ---------
  Total operations before
   corporate expenses                         52,355    7.3%          51,871    7.5%                     44,809    6.9%
Corporate expenses                            (7,268)  (1.0)%         (8,062)  (1.2)%                    (6,257)  (0.9)%
                                            ---------               ---------                          ---------
  Total operations after
   corporate expenses                         45,087    6.3%          43,809    6.3%                     38,552    6.0%
Provision for litigation matters -
 divested operations                          (1,600)  (0.2)%             --                                 -- 
                                             --------               ---------                          ---------
  Consolidated EBITA                        $ 43,487    6.1%        $ 43,809    6.3%                   $ 38,552    6.0%
                                            =========               =========                          =========
</TABLE>


<PAGE>
----------------
(1)     Includes sales related to contracts canceled in 1998 and 1997 of $5,975,
        $15,925, and $16,877 for the twelve months ended December 31, 1998, 1997
        and 1996, respectively.

(2)     Includes sales from acquired businesses of $10,322 for the twelve months
        ended December 31, 1998.

(3)     Includes a reduction in sales and gross profit of $4,680, $3,424 and
        $2,751 for the twelve months ended December 31, 1998, 1997 and 1996,
        respectively, to conform to current accounting for customer rebates.

(4)     Includes sales from acquired businesses of $5,874 for the twelve months
        ended December 31, 1998. Also includes sales from branches closed during
        the three years ended December 31, 1998 of $541, $2,116 and $5,978 for
        the twelve months ended December 31, 1998, 1997 and 1996, respectively.

(5)     Includes commission income of $618, $453 and $471 for the twelve months
        ended December 31, 1998, 1997 and 1996, respectively to conform to
        current accounting.

(6)     "EBITA" (earnings before interest, taxes and amortization) is defined as
        income from operations before amortization, excluding $2,491 and $3,330
        of management fees, $263 and $196 of expenses related to minority
        ownership and $3,053 and $2,150 of transaction costs related to the
        Company's conversion from partnership to corporate form (the
        "Conversion"), for the twelve months ended December 31, 1997 and 1996,
        respectively. The 1996 period also excludes a charge of $5,950 related
        to the restructuring of Technology Services.

                                       25

<PAGE>

        Years Ended December 31, 1998 and 1997

Net sales increased $17.8 million or 2.6% in 1998 to $712.5 million from $694.7
million in 1997. Sales variances by segment are as follows:

                                                   Sales Increase    
                                                        Amount       (Decrease)
                                                   (In thousands)        %     
                                                   --------------    ----------
      SunSource Industrial Services Company
           Technology Services                       $   (622)         (0.2)%
           Expediter                                   (1,375)         (1.1)%
           Integrated Supply                           (8,794)        (16.2)%
                                                     ---------
              Industrial Services                     (10,791)         (2.1)%
      Hillman                                          21,860          21.0 %
      Harding                                           6,694           7.6 %
                                                     ---------
              Total Company                          $ 17,763           2.6 %
                                                     =========

Technology Services sales decreased $0.6 million or 0.2% in 1998 to $321.5
million from $322.1 million in 1997 due primarily to the restructuring of the
sales force as well as the effects of the Asian economic crisis on its original
equipment manufacturing customers. Expediter sales decreased $1.4 million or
1.1% in 1998 to $124.5 million from $125.9 million in 1997 due to competitive
pricing pressures as well as continued deterioration in the Canadian dollar.
Integrated Supply sales decreased $8.8 million or 16.2% in 1998 to $45.6 million
from $54.4 million in 1997 due primarily to a net decrease of $10.0 million
resulting from contracts which were canceled in 1998 and 1997. Excluding
terminated contracts, Integrated Supply sales increased 3.0% in the comparison
period.

Hillman's sales increased $21.9 million or 21.0% in 1998 to $125.8 million from
$104.0 million in 1997 due to market penetration of new product lines in the
amount of $5.4 million, sales from newly acquired businesses of $10.3 million
and the balance of $6.2 million in growth from new accounts and expansion of
existing product lines.

Harding's sales increased $6.7 million or 7.6% in 1998 to $95.0 million from
$88.3 million in 1997 due to an increase of $7.0 million as a result of newly
acquired retail glass shops and an increase in retail and contract sales of $4.0
million, offset by a decrease of $2.6 million in wholesale glass and other
product line sales as a result of the planned withdrawal from certain
non-strategic markets. In addition, the discontinuation of certain low-margin
product lines resulted in reduced sales of $1.7 million. Growth in Harding's
retail glass shops is expected to continue as a result of internal sales
programs and the recent acquisitions.

The Company's sales backlog on a consolidated basis was $66.4 million as of
December 31, 1998, compared with $68.3 million at December 31, 1997, a decrease
of 2.8%.

Total Company cost of sales increased $6.9 million or 1.7% in 1998 to $421.3
million from $414.4 million in 1997 due primarily to increased sales levels in
the comparison period.







                                       26

<PAGE>

The Company's consolidated gross margin was 40.9% in 1998 compared with 40.3% in
1997. SunSource Industrial Services Company's gross margin was 38.0% in 1998
compared with 37.8% in 1997, an increase of 0.2%. Technology Services' gross
margin increased 0.1% in 1998 due to tighter pricing controls. The Expediter
activity's gross margin declined 0.8% in 1998 due to competitive pricing
pressures and higher freight costs. The Integrated Supply activity's gross
margin increased 1.8% in 1998 due to sales mix. Hillman's gross margin remained
constant with 1997. Harding's gross margin decreased 0.4% in 1998 due to an
increase in contract sales at lower gross margins than the overall retail
business.

The Company's selling, general and administrative ("S,G&A") expenses increased
by $9.1 million or 3.9% to $241.5 million in 1998 from $232.4 million in 1997.
Selling expenses increased $5.0 million supporting increased 1998 sales levels
and increased marketing efforts at Hillman and Harding. Warehouse and delivery
expenses increased $1.8 million or 4.3%. The increase in general and
administrative expenses of $2.3 million or 3.1% is net of expense reductions of
$1.5 million associated with the replacement of cash basis deferred compensation
awards with stock options.

S,G,&A expenses as a percentage of sales increased compared with 1997, as
follows:

                                                      Twelve Months
                                                    1998             1997
                                                    ----             ----
        Selling Expenses                            17.0%            16.7%
        Warehouse and Delivery Expenses              6.2%             6.1%
        General and Administrative Expenses         10.7%            10.6%
                                                    -----            -----
               Total S,G&A Expenses                 33.9%            33.4%
                                                    =====            =====


EBITA from operations after corporate expenses was $45.1 million for the twelve
months ended December 31, 1998, compared with $43.8 million for the same
prior-year period.

The Company's consolidated operating profit margin (EBITA, as a percentage of
sales) after corporate expenses remained constant at 6.3% in 1998 compared with
the prior year. SunSource Industrial Services Company's operating profit margin
declined to 7.3% in 1998 from 7.7% in 1997, primarily reflecting reduced 1998
sales and increased expenses related to the reorganization of sales and
administrative functions in the Technology Services segment. Integrated Supply's
operating profit margin decreased to 5.0% in 1998 from 6.0% in 1997 due
primarily to the previously mentioned canceled contracts. Hillman's operating
profit margin declined in 1998 to 9.6% from 10.4% in 1997 due to increased
selling expenses for new field staff related primarily to acquisition
activities. Harding's operating profit margin improved in 1998 to 4.3% from 2.5%
in 1997 due to reduced general and administrative expenses and increased sales
activity through internal growth and acquisitions.

Depreciation expense increased $1.0 million to $5.0 million in 1998 from $4.0
million in 1997 due primarily to the 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.




                                       27

<PAGE>

Under partnership form, the management fee due the General Partner amounted to
$3.3 million annually. Upon Conversion, the management fee is retained by a
wholly-owned subsidiary of the Company and is eliminated in consolidation. The
amount for 1997 of $2.5 million is based on nine months only through the
Conversion date.

Other income, net, increased $0.8 million in 1998 to $0.4 million from expense
of $0.4 million in 1997 due primarily to the elimination of expenses related to
minority ownership as a result of the Conversion and other non-recurring
expenses related to divested operations.

The Company recorded a provision of $1.6 million for outstanding litigation
matters related to divested businesses in the third quarter of 1998.

The Company pays interest to the Trust on the Junior Subordinated Debentures in
the amount of 11.6% per annum on their face amount of $105.4 million. The Trust
distributes an equivalent amount to the holders of the Trust Preferred
Securities. For the years ended December 31, 1998 and 1997, the Company paid
$12.2 million and $3.1 million, respectively, in interest on the Junior
Subordinated Debentures, equivalent to the amounts distributed by the Trust. The
1997 amount of $3.1 million represents payments made from the Conversion date
through December 31, 1997. On an annual basis, the interest payments and Trust
distributions amount to $12.2 million.

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. The Company's combined
effective tax rate was 37.6% for the year ended December 31, 1998, including the
effect of favorable non-recurring prior-year income tax adjustments related to
the Conversion. The Company expects its effective tax rate to be about 42% in
the future due to the implementation of recently identified state and local tax
planning strategies. See Note 5 of Notes to Consolidated Financial Statements of
the Company for the three years ended December 31, 1998, for income taxes and
related disclosures.

        Years Ended December 31, 1997 and 1996

Net sales increased $48.2 million or 7.5% in 1997 to $694.7 million from $646.5
million in 1996. Sales variances by segment are as follows:

                                                      Sales Increase  
                                                          Amount      (Decrease)
                                                      (In thousands)       %   
                                                     --------------  ---------- 
        SunSource Industrial Services Company                         
             Technology Services                        $ 23,080         7.7%
             Expediter                                     4,522         3.7%
             Integrated Supply                            11,028        25.4%
                                                        ---------
                Industrial Services                       38,630         8.3%
        Hillman                                           11,685        12.7%
        Harding                                           (2,111)       (2.3)%
                                                        ---------
                Total Company                           $ 48,204         7.5%
                                                        =========



                                       28

<PAGE>
Technology Services sales increased $23.1 million or 7.7% in 1997 to $322.2
million from $299.1 million in 1996 due to continued strength in existing
product markets, new product line additions and sales territory expansion.
Expediter sales increased $4.5 million or 3.7% in 1997 to $125.9 million from
$121.4 million in 1996 due to sales growth of 3.0% in the U.S. marketplace and
8.3% in Canada as a result of general economic strength.

Integrated supply sales increased $11.0 million or 25.4% in 1997 to $54.4
million from $43.4 million in 1996 due primarily to an increase in the number of
in-plant inventory management programs.

Hillman's sales increased $11.7 million or 12.7% in 1997 to $104.0 million from
$92.3 million in 1996 due to contributions from acquisitions in the amount of
approximately $5.0 million and the balance of $6.7 million in growth from new
accounts, expansion of existing product lines and market penetration of new
product lines.

Harding's sales declined $2.1 million or 2.3% in 1997 to $88.3 million from
$90.4 million in 1996 due to a decrease of $2.0 million in wholesale glass,
brokerage and other product line sales as a result of the planned withdrawal
from certain non-strategic markets. In addition, the discontinuation of certain
low margin product lines resulted in reduced sales of $0.4 million, offset by an
increase in retail glass and contract sales of $0.3 million from 1996.

Total Company cost of sales increased $26.2 million or 6.8% in 1997 to $414.4
million from $388.2 million in 1996 due primarily to increased sales levels in
the comparison period.

The Company's consolidated gross margin was 40.3% in 1997 compared with 40.0% in
1996. SunSource Industrial Services Company's gross margin was 37.8% in 1997
compared with 38.1% in 1996, a decrease of 0.3%. Technology Services' gross
margin increased 0.8% in 1997 due to labor efficiencies in its service and
repair business and lower freight costs. The Expediter activity's gross margin
declined 0.8% in 1997 due to competitive pricing pressures. The Integrated
Supply activity's gross margin declined 1.3% in 1997 due to changes in sales mix
as a result of new in-plant inventory management programs.

Hillman's gross margin increased 2.8% due primarily to reduced packaging costs
in 1997 which were much higher in 1996 as a result of costs associated with the
integration of the Curtis acquisition and for other business expansion programs.
Harding's gross margin increased 1.1% due to improved purchasing management and
the discontinuation of lower margin product lines.

The Company's S,G&A expenses increased by $15.9 million or 7.4% to $232.3
million in 1997 from $216.4 million in 1996. Selling expenses increased $6.4
million supporting increased 1997 sales levels in the SunSource Industrial
Services Company and increased marketing efforts at Harding. Warehouse and
delivery expenses increased $2.8 million due to expansion programs by certain
operating units and the addition of several large in-plant accounts by
Integrated Supply. General and administrative expenses increased $6.7 million
consisting of: (i) an increase of $5.3 million to support the overall increase
in 1997 sales levels and the increased number of systems accounts in the
Integrated Supply business, and (ii) an increase of $1.6 million in corporate
expenses compared to 1996 which included an expense reduction of $1.5 million as
a result of incentive-based compensation plans and a non-recurring reduction in
insurance reserves of $0.2 million.

                                       29

<PAGE>

S,G,&A expenses as a percentage of sales remained constant overall with 1996, as
follows:
                                                           Twelve Months
                                                         1997           1996
                                                         ----           ----
        Selling Expenses                                 16.7%          16.1%
        Warehouse and Delivery Expenses                   6.1%           6.3%
        General and Administrative Expenses              10.6%          11.1%
                                                         -----          -----
               Total S,G&A Expenses                      33.4%          33.5%
                                                         =====          =====

Depreciation expense increased $0.4 million to $4.0 million in 1997 from $3.6
million in 1996 due primarily to an increase in the depreciable fixed asset
base.

The Company's consolidated operating profit margin ("EBITA, as a percentage of
sales") after corporate expenses improved in 1997 to 6.3% from 5.9% in 1996.
SunSource Industrial Services Company improved its operating profit margin to
7.7% in 1997 from 7.4% in 1996 primarily as a result of expense efficiencies.
Hillman improved its operating profit margin significantly in 1997 to 10.4% from
7.7% in 1996 due to improved packaging productivity in 1997 as previously
discussed. Harding's operating profit margin declined in 1997 to 2.5% from 3.6%
in 1996 due to significant investments in sales and marketing efforts in 1997
and reduced sales as a result of discontinuation of certain low margin product
lines and markets served.

Under partnership form, the management fee due the General Partner amounted to
$3.3 million annually. Upon Conversion, the management fee was retained by a
wholly-owned subsidiary of the Company and eliminated in consolidation. The
amount for 1997 of $2.5 million is based on nine months only through the
Conversion date.

Other expense, net, increased $0.5 million to $0.4 million in 1997 from $0.1
million of income in 1996 due primarily to favorable non-recurring legal
settlements and post-closing adjustments recorded in 1996 which were related to
divisions sold in prior years.

The Company pays interest to the Trust on the Junior Subordinated Debentures in
the amount of 11.6% per annum on their face amount of $105.4 million. The Trust
distributes an equivalent amount to the holders of the Trust Preferred
Securities. For the year ended December 31, 1997, the Company paid $3.1 million
in interest on the Junior Subordinated Debentures, equivalent to the amount
distributed by the Trust from the Conversion date through December 31, 1997. On
an annual basis the interest payments and Trust distributions amount to $12.2
million.


Liquidity and Capital Resources

Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding the $1.6 million litigation charge recorded in 1998, increased $2.3
million or 4.8% to $50.1 million in 1998 from $47.8 million in 1997. The
Company's net interest coverage ratio for the year ended December 31, 1998,
improved slightly to 2.29X (earnings before interest, litigation charge,
distributions on Trust Preferred Securities and income taxes over net interest
expense and distributions on Trust Preferred Securities), from 2.26x on a pro
forma basis in 1997.



                                       30

<PAGE>

The Company's cash position of $2.8 million as of December 31, 1998, decreased
$2.8 million from the balance at December 31, 1997. Cash was provided during
this period primarily from operations ($18.4 million), net borrowings on the
bank revolver ($2.0 million), proceeds from the sale of property and equipment
($0.5 million), and net proceeds from the Offering ($20.8 million). Cash was
used during this period predominantly for acquisitions ($22.8 million), cash
distributions to investors ($4.8 million), capital expenditures ($7.1 million),
purchase of treasury stock ($8.4 million), investment in life insurance ($0.9
million) and other items, net ($0.5 million).

The Company's working capital position of $121.6 million at December 31, 1998,
represents an increase of $0.7 million from the December 31, 1997 level of
$120.9 million. The Company's current ratio decreased to 2.25x at December 31,
1998 from 2.41x at December 31, 1997, principally due to increases in accounts
payable and accrued liabilities, offset by investments in accounts receivable
and inventories.

As of December 31, 1998, the Company had $36.6 million available under its
credit facilities. The Company had $95.8 million of outstanding long-term debt
at December 31, 1998, consisting of the $60.0 million Senior Note at 7.66%, bank
borrowings totaling $35.0 million at an effective interest rate of 6.49%, and
capitalized lease obligations of $0.8 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 December 31, 1998.

As of December 31, 1998, the Company's total debt (including dividends payable)
as a percentage of its consolidated capitalization (total debt, Trust Preferred
Securities and stockholders' equity) was 41.5% compared with 45.6% as of
December 31, 1997. The Company's consolidated capitalization (including
dividends payable) as of December 31, 1998, was $232.8 million compared to
$212.1 million at December 31, 1997.

The Company spent $7.1 million for capital expenditures in 1998, an increase of
$2.2 million from 1997, which is primarily attributable to higher investments in
computer hardware of $1.2 million and plant equipment of $1.0 million.

The Company paid $2.1 million on February 27, 1998, for remaining tax
distributions due to Class B interest holders of the predecessor partnership,
related to taxable income for the nine months ended September 30, 1997.

On December 16, 1998, the Board of Directors declared a dividend of $0.10 per
Common Share which was paid on January 7, 1999, to holders of record as of
December 28, 1998. The Company expects to declare future quarterly dividends on
the Common Shares to aggregate $0.40 per Common Share annually, subject to the
discretion of its Board of Directors and dependent upon, among other things, the
Company's future earnings, financial condition, capital requirements, funds
needed for acquisitions, level of indebtedness, contractual restrictions and
other factors that the Board of Directors deems relevant.

The Company has deferred tax assets aggregating $15.1 million as of December 31,
1998, 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.


                                       31

<PAGE>
Year 2000 Issue

The Company believes that both its proprietary and purchased computer software
systems are an integral part of its business and growth strategies. The Company
depends on these computer-based information technology ("IT") systems generally
to process orders, to manage inventory and accounts receivable collections, to
purchase, sell and ship products efficiently and on a timely basis, to maintain
cost-effective operations and to provide superior service to its customers.

Each of the Company's five segments have distinct IT systems and therefore each
has its own plan for addressing the Year 2000 issue ("Y2K"). One individual in
the Company's Industrial Services business is responsible for the Y2K plans in
the Technology Services, Expediter and Integrated Supply segments. Hillman and
Harding each have one individual responsible for the Y2K plans in their
businesses. These individuals are required to provide senior management of the
Company with a detailed quarterly update on the status of their Y2K plans. The
individual responsible for the Y2K plan at SunSource Industrial Services
resigned in October. A replacement filled the position on November 25, 1998 and
this change has not caused any significant delay in implementing its Y2K plan.


         State of Readiness

The following discussion relates primarily to the Company's IT systems. The
Company recognizes that other machinery and equipment may possibly have Y2K
exposure due to the use of micro-controllers ("non-IT" systems). In general,
however, the Company's exposure to non-IT systems is limited because most of its
operations do not require machinery and equipment with imbedded
micro-controllers.


SunSource Industrial Services

o       The Expediter Segment has evaluated all its IT systems and has
        identified those requiring remediation. The mainframe and financial
        computer hardware and related operating systems have been determined to
        be Y2K compliant. Expediter's critical proprietary application software
        programs require full remediation. This process has been out-sourced to
        an independent consultant, is approximately 50% complete and is targeted
        for completion and testing by the end of the third quarter of 1999.
        Expediter's assessment of critical hardware and software purchased from
        third party vendors resulted in a determination that certain file server
        and personal computer ("PC") hardware and software applications such as
        inventory planning and purchasing, and its financial software, were not
        Y2K compliant. Expediter recently began to upgrade or replace these
        systems and expects to complete this process with full testing by the
        fourth quarter of 1999.

o       Technology Services is in the process of converting all of its operating
        units to a third-party purchased computer system as part of the
        restructuring of this segment. The new computer hardware, operating
        system and application software have all been certified by the vendor as
        being Y2K compliant. The conversion project is approximately 60%
        complete and is targeted for full completion and testing by mid-1999.
        Technology Services has also identified other purchased software
        programs used in conjunction with the primary system which must be
        upgraded to Y2K compliant versions. These upgrades are expected to be
        installed during the second quarter of 1999.


                                       32

<PAGE>

o       The critical third-party IT system for Integrated Supply's domestic
        operations has a Y2K compliant version that was installed during the
        first quarter of 1999. Certain other software applications used in
        conjunction with this system require upgrades which are also targeted
        for installation by the end of the second quarter of 1999. Certain
        hardware used by Integrated Supply requires an upgrade which is expected
        to be implemented by the end of the second quarter of 1999.

o       Most of the Company's international activities are conducted using IT
        systems covered by the foregoing discussion. The separate operating
        systems at Integrated Supply's Mexican operations are expected to be
        upgraded to Y2K compliant versions by mid-1999. The Company's net sales
        from foreign operations is less than 7% of its consolidated net sales.

Hillman

Hillman has completed remediation (including full testing) on approximately 93%
of its proprietary software programs. The remaining 7% of these programs include
lower priority programs (e.g., display only) which are expected to be completed
by mid-1999. Hillman's critical purchased software applications and hardware
have been certified by the vendors to be compliant, except for several
applications (i.e. payroll, telephone and shipping) which are expected to be
upgraded or replaced by mid-1999.

Harding

Harding's critical purchased point-of-sale software application is Y2K compliant
and its related hardware operating system has a Y2K compliant release which
Harding has recently started installing at each of its locations; this process
is expected to be completed by the end of the third quarter of 1999. Harding's
purchased financial software requires a version update to become Y2K compliant
which is expected to be installed by the end of April 1999. Harding completed
the necessary upgrades for network servers and PC hardware during the first
quarter of 1999. An assessment of Y2K compliance for each site's telephone
system is expected by the end of the second quarter of 1999 with corrective
action for any non-compliant systems scheduled for completion by the end of the
third quarter of 1999.

Acquisitions

All of the Company's recent acquisitions have been evaluated for Y2K compliant
systems and four have been identified as not having Y2K compliant systems. Three
of these systems will be integrated into existing systems that are already Y2K
compliant by the end of the third quarter of 1999. The other system requires
certain hardware replacements and software upgrades which are expected to be
completed by the end of July 1999. Prospectively, the Company will require
certification of Y2K compliance as part of its purchase agreements.




                                       33

<PAGE>

         Costs to Address Year 2000 Issues

The Company's Y2K costs incurred through December 1998 are approximately $0.7
million. Approximately 80% of these costs are related to remediation of
internally designed software applications. Y2K costs of $1.0 million are
expected to be incurred during 1999, with approximately 20% for remediation of
internally designed software applications, 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

The Company believes that its most significant risk associated with the Y2K
issue is that certain vendors may not be able to supply products to the
Company's operating businesses. The Company believes that this situation would
only result in a temporary interruption in service for the following reasons:

o       The Company does not have any single supplier that provides more than 8%
        of its total annual purchases.

o       The Company's purchasing functions and distribution centers are
        geographically diversified which allows greater access to various
        suppliers.

As a preemptive measure, the Company's businesses have requested Y2K compliance
letters from their major suppliers and have issued second requests where
necessary. The Company has received responses from approximately 80% of its
suppliers. At this time, no significant Y2K issues have been communicated from
major suppliers that have responded. The Company recognizes, however, that
certain suppliers may not respond to these requests and therefore the Company
may not be able to fully evaluate the extent of its risk in this area. To limit
the risk of supply shortages in early 2000, however, the Company's businesses
plan to increase inventory levels for selected product lines as a measure to
ensure proper fill rates.

The Company also recognizes the risk that unresolved Y2K issues within its
customer base could result in the Company not being able to sell its products to
such customers, or to collect accounts receivable from them. The Company
believes that such risk is significantly limited due to the fact that no
individual customer accounts for more that 7% of the Company's revenue.

While the Company expects all of the critical components of its businesses'
computer systems will be Y2K compliant and tested prior to December 31, 1999, it
is possible that certain corrective action or testing may not be completed as
planned. In the event that this occurs, the Company's businesses expect to be
prepared to implement procedures from their existing business continuation plans
which may be necessary in order to minimize potential disruptions to their
operations.

The Year 2000 disclosures 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. 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.


                                       34

<PAGE>

Inflation

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


Subsequent Event

After the close of business, on December 31, 1998, the Company reorganized its
primary operating subsidiary, SDI Operating Partners, L.P. (the "Operating
Partnership"), by contributing its assets and liabilities to newly-formed
corporate subsidiaries organized according to the Company's current operating
structure (the "Reorganization"). The Reorganization allows the Company to
implement certain state and local tax planning strategies, to offer its key
employees incentive stock options and align its operating businesses in
corporate form. As a result of the Reorganization, the Operating Partnership and
its general partner, SDI Partners I, L.P. cease to exist.


   
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
    

Not Applicable.









                                       35

<PAGE>

   
Item 8 - Financial Statements and Supplementary Data.
    




                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>

                                                                                              Page
<S>                                                                                            <C>
Report of Independent Accountants                                                              37

Financial Statements:

         Consolidated Balance Sheets, December 31, 1998 and 1997                               38

         Consolidated Statements of Income, Years ended
           December 31, 1998, 1997 and 1996                                                    39

         Consolidated Statements of Cash Flows, Years ended
           December 31, 1998, 1997 and 1996                                                    40
   
         Consolidated Statements of Changes in Partners' Capital for the Year
           ended December 31, 1996 and Changes in Stockholders' Equity (Deficit)
           for the Years ended December 31, 1998 and 1997                                      41
    

         Notes to Consolidated Financial Statements                                            42-62


Financial Statement Schedules:

         I                 Condensed Financial Information of Registrant                       63-64

         II                Valuation Accounts                                                  65

</TABLE>



                                       36

<PAGE>

                        Report of Independent Accountants



The Board of Directors
  SunSource Inc.


In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
SunSource Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of operations and cash flows for each of the three years in the period
ending December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and the significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.




PricewaterhouseCoopers LLP

March 26, 1999


















                                       37

<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (dollars in thousands)
<TABLE>
<CAPTION>
                                                                      December 31,      December 31,
                ASSETS                                                    1998             1997
              ---------                                              --------------    ------------- 
<S>                                                                  <C>               <C>        
Current assets:
  Cash and cash equivalents                                          $     2,796       $     5,638
  Accounts receivable, net of
    allowance for doubtful accounts of
    $2,489 and $2,195, respectively                                        88,629            82,501
  Inventories                                                             112,497           103,369
  Deferred income tax asset                                                 9,886            10,791
  Other current assets                                                      5,421             4,559
                                                                     ------------       ----------- 
      Total current assets                                                219,229           206,858
Property and equipment, net                                                26,770            21,939
Goodwill, net of accumulated amortization
  of $16,428 and $14,367, respectively                                     77,544            62,588
Other intangibles, net of accumulated                                                   
  amortization of $15,125 and $14,910, respectively                         1,807               784
Deferred income tax asset                                                   5,202             5,014
Cash surrender value of life insurance policies                            10,262             8,407
Other assets                                                                  754               552
                                                                     ------------      ------------ 
      Total assets                                                    $   341,568       $   306,142
                                                                     ============      ============

          LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable                                                    $    58,353       $    50,125
  Notes payable                                                             1,770             2,080
  Current portion of capitalized lease obligations                            276               156
  Dividends / distributions payable                                           676             2,995
  Deferred income tax liability                                               929               935
  Accrued expenses:                                                                     
    Salaries and wages                                                      8,379             6,891
    Income and other taxes                                                  4,194             4,286
    Other accrued expenses                                                 23,050            18,452
                                                                      -----------       ----------- 
      Total current liabilities                                            97,627            85,920
Senior notes                                                               60,000            60,000
Bank revolving credit                                                      35,000            33,000
Capitalized lease obligations                                                 566               572
Deferred compensation                                                      11,802            10,451
Other liabilities                                                             308               787
                                                                      -----------       ----------- 
      Total liabilities                                                   205,303           190,730
                                                                      -----------       ----------- 
Guaranteed preferred beneficial interests in the
 Company's junior subordinated debentures                                 115,551           115,903
                                                                     ============      ============
Commitments and contingencies

Stockholders' equity (deficit):
  Preferred stock, $.01 par, 1,000,000 shares
   authorized, none issued                                                    --                 --
  Common stock, $.01 par, 20,000,000 shares authorized,
   7,217,263 and 6,418,936 shares issued, respectively                        72                 64
  Additional paid-in capital                                              21,099                 --
  Retained earnings                                                       12,748              1,735
  Unearned compensation                                                     (229)                --
  Accumulated other comprehensive income                                  (4,596)            (2,290)
  Treasury stock, at cost, 461,100 shares
   in 1998, none in 1997                                                  (8,380)                --
                                                                      -----------       ----------- 
      Total stockholders' equity (deficit)                                20,714               (491)
                                                                      -----------       ----------- 
      Total liabilities and stockholders'
        equity (deficit)                                             $   341,568        $   306,142
                                                                     ============      ============

</TABLE>
           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       38
<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                        FOR THE YEARS ENDED DECEMBER 31,
    (dollars in thousands, except for partnership interest and share amounts)
<TABLE>
<CAPTION>

                                                          1998         1997          1996
                                                       ---------    ---------     ----------
<S>                                                    <C>          <C>           <C>       
Net sales                                              $ 712,470    $ 694,707     $  646,503
Cost of sales                                            421,302      414,400        388,189
                                                       ---------    ---------     ----------
   Gross profit                                          291,168      280,307        258,314
                                                       ---------    ---------     ----------

Operating expenses:
  Selling, general and administrative expenses           241,479      232,353        216,434
  Management fee to general partner                           --        2,491          3,330
  Depreciation                                             5,016        4,009          3,603
  Amortization                                             2,276        1,894          1,924
                                                       ---------    ---------     ----------
   Total operating expenses                              248,771      240,747        225,291
                                                       ---------    ---------     ----------
Provision for litigation matters -
 divested operations                                       1,600           --             --
Transaction and other related costs                           --        3,053          2,150
Restructuring charges                                         --           --          5,950
Other income (expense), net                                  414         (399)            79
                                                       ---------    ---------     ----------
   Income from operations                                 41,211       36,108         25,002
Interest expense, net                                      6,838        7,198          6,875
Distributions on guaranteed preferred
 beneficial interests                                     12,232        3,058             --
                                                       ---------    ---------     ----------
    Income before provision for income taxes              22,141       25,852         18,127
Provision (benefit) for income taxes                       8,324       (6,680)        (1,140)
                                                       ---------    ---------     ----------
    Income before extraordinary loss                      13,817       32,532         19,267
Extraordinary loss from early extinguishment
    of debt (note 6)                                          --       (3,392)            --
                                                       =========    =========     ==========

    Net income                                         $  13,817    $  29,140     $   19,267
                                                       =========    =========     ==========
Basic and diluted net income
 per common share (note 1)                                 $2.00          N/A            N/A

Pro forma net income per common share* (note 1)              N/A        $1.88            N/A

Weighted average number of
  outstanding common shares (note 1)                   6,907,318    6,418,936            N/A

Net income allocated to partners:
  General partner                                            N/A          N/A     $      193
                                                                                  ----------
  Class A limited partners                                   N/A          N/A     $   12,210
                                                                                  ----------
  Class B limited partners                                   N/A          N/A     $    6,864
                                                                                  ----------

Earnings per limited partnership interest:
   Income before extraordinary loss
     - Class A interest                                      N/A          N/A     $     1.10
     - Class B interest                                      N/A          N/A     $     0.32
                                                         
   Extraordinary loss                                    
     - Class A interest                                      N/A          N/A             --
     - Class B interest                                      N/A          N/A             --
                                                       
   Net income                                          
     - Class A interest                                      N/A          N/A     $     1.10
     - Class B interest                                      N/A          N/A     $     0.32

Weighted average number of outstanding limited partnership interests:
  - Class A interests                                        N/A          N/A     11,099,573
  - Class B interests                                        N/A          N/A     21,675,746

</TABLE>
* Includes the effects of the Conversion and Refinancing only.

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                       39
<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEARS ENDED DECEMBER 31,
                             (dollars in thousands)
<TABLE>
<CAPTION>

                                                                      1998          1997         1996
                                                                   ---------    ----------    ---------
<S>                                                                <C>          <C>           <C>      
Cash flows from operating activities:
  Net income                                                       $  13,817    $   29,140    $  19,267
  Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                                     7,292         5,903        5,547


     Extraordinary loss                                                   --         3,392           --
     Restructuring charges                                                --            --        5,950
     Transaction costs                                                    --         3,053        2,150
     Provision for deferred compensation                                  --         2,649        1,071
     Decrease (increase) in deferred income taxes, net                   711        (8,912)      (2,163)
     Increase in cash value of life insurance                           (846)         (525)        (157)
     Changes in current operating items:
        Increase in accounts receivable                               (3,616)       (3,627)      (2,465)
        Increase in inventories                                       (7,303)         (848)      (7,572)
        Decrease (increase) in other current assets                     (792)          175           70
        Increase in accounts payable                                   5,798         1,325        6,062
        Increase (decrease) in income taxes payable                      134         1,136          (32)
        Decrease in accrued interest                                      --          (473)         (47)
        Decrease in accrued restructuring charges
          and transaction costs                                       (1,099)       (4,569)      (1,899)
        Increase (decrease) in other accrued liabilities               5,633         1,459       (2,737)
     Other items, net                                                 (1,353)       (1,365)         253
                                                                   ---------    ----------    ---------

    Net cash provided by operating activities                         18,376        27,913       23,298
                                                                   ---------    ----------    ---------

Cash flows from investing activities:
  Proceeds from sale of property and equipment                           485           802           62
  Payments for acquired businesses                                   (22,807)         (793)        (683)
  Capital expenditures                                                (7,078)       (4,933)      (4,341)
  Investment in life insurance policies                                 (903)       (3,316)      (1,400)
  Other, net                                                              20           144          (39)
                                                                   ---------    ----------    ---------
    Net cash used for investing activities                           (30,283)       (8,096)      (6,401)
                                                                   ---------    ----------    ---------

Cash flows from financing activities:
  Net proceeds from issuance of common stock                          20,813            --           --
  Proceeds from issuance of senior notes                                  --        60,000           --
  Borrowings under the bank credit agreement, net                      2,000        22,000       11,000
  Purchase of treasury stock at cost                                  (8,380)           --           --
  Cash distributions / dividends to investors                         (4,848)      (13,901)     (25,641)
  Cash distributions paid on Class A exchange                             --       (14,429)          --
  Prepayment of senior notes                                              --       (63,934)          --
  Repayment of senior notes                                               --            --       (6,395)
  Prepayment penalties and related costs                                  --        (4,278)          --
  Other, net                                                            (520)       (1,303)         (95)
                                                                   ---------    ----------    ---------
    Net cash provided by (used for) financing activities               9,065       (15,845)     (21,131)
                                                                   ---------    ----------    ---------
Net (decrease) increase in cash and cash equivalents                  (2,842)        3,972       (4,234)

Cash and cash equivalents at beginning of period                       5,638         1,666        5,900
                                                                   ---------    ----------    ---------
Cash and cash equivalents at end of period                         $   2,796    $    5,638    $   1,666
                                                                   =========    ==========    =========
</TABLE>


           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




                                       40

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
   CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEAR ENDED
              DECEMBER 31, 1996 AND CHANGES IN STOCKHOLDERS' EQUITY
            (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
                             (dollars in thousands)
<TABLE>
<CAPTION>


                                                                               PARTNERS' CAPITAL                               
                                                     --------------------------------------------------------------------      
                                                                                                              Cumulative       
                                                                                                                Foreign        
                                                        General        Class A       Class B      Class B     Translation      
                                                        Partner        Limited       Limited     Treasury      Adjustment      
                                                        -------        -------       -------     --------     -----------      
<S>                          <C> <C>                    <C>           <C>           <C>          <C>           <C>             
Partners' Capital - December 31, 1995                   $   963       $ 67,642      $ 29,252     $ (1,514)     $ (1,400)       
  Net income                                                193         12,210         6,864            -             -        
  Cash distributions paid and/or                                                                              
    declared to partners                                   (196)       (12,210)       (7,076)           -             -        
  Change in cumulative foreign                                                                                
   translation adjustment, net of tax                        -               -             -            -          (109)       
                                                        -------        -------       -------     --------      --------        
Partners' Capital - December 31, 1996                       960         67,642        29,040       (1,514)       (1,509)       
  Net income                                                260          9,157        16,633                                   
  Cash distributions paid and/or                                                                              
    declared to partners                                   (150)        (8,140)       (6,730)                                  
  Change in cumulative foreign                                                                                
   translation adjustment, net of tax                        -               -             -            -          (167)       
                                                        -------        -------       -------     --------      --------        
Partners' Capital - September 30, 1997                    1,070         68,659        38,943       (1,514)       (1,676)       
Conversion adjustments:                                                                                       
  Common stock                                                                           (64)                                  
  Paid-in capital                                        (1,070)       (68,659)                                                
  Comprehensive income                                                                                            1,676        
  Retained earnings                                                                  (38,879)       1,514                      
  Minority ownership (a)                                                                                                       
  Class A exchange (b)                                                                                                         
  Goodwill - Minority interest (c)                                                                                             
                                                        -------       --------      --------     --------      -------- 
Stockholders' Deficit - September 30, 1997              $     -       $      -      $      -     $      -      $      -        
                                                        =======       ========      ========     ========      ========        
  Net income                                                                                                                   
  Change in cumulative foreign                                                                                              
   translation adjustment, net of tax                                                                                          
  Adjustment to cash distributions                                                                                          
     declared to partners                                                                                                      
  Dividends declared on common stock                                                                                           
                                                                                                                            
Stockholders' Deficit - December 31, 1997                                                                                      
                                                                                                                            
  Net income                                                                                                                   
  Change in cumulative foreign translation                                                                                  
     adjustment, net of tax                                                                                                    
  Comprehensive income                                                                                                         
  Issuance of 796,408 shares of common stock                                                                                
     in public offering                                                                                                        
  Issuance of 1,988 shares of common stock                                                                                  
   to certain non-employee directors                                                                                           
  Dividends declared on common stock                                                                                           
  Stock options granted at a discount                                                                                          
  Repurchase of 461,100 shares of common stock                                                                                 

Stockholders' Equity - December 31, 1998                                                                                       
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>

                                                                          STOCKHOLDERS' EQUITY (DEFICIT)
                                                     -----------------------------------------------------------------------
                                                                               Retained                       Accumulated   
                                                                 Additional    Earnings /                       Other       
                                                     Common       Paid-in     Accumulated      Unearned      Comprehensive  
                                                      Stock        Capital      Deficit)      Compensation     Income (d)   
                                                     ------      ----------   -----------     ------------   -------------  
<S>                          <C> <C>                                                                                        
Partners' Capital - December 31, 1995                                                                                       
  Net income                                                                                                                
  Cash distributions paid and/or                     
    declared to partners                                                                                                    
  Change in cumulative foreign                       
   translation adjustment, net of tax                                                                                       
                                                                                                                            
Partners' Capital - December 31, 1996                                                                                       
  Net income                                                                                                                
  Cash distributions paid and/or                     
    declared to partners                                                                                                    
  Change in cumulative foreign                       
   translation adjustment, net of tax                     -            -               -               -            -       
                                                     ------     --------        --------          -------    ---------      
Partners' Capital - September 30, 1997                    -            -               -               -            -       
Conversion adjustments:                              
  Common stock                                           64                                                                 
  Paid-in capital                                                 68,659           1,070                                    
  Comprehensive income                                                                                         (1,676)      
  Retained earnings                                                               37,365                                    
  Minority ownership (a)                                                           1,082                                    
  Class A exchange (b)                                           (68,659)        (61,761)                                   
  Goodwill - Minority interest (c)                                                20,759                                    
                                                     ------     --------        --------          -------    ---------      
Stockholders' Deficit - September 30, 1997               64            -          (1,485)              -       (1,676)      
                                                                                                                            
  Net income                                                                       3,090                                    
  Change in cumulative foreign                       
   translation adjustment, net of tax                                                                            (614)      
  Adjustment to cash distributions                   
     declared to partners                                                            772                                    
  Dividends declared on common stock                                                (642)              -                    
                                                     ------     --------        --------          -------    ---------      
Stockholders' Deficit - December 31, 1997                64            -           1,735               -       (2,290)      
                                                                                                                            
  Net income                                                                      13,817                                    
  Change in cumulative foreign translation           
     adjustment, net of tax                                                                                    (2,306)      
                                                                                                                            
  Comprehensive income                                                                                                      
                                                                                                                            
  Issuance of 796,408 shares of common stock         
     in public offering                                   8       20,806                                                    
  Issuance of 1,988 shares of common stock           
   to certain non-employee directors                                  39                                                    
  Dividends declared on common stock                                              (2,804)                                   
  Stock options granted at a discount                                254                            (229)                   
  Repurchase of 461,100 shares of common stock                                                                              
                                                     ------     --------        --------          -------    ---------      
Stockholders' Equity - December 31, 1998             $   72     $ 21,099        $ 12,748          $ (229)    $ (4,596)      
                                                     ======     ========        ========          =======    =========      
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
                                                   
                                                    ----------------------------------
                                                                       Total Partners'
                                                                         Capital /
                                                      Treasury         Stockholders'
                                                        Stock        (Deficit) Equity
                                                      --------       ----------------
<S>                          <C> <C>                                       <C>     
Partners' Capital - December 31, 1995                                      $ 94,943
  Net income                                                                 19,267
  Cash distributions paid and/or                    
    declared to partners                                                    (19,482)
  Change in cumulative foreign                      
   translation adjustment, net of tax                                          (109)
                                                                           --------
Partners' Capital - December 31, 1996                                        94,619
  Net income                                                                 26,050
  Cash distributions paid and/or                    
    declared to partners                                                    (15,020)
  Change in cumulative foreign                      
   translation adjustment, net of tax                        -                 (167)
                                                      ---------            --------
Partners' Capital - September 30, 1997                       -              105,482
Conversion adjustments:                             
  Common stock                                                                    -
  Paid-in capital                                                                 -
  Comprehensive income                                                            -
  Retained earnings                                                               -
  Minority ownership (a)                                                      1,082
  Class A exchange (b)                                                     (130,420)
  Goodwill - Minority interest (c)                                           20,759
                                                      ---------            --------
Stockholders' Deficit - September 30, 1997                   -               (3,097)
                                                                                                     
  Net income                                                                  3,090
  Change in cumulative foreign                      
   translation adjustment, net of tax                                          (614)
  Adjustment to cash distributions                  
     declared to partners                                                       772
  Dividends declared on common stock                                           (642)
                                                      ---------            --------
Stockholders' Deficit - December 31, 1997                    -                 (491)
                                                                           --------
  Net income                                                                 13,817
  Change in cumulative foreign translation          
     adjustment, net of tax                                                  (2,306)
                                                                           --------
  Comprehensive income                                                       11,511
                                                                           --------
  Issuance of 796,408 shares of common stock        
     in public offering                                                      20,814
  Issuance of 1,988 shares of common stock          
   to certain non-employee directors                                             39
  Dividends declared on common stock                                         (2,804)
  Stock options granted at a discount                                            25
  Repurchase of 461,100 shares of common stock          (8,380)              (8,380)
                                                      ---------            --------
Stockholders' Equity - December 31, 1998              $ (8,380)            $ 20,714
                                                      =========            ========
</TABLE>

(a)  Minority ownership included as other liabilities by the Partnership.

(b)  Each Class A limited partnership interest was exchanged for $1.30 in cash
     plus 0.38 share of Trust Preferred Securities recorded at fair value based
     on the price of the Class A interests upon close of trading on the New York
     Stock Exchange on September 30, 1997 of $11.75. This fair value of $115,991
     is recorded by the Company as Guaranteed Preferred Beneficial Interests in
     the Company's Junior Subordinated Debentures.

(c)  Goodwill related to the exchange of the GP minority interest (See Note 1).

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

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




41

<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (dollars in thousands, except per share amounts)

   
1.  Basis of Presentation:
    

The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company"), its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the
"Trust"). All inter-company balances and transactions have been eliminated.

Effective the close of business on December 31, 1998, the Company reorganized
the Operating Partnership by contributing its assets and liabilities to
newly-formed, indirect, wholly-owned corporate subsidiaries organized according
to the Company's current operating structure (the "Reorganization"). As a result
of the Reorganization, the Operating Partnership and its general partner, SDI
Partners I, L.P.(the "G.P.") cease to exist. In connection with the
Reorganization, the Company amended its debt financing agreements (see Notes 9
and 10).

         Nature of Operations:

The Company is one of the leading 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.
("SunSource Industrial Services Company"), The Hillman Group Inc. ("Hillman")
and Harding Glass Inc. ("Harding").

SunSource Industrial Services Company operates in three business segments: (1)
Technology Services, operating as SunSource Technology Services Company, Inc.;
(2) Expediter, operating as Kar Products, Inc.; (3) Integrated Supply, operating
as SunSource Inventory Management Company, Inc. Technology Services offers a
full range of technology-based products and services to small, medium and large
manufacturers. The Expediter segment provides personalized, small parts
inventory management services to low volume customers. The Integrated Supply
segment provides major industrial manufacturing customers with comprehensive
inventory management services for their maintenance, repair and operating
supplies.

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

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

Technology Services, Expediter and Integrated Supply accounted for 45%, 18% and
6%, respectively, of the Company's consolidated 1998 net sales and Hillman and
Harding accounted for 18% and 13%, respectively. On a consolidated basis, the
Company has over 200,000 customers, the largest of which accounted for less than
7% of 1998 net sales. The Company's foreign sales in Canada and Mexico accounted
for less than 10% of its consolidated 1998 net sales. The average single sale in
1998 was less than three hundred dollars. Sales performance is tied closely to
the overall performance of the non-defense-goods producing sector of Gross
Domestic Product in the United States.



                                       42

<PAGE>


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

   
1.  Basis of Presentation, continued:
    

         Conversion to Corporate Form

On September 25, 1997, the limited partners of the Partnership approved the
conversion of the Partnership to a corporation effective at the close of
business on September 30, 1997 (the "Conversion"). In connection with the
Conversion, the Company refinanced all of its outstanding bank revolving credit
and senior note debt (the "Refinancing"). As a result of the Conversion, the
Class A limited partnership interests in the Partnership were converted into
cash and Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures (the "Trust Preferred Securities", which were issued by
the Trust), and the Class B limited partnership interests in the Partnership
were converted into common stock of the Company and the general and limited
partnership interests in the GP, which was also the general partner of the
Partnership, were exchanged with the Company for 1,000,000 shares of its common
stock.

The exchange represented by the GP's 1% ownership interest in the Company was
subject to purchase accounting in accordance with Accounting Principles Bulletin
("APB") No. 16 and resulted in the Company recording goodwill in the amount of
$20,759 at September 30, 1997. The Company incurred transaction and other costs
related to the Conversion of $5,171, of which $4,668 represents transaction
costs and $503 a charge for deferred compensation accelerated as a result of the
Conversion. Cash payments in 1998, 1997 and 1996 were $238, $2,698 and $1,732,
respectively.

         Restructuring Charges:

In December 1996, the Company recorded a provision for restructuring charges in
the amount of $5,950 for Technology Services and Harding in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." Restructuring charges for Technology Services in the amount of $4,400
included termination benefits for 175 employees and other exit costs.
Restructuring charges for Harding in the amount of $1,550 represent primarily
the write-off of assets in connection with the Company's decision to withdraw
from certain geographic markets which was completed in 1997. The following table
summarizes activity in the restructuring liability for Technology Services by
balance sheet classification for the twelve months ended December 31, 1998:

<TABLE>
<CAPTION>
                                                 Termination         Other
                                                   Benefits        Exit Costs         Total  
                                                 -----------       ----------         -----  
<S>                 <C> <C>                      <C>               <C>              <C>     
Current - other accrued expenses:
Balance at December 31, 1997:                    $    1,278        $     484        $  1,762
  Reduction for payments                               (738)            (123)           (861)
  Reclassified from long-term                           259              138             397 
                                                 -----------       ----------       ---------
Balance at December 31, 1998:                    $      799        $     499        $  1,298 
                                                 ===========       ==========       =========

Long-term - other liabilities:
Balance at December 31, 1997:                    $      409        $     238        $    647
  Long-term - reclassified to current                  (259)            (138)           (397)
                                                 -----------       ----------       ---------
Balance at December 31, 1998:                    $      150        $     100        $    250 
                                                 ===========       ==========       =========
</TABLE>

Termination payments to-date represent severance payments and other support
costs for approximately 90 employees; other exit costs include legal and
consulting costs to execute termination activities and facility shut-down costs.

                                                43

<PAGE>

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


   
2.  Summary of Significant Accounting Policies:
    

         Cash Equivalents:

Cash equivalents consist of commercial paper, U.S. Treasury obligations and
other liquid securities purchased with initial maturities less than 90 days and
are stated at cost which approximates market value.

         Inventories:

Inventories, which consist of products purchased for resale, are valued at the
lower of cost or market, cost being determined principally on the first-in,
first-out method.

         Property and Equipment:

Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major renewals.
Maintenance and repairs are charged to expense as incurred. When assets are
sold, or otherwise disposed of, the cost and related accumulated depreciation
are removed from their respective accounts, and the resulting gain or loss is
reflected in current operations.

         Depreciation:

For financial accounting purposes, depreciation, including that related to plant
and equipment acquired under capital leases, is computed on the straight-line
method over the estimated useful lives of the assets, generally three to
twenty-five years, or, if shorter, over the terms of the related leases.

         Goodwill and Other Intangible Assets:

Goodwill related to the excess of acquisition cost over the fair value of net
assets acquired and the goodwill associated with the GP Exchange discussed in
Note 1 is amortized on a straight-line basis over forty years. Other intangible
assets arising principally from acquisitions are amortized on a straight-line
basis over periods ranging from three to ten years.

         Long-Lived Assets:

Under the provisions of Statement of Financial Accounting Standard ("SFAS") 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company has evaluated its long-lived assets and certain
identifiable intangibles for financial impairment, and will continue to evaluate
them, based on the estimated future cash flows, as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. See Note 1, "Restructuring Charges" for information on the
write-down of assets at Harding in 1996.





                                       44

<PAGE>

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

   
2.  Summary of Significant Accounting Policies, continued:
    

         Income Taxes:

Deferred income taxes are computed using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. As a result
of the Conversion, the Company recognized additional deferred income tax
benefits which were not previously available to the Partnership due to its
partnership status.

         Retirement Benefits:

Certain employees are covered under profit-sharing retirement plans ("defined
contribution plans") for which contributions are determined on an annual basis
in accordance with the requirements of each plan. Defined benefit plan
contributions covering certain employees are funded, at a minimum, in accordance
with the requirements of the Employee Retirement Income Security Act of 1974, as
amended.

In accordance with collective bargaining agreements, annual contributions to
multi-employer pension plans are made. These contributions, which are based on
fixed contributions per month for each hour worked, are charged to income as
incurred.

Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan.

         Fair Value of Financial Instruments:

Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value due to short-term maturity or revolving
nature of these instruments. The fair values of the Company's debt instruments
are disclosed in Note 10. The fair value of the Trust Preferred Securities are
disclosed in Note 13.

         Translation of Foreign Currencies:

The translation of applicable foreign-currency-based financial statements into
U.S. dollars is performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using an
average exchange rate during the period. The changes in the cumulative foreign
translation adjustment for each period relate to translation adjustments in
their entirety.

Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ended December 31, 1998.

         Use of Estimates in the Preparation of Financial Statements:

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


                                       45

<PAGE>


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

   
3.  Acquisitions:
    

During 1996, the Company acquired the assets of a hydraulic parts distributor
which were integrated into its Technology Services segment

During 1998 and 1997, Harding acquired the assets of eleven and three retail
glass shops, respectively, which were integrated into its existing operations.

During 1998, Hillman acquired the assets of three companies which supply keys,
letters, numbers and signs and other products to retail hardware stores, which
were integrated into its existing operations.

For the years ended December 31, 1998, 1997 and 1996, respectively, net cash
consideration paid for the acquired businesses, including transaction costs, was
$22,807, $793 and $683, including goodwill of $18,210, $429, and $141 and the
assumption of certain liabilities of $3,085, $236 and $58.

These acquisitions have been accounted for as purchases and, accordingly, the
results of operations have been included in the accompanying consolidated
financial statements from the date of acquisition. The following disclosures
indicate the Company's estimate of financial results had these acquisitions been
consummated on January 1, 1997:
                                                          Pro forma      
                                                  -------------------------
                                                    1998             1997*  
                                                  --------         --------
      Net sales                                   $733,539         $726,534
      Income before extraordinary items             15,431           11,770
      Net income                                    15,431           11,770
      Basic and diluted earnings per share           $2.23            $1.83

* Includes the effects of the Conversion and Refinancing.

   
4.   Related Party Transactions:
    

Previously under partnership form, the GP earned a management fee annually from
the Operating Partnership equal to 3% of the aggregate initial capital
investment of the holders of Class A interests. Management fees earned in each
of years 1997 and 1996 were $2,491 and $3,330, respectively. The 1997 management
fee was pro-rated through the Conversion and paid in full on September 30, 1997.
The management fee for 1996 was paid in full in March 1997.

From January 1, 1996 through September 30, 1998, a member of the Company's Board
of Directors was a partner in a law firm which represents the Company in various
matters and with which the Company had a leasing arrangement for office space
during 1996 and through September 1997. Payments to this law firm were $389,
$811 and $407 in 1998, 1997 and 1996, respectively. Amounts payable to this law
firm were $109, $10 and $25 at December 31, 1998, 1997 and 1996, respectively.

An affiliate of a firm which owned beneficially more than 5% of the Company's
Common Shares during 1998 performed investment banking services for the Company
in 1998 and 1996. Payments for these services were $361 in 1998 and $125 in
1996.

A member of the Company's Board of Directors is an officer of a firm which
performed investment banking services for the Company in 1998 and 1996. Payments
for these services were $361 in 1998 and $2 in 1996.


                                       46

<PAGE>


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



   
5.  Income Taxes:
    

The components of the provision (benefit) for income taxes are as follows for
the three years ended:
                                                          December 31,       
  Current:                                        1998        1997        1996  
                                               ---------    --------    --------
   Federal                                     $  4,021     $   770     $    --
   State and local                                  915         457         418
   Foreign                                        1,731       1,005         605 
                                               ---------    --------    --------
     Total current                                6,667       2,232       1,023 
                                               ---------    --------    --------
  Deferred:
   Federal                                        1,635         183     $(1,919)
   State and local                                  187          42        (244)
   Foreign                                         (165)        428          -- 
                                               ---------    --------    --------
     Total deferred                               1,657         653      (2,163)
                                               ---------    --------    --------
  Deferred tax benefit upon conversion               --      (9,565)         -- 
                                               ----------   --------    --------
     Provision (benefit) for income taxes      $  8,324     $(6,680)    $(1,140)
                                               ==========   ========    ========


Upon the Conversion, the Company recorded additional deferred tax assets of
$9,565 not previously available under partnership form. The table below reflects
the significant components of the company's net deferred tax assets:

                                                             December 31,   
                                                          1998          1997 
                                                          ----          ---- 
       Deferred tax assets:
         Inventory                                       $ 4,917       $ 5,180
         Deferred compensation                             3,592         3,827
         Casualty loss liability                           1,046         1,560
         Goodwill                                            274            --
         Prepayment penalty                                  835         1,059
         Bad debt reserve                                    931           936
         Vacation pay liability                              644           998
         Restructuring reserve                               604           780
         Net operating loss - Mexico                         512           489
         Transaction costs                                   731           777
         Litigation reserves                                 624            --
         All other                                           378           199
                                                        --------      --------
                         Deferred tax assets             $15,088       $15,805
                                                        --------      --------

       Deferred tax liabilities:
         Costs of goods sold - Mexico                       (929)         (935)
                                                        --------      --------

                         Net deferred tax assets         $14,159       $14,870
                                                        ========      ========



                                       47

<PAGE>


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

   
5.  Income Taxes, continued:
    

Below is a reconciliation of U.S. Federal income tax rates to the effective tax
rates for the twelve months ended December 31, 1998 and the period from the
Conversion through December 31, 1997:
                                                          12 Months     3 Months
                                                            Ended         Ended
                                                          12/31/98      12/31/97
                                                          --------      --------
         U.S. federal income tax rate                        35.0%        35.0%
         Foreign income tax rates in excess of
          U.S. federal income tax rates                       1.8%         8.9%
         State and local income taxes, net of
          U.S. federal income tax benefit                     3.8%         4.2%
         Non-deductible expenses                              4.9%         4.3%
         Tax benefits associated with the
          conversion, net                                    (7.9)%         --
         Recognition of deferred tax benefits relating
          to cumulative temporary differences                   --       (10.2%)
                                                             -----       -----
         Effective income tax rate                           37.6%        42.2% 
                                                             =====       =====

   
6.  Extraordinary Losses:
    

In 1997, in connection with the Refinancing, the Company paid prepayment
penalties of $4,343 and recorded an extraordinary loss of $3,392 (net of
deferred tax benefits of $951) due to the early extinguishment of all of the
Company's previously outstanding Series A 9.08% and Series B 8.44% Senior Notes.

   
7.   Property and Equipment:
    

Property and equipment consist of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                      Estimated
                                                     Useful Life     December 31, 
                                                       (Years)          1998           1997 
                                                     -----------      -------        -------
<S>                                                                   <C>            <C>    
         Land                                           N/A           $ 3,058        $ 3,196
         Buildings and leasehold improvements          10-30           18,425         18,367
         Machinery and equipment                        3-10           27,286         20,493
         Furniture and fixtures                         3-5            12,010         10,592
                                                                      -------        -------
                                                                       60,779         52,648
         Less accumulated depreciation                                 34,009         30,709
                                                                      -------        -------
                                                                      $26,770        $21,939
                                                                      =======        =======
</TABLE>

   
8.   Notes Payable:
    

Notes payable consisted of the following at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                              December 31,  
                                                                         1998            1997
                                                                         ----            ----
<S>                                                                     <C>             <C>   
         Trade notes associated with glass inventory financing          $  974          $1,099
         Notes associated with casualty insurance financing                796             981
                                                                        ------          ------
                                                                        $1,770          $2,080
                                                                        ======          ======
</TABLE>

The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1998 and 1997 was 2.57% and 2.83%, respectively.


                                       48

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

   
9.   Lines of Credit:
    

On September 30, 1997, the Operating Partnership entered into a five-year bank
credit agreement with five lenders (the "Credit Agreement"). In connection with
the Reorganization, the Credit Agreement was amended and restated as of December
31, 1998 (the "Amended Credit Agreement"), at which time one of the five lenders
withdrew from the Credit Agreement, temporarily reducing the amount of the
facility to $75,000. On January 6, 1999, a new lender joined the Amended Credit
Agreement which restored the facility to $90,000. The Company and its newly
formed domestic corporate subsidiaries are co-borrowers under the Amended Credit
Agreement. The Amended Credit Agreement provides borrowings on a revolving
credit basis at interest rates based on the London Interbank Offered Rate
("LIBOR") plus a margin of between 1.00% and 1.50% (the "LIBOR Margin") based on
certain leverage ratios as stated in the Credit Agreement, or prime. Letters of
credit commitment fees are based on the LIBOR Margin when issued.

As of December 31, 1998, the LIBOR rate was 5.16%, the LIBOR Margin was 1.25%
and the prime rate was 7.75%. The Company's weighted-average interest rate for
borrowings under its revolving credit facility was 7.05%, 7.79% and 8.82% for
the years ended December 31, 1998, 1997 and 1996, respectively. As of December
31, 1998, the Company had $36,577 available under the temporarily reduced
facility of $75,000. The $38,423 outstanding consists of bank borrowings at
LIBOR amounting to $35,000 as reflected on the Company's consolidated balance
sheet at December 31, 1998, and letter of credit commitments aggregating $3,423.
Amounts outstanding under the Amended Credit Agreement are due upon its
termination on September 30, 2002.

The Amended Credit Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific coverage ratios and levels of
financial position and restricts incurrence of additional debt and the sale of
assets. The Company is able to utilize any unused capacity under the revolving
credit line for acquisitions. If the Company sells a significant amount of
assets as defined in the Amended Credit Agreement, it must make an offer of
prepayment of note principal to the lenders determined on an applicable share
basis with the senior noteholder under the Amended Noteholder Agreement (see
Note 10).

The Company has another credit facility available in the amount of $500 for
letters of credit of which no amount was outstanding at December 31, 1998. The
letters of credit commitments are issued at varying rates. This facility,
renewable annually, is not subject to compensating balance requirements or
unused commitment fees.

An indirect, wholly-owned Canadian subsidiary of the Company has a $2,500
Canadian dollar line of credit with a local lender for working capital purposes
of which no amount was outstanding at December 31, 1998. This facility, which is
renewable annually, provides bank borrowings at an interest rate of prime plus
1/4 of 1%.

   
10.   Long-Term Debt:
    

On September 30, 1997, the Company issued $60,000 of senior notes through a
private placement with an institutional investor. The senior notes are payable
in full on September 30, 2002 and were issued at a fixed rate of 7.66%. A
surcharge rate of 7.91% was in effect from September 30, 1997 through December
31, 1997, as provided in the Noteholder Agreement (the "Noteholder Agreement").


                                       49

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)


   
10.   Long-Term Debt, continued:
    

In connection with the Reorganization, the Noteholder Agreement was amended and
restated (the "Amended Noteholder Agreement"). The Company and its newly formed
domestic corporate subsidiaries are co-obligors under the Amended Noteholder
Agreement. Interest is required to be paid quarterly on March 30, June 30,
September 30 and December 30 on the outstanding principal of the senior notes.
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty ("Make-Whole Amount"),
if any, as defined in the Amended Noteholder Agreement.

The Amended Noteholder Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific coverage ratios and levels of
financial position and restricts incurrence of additional debt and the sale of
assets. If the Company sells a significant amount of assets as defined in the
Amended Noteholder Agreement, it must make an offer of prepayment of note
principal to the senior noteholder determined on an applicable share basis with
the lenders under the Credit Agreement. The prepayment offer must also include
accrued interest thereon as defined in the Amended Noteholder Agreement. A Make
Whole Amount is not required to be paid on the first $15,000 of net cash
proceeds from certain dispositions accepted as a prepayment by the senior
noteholder or upon a change in control as defined in the Amended Noteholder
Agreement.

As of December 31, 1998, the estimated fair value of the Company's senior notes
is approximately $65,000 as determined in accordance with SFAS 107. The Company
discounted the future cash flows of its senior notes based on borrowing rates
for debt with similar terms and remaining maturities. The fair value estimate is
made at a specific point in time and is subjective in nature and involves
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimate.


   
11.  Leases:
    

Certain warehouse and office space and equipment are leased under capital and
operating leases with terms in excess of one year. Future minimum lease payments
under noncancellable leases consisted of the following at December 31, 1998:

                                                           Capital   Operating
                                                           Leases     Leases 
                                                           ------     -------- 
   1999                                                    $  302      11,972
   2000                                                       302       9,754
   2001                                                       230       7,256
   2002                                                         8       5,661
   2003                                                        --       5,197
   Later years                                                 --       9,659
                                                            ------    -------
     Total minimum lease payments                           $ 842     $49,499
                                                                      =======
   Less amounts representing interest                        (155)
                                                            ------
     Present value of Net Minimum Lease payments
     (including $276 currently payable)                     $ 687 
                                                            ======

Total rental expenses for all operating leases amounted to $15,350 in 1998,
$15,921 in 1997, and $15,239 in 1996.


                                       50

<PAGE>

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

   
12.  Deferred Compensation Plans:
    

The Company has adopted several deferred compensation plans since 1979, whereby
certain officers and employees earned performance-based compensation, payment of
which was deferred until future periods. The Long-Term Performance Award Plan
was effective through December 31, 1986 and was replaced by the Deferred
Compensation for Division Presidents Plan which was adopted in 1987 and amended
thereafter. The Long-Term Performance Share Plan was adopted January 1, 1994 and
amended thereafter.

The Company also adopted the Deferred Compensation Plan for Key Employees of SDI
Operating Partners, L.P. (the "Key Employees Plan") on January 1, 1996 to allow
participants eligible for accelerated payments under the change in control
provisions of the other deferred compensation plans an election to continue to
defer their balances. A change of control occurred on September 30, 1997 as a
result of the Conversion whereby all awards earned through December 31, 1996
became fully vested and eligible for distribution. However, certain employees
elected to continue to defer their awards under the Key Employees Plan. Upon
approval of the SunSource Inc. 1998 Equity Compensation Plan (the "Equity
Compensation Plan") by shareholders of the Company on April 28, 1998, awards
under the Deferred Compensation for Division Presidents and the Long-Term
Performance Share Plan ceased as of December 31, 1997. The Equity Compensation
Plan replaces the cash basis deferred compensation awards with stock options.

Effective October 1, 1998, the provisions of the Key Employees Plan which also
provide eligible employees of the Company the opportunity to defer receipt of
all or a portion of their salary and bonuses were amended to facilitate such
deferrals. The plan, as amended and restated, has been renamed the SunSource
Inc. Deferred Compensation Plan for Key Employees.

There were no amounts charged to income under the Company's deferred
compensation plans in 1998. The amounts charged to income in 1997 and 1996 were
$3,152 and $1,071, respectively. The 1997 charge includes $503 which is
classified in transaction and other related costs on the accompanying statement
of income for the year ended December 31, 1997, since this charge would not have
been incurred had the Conversion not been consummated. During the three years
ended December 31, 1998, distributions from the deferred compensation plans
aggregated $26 in 1998, $2,876 in 1997 and $1,160 in 1996. The Company's
deferred compensation liabilities amounted to $11,802 as of December 31, 1998
and $10,451 as of December 31, 1997.

The Company has established a Rabbi Trust (the "Rabbi Trust") to assist in
funding the liabilities of its deferred compensation plans. The Rabbi Trust
holds insurance policies purchased by the Company on the lives of certain
participants in the deferred compensation plans. The Rabbi Trust is the sole
beneficiary of these insurance policies of which the cash surrender value
aggregated $10,262 at December 31, 1998. Prior to a change in control and upon
direction from the Company in writing, the Rabbi Trust shall pay to the Company
all or a portion of the proceeds of any death benefits payable under any
insurance policy held by the Rabbi Trust in excess of any benefits payable under
the Company's deferred compensation plans with respect to the insured
participant.





                                       51

<PAGE>


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

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

In connection with the Conversion, Class A interests of the Partnership were
exchanged for Trust Preferred Securities of the Trust, as discussed in Note 1.
The Trust was organized in connection with the Conversion for the purpose of (a)
issuing its Trust Preferred Securities to the Company in consideration of the
deposit by the Company of Junior Subordinated Debentures in the Trust as trust
assets, and its Trust Common Securities to the Company in exchange for cash and
investing the proceeds thereof in an equivalent amount of Junior Subordinated
Debentures and (b) engaging in such other activities as are necessary or
incidental thereto.

The Trust had no operating history prior to the issuance of the Trust Preferred
Securities. The terms of the Junior Subordinated Debentures include those stated
in the Indenture (the "Indenture") between the Company and the indenture
trustee, and those made part of the Indenture by the Trust Indenture Act.

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 sole assets of the Trust are the Junior Subordinated Debentures and the
obligations of the Company under 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 Trust Preferred Securities have equity characteristics but creditor's rights
and are therefore classified between liabilities and stockholders' deficit on
the balance sheet. On September 30, 1997, the Trust Preferred Securities were
recorded at fair value of $115,991 based on the price of the Class A interests
of $11.75 upon close of trading on the New York Stock Exchange on that date. The
Trust Preferred Securities have a liquidation value of $25.00 per security. The
excess of fair value of the Trust Preferred Securities on September 30, 1997
over their liquidation value of $105,446, or $10,545 is amortized over the life
of the Trust Preferred Securities. The fair value of the Trust Preferred
Securities on December 31, 1998 was $122,845, based on the closing price on the
New York Stock Exchange of $29.125 per security on that date.

The interest payments on the Junior Subordinated Debentures underlying the Trust
Preferred Securities, aggregating $12,232 per year, are deductible for federal
income tax purposes under current law and will remain an obligation of the
Company until the Trust Preferred Securities are redeemed or upon their maturity
in 2027.


   
14.  Stockholders' Equity (Deficit):
    

         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 December 31, 1998, the number of shares purchased under this
authorization was 461,100 at an aggregate cost of $8,380. These shares are held
in treasury.



                                       52

<PAGE>


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


   
14.  Stockholders' Equity (Deficit), continued:
    

         Public Offering
   
On January 22, 1998, the Company filed a registration statement on Form S-2 with
the United States Securities and Exchange Commission, which was amended
thereafter, for an offering of Common Shares of the Company (the "Offering").
The registration statement became effective on March 19, 1998 and the Offering
closed in its entirety on March 27, 1998. Of the 2,284,471 shares sold in the
Offering, 796,408 shares were issued and sold by the Company and 1,488,063
shares were sold by the selling stockholders, affiliates of Lehman Brothers Inc.
The Company received net cash proceeds of $20,813 from the 796,408 shares sold
in the Offering. The Company recorded an increase of $8 in Common Stock and
$20,805 in Additional Paid-in Capital.
    
         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 1,988 Common Shares through December 31,
1998. Prospectively, under the terms of the plan, non-employee directors will be
issued Common Shares on a quarterly basis to cover at least 50% and up to 100%
of their annual retainer fee. The number of shares to be issued will be
dependent upon the market price of the Common Shares, the number of directors
receiving shares, and the percentage of their annual retainer above 50% that
each director elects to receive in Common Shares.

         Stock Options

On April 28, 1998, the Company adopted the 1998 Equity Compensation Plan (the
"Plan"), after approval by shareholders at the 1998 Annual Meeting. Grants under
the Plan may consist of options intended to qualify as incentive stock options
("ISO"), or non-qualified stock options that are not intended to so qualify
("NQSO"). In addition, grants may also consist of grants of restricted stock,
stock appreciation rights (SAR's), or performance units. The option price of any
ISO will not be less than the fair market value on the date the option is
granted (110% of fair value in certain instances). The option price of a NQSO
may be greater than, equal to, or less than the fair market value on the date
the option is granted (but not less than 85% of the fair market value). The
amount of options available for the Plan is calculated annually and cumulatively
at the rate of 5% of shares outstanding per year. The maximum number of shares
available under the Plan is 25% of the total outstanding shares or 2,000,000
million Common Shares.

The Plan is administered by a committee of the Board of Directors. The Committee
determines the term of each option, provided, however, that the exercise period
may not exceed ten years from the date of grant, and for ISO's, in certain
instances, may not exceed five years. The options granted under the Plan vest
based on the results of financial performance. If threshold financial
performance targets are not met, 100% of the options vest on the ninth
anniversary of the grant. If threshold performance targets are met, stock
options become fully vested within 3 or 5 years from the date of grant,
depending on performance.





                                       53

<PAGE>

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

   
14.  Stockholders' Equity (Deficit), continued:
    

         Stock Options, continued

A summary of the Company's stock option plan for the twelve months ended
December 31, 1998 is presented below:

<TABLE>
<CAPTION>
                                                                       Weighted-                           Weighted-
                                                                       Average                             Average
                                                      Number           Exercise         Number            Exercise
                                                        of              Price         Of Shares             Price
                                                     Options          Per Share      Exercisable          Per Share
                                                     -------          ---------      -----------          ---------
<S>                    <C>                                                                                <C>     
Outstanding at January 1, 1998                            --                 --               --          $     --
Granted                                              211,495            $ 17.62               --             17.62
Exercised                                                 --                 --               --                --
Expired/Canceled                                          --                 --               --                --
Outstanding at December 31, 1998                     211,495            $ 17.62               --          $  17.62
</TABLE>

As of December 31, 1998, the 211,495 options outstanding under the Plan have
exercise prices between $15.99 and $18.81 and a weighted-average remaining
contractual life of 9.5 years.

During 1998, the Company issued certain options at and below the fair market
price of the common stock on the grant date. For those options issued with an
exercise price equal to the fair market value, the weighted-average exercise
price was $18.82 and the average fair market value was $18.84. For options
issued with an exercise price below fair market value for the stock on their
grant date, the weighted average exercise price was $15.99 and the average fair
market value was $18.81.

Compensation expense of approximately $254 is being recognized over vesting
periods for certain options which were granted at below fair market value in
1998 of which $25 was recognized in 1998. If compensation cost had been based on
the fair value of the options at the grant dates, consistent with the method
required under SFAS 123, "Accounting for Stock-Based Compensation", the
Company's net income and net income per Common Share would have been:

                                                                          1998  
                                                                          ----  
   Net Income                                            As reported    $ 13,817
                                                         Pro forma      $ 13,769

   Basic and diluted net income per common share         As reported      $ 2.00
                                                         Pro forma        $ 1.99


The estimated weighted-average grant-date fair value of the options granted
during the year ended December 31, 1998 was $18.82 and the weighted-average
remaining contractual life of options outstanding at December 31, 1998 was 9.5
years.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1998: expected volatility of 28.7%; risk free
interest rates of 5.0% to 5.5% and expected lives of 6 and 9.5 years, based on
differing vesting schedules.



                                       54

<PAGE>
                         SUNSOURCE INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
                (dollars in thousands, except per share amounts)

   
14.  Stockholders' Equity (Deficit), continued:
    

         Earnings Per Share

The Company computes earnings per share in accordance with SFAS 128, "Earnings
per Share". SFAS 128 requires the presentation of basic and diluted earnings per
share for companies with complex capital structures. As noted above under "Stock
Options", certain executives and key employees were granted a total of 211,495
options to purchase the Company's Common Shares during 1998 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 twelve months ended December 31, 1998.

Due to the fact that the Company was not a corporation for the full year ended
December 31, 1997, a pro forma net income per Common Share has been presented
for the twelve months ended December 31, 1997. Pro forma net income per Common
Share assumes the Conversion and Refinancing occurred at the beginning of 1997
and accordingly excludes the extraordinary loss of $0.53 per Common Share. The
1997 pro forma earnings per share presented herein does not include the effect
of the Offering which increased the number of Common Shares outstanding and
provided cash which reduced the Company's bank revolving debt and interest
expense.

The number of outstanding Common Shares as of December 31, 1998 was 6,756,163.
The weighted average number of Common Shares outstanding for the twelve months
ended December 31, 1998 was 6,907,318, including the shares sold in the Offering
and the shares issued to non-employee directors, net of the 461,100 shares
repurchased and held in treasury.

         Common Stock Dividend

The Board of Directors of the Company declared on December 16, 1998 a cash
dividend of $0.10 per Common Share which was paid on January 7, 1999 to holders
of record as of December 28, 1998.


   
15.  Allocation of Partnership Taxable Income:
    

Prior to the Conversion, for the shortened Partnership tax year from January 1,
1997 through September 30, 1997, the Partnership earned federal taxable income
of $0.5605 per Class B limited partnership interest. For 1996 federal taxable
income amounted to $0.70, per B interest.

Under the Partnership Agreement, holders of B interests were entitled to receive
annual cash distributions sufficient to cover their tax liabilities on taxable
income allocated to the B interests. For 1997 and 1996 these cash distributions
amounted to $6,136 or $0.2775 per B interest and $7,663 or $0.3465 per B
interest, respectively.





                                       55

<PAGE>


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

   
16.  Retirement Benefits:
    

Certain of the Company's subsidiaries provide defined benefit pension plans and
post-retirement benefits to employees. The following provides a reconciliation
of benefit obligations, plan assets, and funded status of the plans:
<TABLE>
<CAPTION>
                                                                                    Other
                                                                               Post-retirement
                                                         Pension Benefits          Benefits    
Benefit Obligation:                                      1998       1997        1998      1997 
                                                        -------  ---------    -------   -------
<S>                                                     <C>       <C>         <C>       <C>    
Benefit obligation - beginning of year                  $23,961   $23,856     $   454   $   477
Service cost                                              1,000       920          --        --
Interest cost                                             1,752     1,702          84        32
Amendments                                                   --        --         734        --
Actuarial (gain) loss                                     1,777       290          42        (5)
Benefits paid                                            (1,729)   (2,807)*       (82)      (50)
                                                        --------  --------    --------  --------
Benefit obligation - end of year                        $26,761   $23,961     $ 1,232   $   454 
                                                        ========  ========    ========  ========
Fair Value of Plan Assets:
Fair value of plan assets - beginning of year           $28,597   $26,519      $   --   $    --
Actual return on plan assets                              4,432     4,708          --        --
Expenses                                                    (24)      (24)         --        --
Plan participant contributions                              199       201          --        --
Benefits paid                                            (1,729)   (2,807)*        --        --
                                                        --------   -------    -------   -------
Fair value of plan assets - end of year                 $31,475   $28,597     $    --   $    --
                                                        ========  ========    =======   =======
</TABLE>

* includes non-recurring lump-sum settlements to certain employees of $1,483.
<TABLE>
<CAPTION>

<S>                                                     <C>          <C>        <C>       <C> 
Funded Status of Plans:
Funded status of the plans                              $ 4,714   $ 4,636     $(1,232)  $(1,205)
Unrecognized actuarial (gain) loss                       (3,466)   (3,312)         45        20
Unrecognized prior service cost                            (279)     (303)        678       734
Unrecognized net transition asset                        (1,180)   (1,414)         --        -- 
                                                        --------   -------    --------  --------
Accrued benefit cost
 recognized in the balance sheet                        $  (211)  $  (393)    $  (509)  $  (451)
                                                        ========  ========    ========  ========

Net periodic pension costs include the following components:
Net Periodic Pension Cost (Benefit):                       1998     1997         1996 
                                                        --------  -------      ------
Service cost                                            $ 1,000   $   920      $  879
Interest cost                                             1,752     1,702       1,656
Expected return on plan assets                           (2,727)   (3,160)     (2,750)
Amortization of net asset                                  (234)     (234)       (234)
Amortization of prior service cost                          (24)      (24)        (24)
Recognized net actuarial loss                                52       769         493 
                                                        --------  --------     ------
         Net periodic pension cost (benefit)            $  (181)  $   (27)     $   20 
                                                        ========  ========     ======

Net post-retirement costs include the following components:
Net Periodic Post-retirement Cost:
Service cost                                            $    84   $    32      $   34
Amortization of prior service cost                           56        --          -- 
                                                        -------   -------      ------
         Net post-retirement cost                       $   140   $    32      $   34 
                                                        =======   =======      ======
</TABLE>



                                       56

<PAGE>

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

   
16.  Retirement Benefits, continued:
    

Assumptions:                                        1998      1997      1996 
                                                    -----    ------     -----
Discount rate                                       7.00%     7.25%     7.25%
Rates of increase in compensation levels            6.50%     6.50%     6.50%
Expected long-term rate of return
  on plan assets                                    9.75%     9.75%     9.75%
Health care cost trend rate on covered charges      8.50%     9.50%     9.50%

The health care cost trend rate, or the expected rate of increase in health-care
costs, is assumed to gradually decrease to 6.5% by 2004.

The impact of a 1% change in health care inflation on post-retirement benefits
is as follows:
                                                           Trend +1%   Trend -1%
                                                           ---------   ---------
         December 31, 1998 projected benefit obligation     $  112      $  (99)
         1998 service and interest cost                     $    8      $   (7)

Certain employees of the Company's Kar Products, Inc., SunSource Technology
Services Inc. and its divested operations are covered by defined benefit
retirement plans. Assets of the defined benefit plans consist of insurance
contracts and assets managed under a commingled trust agreement. The trust
assets are invested primarily in equity and fixed income holdings. Certain
employees of the Company's SunSource Technology Services Inc. subsidiary are
covered by post-retirement benefits.

Costs (income) charged to operations under all retirement benefit plans are as
follows:
                                                    1998       1997        1996
                                                    ----       ----        ----
         Defined contribution plans                $3,052     $1,154      $1,327
         Multi-employer pension plans                 217        253         189
         Defined benefit plans                       (181)       (27)         20
                                                   -------    -------     ------
                  Total                            $3,088     $1,380      $1,536
                                                   =======    =======     ======

The Company's share of unfunded vested liabilities under multi-employer pension
plans and its benefit contributions to multi-employer health and welfare plans
are not material.

   
17.   Commitments and Contingencies:
    

Performance and bid bonds are issued on the Company's behalf during the ordinary
course of business through surety bonding companies as required by certain
contractors. As of December 31, 1998, the Company had outstanding performance
and bid bonds aggregating $1,155.

Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1998, the
Company had outstanding letters of credit in the aggregate amount of $373
related to these activities.

As of December 31, 1998, the Company has guaranteed approximately $772 worth of
lease obligations, principally relating to businesses previously divested. The
Company is not currently aware of any existing conditions which would cause a
financial loss related to these guarantees.


                                       57

<PAGE>

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

   
17.   Commitments and Contingencies, continued:
    

Under the Company's insurance programs, commercial umbrella coverage is obtained
for catastrophic exposure and aggregate losses in excess of normal claims.
Beginning in 1991, the Company has retained risk on certain expected losses from
both asserted and unasserted claims related to worker's compensation, general
liability and automobile as well as the health benefits of certain employees.
Provisions for losses expected under these programs are recorded based on an
analysis of historical insurance claim data and certain actuarial assumptions.
As of December 31, 1998, the Company has provided insurers letters of credit
aggregating $3,050 related to certain insurance programs.

Litigation originally instituted on February 27, 1996 is pending in the Court of
Common Pleas of Montgomery County, Pennsylvania in which Dorman Products of
America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege that
misrepresentations of certain facts were made by the Company, upon which R&B
allegedly based its offer to purchase the assets of the Dorman Products division
of the Company. Dorman and R&B seek damages of approximately $21,000.

Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material effect on
the consolidated financial position, operations or cash flows of the Company.

   
18.  Statements of Cash Flows:
    

Supplemental disclosures of cash flow information are presented below:

                                                1998         1997        1996  
                                             ---------    ---------   ---------
Cash paid during the period for:
  Interest                                   $   7,725    $   7,357   $   6,769
                                             =========    =========   =========
  Income taxes                               $   8,190    $   1,433   $   1,189
                                             =========    =========   =========

Non-cash investing activities:
 Acquisitions (see Note 3):
   Fair value of assets acquired,
    including goodwill                       $  25,892    $   1,029   $     758
   Less liabilities assumed                     (3,085)        (236)        (58)
   Post-closing adjustments                         --           --         (17)
                                             ----------   ----------  ----------
    Cash paid for acquired businesses        $  22,807    $     793   $     683 
                                             ==========   ==========  ==========

Non-cash financing activities:
  Accrued and unpaid dividends
   on common shares                          $     676    $     642   $      --
  Accrued and unpaid
   partnership distributions                 $      --    $   2,353   $   1,857
  Exchange of 11,099,573 Class A limited
   partnership interests for 4,217,837
   Trust Preferred Securities                $      --    $ 115,991   $      --
  Exchange of 21,675,246 Class B limited
   partnership interests for 5,418,936
   common shares                             $      --    $  38,943   $      --
  Exchange of GP's Minority Interest for
   1,000,000 common shares                   $      --    $  21,841   $



                                       58

<PAGE>

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

   
19.  Quarterly Data (unaudited):
    

    1998                          Fourth        Third       Second       First 
    ----                         --------     --------     --------    --------
Net sales (1)                    $168,769     $183,593     $188,931    $171,177
Gross profit (1)                   72,047       75,814       75,494      67,813
Net income                          3,031        4,550        4,615       1,621
Net income per
  Common Share                       $.44         $.64         $.64        $.25

    1997
Net sales (1)                    $168,190     $177,578     $180,696    $168,243
Gross profit (1)                   68,424       71,936       73,000      66,947
Income before
 extraordinary loss (2)             3,090       15,673        9,193       4,576
Extraordinary loss (Note 6)            --       (3,392)          --          --
Net income (2)                      3,090       12,281        9,193       4,576
Net income per common share          $.48          N/A         N/A          N/A
Pro forma net income
 per common share                     N/A     $    .58         N/A          N/A
Net income (loss) per limited
  partnership interest
             - Class A                N/A          N/A        $.28         $.27
             - Class B                N/A          N/A        $.28         $.07

(1)  Includes amounts reclassified to conform to current accounting.
(2)  Includes $2,428, $275 and $350 of non-recurring conversion and other
     related costs recorded in the third, second and first quarters,
     respectively and reflects operations on a partnership basis prior to the
     Conversion and Refinancing transactions (see Note 1).


   
20. Concentration of Credit Risk:
    

Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high credit
quality financial institutions. Concentrations of credit risk with respect to
sales and trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.




                                       59

<PAGE>


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


   
21. Segment Information:
    

In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which replaces previous generally accepted
accounting principles on segment reporting. Adoption of SFAS 131 is required
beginning with 1998 reporting. Previously reported information has been restated
to conform to reporting under SFAS 131.

The Company has five reportable segments (see Note 1 "Nature of Operations")
which are disaggregated based on the products and services provided, markets
served, marketing strategies and delivery methods.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales are immaterial.
The Company measures segment profitability and allocates corporate resources
based on each segment's Earnings Before Interest, Taxes and Amortization
("EBITA") which is defined as income from operations before amortization. The
Company also measures the segments on performance on their tangible asset base.
The table below provides the Company's segment disclosures and is followed by
reconciliations of the segment amounts to the consolidated amounts where
appropriate:

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,   
                                                                1998              1997             1996   
                                                             ---------         ---------         ---------
<S>                                                          <C>               <C>               <C>      
Net Sales
Technology Services                                          $ 321,526         $ 322,148         $ 299,068
Expediter                                                      124,536           125,911           121,389
Integrated Supply                                               45,626            54,420            43,392
Hardware Merchandising                                         125,830           103,970            92,285
Glass Merchandising                                             94,952            88,258            90,369
                                                             ---------         ---------         ---------
   Consolidated net sales                                    $ 712,470         $ 694,707         $ 646,503
                                                             =========         =========         =========


Gross Profit
Technology Services                                          $  85,639         $  85,443         $  76,896
Expediter                                                       88,175            90,171            87,839
Integrated Supply                                               12,265            13,669            11,436
Hardware Merchandising                                          66,485            54,901            46,127
Glass Merchandising                                             37,986            35,670            35,545
                                                             ---------         ---------         ---------
   Segment gross profit                                      $ 290,550         $ 279,854         $ 257,843
                                                             =========         =========         =========


EBITA
Technology Services                                          $  13,583         $  14,825         $  13,690
Expediter                                                       20,215            20,697            18,770
Integrated Supply                                                2,299             3,292             2,008
Hardware Merchandising                                          12,130            10,833             7,130
Glass Merchandising                                              4,128             2,224             3,211
                                                             ---------         ---------         ---------
   Segment profit                                            $  52,355         $  51,871         $  44,809
                                                             =========         =========         =========
</TABLE>







                                       60

<PAGE>


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

   
21. Segment Information, continued:
    
<TABLE>
<CAPTION>
 
                                                                          Year Ended December 31,   
                                                                1998              1997             1996   
                                                             ---------         ---------         ---------
<S>                                                          <C>               <C>               <C>      
Tangible Assets
Technology Services                                          $  85,460         $  90,597         $  81,720
Expediter                                                       42,479            41,991            42,274
Integrated Supply                                               15,343            13,138            13,813
Hardware Merchandising                                          59,487            40,579            41,322
Glass Merchandising                                             27,642            23,879            24,427
                                                             ---------         ---------         ---------
   Segment tangible assets                                   $ 230,411         $ 210,184         $ 203,556
                                                             =========         =========         =========

Capital Expenditures
Technology Services                                          $   2,058         $   2,045         $   1,200
Expediter                                                        1,693               622               786
Integrated Supply                                                  209               266               282
Hardware Merchandising                                           2,396             1,754             1,985
Glass Merchandising                                                850               373               640
                                                             ---------         ---------         ---------
   Segment capital expenditures                              $   7,206         $   5,060         $   4,893
                                                             =========         ==========        =========

Depreciation
Technology Services                                          $   1,607         $   1,438         $   1,323
Expediter                                                          981               886               897
Integrated Supply                                                  154               107                72
Hardware Merchandising                                           1,347               747               451
Glass Merchandising                                                824               730               775
                                                             ---------         ---------         ---------
   Segment depreciation                                      $   4,913         $   3,908         $   3,518
                                                             =========         =========         =========

Geographic Segment Data:
Net Sales
United States                                                $ 662,277         $ 640,875         $ 606,734
Canada                                                          32,968            34,022            30,888
Mexico                                                          17,225            19,810             8,881
                                                             ---------         ---------         ---------
   Consolidated net sales                                    $ 712,470         $ 694,707         $ 646,503
                                                             =========         =========         =========

Reconciliation of Segment Profit to
 Income Before Income Taxes and
 Extraordinary Loss:
Segment profit - EBITA                                       $  52,355         $  51,871         $  44,809
Amortization                                                    (2,276)           (1,894)           (1,924)
Corporate expenses                                              (7,268)           (8,062)           (6,257)
                                                             ----------        ----------        ----------
Income before non-recurring charges                             42,811            41,915            36,628
Non-recurring charges:
 Provision for litigation matters -
   divested operations                                          (1,600)               --                --
  Transaction and other costs                                       --            (3,053)           (2,150)
  Management fee                                                    --            (2,491)           (3,330)
  Restructuring                                                     --                --            (5,950)
  Minority ownership expense                                        --              (263)             (196)
                                                             ----------        -----------       ----------
Income from operations                                          41,211            36,108            25,002
Interest expense, net                                           (6,838)           (7,198)           (6,875)
Distribution on guaranteed
 preferred beneficial interests                                (12,232)           (3,058)               -- 
                                                             ----------        ----------        ----------
 Income before income taxes and
  extraordinary items                                        $  22,141         $  25,852         $  18,127 
                                                             ==========        ==========        ==========
</TABLE>

                                       61

<PAGE>


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


   
21. Segment Information, continued:
    

                                                 Year Ended December 31,   
                                               1998        1997        1996   
                                           ---------   ---------    ---------
Reconciliation of Segment Tangible
 Assets to Total Assets:
Segment tangible assets                    $ 230,411   $ 210,184    $ 203,556
Goodwill                                      77,544      62,588       43,036
Other intangible assets                        1,322         170          503
Deferred income taxes                         15,088      15,805        5,007
Cash value of life insurance                  10,262       8,407        4,566
Other corporate assets                         6,941       8,988        5,887
                                           ---------   ---------    ---------
  Total assets                             $ 341,568   $ 306,142    $ 262,555
                                           =========   =========    =========

Reconciliation of Segment
 Capital Expenditures to
 Total Capital Expenditures:
Segment capital expenditures (1)           $   7,206   $   5,060    $   4,893
Corporate capital expenditures                   196         130           71
                                           ---------   ---------    ---------
  Total capital expenditures               $   7,402   $   5,190    $   4,964
                                           =========   =========    =========

(1)  Includes $324, $257 and $623 of assets acquired under capital leases in
     1998, 1997 and 1996, respectively.

Reconciliation of Segment Depreciation
 to Total Depreciation:
Segment depreciation                       $   4,913   $   3,908    $   3,498
Corporate depreciation                           103         101          105
                                           ---------   ---------    ---------
  Total depreciation                       $   5,016   $   4,009    $   3,603
                                           =========   =========    =========


   
22. Subsequent Events:
    

From January 1, 1999 through March 25, 1999, Harding has acquired twenty-three
retail glass shops for a net cash consideration, including estimated transaction
expenses, of $12,417 and the assumption of certain liabilities estimated at
$1,156. These acquisitions resulted in estimated goodwill of $8,415 and the
repayment of $3,306 of outstanding debt. Sales from these acquisitions
aggregated approximately $27,000 for the twelve-month period prior to
acquisition.

On January 15, 1999, the Company's SunSource Industrial Services Company, Inc.
subsidiary entered into a long-term lease for warehouse and office space which
expires on March 10, 2009. The lease provides for annual rental payments of $712
for years one through three, $762 for years four through six and $816 for years
seven through ten.






                                       62

<PAGE>


                         SUNSOURCE INC. AND SUBSIDIARIES

           Schedule I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                             (dollars in thousands)
<TABLE>
<CAPTION>
Balance Sheets as of December 31                                        1998                  1997                 1996
--------------------------------                                  -----------------     ----------------      ---------------
<S>                                                               <C>                   <C>                      <C>         
Assets
  Cash                                                            $               1     $             1       $            --
  Deferred income taxes                                                      14,576               15,316                   --
  Investment in SDI Operating Partners, L.P.                                122,148(1)           100,893 (1)           94,619
  Investment in SunSource Capital Trust                                       3,261                3,356                   --
                                                                  -----------------     ----------------      ---------------
    Total assets                                                  $         139,986     $        119,566      $        94,619
                                                                  =================     ================      ===============

Liabilities


  Current liabilities                                             $             461     $            893      $            --
  Junior subordinated debentures - common                                     3,261                3,261                   --
  Junior subordinated debentures - preferred                                115,551              115,903                   --
                                                                  -----------------     ----------------      ---------------
     Total liabilities                                                      119,273              120,057                   --
                                                                  -----------------     ----------------      ---------------

Partners' capital:
   General partner                                                               --                   --                  960
   Limited partners - Class A interests                                          --                   --               67,642
   Limited partners - Class B interests                                          --                   --               29,040
   Class B interests held in treasury                                            --                   --               (1,514)
   Cumulative foreign translation adjustment                                     --                   --               (1,509)
                                                                  -----------------     ----------------      ---------------
     Total partners' capital                                                     --                   --               94,619
                                                                  -----------------     ----------------      ---------------

Stockholders' equity (deficit):
   Preferred stock                                                               --                   --                   --
   Common stock                                                                  72                   64                   --
   Retained earnings                                                         12,747                1,735                   --
   Paid in capital                                                           21,099                   --                   --
   Unearned compensation                                                       (229)                  --                   --
   Cumulative foreign translation adjustment                                 (4,596)              (2,290)                  --
   Treasury stock                                                            (8,380)                  --                   --
                                                                  -----------------     ----------------      ---------------
     Total stockholders' equity (deficit)                                    20,713                 (491)                  --
                                                                  -----------------     ----------------      ---------------

Total liabilities, partners' capital and
   stockholders' equity (deficit)                                 $         139,986     $        119,566      $        94,619
                                                                  =================     ================      ===============

</TABLE>

(1) Represents an indirect investment through two wholly-owned subsidiaries.




                                       63

<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES

           Schedule I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                   (continued)

                             (dollars in thousands)

<TABLE>
<CAPTION>
Statements of Income for the Years Ended December 31                               1998             1997             1996
----------------------------------------------------                            -----------     -------------     -----------
<S>                                                                             <C>         <C> <C>               <C>       
Equity in net income:
  SDI Operating Partners, L.P.                                                  $   32,657  (1) $     33,562(1)   $   19,267
  SunSource Capital Trust                                                               --                95              --
Administrative expense                                                                (201)               --              --
Interest expense, net                                                              (11,881)           (3,065)             --
Provision for income taxes                                                          (6,758)           (1,452)             --
                                                                                -----------     -------------     -----------
     Net income                                                                 $   13,817      $     29,140      $   19,267
                                                                                ===========     =============     ===========

Net income allocated to partners:
   General partner                                                                  N/A              N/A          $      193
   Class A interests                                                                N/A              N/A          $   12,210
   Class B interests                                                                N/A              N/A          $    6,864

Net income per common share                                                     $     2.00           N/A              N/A
                                                                                ===========

Pro forma net income per common share (note 1)                                      N/A         $       1.88          N/A
                                                                                                =============


Statements of Cash Flows for the Years Ended December 31                           1998             1997             1996
----------------------------------------------------                            -----------     -------------     -----------

Cash provided by operations                                                     $       --      $         --      $       --

Cash provided from (used for) investment in
   SDI Operating Partners, L.P.                                                     (7,585)           28,191          25,385
Cash provided from investment in SunSub A Inc.                                      12,232             3,058              --
   
Cash provided by issuance of common stock                                           20,813                --              --
Cash used for purchase of treasury stock, at cost                                   (8,380)               --              --
Cash distributions to investors                                                     (4,848)          (28,191)        (25,385)
Cash distributions to holders of trust preferred securities                        (12,232)           (3,058)             --
                                                                                -----------     -------------     -----------
   Increase (decrease) in cash                                                  $       --      $         --      $       --
                                                                                ===========     =============     ===========
    
</TABLE>

(1)  Includes an indirect investment through two wholly-owned subsidiaries from
     October 1, 1997 through December 31, 1997.


This financial information should be read in conjunction with the consolidated
 financial statements of the Company.




                                       64

<PAGE>

                         SUNSOURCE INC. AND SUBSIDIARIES

                        Schedule II - VALUATION ACCOUNTS

                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                             Deducted From Assets in Balance Sheet
                                         ===============================================================================
                                           Allowance         Allowance
                                              for               for             Accumulated           Accumulated
                                           Doubtful           Obsolete         Amortization          Amortization
                                           Accounts         Inventories         of Goodwill         of Intangibles
                                         ----------         -----------        ------------         ---------------
<S>               <C> <C>                     <C>                 <C>               <C>                      <C>   
Balance, December 31, 1995                    1,827               3,410             11,739                   13,724
  Additions charged to cost                                                                             
    and expenses                              1,280               1,440              1,409                      648
  Deductions                                    899(A)            1,010 (A)            269 (B)                   --
                                                                                                        
                                         ----------           ---------           --------               ----------
Balance, December 31, 1996                    2,208               3,840             12,879                   14,372
  Additions charged to cost                                                                             
    and expenses                              1,711               1,797              1,488                      538
  Deductions                                  1,724(A)            1,272 (A)             --                       --
                                         ----------           ---------           --------               ----------
Balance, December 31, 1997                    2,195               4,365             14,367                   14,910
                                                                                                        
  Additions charged to cost                                                                             
    and expenses                              1,693               1,413              2,061                      215
  Addition due to deferred                                                                              
    recognition of tax benefit                                                                          
      from Conversion                            --                  --                 --                       --
  Deductions                                  1,399(A)            1,478                 --                       --
                                         ----------           ---------           --------               ----------
Balance, December 31, 1998               $    2,489           $   4,300           $ 16,428               $   15,125
                                         ==========           =========           ========               ==========
</TABLE>
Notes:

(A)  Includes write-off of accounts receivable (net of bad debt recoveries) and
     inventories. 
(B)  Includes write-off of Goodwill in accordance with FAS 121, Impairment of
     Long-Lived Assets.



                                       65

<PAGE>
   
Item 9 - Changes in and Disagreements on Accounting and
         Financial Disclosure.
    


         Not applicable.








                                       66

<PAGE>


                                    PART III



   
Item 10 - Directors and Executive Officers of the Registrant.
    

Information under the heading "Election of Directors" in the Proxy Statement for
the annual meeting of stockholders to be held April 27, 1999 (the "1999 Annual
Proxy Statement") is incorporated by reference herein.


   
Item 11 - Executive Compensation
    

Information under the heading "Executive Compensation" in the 1999 Annual Proxy
Statement is incorporated by reference herein.


   
Item 12 - Security Ownership of Certain Beneficial Owners and Management.
    

Information under the heading "Security Ownership of Certain Beneficial Owners
and Management" in the 1999 Annual Proxy Statement is incorporated by reference
herein.


   
Item 13 - Certain Relationships and Related Transactions.
    

Information under the heading "Certain Transactions" in the 1999 Annual Proxy
Statement is incorporated by reference herein.












                                       67

<PAGE>


                                     PART IV


   
Item 14 - Exhibits, Financial Statement Schedules, and Reports 
          on Form 10-K.
    


                  (a)  Documents Filed as a Part of the Report:

                          1.       Financial Statements.

                                   The information concerning financial
statements called for by Item 14 of Form 10-K is set forth in Part II, Item 8 of
this annual report on Form 10-K.


                          2.       Financial Statement Schedules.

                                   The information concerning financial
statement schedules called for by Item 14 of Form 10-K is set forth in Part II,
Item 8 of this annual report on Form 10-K.


                          3.       Exhibits, Including Those Incorporated by
                                   Reference.

                                   The following is a list of exhibits filed as
part of this annual report on Form 10-K. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing is
indicated in parentheses.


                  Plan of Acquisition, Reorganization, Arrangement,
                  Liquidation or Succession

                  2.1     Agreement and Plan of Conversion dated as of
                          July 31, 1997 (4) (Exhibit 2.1)

                  Articles of Incorporation and By-Laws

                  3.1     Amended Bylaws of the Company dated as of
                          September 24, 1998 (1) (Exhibit 3.1)

                  3.2     Amended and Restated Certificate of
                          Incorporation of the Company (5) (Exhibit 3.1)

                  3.3     Bylaws of the Company (5) (Exhibit 3.2)






                                       68

<PAGE>


               Instruments Defining the Rights of Security Holders,
               Including Indentures

              4.1     Amended and Restated Declaration of Trust (5) (Exhibit
                      4.1)

              4.2     Indenture between the Company and the Bank of New York (5)
                      (Exhibit 4.2)

              4.3     Preferred Securities Guarantee (5) (Exhibit 4.3)

              4.4     Rights Agreement between the Company and the Registrar and
                      Transfer Company (5) (Exhibit 10.5)

              4.5     **Amended and Restated Note Purchase Agreement dated
                      December 31, 1998 between Teachers Insurance and Annuity
                      Association and SunSource Inc. and its Subsidiaries,
                      Exhibit 10.2

               Material Contracts
   
              10.1    **Second Amended and Restated Credit Agreement dated
                      December 31, 1998, among First Union National Bank, for
                      itself and as agent, The Bank of Nova Scotia, for itself
                      and as documentation agent, and SunSource Inc. and its
                      Subsidiaries Exhibit 10.1
    
              10.2    *Deferred Compensation Plan for Key Employees of SDI
                      Operating Partners, L.P. (2) Exhibit 10.1

              10.3    *SunSource Inc. 1998 Equity Compensation Plan (3) Exhibit
                      10.1

              10.4    *SunSource Inc. Stock Compensation Plan for Non-Employee
                      Directors (3) Exhibit 10.2

              10.5    *Sun Distributors Incentive Compensation Plan. (6)
                      (Exhibit 10.5)

              10.6    *Sun Distributors, Inc. Long-Term Performance Award Plan.
                      (As Amended June 1985) (6) (Exhibit 10.6)

              10.7    *SDI Operating Partners, L.P. Deferred Compensation Plan
                      for Division Presidents (As amended September 13, 1993).
                      (7) (Exhibit 10.7)

              10.8    *SDI Operating Partners, L.P. Long-Term Performance Share
                      Plan dated January 1, 1994. (7) (Exhibit 10.8)

              10.9    *Deferred Compensation Plan for Key Employees of SDI
                      Operating Partners, L.P. (2) (Exhibit 10.4)


                                       69

<PAGE>
                  Subsidiaries of the Registrant

           **21.1  Subsidiaries
   
                  Independent Accountants

           **23.1  Consent of PricewaterhouseCoopers LLP
    
                  Financial Data Schedules

           **27.1  Summary financial information as of and for the year
                          ended December 31, 1998.
           ------------------------

                      (1)   Filed as an exhibit to Quarterly Report on Form
                            10-QA for the Quarter ended September 30, 1998.

                      (2)   Filed as an exhibit to Registration Statement No.
                            333-63409 on Form S-8.

                      (3)   Filed as an exhibit to Quarterly Report on Form 10-Q
                            for the Quarter ended March 31, 1998.

                      (1)   Filed as an exhibit to Registration Statement No.
                            333-19077 on Form S-4.

                      (2)   Filed as an exhibit to Registration Statement No.
                            333-44733 on Form S-2.

                      (3)   Filed on March 31, 1993, as an exhibit to Annual
                            Report on Form 10K for the year ended December 31,
                            1992.

                      (4)   Filed on March 31, 1994, as an exhibit to Annual
                            Report on Form 10K for the year ended December 31,
                            1993.


                       *    Management contract or compensatory plan or
                            arrangement required to be filed as an Exhibit
                            pursuant to Item 14(c) of this report.

                      **  Filed herewith.


                  (b)     Reports on Form 8-K.

                          None







                                       70

<PAGE>

                                   SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) 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.



Date:  March 29, 1999                           By:/s/ Donald T. Marshall
                                                -------------------------
                                                Donald T. Marshall
                                                Title: Chairman and Chief
                                                Executive Officer



Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Each person in so signing also makes, constitutes and appoints Donald T.
Marshall and Joseph M. Corvino, and each of them, his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.

         Signature               Capacity                              Date
         ---------               --------                              ----


/s/ Donald T. Marshall           Principal Executive              March 29, 1999
------------------------------   Officer and Director
Donald T. Marshall                                    



/s/ Joseph M. Corvino            Principal Financial              March 29, 1999
------------------------------   Officer
Joseph M. Corvino                            





/s/ John J. Dabrowski            Principal Accounting             March 29, 1999
------------------------------   Officer
John J. Dabrowski                            



                                       71

<PAGE>


/s/ O. Gordon Brewer, Jr.         Director                        March 29, 1999
------------------------------
O. Gordon Brewer, Jr.



/s/ Norman V. Edmonson            Director                        March 29, 1999
------------------------------
Norman V. Edmonson



/s/ Arnold S. Hoffman             Director                        March 29, 1999
------------------------------
Arnold S. Hoffman



/s/ Robert E. Keith, Jr.          Director                        March 29, 1999
------------------------------
Robert E. Keith, Jr.



/s/ John P. McDonnell             Director                        March 29, 1999
------------------------------
John P. McDonnell



/s/ Donald A. Scott               Director                        March 29, 1999
------------------------------
Donald A. Scott



/s/ Geoffrey C. Shepard           Director                        March 29, 1999
------------------------------
Geoffrey C. Shepard



/s/ Francis G. Ziegler            Director                        March 29, 1999
-----------------------------
Francis G. Ziegler


                                       72