Richard Shaw – Vice President, Communications and Learning David Pugh - Chairman and Chief Executive Officer Mark O. Eisele – Vice President, Chief Financial Officer Ben Mondics - President and Chief Operating Officer

Matt Duncan - Stephens Incorporated Analyst for Jeffrey Hammond - KeyBanc Capital Markets Joe Mondello - Sidoti & Company Brent Rakers - Morgan Keegan Greg Halter - Great Lakes Review Holden Lewis - BB&T Capital Markets

Good day, ladies and gentlemen and welcome to the Applied Industrial Technologies second quarter 2009 financial earnings conference call. All lines will be in a listen only mode until the formal question and answer session. At that time, instructions will be given. At the request of Applied Industrial Technologies, today’s conference call is being recorded. If you should have any objection, you can disconnect at this time. I would now like to introduce Mr. Richard Shaw, Applied’s Vice President, Communications and Learning.

Thank you, John, and good morning, everyone. On behalf of Applied Industrial Technologies, I’d like to thank you for joining our fiscal 2009 second quarter conference call this morning. You should have already received our earnings release that we issued this morning before the market opened. If you’ve not received it, you can retrieve it by visiting our website at www.applied.com. A replay of today’s broadcast will be available for the next two weeks as noted in the archive information that’s contained in the news release. Before we begin I would like to remind everyone that we will discuss Applied’s business outlook during this conference call and make statements that are forward-looking. All forward-looking statements are based on current expectations regarding important risk factors, including trends in the industrial sector of the economy, the success of our various marketing strategies, and other risk factors identified and applied to most periodic report and also with other filings made with the SEC. Accordingly, actual results may differ materially from those expressed in the forward-looking statements. This conference call is the copyrighted property of Applied Industrial Technologies and any copying, rebroadcast publication, posting, transcription, or distribution of any portion of the call without Applied’s express written prior consent is prohibited. Our speakers today include David Pugh, Chairman and CEO of Applied, who will discuss our overall performance during the quarter. We’ll also hear form Mark Eisele, Vice President and Chief Financial Officer, who will discuss our financial performance in detail, and Ben Mondics, our President and Chief Operating Officer, who will discuss operational activities. Getting us started today is David Pugh.

Thanks, Rick. Good morning. It looks like we have a pretty healthy group listening this morning. Let me open with a mild disclaimer because this is a different environment in which we’re operating. Today you will not be receiving the level of definitive information to which you’ve grown accustomed simply because it’s unknowable at this juncture. That’s not an apology, it’s just fact, because we’re not alone. In a recent survey of 270 leading CFOs, 70% of them said they couldn’t forecast beyond the current quarter with any degree of accuracy and almost 20% of those guys said they couldn’t see beyond two weeks and an equal amount said they were currently in the dark as to what would be happening. That doesn’t really scare me because I feel we are agile enough to continue to identify and maximize opportunities quickly. So if we seem to be in an abbreviated mode today, it’s for good reason. Having said that, if you looked at our news release this morning, as we indicated, the industrial economy in our second quarter continued to decline at a continually increasing rate. The economic indices that we normally track, such as the Purchasing Manager’s Index, the Industrial Production Index, the Manufacturing Capacity Utilization, have all fallen to levels we haven’t seen in over 25 years and reflecting that slow down, our sales for the quarter excluding acquisitions were down 11.9% from the prior year and even with the acquisition, we were still down by 1.7%. The consumer demand continues to decline and there are inventory adjustments occurring throughout the supply chain. At the risk of sounding like the master of the obvious, this is a very difficult business climate, and the economic indicators that we watch would suggest the market has yet to hit bottom. There are various forecasts out there of new economic events that would take the market even lower. As a result we’re making appropriate adjustments to our cost structure while maintaining a high level of customer service. Our efforts are focusing heavily on asset management and maximizing subsequent cash flow to protect the interests of our shareholders as we navigate through an increasingly turbulent storm. In conditions like this, the timelines for improvement in marginal assets including suppliers and customers necessarily shrinks. In spite of the tough economy, our operating margin of 5.7% was very good in our eyes. Our goal and what we’re targeting is to keep that operating margin at 5% or better during these difficult times. Another positive was our continued success with government sales which continues its double digit growth. Since we started that initiative about three years ago, we have continued to grow it very, very quickly. Today we’re in an excellent position to benefit from increased government spending on any economic stimulus program aimed at creating jobs. We will continue to push this effort as we continue on in our planning. Ben’s going to add more details about the market segments and their effect on our top line in his comments but I want to just assure you in this uncertain time that we are operationally strong and we are committed to continuous improvement. It’s in times like hat that we truly appreciate the quality of our processing controls that have been in place for our oversight. Overall the company is stable. Our balance sheet is strong and we have an effective basis to weather the current economic challenge. Having said that, I’m going to turn it over to Ben for a few thoughts about the markets and where he thinks things are going.

Thanks, Dave, and good morning everyone. As Dave indicated, the economic indicators we followed [inaudible] serious downturn during our second quarter and we experienced a similar downturn with many of our customers. During the quarter the Purchasing Manger’s Index fell from 43.5 in September to 32.4 in December, a drop of 25% and the lowest score since June of 1980. Generally, any score below 50 indicates a contracting economy. Adding to that, the manufacturing capacity utilization for December of 70.1 is the lowest it has been since February of 1983 and well below the 80% benchmark that is considered expansionary. Housing starts dropped to a 50 year low with a seasonally adjusted annual rate of 550,000 in December. This rate was 15.5% below the November 2008 rate of 651.000 units. All in all, these are tough numbers that look a lot like the recession of the early 1980s. Economic indicators show there is more to come before we hit bottom. Ultimately the questions are when will we hit bottom and how fast will the recover be? We can’t give you any real insight into those questions but we may know more by the end of our third quarter. In our US based service center business, 13 of our top 30 industries declined by double digit percentages from last year. These included major retreats by primary metals, cement, forest products, transportation equipment, and fabricated metal products. In total, 21 of the top 30 industries declined. On the positive side of our performance were coal mining, power generation, and food. All achieved moderate growth. Our government sales continued to improve during the quarter showing a double digit increase and our sales efforts continued to expand into all types of government entities including local, county, state, and Federal government. In our last teleconference we indicated that we thought there was a slowdown in the works. Unfortunately, the slowdown was much greater than our original expectation. Customer demand has declined rapidly and there are inventory adjustments occurring throughout the supply chain. Many customers have delayed capital projects until business starts to pick up. We believe that going forward we can keep our operating margin at 5% or greater, that’s our target. To deliver that level of performance, we are making adjustments in several areas of our business. For example, we have reviewed all planned projects and have eliminated or delayed a substantial number of them. We have instituted tight spending controls and have eliminated any discretionary spending. We have reduced work weeks in some locations as we face reduced demand from customers and we have reduced some of our work force where we felt it was absolutely necessary. All in all, we have made and will continue to make adjustments to bring our labor costs in line with the amount of business we have to support it. We are taking a measured approach to the adjustments we are making, looking at the long term ramifications, and assuring that we can continue to deliver a high level of customer service. Additionally, we are making investments where they are appropriate. While we have merged four service centers in the month of January for example, we have also added three in the months of December and January, one through the acquisition of Cincinnati Transmission in December and two to service National Agreement customers. As businesses struggle with the recession, there was some pressure on pricing. Although commodity prices, steel, scrap, fuel, have fallen, and in some cases dramatically, we have not seen any movement by our suppliers to reduce their prices to us and we will continue to watch this situation closely. I will now turn the call over to Mark Eisele for a discussion of the quarter’s financial result. Mark O. Eisele: Thanks, Ben. Good morning, everyone. Let me provide some additional insight for our second quarter financial performance which resulted in earnings of $0.38 per share. Sales for the quarter ended at $502.4 million, a 1.7% decrease, over last year’s second quarter. We had 62 selling days in both this and last year’s second quarter. We estimate that sales were positively affected by approximately 1% to 2% from the impact of passing along supplier price increases. Sales at our US service centers were down 13% from the prior year quarter, reflecting the economic slowdown and its impact on our various industrial sectors as discussed by Ben. This decline did accelerate throughout the quarter. Sales at our US fluid power businesses excluding recent acquisitions were down 8% for the quarter. Our overall US fluid power sales, however, increased significantly due to incorporation of $45.2 million of sales from the fluid power resources acquisition closed in our first quarter. We were very pleased to see sales in local currency at our Canadian operations increase 7.3% over the prior year quarter. Due to the impact of the decline in the Canadian currency, for US reporting purposes though, we are showing a 7.4% net decline in Canadian sales. Our same-store Mexican operations had about a 20% sales increase during the quarter also. Our overall Mexican operations like our US power fluid operations, also produced significant sales increases bolstered by our acquisitions of VYCMEX in December 2007 and Enol in May 2008. At quarter’s end, our North American operating facilities remained at 474 and our full time associate count was 5,203 associates. Our product mix during the quarter was 27.9% fluid power products and 72.1% industrial products compared to 19.4% and 80.6% in the prior period. The recent acquisitions within our fluid power business account for the shift in product mix. Our gross profit percentage for the quarter was 27.0%, in line with our comments from our first quarter conference call. This 27% margin is 30 basis points below last year’s second quarter which reflects the ongoing challenges of passing on supplier price increases to our large contractual customers, as well as price competitiveness in the marketplace related to overall economic conditions. Our selling, distribution, and administrative expense as a percent of sales was 21.2% in the quarter, or approximately 120 basis points higher than the second quarter of fiscal 2008. SD&A expenses for the quarter increased in absolute dollars by 4.3% compared to a sales decrease of 1.7%. Approximately $13.7 million of SD&A including $2.4 million of intangible amortization expense related to recent acquisitions not included in the prior year quarter. We also saw increases during the quarter relating to higher health care costs under our self insurance programs. Partially offsetting the SD&A increases were decreases in crude liabilities for several performance driven accruals for incentives and benefits. Our operating margin in the quarter was 5.7% compared to 7.3% in the prior year’s second quarter. The decreased sales, lower gross profit percentage, and the increase in the SD&A were the primary reasons for the lower operating margin. In addition, the incremental intangible asset amortization from the recent acquisitions decreased our quarterly operating margin by 50 basis points. Our net interest expense for the quarter increased $1.3 million from the same period in the prior year. This net increase is attributable to lower interest income from lower overnight investing rates and lower cash balances and to additional interest expense related to the borrowings under our revolving credit facility. The weighted average interest rate on our $111 million of bank debt at December 31 was 2.2%. While the effective tax rate for the quarter was 35.9% compared to 38.1% in the second quarter last year, we anticipate our tax rate for the entire year to be in the 36.5% to 37.0% range. Our balance sheet remains solid with shareholder’s equity at $504.9 million and a current ratio of 2.4:1. Our pre-tax return on assets was 11.2% for the quarter compared to 18.4% in the prior year quarter. This decrease is primarily due to the large amount of intangible assets and goodwill added to our asset base from the fluid power resource acquisition as well as lower operating results. Our December 2008 inventories increased $26.3 million during the quarter and was in line with our anticipated seasonal increase previously disclosed in our first quarter conference call. This increase as historically has been the case is expected to be reduced in our third and fourth quarters so that after adjusting for acquisitions inventory levels at year end should be close to our prior year levels. We are adjusting our inventory purchasing strategies to take into account the effects of slowing customer demand. Cash used in operations for the quarter was $16.4 million compared to cash generated of $21.8 million in the prior year’s second quarter. As we noted in the first quarter, we took actions to accelerate some cash collections into the first quarter that traditionally we’re in the second quarter. Year-to-date cash generated from operations was $32.5 million compared to $50.7 million in the same period in the prior year. The decrease in the operational cash was driven by lower net income of $9 million compared to the prior year and $15 million of the larger increase in inventory purchased compared to prior year. Our expectations for the last half of our year are for solid cash flows from operations as inventory levels decline between now and June 30. Our forecast for the remaining two quarters of fiscal 2009 is for our gross profit percentage to be close to 27%. We continue to investigate and implement cost cutting measures to help offset the challenges from the significant sales declines we are experiencing. We expect these efforts to lower our SD&A run rate in excess of 10%. After these reductions, we anticipate our operating margins for the last half of the year to be around 5.0%. Adjusting for the additional amortization expense impact of 50 basis points discussed earlier, we are in the 5.5% range for an apples to apples comparison with our fiscal 2008 operating margin of 7.3%. Because of the lower than expected results in the first half of the year and the continued downturn in the US and world economies, we have reduced our sales guidance for fiscal 2009 to $1.95 billion to $2.1 billion and have decreased our annual earnings per share guidance to a range of $1.30 to $1.70 per share. Now some closing remarks by Dave Pugh.

Thanks, Mark, thanks Ben. I don’t think there’s any doubt that we are now in a substantial recession, one that has the potential to rival anything I’ve seen in my career. In response we’ve raised our sense of urgency and we have taken and continue to take steps that keep our cost structure in line with the business opportunities. Our current financial strength is a plus. So while there’s really no sense of panic here we’re going to continue to take those steps that are prudent to protect the interest of our shareholders and certainly with more of a short term focus. The key to me is to continue to increase our agility in such a dynamic market. With that, John, I’m going to open it up to questions. If you’ll get us going, thank you.

(Operator Instructions) Your first question comes from Matt Duncan from Stephens Inc. Matt Duncan - Stephens Incorporated: I understand obviously that on forecasting things you’re a little bit tough here so maybe we can focus on what you’ve seen so far and I know you typically don’t talk about month to month trends but I don’t know if you’d be willing to right now since things are changing so fast, if you could kind of help us understand what you guys have seen month to month throughout the December quarter, I think that’d be helpful.

We have seen an acceleration throughout the December quarter and I would say that basically what we’re seeing throughout January so far has been similar to the month of December, so we haven’t seen any further acceleration of the downturn. Matt Duncan - Stephens Incorporated: Dave, I guess if I look at the guidance, the $1.95 billion in revenue looks like to me that it assumes 20% plus organic sales declines and the $1.30 looks like it assumes an operating margin below the 5% you’re targeting, am I right in both of those cases, and sort of is that kind of your view on the worst case? Talk to us about how you kind of came up with the low end of the guidance range maybe.

Matt, I would think that’s a fair statement. Obviously what we’re targeting and the actions we’re talking are to try to accomplish operating results that we think are appropriate in this manner but there’s lots of uncertainty out there and you put a stake in the sand of where you’d like to try to cut out with but you could have variability plus or minus on that stake in the sand too, so we’re working hard to manage things and as this downturn continues, it will continue to take actions as needed and as we continue to adjust costs as we see fit. Matt Duncan - Stephens Incorporated: Another question I guess to that point would be at what point during the quarter did you guys get more aggressive with your cost cutting and what kind of work do you guys think you have left from that point of view?

We probably the end of the September quarter we started to take some actions with regards to the basic stuff and then accelerated throughout the quarter and we’ll still in the midst of that today, so definitely the actions we took accelerated in the month of December and continue in January.

Matt, if you take a look at it, we had some falling going into the quarter but I think we, like everybody else, saw November and December get substantially more difficult. December is a tough month to take budget actions with the holidays, vacation stuff in there, so while we did some things then, I think the movement even a little bit more as we started into January, so you could probably see more if effect of our planning in the next quarter. Matt Duncan - Stephens Incorporated: Okay, so it sounds like that stuff is going to be accelerating. I guess then if I look at branch closures, I know you alluded to four of those, I guess you said since the end of the quarter. Is that something that you’re thinking about potentially getting more aggressive with or are you really trying to do it more with shortening the work week and reducing work force for the time being?

It’s a combination and we look at it on a location by location basis. For example, if we have a large customer that has shut down operations permanently, and if a significant portion of that location’s business, then those are the situations where we look at merging that location with one that’s close by. If business is down overall, we have in some cases reduced the work force and in others we’ve reduced workweek. So we’re looking at each one individually and taking all those actions on a case by case basis. Matt Duncan - Stephens Incorporated: Last thing then I’ll jump back in the queue. Mark, can you tell us what’s in the Other Expense line that ticked up a little bit here? Mark O. Eisele: There’s two things that are included in there. About one-third of the dollar amount relates to foreign currency translation items in the quarter for the Canadian and Mexican currencies, and the other two-thirds is in there relates to situations for a non-qualified benefit plans for which we have assets funding those plans. The changes in market value of those assets roll through this Other Expense line and therefore since the market had declines during the quarter, we had to show those as an expense right here on that line item.

Your next question comes from Jeff Hammond from Keybanc Capital. Analyst for Jeffrey Hammond - KeyBanc Capital Markets: This is actually Josh [inaudible] filling in for Jeff here. Just wanted to touch a little bit on the gross margins here. I know that traditionally you’re able to kind of hold the line as input costs decline. I know you reiterated the 27% target for the rest of the year similar that you did in the first quarter. Maybe comment on if you guys are seeing any pressure there from your customers to kind of give back some price, particularly on the national accounts and how you’re viewing that number versus last year.

We are experiencing a lot of pressure in the marketplace and we’re doing our best to manage through that and work with our customers to continue to bring the total value that we provide and also work with our suppliers, so it’s a balancing act for us and it also falls in that kind of cloudy area of what the market’s going to be like for the next 5.5 months, so we’ll continue to manage our way through that and that’s our best estimate at this time on how we’ll do for the year. Analyst for Jeffrey Hammond - KeyBanc Capital Markets: Perfect, and just as a follow up, when you guys talk about the low water mark kind of being around 5%, I’m assuming that’s kind of over a period of time that we may see that dip below for a quarter and still be on track for the rest of the year, particularly say if third quarter is more weak then the fourth quarter.

I think that 5% is our goal and hopefully when we look at this, that would be the low water mark, but as things developed as we look into the future, we’ll have to continue to adjust and meet the needs that we have to based on what the economy is doing.

Your next question comes from Joe Mondello from Sidoti and Company. Joe Mondello - Sidoti & Company: First off, I was just wondering if you could... Looking at the last downturn, you saw a 90% decline in EPS, 2% margin, just wondering if you could give more of a sense in where you come up with the 5% operating margin and how things are different from the last downturn where you can hold that 5% operating margin.

I think that what we’re looking for with the operating margin is we really have viewed how we as a company for the last 5 plus years as fundamentally is changing how we approach managing our business and by those changes, we were able to improve our operating margins in the uptimes to a 7.3% level for fiscal 2008 and we saw steady increases year-over-year. Those same disciplines and operating methods will enable us to have the low water mark in a downturn be higher than the last one and so that’s exactly what we’re doing, is we’re marching to the same drum and doing the same business principals and therefore we should have better results on our low water mark compared to previous low water marks just like we’ve had better results on our high water marks when times were good. Joe Mondello - Sidoti & Company: Could you just mention a couple specific things that have enabled you to increase [inaudible].

Right off the bat, the number one thing is our attention to pricing philosophy and pricing discipline. In the last downturn I think we fell pretty to some of our old preconceived notions that prices had to fall even when our costs were not falling so we have done a very good job of price discipline and putting information in the hands of our people throughout this subsequent period that has been one of the strongest reasons that we’ve been able to grow the margins and I think that by itself is the strongest factor we’re going to have going through this next decline. Joe Mondello - Sidoti & Company: Secondly, your inventory picked up and I thought that was a little odd just going into this huge downturn. Could you talk on that?

Traditionally we do have seasonal increases in our inventory right around the calendar year end and as we expected and as going into this quarter as well as going into this fiscal year that we would see that exact same thing happen. The dollar amounts that we anticipated in our forecasts was a $25 million increase. It ended up being a little over $26 million increase so things happened that we expected. We expect to have those inventories reducing between now and June 30. Obviously with the acceleration of the sales decline, we’re pulling some different levers with managing inventories to take that into account so that we can properly manage that asset.

To be brutally honest, we probably didn’t move quickly enough on inventory this quarter and that’s unusual for us and we do not see that occurrence going forward so we will get this under control. Joe Mondello - Sidoti & Company: Then last thing, could you just on CapEx going forward for the rest of the year, do you have... I’m not sure if I missed that or do you have a guidance on that?

The guidance we provided at the beginning of the year over the summer was... I don’t have the numbers exactly in front of me but I thought it was like $8 million to $10 million of CapEx. I think we are on target to do that or a little bit lower than that. I will say that over the last couple of months what we have done for the CapEx that we have not spent but that we had approvals for that we did last April and May when we were coming up with the fiscal 2009 budget, we haven’t spent the money, we’ve basically asked all of the business unit heads to get all of those projects reapproved so that we can make sure that we still want to spend that money. So the expectation is for CapEx is to be maybe on the low end of the range that we gave at the beginning of the year, and it will still be significantly below our depreciation expense that we’re incurring.

Your next question comes from Brent Rakers from Morgan Keegan. Brent Rakers - Morgan Keegan: I just wanted to follow up on, I think Mark, you talked earlier about what the SD&A had done on a year-over-year basis excluding the acquisitions and by my calculations I think that shows SD&A down 9% year-over-year on an Internal Revenue growth of down 12. Could you maybe... It sounds like a lot of these initiatives, we’re doing maybe late in the quarter and maybe are more relevant for the March quarter than the December quarter, so maybe if you could talk to me more specifically the variable to fixed cost mix and why that SD&A dropped at the rate it did in the December quarter.

I think one of the things in the December quarter that we saw that reduced our SD&A expenses are related to some of the accrual adjustments we had for incentives and benefit plans as things were changing in the operating environment. Those are natural levers that should pull themselves. As our performance goes down, our expenses and the anticipated expenses we have for those plans go down as well. So we did have some true ups in the December quarter for items that were accrued previously for expected payouts for let’s say annual programs or even long term programs, so those in fact that the December quarter provided a lot of reductions for that. I think the expectation is for these additional levers that we’re pulling for additional SD&A reductions for an additional 10% run rate reduction, but those are the things that we’re doing in December and are doing in January that will help those continue to be managed. Brent Rakers - Morgan Keegan: Mark, could you maybe... and I think that’s probably fairly significant to have an understanding on how much those accruals are. Could you give us a better sense of are we talking maybe a couple million dollars additional to maybe theoretically should have been put in the September quarter had you known then what you know now or? Mark O. Eisele: The expense adjustments happen in the proper quarters when things are happening. If you’d go back and say if there’s perfect knowledge in the future in other quarters. There is probably a couple million dollars in there Brent. I don’t have the exact numbers here to give that breakdown. Brent Rakers - Morgan Keegan: Then if we could maybe expand on the head count, it looks like you reduced the head count about 50 people sequentially but you also talked a lot about cutting back work weeks and number of hours. Can you maybe elaborate or quantify a little bit more? Do you have an extensive number of part time employees that you’re cutting back on and then could you elaborate on just the work week changes that you mentioned earlier?

Brent, I don’t want to give a lot of detail on exactly what we’re doing, but if you look at it from a full time equivalent standpoint, in the month of January we’ve made significant progress, much more than the 50 that we show for the December quarter, so looking at it overall from a full time equivalent standpoint, you’ll see a much greater impact in the March quarter. Brent Rakers - Morgan Keegan: Final question, you’re talking about a 10% reduction I guess in the SD&A run rate. Just to clarify, is that related to... Is that working off of this December quarter number, and then secondly, how do we account for the typical seasonality of SD&A in the third and fourth quarter relative to what we just saw here in December.

Brent, we’ve taken both those things into account. Basically looking at the December run rates, that was probably the primary driver from looking at the numbers and obviously we do look at the seasonality within the SD&A as well and taking those things into account to come up with our projections going forward. The expectation though is that if you want to look at it from a very high level is for a 10% reduction in the SD&A levels going forward.

Your next question comes from Greg Halter from Great Lakes Review. Greg Halter - Great Lakes Review: I wonder if you could comment on your pension expense going forward. It’s probably already set for this year but what do you envision looking out ahead given the market challenges?

We have two defined benefit plans. One is a small funded plan and another is an unfunded plan for a SERP type things and I don’t anticipate significant changes in our expenses going forward although we use outside experts and actuaries to help determine what those costs are and obviously all of the assumptions are critical in determining which way the wind’s going to blow on those and it all depends as to what’s going to happen with discount rates as we go forward into the future and I can’t predict what’s going to happen with those. I believe the assumptions that we utilize and we will continue to utilize are very middle of the road as well as more conservative so that we’re recording expense appropriately when people are spending the time working. Greg Halter - Great Lakes Review: The rate on the debt, that 2.2%, is that a floating rate?

Yes. Our bank debt has several tranches of borrowings and the primary way we’re doing our borrowings now is for the most part based upon one month LIBOR at various dates and then that has to get renewed. Whenever you take a borrowing you have in essence it’s fixed for 30 days and then you need to re-borrow and whatever LIBOR is at that point in time, t hen you’d be re-borrowing it at that rate. As of now, I’m not sure exactly today what the rates are, but one month LIBOR is around 50 basis points right now, so it’s very attractive. So some of the bank debt is based upon LIBOR. Some of it is based upon prime and we also do have entered into an interest rate swap in September as we talked about in the last conference call that converts $50 million of that bank debt to a fixed rate of about 3 1/3% for the next two years. So we’re very pleased with our borrowing rates and we think we’ve got a great bank facility and we feel fortunate that we’re able to have interest rates as low as they are based upon what’s happening out there in the economy. Greg Halter - Great Lakes Review: That sounds good, and then the other side, your cash of $46 million, so it’s probably not earning much these days. Just wondering where that is invested, in what geographic area, US or elsewhere, and then what it is invested in.

That money is basically in Canada and it’s basically in short term like overnight money market type things with very safe principal is how we look at things as opposed to enhanced overnight borrowings, so that’s... If he money was in the US, we would be able to utilize that to pay down debt. Greg Halter - Great Lakes Review: Okay, so you can’t bring it back without a prepaid [treation] penalty?

That is correct and the thought process that we have is for the money in Canada is to keep it there for continued money expansions in Canada. Greg Halter - Great Lakes Review: But if the new administration came in with some sort of new rate, or amnesty or whatever, you could bring that back and then pay down your debt?

Yes. I mean, if there’s a repatriation holiday, we would look hard at that. Greg Halter - Great Lakes Review: Okay. And I wonder if you could comment on your receivables. It looks like the balance is on a year-over-year basis is in pretty good shape. I think it’s only up slightly year-over-year basis, but just wondered if you could comment on the quality.

Right. We have seen some slight deterioration in our overall aging, but the amounts of past due receivables that are 61 days past due are older has only deteriorated 10% from where it was 6 months ago, or a year ago. We’ve seen some slight deterioration. We haven’t seen a major deterioration. Our issue in our bad debt exposure really is when companies file bankruptcy, as opposed to when companies just don’t pay their bills. For the most part, our customers pay us first, because we’re providing them the replacement parts to keep their plants operating to keep them alive. Greg Halter - Great Lakes Review: Last one – if you could comment on the national account business versus your smaller accounts, in terms of percentage of the total and how they did in the quarter.

Greg, our business – our national account business – typically runs about 1/3 of our total business, and that was where we ran for the quarter, so not a big change there. Greg Halter - Great Lakes Review: Okay. And any comment if the nationals were up more than the average, or [smallers] were, vice versa?

I think in general, slightly down, down slightly more than the total business. Greg Halter - Great Lakes Review: For the national?

Yes. We experienced a number of plant shut-downs in the last month of December. Greg Halter - Great Lakes Review: Okay. Thank you.

Your next question comes from Holden Lewis - BB&T Capital Markets Holden Lewis - BB&T Capital Markets: Getting back to the inventory, you referenced a couple million dollars perhaps in accrual true ups that might have hit the SG&A. Were there any offsettings for the true ups as it relates to rebates in the cost to goods line at all? What are you seeing in rebates – what are you anticipating there?

The specific question is there were no unusual items in rebates during the quarter. Obviously for inventory purchases and for the increase in inventory dollars, if some of those dollars had rebates attached to them, those rebates would go onto our balance sheet, and then would roll through the income statement, when those inventories are sold. I think the rebate arena in the negotiations and discussions with our suppliers as we talked earlier today is one of our big challenges. That’s with the change in the economy and for us, managing our inventory dollars and managing the gross profit dollars, that’s something that we’re working hard at going forward, to try to make sure we have the appropriate management of our assets from the balance sheet perspective, as well as managing the gross profit from the income statement perspective. It’s a delicate balancing act. Holden Lewis - BB&T Capital Markets: To that point, you saw no reason in Q2 to have to sort of true up rebates in any way?

There were no major true ups. All of the accruals had been pretty much spot-on throughout December 31st. Holden Lewis - BB&T Capital Markets: And then as it relates to the inventory increase – and I hear what you say about the typical seasonal increase – but of course typically, you would expect the second half to be seasonally stronger than perhaps you’re forecasting now. I guess you kind of said maybe you didn’t react as quickly as you might have liked, but have you seen a bunch of steeply discounted inventory that maybe you’ve been able to take advantage of, or has that not been particularly unusual this time around?

I think the short answer is we have not seen a lot of discounted inventory yet from the suppliers. Holden Lewis - BB&T Capital Markets: Can you maybe just sort of speculate on why that would be? Everyone is talking about this desire on the part of OEMs to cut their inventory levels and destock, and yet we’re having a hard time finding many distributors who might be natural outlets for that at the right price who have build up much in the way of inventory. It just seems to be somewhat conflicting I guess. I’m curious if you might have some opinion as to why that might be. Mark O. Eisele: There’s a couple of things. One is in uncertain conditions like this, we tend to conserve cash. In trying to predict when an inventory build-up will turn, in regard to generating that cash, is very difficult. The other thing - I’m surprised it hasn’t even come up in discussions here – that ugly ‘d’ word is sitting out there so you know, you want to make sure we’re not getting into inventory that might go the other way. Holden Lewis - BB&T Capital Markets: Is the inventory on offer to you, you’re just opting not to take it? Mark O. Eisele: I’d have to go back and ask that question, because the guys who typically see that on the front end understand where we’re guiding from – you know, the top levels. I’ll just say it hasn’t been brought to our attention.

[inaudible] any significant dollar Holden Lewis - BB&T Capital Markets: Okay. Just if you’re going to set the acquired revenues, I think you said 45.2, was from the FPR. Can you give an aggregate sense, since one of these is sort of par for course and all that, VYCMEX and Enol, in aggregate, how much revenue did that contribute in the quarter?

I don’t know those numbers right in front of me, but it was in the, I would say, $7 million range? Something like that. I’m not sure with the currency translation what the impact is before translation, but that would be for the USD impact. Holden Lewis - BB&T Capital Markets: So, USD $7 million or $8 million from those two deals?

Yes.

Your next question comes from Brent Rakers - Morgan Keegan Brent Rakers - Morgan Keegan: Just a couple of follow-ups on the SD&A. I guess first you talked about some modest headcount reductions. Any severance cost in the quarter, any severance expected as you go into the March quarter?

In the December quarter, there was a very small limited amount of severance. In the January quarter, we have considered – for the quarter starting in January, we have considered severance, and we’re looking at our savings and the SD&A reductions going forward that they have already been taken into account in our numbers; in our projections of a 10% decrease in SD&A. Brent Rakers - Morgan Keegan: Mark, did you ever talk more specifically about head count? We brought that down to 50 already – did we ever get a sense within this 10% reduction, how much more that might be? Mark O. Eisele: No, we didn’t mention it. We’re looking at everything all summed up; the culmination of all of our actions, and we did not give a head count number. Brent Rakers - Morgan Keegan: Final question – you mentioned earlier you had some headwinds in the December quarter from healthcare costs. Could you maybe elaborate on whether that relates to some unusual claims, or just the general healthcare inflation rate, or what?

I think it’s both of those things, Brent. I will say that from our perspective, we thought we had a larger number of relatively large dollar claims than w would expect based upon our population and talking to our experts that we utilize, we seem to be running high with a number of those claims. You can’t forecast what’s going to happen in the future, but you could somehow say in the last couple of years, maybe we were running low. It all sort of reverts back to a means. Healthcare expenses, we continue to actively manage that, and look at our opportunities as to what we can do to best manage the program. Mark O. Eisele: It is not something that we would forecast to continually go up, because if you look at the aging of our workforce, it’s actually going down a little bit.

Your next question comes from Holden Lewis - BB&T Capital Markets Holden Lewis - BB&T Capital Markets: Thank you. Two things, first, I think you’ve been operating pretty lean throughout the cycle for the most part, and now you’re kind of talking about maybe shutting a couple branches and letting some folks go. I guess, on what basis are we making this decision on who and where to let go? Is it just the lowest performers are being cut out? Is there any abandonment of revenues or anything like that, that comes with this? I guess the question is really to what extent are we cutting into meat? I don’t think that you had a lot of fat on there to begin with.

You’re right, Holden. We don’t have a lot of fat. We’ve been very diligent since the last downtown in making sure that we don’t have operations where we have any fat. You won’t see the large number of mergers or closures like you did in the last downturn. We look at every market and make sure there’s a market there to support a location. There’s a much smaller number so you’re not going to see great numbers in closures. When we look at reduction of the workforce, we take a little bit more of a midterm/long term view of where the market’s going in that area, and make the appropriate adjustments; whether it’s a reduced work week, or eliminate some positions. Holden Lewis - BB&T Capital Markets: Okay. And then on the pricing issue: I mean you were 100 or 200 basis points last quarter, you’re 100 or 200 basis points this quarter. You talk about pressure I guess, but it seems like it’s pretty stable. The guidance on the gross margin – if that 100 to 200 becomes zero or minus 1, is the gross margin guidance still doable, or is implicit in the gross margin the assumption that pricing will be stable at 100 or 200 basis points?

I think, Holden, when we look at the impact of the supplier price increases on our business, we’re not looking at that as anything that’s going to either increase or decrease our gross profit percentage when we sell that product to our customers. Our expectation is to pass that through. I don’t expect that to have much of a change at all. Holden Lewis - BB&T Capital Markets: Okay. So you don’t expect to have to cut price unless your customers cut their costs immaterial to you?

That’s our expectation.

At that point, the margin still remains the same. Holden Lewis - BB&T Capital Markets: Understood. Are you seeing, you’re discounting in the market, are you seeing the discounting on the part of those competitors stable, getting better, getting worse? What’s the environment out there? Mark O. Eisele: It’s a mixed bag, Holden. Generally, with the economy being what it is, yes – we’re seeing what you would expect to see. There’s some degradation in the market place. Holden Lewis - BB&T Capital Markets: Okay. And that has not improved over the last month or two? The thought being that the rolling discount when there’s volumes to be had – if there’s no volumes to be had, then nobody’s going to discount, because you can’t give away both volume and price. That hasn’t dawned on the smaller distributor in the chain yet?

Not that we’ve seen, no.

We have no further questions at this time, and I will now turn it back to Dave for closing remarks.

Thank you John. Thanks – good questions. I think we’re all sitting in the same boat right now – we’re watching to see what’s going to occur over the next quarter. Hopefully there will be some positive things that will happen to start turning these things around. We will certainly have better information when we come back to you in April. Thanks for joining us, and we’ll talk to you then.

Thank you ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.